Trump urges US debt default

Former US President Donald Trump delighted his hardened supporters and horrified his detractors last week, and it was nothing to do with sex. On CNN he shrugged off worries about a possible default on the US national debt. “It’s really psychological more than anything else. And it could be really bad, it could be maybe nothing, maybe it’s a bad week, or a bad day, who knows?” he told an audience of largely Republican voters. It’s not how the US Treasury Secretary, Janet Yellen, sees it. She said “the notion of defaulting on our debt is something that would so badly undermine the US and the global economy that I think it should be regarded by everyone as unthinkable”.  Trump wants “massive” spending cuts, because, in his words “we’re spending money like drunken sailors.”

Yellen and Trump are both right. On Yellen’s side of the argument the US national debt is speeding its way towards a staggering $32 trillion; around a third of this is held by other nations and two-thirds by US citizens and American entities, including the government itself. The US government currently has a debt ceiling of about $31.4 trillion, which it surpassed in January, but Yellen has used various accounting tricks to continue paying the federal government’s bills since then and avoid a default. Time runs out as soon as 1 June; if the Republicans and Democrats in Congress can’t agree a compromise by that date or shortly thereafter, then federal government bills will go unpaid and eventually a default will happen.

On Trump’s side of the fence while it’s true that no-one knows precisely what might happen in the case of a default, some uncomfortable things would happen; everything from Social Security payments to food stamps (more than 44 million Americans are on food stamps) to federal civilian and military pay would be delayed; global investors would be spooked and shy away from buying any more US government bonds.  Yet he’s right that the US government spends money like water. US tax receipts have fallen in each of the past five months while federal spending has continued rising. The Congressional Budget Office (CBO) estimates there will be a fiscal deficit (an excess of spending over the tax take) of $1.5 trillion this year. That shortfall will have to be made up by adding to the debt.

Gross stupidity

“It would be an act of gross stupidity by Republicans and Democrats alike”

to permit a government shutdown never mind default says Russ Mould, investment director with British stockbroker AJ Bell. The stupidity would spill out beyond America’s borders. Without a compromise economic growth would be hit, at a time when the economic outlook is already uncertain. If the failure to agree a new higher level of debt was protracted, interest payments on the existing debt would cease – default would happen. That would raise the price the US would have to pay for future borrowings – and interest payments on the current debt currently cost more than $900 billion.  For Mould “this is the choice that faces America now. Austerity on one hand, something for which there is no political (or public) appetite, or inflation on the other, either thanks to lower interest rates, more QE (Quantitative Easing) or both. This is why there is a political impasse over the debt ceiling, whether it is resolved quickly or not.”

Trump’s cunning plan?

Can Trump, who remains the clear front-runner to be anointed the Republican Party’s candidate for the Presidential election next year, seriously be contemplating the risk of a default? He cannot be unaware of the many warnings from different quarters about the dangers to the US economy and the reputation of the US from even a whiff of a default. Perhaps he is using this default brinkmanship to sort out who is and who is not a Trump loyalist among Republican politicians? During the CNN broadcast he said: “I say to the Republicans out there, congressmen, senators, if they don’t give you massive cuts, you’re gonna have to do a default…We might as well do it now because you’ll do it later.”

It may be unpalatable; but Trump may have a point. US debt is now so huge that no-one can seriously expect it ever to be repaid. By raising the debt ceiling US politicians are merely kicking a hefty can down a shabby road. Isn’t a default – orderly or otherwise – an inevitability? Federal spending according to the CBO will rise to be an average of almost one third of America’s gross domestic product (GDP, all the goods and services it produces) during 2043-52, and the federal debt will reach 185% of GDP (against some 120% today) by the latter date “and would continue to rise thereafter” says the CBO.

The federal US financial system is like a prisoner undergoing a medieval torture of being pulled apart by horses headed in opposite directions.

It is lavishing a fortune on assisting Ukraine to defend itself in a war without obvious end; its benefit payments (already high, accounting for more than two-thirds of all federal spending) will continue to grow as the population ages and falls prey to age-related illnesses; servicing the debt will cost almost $400 billion this year, almost 7% of the federal budget, “more than $100 billion more than the government expects to spend on veterans’ benefits and services and more than it will spend on elementary and secondary education, disaster relief, agriculture, science and space programs, foreign aid, and natural resources and environmental protection combined” says the Pew Research Center. In a time of low interest rates – the average interest rate on federal debt in 2021 was a record low 1.605% - the debt could be put on the back burner. But as the Federal Reserve has pushed rates higher to try to quash inflation the cost of the national debt has become insupportable.

No doubt some compromise deal will be cooked up between Democrats and Republicans, but the days from now to 1 June will be nail-biting and will no doubt spring further surprises. Of course the US will never run out of Dollars – it can simply print more. Equally, that way is a short cut to inflation going seriously mad. The tragedy is that whatever compromise is reached the Everest-like national debt will continue growing until one day its inevitable avalanche engulfs us all.