Monday, May 9, 2016

Trump Back Peddles on His Debt Default Proposal

Apparently Donald Trump was on CNN trying to clarify his insane suggestion that the Federal government should be run like his Atlantic City disasters:
I said if we can buy back government debt at a discount, in other words, 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. In other words, we can buy back debt at a discount. People said I want to go and buy debt and default on debt, these people are crazy. This is the United States government. First of all, you never have to default because you print the money, I hate to tell you, OK? So there is never a default. But the point is, it was reported in the New York Times incorrectly.
The interview babbled on but let’s take him at his word here. Suppose you had purchased $100 million of 30-year government bonds at the beginning of the year. The Federal government has promised to pay the holder $3 million per year until 2045 and at the end of the year, the holder gets $100 million in principal. For the Federal government, their loan is not callable but you could sell this if suddenly interest rates went up from 3% to 4%. The only problem is that the present value of your future payments is now only $82.7 million. Trump’s brilliant idea would be to have the Federal government immediately retire this loan for the $82.7 million and then refinance it in the current market. But let’s see, the interest rate is now 4% not 3%. For the next 30 years, the Federal government will pay over $3.3 million in interest expenses as opposed to the original $3 million. Trump says he learned finance at Wharton. Something tells me that the finance department is denying he ever took classes from them.

1 comment:

Steve D said...

$.3M MORE in stimulus dollars-no big deal for a currency sovereign. Either way, tRUMP is still an economic moron.