Category: Federal Budget

Trump Tweets Wildly Misleading Comparison of the National Debt in His First Month to Obama’s

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On Saturday morning, President Donald Trump took to Twitter to point out a fact he thought the media was underreporting: the decrease in the national debt in his first month.

“The media has not reported that the National Debt in my first month went down by $12 billion vs a $200 billion increase in Obama first mo[nth],” tweeted Trump.

The tweet, which echoes something Herman Cain said on Fox News’ Fox & Friends an hour before, doesn’t make sense for a few reasons.

First, it is true that the debt has probably ticked down but as noted by the Atlantic’s David Frum, this is mostly due to the federal government rebalancing its intra-governmental holdings. Debt outstanding to the public has barely budged since Inauguration Day.

Additionally, the federal government is still operating under the budget passed before Trump came into office, so even if the overall debt decreased, his administration had little to do with it.

Finally, and most importantly, the economic circumstances during his and Obama’s first month in office are vastly different and make the comparison totally off base.

When Obama took office in January 2009, the country was in the midst of the worst financial crisis since the Great Depression. The US economy lost 702,000 jobs in February 2009 and 832,000 in March 2009, GDP growth collapsed, and foreclosures soared.

In response to this crisis, Obama did what presidents typically do during recessions: took on debt to stimulate the economy.

President Obama’s first 100 days in the White House:

In the depths of a recession, private investment collapses. So, generally accepted economic theory concludes that the government should induce investment and step in during these times of crisis to prop up the stumbling private sector.

Thus, both Obama and his predecessor George W. Bush signed into law bills to inject large amounts of capital into the economy to both save the financial sector and get people back to work.

For instance, Bush passed the Toxic Asset Relief Program in October 2008 which used just over $426 billion in federal funds to “bail out” the country’s largest banks. Obama signed the American Recovery and Reinvestment Act in February 2009 which allocated $831 billion in federal funds to finance investment projects such as infrastructure.

By contrast, Trump has inherited — as he even noted — a country with a vastly improved economic standing.

The labor market has improved drastically, with unemployment at just 4.8% and the number of people claiming unemployment benefits nearing the lowest point in 40 years. In fact, during Obama’s term the US added over 11 million private sector jobs.

Donald Trump’s first 100 days in office:

Things outside of the labor market are pretty solid as well. Corporate profits have recently dipped below all-time highs and the stock market has soared more than 225% from its bottom in March 2009, and the housing market is growing again.

While it’s not all perfect — business investment is lagging, wages still haven’t hit pre-crisis levels, and economic gains have not been equally distributed throughout the country — there is no doubt that Trump inherits a better economic starting position than Obama did in 2009 with no reason to spend massive amounts of federal money to assist the economy.

Trump even noted these differences in a follow-up tweet.

“Great optimism for future of US business, AND JOBS, with the DOW having an 11th straight record close,” tweeted Trump. “Big tax & regulation cuts coming!”

While some of the increase in the confidence indexes have come after the election, much of the economic good news was around before Trump took office.

(h/t AOL)

Trump Tries to Backtrack His Defaulting on Debt Comments

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Donald Trump declared Monday the U.S. never has to default on debt “because you print the money,” while trying to clarify his strategy for managing the national debt.

Trump insisted that he never said the U.S. should default or attempt to renegotiate with creditors, as had been reported. Trump told CNN’s Chris Cuomo on “New Day”:

People said I want to go and buy debt and default on debt, and I mean, 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?

The presumptive Republican presidential nominee explained he would center his approach on debt buybacks if and when interest rates go up.

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.

He also repeated his claim that he is “the king of debt.”

I understand debt better than probably anybody. I know how to deal with debt very well. I love debt — but you know, debt is tricky and it’s dangerous, and you have to be careful and you have to know what you’re doing.

(h/t CNN)

Reality

Trump lied. In an interview with CNBC on 5/6/16 that we cataloged here along with video, Trump was asked if the U.S. needs to pay its debt in full or if it could negotiate a partial repayment, Trump said:

I would borrow, knowing that if the economy crashed, you could make a deal.

Also during his CNBC interview, Trump had said that interest rates should be kept low — contradicting his remarks on CNN Monday — because a rate jump could trigger a catastrophic increase the cost of borrowing.

We’re paying a very low interest rate. What happens if that interest rate goes up 2, 3, 4 points? We don’t have a country.

Furthermore, whether through debt buyback or restructuring, neither of Trump’s debt-reduction proposals from the past week square with his party’s core approach on the issue — deep spending cuts and entitlement program reform.

The Republican Party’s official platform argues the U.S.’s looming “debt explosion” should be averted through “immediate reductions in federal spending, as a down payment on the much larger task of long-range fiscal control.”

These cuts “must be accompanied by major structural reforms,” according to the platform, and pointing to programs such as Medicare, Medicaid, and Social Security, the GOP argues that “we must restructure the twentieth century entitlement state.”

Media

Links

http://video.cnbc.com/gallery/?video=3000515269

http://www.politico.com/story/2016/05/trump-debt-bankruptcy-wall-street-222976

New York Times article that Trump claimed misrepresented him. They didn’t.

Donald Trump Just Threatened to Cause an Unprecedented Global Financial Crisis

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In an interview on CNBC, Donald Trump broke with tired clichés about the evils of federal debt accumulation. “I am the king of debt,” he said. “I love debt. I love playing with it.”

But he replaced fearmongering about debt with an even more alarming notion — a bankruptcy of the United States federal government that would incinerate the world economy.

“I would borrow, knowing that if the economy crashed, you could make a deal,” Trump said. “And if the economy was good, it was good. So therefore, you can’t lose.”

With his statement, Trump not only revealed a dangerous ignorance about the operation of the national monetary system and the global economic order, but also offered a brilliant case study in the profound risks of attempting to apply the logic of a private business enterprise to the task of running the United States of America.

Trump’s business logic makes sense

Trump is a businessman, and in terms of thinking like a businessman his idea makes sense.

The interest rate that investors currently charge the United States in order to borrow money is very low. A smart business strategy under those circumstances would be to borrow a bunch of money and undertake a bunch of big investment projects that are somewhat risky but judged to possibly have a huge payoff.

You now have two possible scenarios.

In one scenario, the investments work out and you make a ton of money. In that case, you can easily pay back the loan and everyone wins.

In another scenario, the investments don’t work out and you don’t make much money. In that case, you objectively can’t pay back the loan. You either work out a deal with the people you owe money to in which they accept less than 100 percent of what you owe them (this is called a “haircut”) or else you go to bankruptcy court and a judge will force them to accept less than 100 percent.

This is how businesspeople think — especially those who work in capital-intensive industries like real estate. And for good reason. This is the right way to run a real estate company.

Applying this idea to the United States would destroy the economy

The United States of America, however, is not a real estate development company. If a real estate company defaults on its debts and its creditors lose money, that’s their problem. If a bank fails as a result, then it’s the FDIC’s responsibility to clean it up.
The government doesn’t work like that. Right now, people and companies all around the world treat US government bonds as the least risky financial asset in the universe. If the government defaults and banks fail as a result, the government needs to clean up the mess. And if risk-free federal bonds turn out to be risky, then every other financial assetbecomes riskier. The interest rate charged on state and local government debt, on corporate debt, and on home loans will spike. Savings will evaporate, and liquidity will vanish as everyone tries to hold on to their cash until they can figure out what’s going on.

Every assessment of risk in the financial system is based on the idea that the least risky thing is lending money to the federal government. If that turns out to be much riskier than previously thought, then everything else becomes much riskier too. Business investment will collapse, state and local finances will be crushed, and shockwaves will emanate to a whole range of foreign countries that borrow dollars.

Remember 2008, when the markets went from thinking housing debt was low-risk to thinking it was high-risk, and a global financial crisis was the result? This would be like that, but much worse — US government debt is the very foundation of low-risk investments.

What’s especially troubling about Trump’s proposal is that there is genuinely no conceivable circumstance under which this kind of default would be necessary. The debt of the federal government consists entirely of obligations to pay US dollars to various individuals and institutions. US dollars are, conveniently, something the US government can create instantly and in infinite quantities at any time.

Of course, it might be undesirable to finance debts by printing money rather than raising taxes or cutting spending. In particular, that kind of money printing could lead to inflation, and even though inflation is very low right now there’s no guarantee that it will always be low.

But a little bit of inflation is always going to be strictly preferable to destroying the whole American economy, especially because a debt default would cause a crash in the value of the dollar and spark inflation anyway.

Trump doesn’t know what he’s talking about

This is the second time this week that Trump has revealed a profound ignorance of an issue related to government debts.

The early instance in which he kept proposing that Puerto Rico declare bankruptcy even though doing so is illegal was on a question that’s very important to Puerto Ricans but not so important to everyone else. It is, however, important to pay attention to how presidential candidates approach issues across the board — and what we saw with Puerto Rico is that Trump approached the issue by simplistically applying business logic without bothering to check whether it applies to the actual situation.

Now in the CNBC interview he’s done the exact same thing on a matter of more consequence —not the debts of Puerto Rico but the debts of the United States of America. It’s understandable that a real estate developer might assume that what works in real estate would work in economic policy, but it’s not true. And Trump hasn’t bothered to check or ask anyone about it.

(h/t CNBC)

Reality

What Donald Trump is proposing to pay off the national debt (which is money that we are obligated to pay creditors and for services) is to borrow large sums of money at a lower rate. In other words robbing Peter to pay Paul.  Should the economy be healthy then we can pay back that borrowed money no problem. However should the economy crash, and the United States is unable to meet the legal obligation of debt repayment (‘defaulting‘) then Trump proposed to renegotiate that new debt at a lower rate.

While Trump did not say the word ‘default’ he explained the exact definition of the word default in his proposal.

This raised eyebrows by suggesting an unorthodox approach towards cutting the national debt… not paying it then renegotiate terms. Such a renegotiation risks creating financial turmoil because U.S. Treasuries are considered the safest assets on the planet and a major benchmark for valuing other securities. Calling into question their safety could cause borrowing rates to rise and create confusion in the markets.

Confusion in the markets is a very bad thing. Wall Street and businesses need to know what the rules are in order to subvert play them.

Media

http://video.cnbc.com/gallery/?video=3000515269

Trump Flip-Flops on Elements of His Tax Plan

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Presidential candidate Donald Trump today backed away a bit from his tax plan, describing it as open to negotiation.

Pressed by CNBC as to how he could simultaneously brand himself as a populist who will take on wealthy elites while proposing sweeping tax cuts for billionaires, Trump backed away from his plan.

I am not necessarily a huge fan of that. I am so much more into the middle class who have just been absolutely forgotten in our country.

Trump described his tax proposal, which was the most detailed policy paper he put out in the campaign, as merely a starting point for a future deal.

You know, when you put out a tax plan, you are going to start negotiating. You don’t say, ‘OK, this is our tax plan, lots of luck, folks.’ There will be negotiation back and forth. And I can see that going up, to be honest with you.

The Trump tax plan has attracted criticism in two main areas: first, in that it loses too much revenue, and second, in that it primarily benefits high-income taxpayers. Both are shown in the Tax Foundation analysis published last year. A third criticism, albeit a more subtle one, is that Trump’s plan reduces rates without doing much to improve tax bases, and therefore generates less growth than it could otherwise, as Tax Foundation President Scott Hodge has argued.

If Trump moderates some of the elements of his tax plan, he may want to consider getting rid of the preferential rate for pass through income, which benefits wealthier Americans and encourages relabeling, and also reducing the size of the zero bracket in his plan, which is about four times larger than the current standard deduction, and contributes substantially to the plan’s $10 trillion revenue loss.

(h/t Tax Foundation)

Reality

A politician changing their mind toward a better idea can be a good thing as it shows progress. But when a politician changes their mind, not organically, but timed as a means to maximize their popularity, this is called a flip-flop.

In our review of Donald Trump’s tax reform plan would reduce federal revenues by $9.5 trillion dollars over 10 years causing massive cuts from the military to Social Security. Any change here would be progress.

Media

Links

Stop The Donald Trump’s Tax Reform Analysis

Trump’s Unusual Plan to Lower the National Debt: Sell Off Government Assets

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As president, Donald Trump would sell off $16 trillion worth of U.S. government assets in order to fulfill his pledge to eliminate the national debt in eight years, senior adviser with the campaign Barry Bennett said.

“The United States government owns more real estate than anybody else, more land than anybody else, more energy than anybody else,” Bennett told Chris Jansing Sunday on MSNBC. “We can get rid of government buildings we’re not using, we can extract the energy from government lands, we can do all kinds of things to extract value from the assets that we hold.”

In a wide-ranging interview with The Washington Post, Trump said he would get rid of the $19 trillion national debt “over a period of eight years.” The article noted that most economists would consider Trump’s proposal impossible, as it could require slashing the annual federal budget by more than half.

Glenn Kessler, who writes the Post’s Fact Checker column, deemed the plan “nonsensical” and gave it “Four Pinocchios.” Kessler assessed that even if Trump were to eliminate every government function and shut down every Cabinet agency, he would still be short $16 trillion.

“We regret we have only Four Pinocchios to give for this whopper,” Kessler said. “Trump is insulting the intelligence of Americans for making such a claim in the first place.”

However, when pressed on whether the United States could sell off $16 trillion worth of assets, Bennett responded affirmatively on Sunday.

“Oh, my goodness,” he said. “Do you know how much land we have? You know how much oil is off shore? And in government lands? Easily.”

Reality

Under the Constitution the only land the Feds own is D.C., the ports, and military bases. The rest is owned by the States or private ownership. Read the Constitution Donald.

According to the U.S. Government Accountability Office, as of September 2015 the federal government’s assets totaled $3.2 trillion. However, that does not include include stewardship assets or natural resources which are not valued.

Trump is also missing the point that the federal budget is already running a deficit. So before Trump can start paying down the debt, he needs to eliminate the deficit — which year after year, is adding to the national debt owed to bondholders.

In conclusion, if you have $19 trillion, subtract $3.2 trillion, you are left with $15.8 trillion. Math is math, and Trump’s doesn’t add up.

Links

http://www.nbcnews.com/politics/2016-election/donald-trump-s-unusual-plan-lower-national-debt-sell-government-n549946

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