The Donald is an Economic Imbecile

One of the biggest fallacies about this election that you will hear far too often is that Donald Trump is a skilled businessman. When you start off as the heir to hundreds of millions of dollars in several decades ago money, owning a business empire at seventy years old is not impressive. Donald Trump has outsourced and bankrupt his way through a business career that is really only distinguished by branding of himself as a product. Trump is certainly no Bill Gates, Warren Buffett, or Steve Jobs.

The other part of this fallacy is the idea that even a good businessman is fit to run the country. Running a business is not the same as running a government. The two things aren't compatible. In business, your job is to turn a profit. In public-sector endeavors, the job is to provide good services to the public that meet their needs. The other over-riding factor is that sometimes a private business can go bankrupt or default on it's bonds, because it's in the best interest of the shareholders. In the public-sector, the government cannot do that. The "full faith and credit" of our nation, really the backbone of so much of the world economy, depends on the United States paying it's debts.

Enter here the failed businessman and economic illiterate, Donald Trump:

On CNBC this morning Trump suggested that one strategy he'll use for reducing the national debt is having bond holders accept "haircuts". To be clear what that means, he'll try to get people who own US Treasury bonds and are owned X to accept X/2, or some reduced amount of what they are owed.

That's called defaulting on a debt obligation.

In other words, he wants to put the US through something like bankruptcy. Now, to be clear, in the world of business this is not at all uncommon. In a bankruptcy proceeding almost everyone takes a haircut. Many lose everything. You were owed $7 million and you have to accept $2 million. It often happens in simple business negotiations too. Things aren't going great. Debt has to be restructured to help the company survive. A creditor thinks they might lose everything so they'll accept 50 cents on the dollar.

So all good, except the United States is not a struggling casino. It's a sovereign nation with sovereign debt.

It is not too much to say that centuries of American prosperity have been undergirded by the "full faith and credit of the United States." In other words, the US always pays its debts in full and on time. Indeed, it's black letter text in the US constitution that the country's debt can never even be questioned. Defaulting on the national debt would clearly be unconstitutional.

That's the constitution part, which is a weighty matter. But the entire architecture of the global economy and the United States place in it rests on the certainty and basic risklessness of US government debt obligations. It's as simple as that. (This has actually allowed the US to in effect have people pay the Treasury to hold on to their money since 2008.) Introducing the idea that the US might pay back only a portion of the returns on Treasury bonds would basically disrupt the entire global economy, have massive and traumatic knock-on effects on the US economy and its ability to service its own debt. It would be catastrophic, an entirely self-inflicted wound.

A private company may, from time to time, be in a position where bankruptcy is a superior option to paying. The impact is that it will cost much more for that company to service it's debt, and borrowing money will be harder. Think about that from a national standpoint- The United States of America has had an unprecedented run of low-interest bond sales to finance it's debt, because the United States is one of the safest investments in the world. Quite obviously, the U.S. would have to pay astronomical interest rates and make gigantic, painful cuts to everything it does if it didn't pay it's full debt. The secondary impact is that the entire global economy may collapse under Trump's plan, because so many investors do hold U.S. Treasury bonds, or debt, and we would wreck one of the safest investments in the economy. What Trump just said is dangerous.

Oh, and unconstitutional. For all of my conservative friends who like to cite an imaginary constitution of their's, here's something actually unconstitutional for you to chew on- from the presumptive Republican nominee for President.