by Peter G. Klein
US presidential candidate Donald Trump made more waves yesterday by suggesting he might attempt to reduce the US national debt by renegotiating with creditors. “Such remarks by a major presidential candidate,” intoned the New York Times solemnly, “have no modern precedent. The United States government is able to borrow money at very low interest rates because Treasury securities are regarded as a safe investment, and any cracks in investor confidence have a long history of costing American taxpayers a lot of money.”
But the idea that the US can never restructure or even repudiate the national debt — that US Treasuries must always be treated as a unique and magical “risk-free” investment — is wildly speculative at best, preposterous at worst. Every other borrowing entity — individuals, business firms, and governments — has the option of renegotiating interest payments and even defaulting on loans. It is hardly an extraordinary event, even for sovereign borrowing — that’s why lenders charge a risk premium beyond the return they require to compensate for time preference.