The huuuge problem with the take on the national debt that Donald Trump expressed in May is that he was probably right.
He said, in an interview that might be nearly forgotten ancient history by the time you read this, that the United States ought to try to renegotiate the terms of its debt with creditors. He floated that without saying anything about most economists’ and major investors’ belief that the modern world economy is based on the assumption that the United States always makes good on its obligations. Buying a bill, note or bond issued by the U.S. Treasury is supposed to be a risk-free investment.
On the one hand, if the United States tried to get bond holders to take less than what they were contractually owed, that would amount to a selective default by the pillar of the foundation world.
That’s the kind of event that could be part of the boring montage at the beginning of a movie that focuses mainly on Americans living in bombed out buildings, in enclaves governed by three-eyed mutant warlords with awful teeth. Some of the first victims would likely be the insurance companies and pension funds that were pushed by regulators to invest heavily in government debt securities, and in companies dependent on those securities, by financial regulators that were trying, ever so hard, to reduce risk. The next victims might be cities. The only lives that would still matter would be the lives of people with plenty of ammo.
Trump’s statement about renegotiating the national debt was akin to another common question about the national debt: “Why don’t we just solve our debt problems by, um, printing a lot more money?” Mainly, because the conventional wisdom is that, if the Fed did that, in such a way that everyone understood what the Fed was doing, the value of the dollar would go poof, and much of our civilization would, likely, go poof.
On the other hand, the U.S. government is really just a big longevity benefits and long-term care insurance (LTCI) issuer operating without any of the constraints that keep private-sector insurers solvent enough. Whatever challenges U.S. life insurers face, the U.S. government faces the same challenges, times 100.
Paul Krugman, the Nobel Prize-winning economists and New York Times economist, might be correct about the federal budget deficit itself not mattering all that much. But at some point, the reality that we promised the ability to buy the same gallon of milk, the same nursing home bed, and the same apartment that’s at least 20 feet above sea level to several different people, who are all planning to live without working from the age of 67 to the age of 97, might matter.