Trumponomics: Speak Loudly and Carry a Yuge Stick
When it comes to policy ideas, Donald Trump is hard to pin down. Now, though, the outline of a Trump economic theory has started to emerge. It isn’t pretty.
He doesn't place much faith in markets. He doesn't want an independent central bank. His views on currencies and sovereign debt rest on the principle that everything is negotiable, even contracts between creditors and borrowers. His main weapon wouldn't be the rule of law but bullying, especially of corporations that move outside the U.S. for competitive reasons.
It's foolhardy, of course, to predict what a President Trump would do. In recent days, he backed down on a campaign promise to eliminate the U.S.'s $19 trillion debt before admitting that that wasn't, well, realistic. Then he implied he would stiff the holders of U.S. Treasuries when he said he wanted to renegotiate that debt.
An uproar ensued, so Trump quickly clarified on Monday that he only meant that the U.S. could buy back debt when bond prices are down and interest rates, which move in the opposite direction, are up. To do that, however, the U.S. would need to issue new debt at the higher rates to buy back the old debt. While that might reduce the amount of debt outstanding, it might not lower interest-rate payments in the long run. So why bother? Good question.
The U.S. is able to borrow as much and as easily as it does because investors believe they can take the U.S.'s "full faith and credit" guarantee to the bank. As soon as they stop believing in it, the interest paid on U.S. Treasuries -- the rock upon which the global financial system rests -- would rise quickly, driving up the cost of financing the public debt.
Trump surely gets this, but seems to be signaling to China, one of the U.S.'s largest creditors, that he won't be pushed around just because they hold a bunch of American IOUs.
Trump went on to say Monday that the U.S. could simply print money if it ran into trouble paying off creditors. To Douglas Holtz-Eakin, a former Congressional Budget Office director who now runs a right-leaning think tank, that shows Trump doesn't believe in an independent Federal Reserve, which now makes the decisions about money supply. "If I were advising him," Holtz-Eakin said, "I'd say let's take a day or two off of this and talk about beauty pageants or something else you know about because this has got to stop."
Trump further revealed his economic vision on Monday by speaking up for a weaker U.S. dollar. This from the man who often castigates China for manipulating its currency downward to make it easier for Chinese exporters to sell goods in the U.S.
Most economists agree that, while China probably manipulated its currency in the past, the yuan is no longer undervalued. Trump, however, persists with the allegation. And on Monday, he implied that he would even mimic the strategy by pushing down the dollar's value. "If the value of the dollar goes up, it would be at this point not a very good thing."
His point? He won't play the global trade game by the same rules that modern Treasury secretaries and presidents have followed, namely, by repeating the sentiment that a strong dollar is good for the economy. If others want to engage in currency wars, Trump seems to be saying, then the U.S. can play that game, too.
But in doing so, he could hasten the day when the dollar is no longer the world's reserve currency. Most global trade is conducted in dollars, which means central banks must hold dollars to facilitate transactions. This amounts to interest-free loans to the U.S., which Trump's currency musings could endanger. There could be other consequences, too, such as making it harder to run a trade deficit and raising borrowing costs for the government, companies and consumers.
Trump was less revealing about his policy views when he spoke this week about taxes, though he did let Congress know that his extravagant tax-cut campaign proposal was just an opening bid.
Back in February, he offered a plan that would relieve 33 million households from paying income taxes at all, yet still give the largest tax break to those in the highest-income brackets. He would drop the top tax rate to 25 percent from 39.6 percent and the top corporate tax rate to 15 percent from 35 percent.
It's a jaw-dropping plan -- the Tax Policy Center, a nonpartisan research group, said it would tear a $9.5 trillion hole in the federal budget over 10 years. Maybe that's why, on Sunday, Trump said that was just to get talks started and that he might accept something less ambitious. "I always believe in flexibility," he deadpanned.
But then Trump went on to say that taxes on wealthy households would go up. He said, "The wealthy are willing to pay more," and followed that with, "I have a feeling we may pay some more." He backtracked on that, too, by saying he meant only that taxes might go up more than his opening bid envisioned.
In the end, it's hard for voters to know if Trump would cut, raise or hold steady existing tax rates, or whether his supporters would care.
But it's doubtful that Trump can win independent and Democratic voters by confusing them on taxes, casting doubt on the U.S.'s ability to make good on its debts or questioning the independence of the Fed.
At least Trump's economic vision is beginning to take shape. It can fairly be summed up as browbeating the rest of the world into submission, consequences be damned.
This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.
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