Donald Trump raised a ruckus with his comments about the national debt last week, when the presumptive Republican presidential nominee seemed to suggest that the U.S. government might not pay all of what it owes. Bonds issued by the Treasury Department are considered some of the most dependable securities in the world, and if a future Trump administration didn't honor them, the consequences for the global economy could be disastrous.
Trump acknowledged these realities in an interview on CNN Monday morning, saying he never meant to suggest that the United States default on its sovereign debt and accusing the media of misrepresenting him.
"It was reported in the failing New York Times and other places that I want to default on debt," Trump complained. "I'm the king of debt. I understand debt probably better than anybody. I know how to deal with debt very well. I love debt."
Just what he was suggesting remained unclear, however. Trump said the U.S. government could repurchase some of its current debt at a discount, as private businesses do, but he apparently went on to give a couple of reasons why this strategy would not serve any financial purpose in the context of federal economic policy.
First, Trump explained -- correctly -- that because the U.S. government prints its own currency, the country should never have to default on its debt. The government can print more money to repay the debts, which would cause inflation but not a default.
"This is the United States government," Trump said. "You never have to default because you print the money, I hate to tell you. Okay, so there’s never a default."
Then, Trump went on to suggest that the Treasury could somehow repurchase bonds that are currently in circulation, effectively paying back the debt early. If interest rates increased, then bondholders might be eager to sell the debt they purchased previously at cheaper rates, because they could make new investments with the money that would pay more lucrative rates. The Treasury, Trump suggested, could buy back those old bonds from investors for less than their face value, reducing the outstanding debt.
Private firms use this strategy often to reduce their debt. A company might borrow money to make some kind of initial investment. If interest rates increase as they reap the profits, the firm can use the money to buy back the debt for less than the amount they borrowed.
This strategy doesn't always improve a firm's financial situation, however. If the firm doesn't have enough cash to make the purchases, then borrowing money to do so won't help, because the firm would be borrowing at a higher interest rate.
That is more similar to the U.S. government's current situation. Since the federal government operates at a deficit, any repurchases would have to be funded through borrowing, and that money would have to be borrowed at an increased interest rate, canceling out any savings.
In fact, the liberal Center on Economic and Policy Research published a brief considering exactly this financial maneuver in 2013. Repurchasing old debt "doesn't change the interest burden one iota," said economist Dean Baker, a director of the center. "It’s utterly meaningless."
Trump seemed to acknowledge these shortcomings of his ideas during the interview on CNN. "If interest rates go up and we can buy bonds back at a discount, if we are liquid enough as a country, we should do that," he said. The United States is not liquid enough to make the purchases -- that is, the government would have to borrow the money to do so.
Trump also seemed to concede that investors wouldn't take him up on the offer to repurchase debt -- after all, they can sell their debt anytime they want on the global market for bonds issued by the Treasury. "With the government, they’re never going to walk in and say, 'Do me a favor, will you buy my debt at a discount?' " Trump said.
Yet Trump didn't recant his proposal. "Here's the story, just to have it corrected," he said. "If we have an opportunity, where interest rates go up and you can buy debt back at a discount, I always like to be able to do that if you can do it."
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Correction: An earlier version of this post misstated the day of the week on which CNN interviewed Trump. The interview aired Monday morning, not Tuesday. This version has been corrected, and we regret the error.