Republican presidential hopeful Donald Trump has clearly mastered the science of media domination. Whenever he speaks, days of editorializing follow. It is a curious spectacle to observe.
During the past week or so, Trump’s remarks regarding public debt have illustrated the point. I found it interesting to go back and listen to what he actually said, having first read many write-ups regarding what he reportedly said and meant. I found an unbridgeable gulf between his remarks, and the remarks about his remarks.
As an aside, the controversy brought to mind three self-imposed impediments to intellectual progress: closed ears, closed hearts, and closed minds. When our ears are closed, the words of a speaker do not enter. We do not even hear them.
We may open our ears. However, if our heart is closed, i.e., if we harbor an unhealthy animosity toward a speaker such that we presume in advance that his or her ideas are bound to be foolish, we will not understand them. Our own antipathy toward the speaker will create a false impression of his or her intent. (This is difficult for me as I admit that I am not by any stretch a Trumpophile.)
Finally, we may succeed in opening our ears and casting aside our antipathy to open our hearts. However, if our minds are closed, we will hear and understand a new and true idea, yet be unable to accept it due to our inability to discard a former favorite fallacy. The door of departure is drawn shut. An open mind, of necessity, requires two passable portals: a welcoming door for new concepts, and an exit gate for the prior presumptions. Few are able to open both doors.
With that said, let us examine Trump’s debt remarks with an eye to learning. His remarks came within the context of an interview on CNBC. The discussion revolved around interest rates and his view of Janet Yellen’s performance.
Trump mentioned that she is not a Republican and could be replaced when her time is up. But by the same token, Trump opined that Yellen has performed well. She is a low-interest-rate person, and he, Trump, is a low-interest-rate person.
He then went on to explain, correctly, that if we raise interest rates, the dollar will strengthen and choke off our international competitiveness. I, for one, was rather surprised at the articulateness and accuracy he displayed in his remarks regarding the relationships between interest rates, currency values, and international trade and competitiveness. I did not expect that.
The interviewer then suggested that low interest rates have created huge income inequality. She asked Trump how he would cope with the inequality if the Fed continues to pursue an accommodative monetary policy.
Now this was where I lost the thread. I have not made the direct connection between low interest rates and inequality. It would seem as though the CNBC interviewer simply wanted to move the topic to inequality.
But Trump did not bite. Instead, he explained that another gaping problem with raising interest rates is the impact it would have on servicing our national debt. If rates rise, the interest cost of our debt rises.
He remarked: “What happens if that interest rate goes two, three, four points up? We don’t have a country.” (OK. You had me and you lost me.) “We have tremendous debt, tremendous. And it’s at low interest rates, fortunately. If those rates go up two points, three points, five points … it’s a real dilemma and we have to be very, very careful.”
Care is always a good idea. Is it a dilemma? Public debt, how misunderstood you are!
Currently, the majority of our federal debt is held by the U.S. private sector. That portion of our debt is an obligation for all U.S. citizens to pay interest and principle to a smaller number of bondholders. The largest bondholders are, of course, the wealthiest among us.
If we were to determine to reduce this debt, the easiest way to do so would be to temporarily raise taxes on the wealthiest Americans, which would then be used to buy back the bonds and notes from the wealthiest Americans.
What impact would this have? The very wealthy would have less wealth in the form of U.S. treasury securities. The nation would have less debt. Is that a wash? That is not quite clear. The answer is complex.
If rates rise and we do not buy back our debt, we raise taxes on those who can afford to pay in order to pay those who hold the debt. In other words, we raise taxes on the wealthy to pay the wealthy higher interest. It all sounds kind of humorous when put that way. But as an economist, I am not sure how else to put it.
Following 9/11, a large tax cut was put into place, which was concentrated on tax relief to the wealthiest citizens. The tax cut, which expanded the government budget deficit, was financed by issuing treasury debt: bonds and notes. The wealthy found that they had more disposable income as a result of the tax cut. Most of it was saved.
This then presented to the wealthy households the question of what to do with the new savings. At the time, the stock market was dicey and the idea of expanding investment was risky. So the new savings went into the new notes and bonds.
When stripped down to the basic, it all sounds a bit farcical: Cut taxes on the wealthy, and then issue notes and bonds so as to offer a savings vehicle for the newly distributed cash to the wealthy. This is, in reality, a stylized story of what actually happened.
A similar flow of funds, but through more complicated channels, has occurred in more recent years. The U.S. debt held by U.S. citizens is the savings vehicle by which the wealthy can hold wealth created by the federal deficits.
In my opinion, the main reason we do not reduce the U.S. debt is that to do so also reduces the wealth held by the wealthiest citizens. Most press reports focus attention on the fact that the U.S. debt creates an obligation to pay. But few include the reality that the debt also creates an asset, a guarantee to receive those payments. The debt is wealth to those who hold the debt.
Would the elimination of the debt help our economy? This is a useful question. It has many facets, both domestic and international. It can affect international trade, the dollar, wealth inequality, unemployment, inflation, and long-run growth and stability.
Shall we examine this in more detail during the next few weeks?
For some reason, the words of comedian Dana Carvey come to mind: “I’m not saying I want Donald Trump to be president. But I never want to live in a world where Donald Trump isn’t running for president.”
(Marcus Hutchins is a former economist, treasury bond arbitrage trader, and hedge fund manager. He retired to Southport in 1997, where he resides with his wife, Andrea, and youngest daughter, Abbey. He welcomes feedback at firstname.lastname@example.org.)