07 May 2016

Trump on Debt Default

Debt, Economics 47 Comments

So people are freaking out about Trump’s remarks concerning Treasury debt default. (E.g. Yglesias and Sumner.)

My initial response (on Twitter) was to contrast the freaking out with free-market economists who had favored debt repudiation as a sound (and moral) strategy.

But then I went and dug up Paul Krugman’s posts (one and two) from 2012, when he said that:

(A) The right wingers warning about big deficits leading to fears of default were wrong, but

(B) Even if the “bond vigilantes” did attack, it would be good for countries like Japan and the US, which have independent fiat currencies and not a lot of foreign-denominated debt.

Naturally, Krugman’s fans on Twitter denounced my dishonesty for claiming that was his position.

The whole thing is funny. I am partly guilty here too, to be sure, but I think when person X suggests “a Treasury default might be a good idea,” people’s reactions depend on who person X is.

Now note that this is not completely due to tribalism. I think it’s fair to say that Rothbard is pointing out an aspect of Treasury default that is admirable, whereas Krugman’s argument (namely, that it would depreciate the currency when the central bank is incapable of doing so, because of liquidity trap) relies on Keynesian nonsense.




47 Responses to “Trump on Debt Default”

  1. Major.Freedom says:

    According to the Keynesians, bankruptcy of a private company is a good thing when said company is relatively overextended.

    Yet, inexplicably, bankruptcy of the US Treasury is never a good thing.

    This ideological bias is ubiquitous in their whole theory. Makes sense, because with no Treasury there is no Keynesianism. It is selfish preservation of careers and status.

    Same goes for the Monetarists.

    • Dexter Morgan says:

      For anti-humanists like myself, bankruptcy is always a good thing in all it’s forms, for any and all reasons.

      • Major.Freedom says:

        Then give me all of your assets and you can declare bankruptcy.

  2. Ken P says:

    Krugman’s latest post/article is even more misleading than usual. He graphs the interest payment/GDP ratio over time I guess to show that we can afford the debt. Which is true – at today’s interest rates and with most of the debt financed short term to get the lowest possible interest rate. Effectively, we are financed with an ARM because we have to turn over at new rates constantly. We are betting on interest rates staying the same or going lower. While a lot of people believe they will, how many people would make that bet with their own money – on a house or a business? I wouldn’t.

    I think you are quite right to point to Krugman’s default is good argument. He is always pointing out people’s crazy statements as proof they are a nut job when he does the same thing.

    One thing Krugman and Trump have in common is the crazy belief that depreciating our currency is a good thing.

    • Ken P says:

      I botched that sentence in second paragraph. Add quotes: “default is good argument” and it will make more sense.

    • Tel says:

      If you see government as having a mortgage, then ultimately the Fed is the banker and government can easily twist the banker’s arm. Any profit the banker makes gets handed back to government again.

      It’s theatre. A financial Potemkin village.

      The real question is confidence in the US dollar, on an international basis. As long as the Fed can keep that plausibly stable, the system will keep going.

  3. Scott Sumner says:

    I have no idea what this post is even about. Krugman wasn’t suggesting he favored default on government debt, just the opposite. What’s your point?

    • Bob Murphy says:

      Scott, Krugman was saying if investors began to worry that Japan or US were going to default on their sovereign bonds, that this would help their economies. Right?

      • Major.Freedom says:

        To add to that, worrying over a default only makes sense if there is an actual possibility of default.

  4. Transformer says:

    “bond vigilantes” attacking (that Krugman said might not be a bad thing) is not the same as a government default (that Trump says might not be a bad thing).

    • Bob Murphy says:

      OK Transformer, but then at the very least Krugman et al. should be saying, “Yes, Trump’s talk of defaulting will help our economy initially when it crashes the currency. But when he actually pulls the trigger, things will get bad. And the bad outweighs the boost it gives initially.”

      Also, he never talked about the downside of the actual default back in the day. So bond vigilantes attack for no reason?

      • Transformer says:

        I don’t think I have seen Krugman comment on these particular statements from Trump but if did he would (to be consistent with his 2012 view) have to say that if Trump provoked Bond Vigilantism (?) it would be a good thing. But this would be totally different to saying that a default would be a good thing.

        Note: Bond vigilantees could attack because they fear greater inflation (inflating away the debt) as well as because they fear default.

        • Major.Freedom says:


          Krugman’s view in 2012 was that a debt default cannot be a bad thing, but will be a good thing, because the exchange rate of the USD will plummet, and at the same time M1 can be increased by the Fed at will, thus avoiding what took place in Greece where they did not have an independent central bank. There, M1 collapsed as the owners of the funds withdrew those funds out of the he country.

          This argument that bond vigilantes fearing a debt default is stimulative whereas actual bond default should be avoided, is an argument that presumes bond vigilantes can coherently regard a default as possible and not possible at the same time. To even talk about bond vigilantes fearing a debt default as being a good thing or a bad thing is already talking about a world in which such an event is possible. For that is the origin of the bond vigilantes beliefs.

          Did you see the offhand and non-chalant “in the short run” at the end of PK’s article?

  5. Tel says:

    Peter Schiff also had a few things to say about that, he was comparing the USA with Puerto Rico, based on a belief that math still works the same even in different localities.

    There’s a trick though: the USA can print money and Puerto Rico cannot do that. OK, interest rates might go up, but the Fed owns a good chunk of that debt anyhow (and as time goes on it will own more). Fed buys up the bonds, interest on the bonds becomes Fed profit, which in turn goes around into government revenue. Fully circular. Thus, there’s no need to worry about the US government ever being able to cover it’s debts on a nominal basis (of course price-inflation is always the enemy of the bondholder, but that was well known when the bonds were purchased).

    The side-effect of rising interest rates on non-government industry might be significant, those guys might be forced to default on corporate bonds, or perhaps the share market could go down… but that’s a separate question.

  6. Andrew_FL says:

    Where was Krugman when people were claiming the fight over the debt ceiling threatened to destroy reality by causing “default”?

    • Khodge says:

      So, rather than coin a trillion dollar coin, tailor a bunch of coins to match the debt of the top ten bond holders and treat the other 90% as if nothing changed. Sounds doable to me.

      • Andrew_FL says:

        I…this is in response to me? Huh?

  7. Adrian Gabriel says:

    Trump is not in any way aligning himself with Rothbard. Robert Wenzel has a great post describing how underneath it all Trump is a big spending Keynesian.


    As a matter of fact he is for the central bank and is not anywhere thinking like Austrian Economists.


    I am ashamed at any supposed Austrian supporting this Statist Socialist and what he is doing. He will grow the police state, be a big spender (as he has stated he supports public works projects), make limited cuts to things like social security, and has no understanding at all about sound economics and the business cycle.

    He has actually stated that low rates are not a problem and thus seems to be man that would elect a Paul Volcker-Keynesian economist to head the Fed. We Austrians should be adamant about supporting only those people that believe in sound economics and understand the business cycle.

    I find it really sad that certain Austrians think this guy is good for the Liberty movement. How so? He sounds just like FDR making promises about liberalizing the economy during his election during the Great Depression. He did just the exact opposite. Trump is a panderer that is a typical establishment crony capitalist businessman. Austrians should emulate only one man in regards to the current election, and that man is Ron Paul.

    I’m with Ron Paul, this guy is a dangerous and someone no Austrian should support.

    • LK says:

      Except more and more Rothbardian and Ron-Paul style libertarians morph easily into Alt Right pro-Trump nativists:


      • Major.Freedom says:

        “The title of the talk is called a refutation of libertarianism, but it could be sort of an autobiographical thing, because it really is the story of how I started out a libertarian individualist, but ended up being a racist, and an anti-semite kind of fascist.”

        So his “refutation” of libertarianism consists of his own moral failures and abandoning it.

        Lol, “more and more”…

        • guest says:

          I didn’t watch the whole thing, but I can solve this guy’s racism issues real fast.

          It’s not necessary to conclude that all blacks tend to be “urban primitives” because they *are* black, in order to correctly conclude that most blacks do, in fact, tend to be urban primitives.

          What this guy doesn’t understand is that blacks are targeted from youth to be propagandized into believing that Whitey is responsible for the difference in wealth that diverges on what race you are.

          They are raised to believe in Socialist values because they believe Capitalism comes from racist white people (completely ignoring the fact that whites “take advantage” of other whites as is consistent with Capitalism).

          That doesn’t make them a group in the sense this guy needs that word to mean.

          Again, notice that those blacks who don’t hold socialist views are called race traitors by their own.

          Also, the fact that SNL’s “The Day Beyonce Turned Black” trades on the fact that blacks have more than their skin color and/or heritage in mind in their definition of what it means to be black.

          News flash: Everyone already knew Beyonce has dark skin. Whoop dee doo.

          It is blacks’ political beliefs that make them engage in group think, not the color of their skin, per se.

          So, yes, even racist blacks are acting as individuals, not as a group.

          • Major.Freedom says:

            Those who disagree with the fact that capitalism punishes racism are often themselves racist, because they do not believe blacks are able to produce as good as whites. They view racist white business owners as not losing anything by hiring less productive whites, because blacks are even less productive.

            Affirmative action has held back blacks and hispanics especially, and it has harmed everyone to the extent that black and hispanic productivity has been reduced from what it otherwise would have been as a result of the anti-merit aggression in the marketplace.

            Imagine affrimative action in sports. It would reduce the quality of the product. Yet what is obvious seems to become unnecessarily convoluted when it comes to other industries.

            • guest says:

              “… are often themselves racist, because they do not believe blacks are able to produce as good as whites.”

              That’s an excellent point. That’s essentially what’s being said.

              I challenge the Black Community to get rid of the Minimum Wage *for Whites* in their communities.

              Put up, or shut up, right? Just try and “take advantage” of Whites by paying them so-called “slave wages”.

              The profit that those Blacks, who would do so, would make would create the incentive for other Blacks to make competing bids for their labor, and Whites would prosper.

      • E. Harding says:

        Same with me. I was a Rothbardian in 2010 and an Alt-Righter pro-Trump nativist as of 2015.

        • Andrew_FL says:

          You were a Rothbardian in 2010???

          • E. Harding says:

            Well, late 2009-early 2010.

        • LK says:

          You’re not so bad after all, E. Harding. lol..

          Any comments on this?:


          • E. Harding says:

            Technically true. I have no problem with the Fed financing the entire U.S. deficit; it wouldn’t even cause all that much inflation. But nominal interest rates of 20+%, double-digit inflation,deficits of over 15% of GDP will have the same effects as a technical default.

            BTW, how do we know a default of the U.S. government would even be all that harmful for anyone but the U.S. government? When a state goes bankrupt, does it result in that state’s economy collapsing?

            • LK says:

              E. Harding,

              But Trump just rejected default. He’s not talking about letting interest rates go to 20%, nor would the deficit need to go to 15% of GDP.

            • E. Harding says:

              OK, and I certainly don’t expect that under a Trump presidency.

      • Adrian Gabriel says:

        Not at all true LK. As I mentioned, Ron Paul is adamantly against Trump, and one of our very best, Robert Wenzel is pointing out that Trump is someone just like you following yours and Krugman’s rule book. He is suggesting the economy needs more money printed to pay for the debt burden, hence, he is suggesting debt monetization.


    • Gene Callahan says:

      I’m sure Trump is very worried about losing the “Austrian” 1% portion of the electorate.

      • Andrew_FL says:

        Well, he needs every percentage point he can get, but he’s also done his best to alienate much larger groups of people.

        I wonder if after Clinton’s inauguration he’ll finally announce it was all a goof, that he epically trolled the American people on purpose. Hell his popularity would probably go up if he did.

        • E. Harding says:

          Trump is currently in the process of unifying the Republican party. So far, it’s working.

          • Andrew_FL says:


          • guest says:

            Unifying to what end?

            Republicans during the 2012 presidential race were compromising all over the place to get unity.

            What’s the point in that? Some pretend gains like a reduction in the rates of increase of the deficit, and such.

            The center keeps moving left.

            I don’t want a unified Republican party, per se.

            • Andrew_FL says:

              guest, then I’ve got good news for you, it’s not happening. E. Harding should do stand up, this “Trump is totally gonna win, guys!” bit is hilarious.

  8. Khodge says:

    Politically, a default should be untenable and has been from the early days of the republic. Econmically, there doesn’t seem to be any value in a default because: Financially it is being proposed by a “businessman” whose entire business model is predicated on poor business sense and frequent bankruptcies.

    Again, financially speaking, if you are using debt for operating cash flow, rather than capital expenditure, you are doing something wrong. (Bribery and extortion of the individual states does not qualify as capital expenditure.)

  9. Scott Sumner says:

    Bob, Yes, but he wasn’t actually calling for default, which would be an insane idea, and I am pretty
    sure that Krugman would also view it as an insane idea.

    • Major.Freedom says:

      The costs of a Treasury default are not erased by inflation, they are merely redistributed. There is no such thing as a free lunch.

      Instead of the costs being borne by the Treasury and the debt holders, inflation redistributes the costs to those whose incomes increase last by the inflation, as well as everyone due to the very existence of the central bank that is itself an error in the creation of institutions.

      To respond to the idea of Treasury default as “insane” appears to be a cover for the lack any actual substantive argument.

      The US already defaulted on its debts in 1971 when the Nixon adminstration ceased remitting dollars for gold to other central banks. Prior to that, it defaulted on its debts in 1944 when it ceased remitting dollars for gold to the citizenry.

      • Tel says:

        The costs of a Treasury default are not erased by inflation, they are merely redistributed.

        That’s gonna sound mighty fine to the debt holders, when you consider there’s a lot fewer bond holders than there are people to redistribute your problems onto. Besides, soft-default by inflation (or by “redistribution” if you must call it that) has good precedent in the Savings & Loans getting destroyed with their long term fixed interest private assets while government inflated currency in the 70’s then upped the interest rates in the 80’s.

        Surely there’s plenty of numpties around ready to fall for the same tricks all over again? If they get stroppy over it we just blame the free market, demand more government powers and toss em a few food stamps… should settle things ready for the next mass shearing.

  10. guest says:

    I think it would hlep people understand us better if we used the term “correction” instead of “crash”.

    People think the economy is “crashing” rather than repairing.

    The hardships in a correction are caused by the removal of artificial stimulus for sectors of the economy that people have been mislead into investing in.

    Those sectors became naturally unsustainable with the introduction of stimulus because if consumers wanted the final goods that came from those particular structures of production, they wouldn’t need stimulus to survive.

    The solution is to stop producing what consumers won’t buy enough of, or can’t afford, to cover your costs. The longer it takes for producers to reallocate their resources to conform with consumer preferences, the longer the depression will be.

    And government stimulus prolongs the allocation process.

    • E. Harding says:

      “People think the economy is “crashing” rather than repairing.”

      -When prices are falling, too, it really is “crashing”, not repairing.

      • guest says:

        When consumers don’t want something, or can’t afford it, prices go down.

        You’re not repairing a “crashing” economy by propping those prices up – rather you’re ignoring consumer preferences or the scarcity of their wealth and causing more of the “overproduction” for which laissez faire gets blamed.

        (Printing money doesn’t create goods, directly, so it has the effect that counterfeit money does, except for the benefit of the government’s favored constituencies – the government is stealing from others on their behalf.)

        In all configurations of the economy, if you can’t get as much money as you’d like from consumers, that is information that you should be producing something else.

        Again, to say otherwise is to claim that certain producers and workers are *entitled* to patronage; that consumers are buying the “wrong” things.

        • guest says:

          Oh, and here’s a neat point I’ve been wanting to make:

          If consumer preferences are not the reason a business or industry is surviving, but rather government stimulus, investments in that industry will be necessarily speculative, all other things being equal.

          If consumers don’t want, or can’t afford, the goods from a particular structure of production, that business or industry is not supposed to survive.

          Why? Because you’re not supposed to produce what consumers won’t buy.

          And if they only buy because government stimulus has given favored businesses an artificial advantage over their competitors, then that’s cronyism.

          That’s not the creation of demand, but rather the supression of the fulfillment of higher-ranked consumer preferences.

  11. Iconicus says:

    Don’t start with “So”!!!

    • Andrew_FL says:

      This is the sort of errant pedantry up with which I will not put.

Leave a Reply