If there’s one part of being president for which Donald Trump feels uniquely suited, it’s handling the national debt. Since several of his companies have gone through bankruptcy, he has ample experience negotiating with creditors.
“I am the king of debt,” he said on CNBC on Thursday. “I love debt. I love playing with it.”
But would he actually bring those skills to bear as president and force holders of $ 19 trillion of U.S. Treasury debt to accept less than 100 cents on the dollar, as his comments in that interview at implied? Almost certainly not.
That debt is the lubricant of the global financial system, so default would cause a financial panic of epic proportions. Moreover, as Mr. Trump seems to realize, the U.S. is not like a hotel. It can borrow as much as it likes.
But there’s another way he might try to save money on the debt: by making it a consideration for the Federal Reserve as it sets interest rates. It’s not unprecedented; but the practice would impinge on Fed independence in a way not seen since the 1960s.
Mr. Trump’s policy pronouncements aren’t known for their consistency. He first said during a debate last fall that his experience in bankruptcy qualified him for dealing with the debt. Then earlier this year he said he’d repay that debt in eight years. On CNBC on Thursday, he once again boasted how “I would borrow, knowing that if the economy crashed, you could make a deal.”
When pressed, though, he said a country is different and he didn’t mean to renegotiate the U.S. debt, only to “refinance” existing debt or repurchase it at a discount, “depending on where interest rates are.” Of course, refinancing debt saves money only when rates go down, which raises the question of what the Fed should do with rates.
Mr. Trump wants rates to remain low to prevent the dollar from appreciating, which would bring “major problems.” He added the caveat, though, that if “inflation starts coming in…you have to go up and you have to slow things down.”
But another consideration, he noted, was the national debt: “What do we do with all of the money that we owe everybody when rates go up and now all of a sudden we have to borrow at two points more? One point more, even, is devastating. It has to be handled very, very carefully.”
For the Fed to base interest-rate decisions on the national debt would blur the lines between monetary and fiscal policy. It’s heresy by today’s standards, but not unprecedented. From the 1940s through the 1960s, the Fed routinely adjusted its actions to help the Treasury, eventually allowing inflation to take off.
From 1942 to 1951, the Fed maintained a ceiling on Treasury yields to make it easier for the Treasury to borrow. William McChesney Martin, chairman from 1951 to 1970, often bent to administration demands.
As Alan Meltzer details in his “History of the Federal Reserve,” Mr. Martin would justify such cooperation by saying the Fed was independent within the government, not of the government. At the request of John F. Kennedy’s administration he bought long-term bonds to boost investment. Pressured by Lyndon B. Johnson to support the Great Society and Vietnam War and wanting to be part of his team, Mr. Martin was slow to raise interest rates as the resulting budget deficits fueled inflation.
The modern era of presidential deference to the Fed began in the 1980s. Ronald Reagan reappointed Paul Volcker, a Democrat, because he shared his anti-inflationary zeal. Though Mr. Reagan’s advisers eased Mr. Volcker out in 1987, his successor, Alan Greenspan, was no more pliable. He went on to acquire such mythical stature that it was successive presidents who bent to his influence, not the other way around. Bill Clinton, a Democrat, reappointed Mr. Greenspan, a Republican, and Barack Obama reappointed Ben Bernanke, also a Republican.
Mr. Trump made it clear he wants a Fed chairman to share his politics. Last year he accused Fed Chairwoman Janet Yellen (incorrectly) of doing President Obama’s bidding. He was more diplomatic Thursday, calling her “very capable,” but she is “not a Republican. When her time is up, I would most likely replace her.”
It may seem discordant to worry about inflation when today it’s too low and serious people think central banks should finance government deficits via “helicopter drops” of money. Nor is it a given that any appointee by Mr. Trump would put inflation at risk to help out his administration.
That said, as Mr. Trump’s positions on trade and immigration demonstrate, much economic orthodoxy has been washed away in this year’s political riptide. It’s not hard to imagine that the autonomy of the Fed could be, as well.