Donald Trump has given many people many good reasons to fear a Trump White House, but perhaps none of the reasons are quite as big as the one he landed on CNBC Thursday.
Trump told the business news channel that, as president, he would look for ways to renegotiate the U.S.'s debt so that creditors would accept less than 100 cents on the dollar.
Asked if the U.S. had to pay its debts in full or whether it could negotiate, Trump said, "I've borrowed knowing that you can pay back with discounts ... I would borrow knowing that if the economy crashed, you could make a deal."
He added, "and if the economy was good, it was good. So therefore, you can't lose."
The New York Times described Trump's comment as having "no modern precedent" among presidential candidates. And with good reason: What Trump is selling as a "can't-lose" scenario is actually an "everybody loses" scenario.
2008 would look like a walk in the park
Right now, the U.S. borrows money at some of the lowest interest rates in the world, because that debt — U.S. Treasury bonds -- is considered one of the safest investments in the world, maybe the safest there is.
But if Trump defaulted on that debt, or even just tried to renegotiate, its status as world's safest debt would disappear overnight. Suddenly, creditors around the world would demand much higher interest rates on U.S. bonds.
That would immediately increase the amount of interest the U.S. would have to pay on the money it borrows. The large but currently manageable debt would suddenly become entirely unmanageable. The U.S. would careen towards a government debt crisis.
At the same time, the value of that debt would collapse on the markets. And since Treasury bonds are part of investment portfolios around the world, everyone would get hit — from governments on every continent to your retirement pension plan to banks and individual investors.
And as Matt Yglesias points out at Vox, if the world's safest investment is no longer so safe, then all the other investments suddenly become riskier too. All the rest of the world's governments would suddenly also face higher interest rates. Heavily indebted countries that are already paying high interest (Greece, Italy and Spain come to mind) would risk all-out collapse.
Simply put, Trump's debt plan would send the entire world into a crisis, and it would probably be much worse than the one in 2008. That crisis was caused by a much smaller class of debt — U.S. mortgages, securitized and sold off to investors. If American mortgage debt going bad could tank the whole world's economy, imagine what U.S. Treasuries going bad could do.
Donald Trump speaks to supporters during a rally in Eugene, Oregon on May 6, 2016. (AFP/Getty)
Casino thinking
So why does Trump believe this is a good idea? Probably because he works in an industry that sometimes operates this way.
Real estate development is often risky, and is often financed by high-interest debt. Investors are willing to lend to a business knowing that it might not be able to pay it back — but only if they can demand high interest rates that cover the cost of the risk.
If your real estate project goes bust, you go to your creditors and negotiate to pay some portion on every dollar owed. And if they don't agree, you go to bankruptcy court and a judge forces your creditors to take a cut.
In this instance, bankruptcy doesn't even really mean bankruptcy. Chances are, you created a "special purpose" company whose one task is to build that real estate development, and it's this company that has gone bankrupt. The rest of your real estate empire is safe.
Unfortunately, with the U.S. government, you can't operate this way. There is no "special purpose vehicle" to contain your losses. You declare bankruptcy, and the global bond markets panic. The entire international network of private and public debt that is the lubricant keeping the economy running would simply grind to a halt.
There wouldn't even be enough money for Trump build a wall on the Mexican border.
Trump, like other Republican candidates before him, has played up his business credentials as qualifying him for the presidency. In Trump's case, however, it's becoming frighteningly clear he can't tell the difference between the Trump Taj Mahal and the White House. And that could make him one very bad investment.
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