Restructuring the National Debt
US presidential candidate Donald Trump made more waves yesterday by suggesting he might attempt to reduce the US national debt by renegotiating with creditors. "Such remarks by a major presidential candidate," intoned the New York Times solemnly, "have no modern precedent. The United States government is able to borrow money at very low interest rates because Treasury securities are regarded as a safe investment, and any cracks in investor confidence have a long history of costing American taxpayers a lot of money."
But the idea that the US can never restructure or even repudiate the national debt -- that US Treasuries must always be treated as a unique and magical "risk-free" investment -- is wildly speculative at best, preposterous at worst. Every other borrowing entity -- individuals, business firms, and governments -- has the option of renegotiating interest payments and even defaulting on loans. It is hardly an extraordinary event, even for sovereign borrowing -- that's why lenders charge a risk premium beyond the return they require to compensate for time preference. There is lots of evidence on private, corporate, and sovereign defaults, and the results are hardly catastrophic. Depending on the circumstances, the benefits of reducing debt can exceed the costs of harming the borrower's reputation and thus increasing the costs of future borrowing. Anyone who has been through a personal or corporate bankruptcy knows this.
During the 2011 congressional debate about raising the US debt ceiling -- a bit of street theater to which US taxpayers are subject to every few years -- I wrote an article exploring the benefits and costs of default in greater detail. Perhaps Trump's statements will bring these issues into the spotlight and we can have a sensible, informed discussion about public debt, not the hysterical rants coming from the usual places.