Financial news

Krugman Catches Trump’s Embarrassing Confusion About US Government Debt

By  | 

Via Economic Policy Journal

Paul Krugman has this right:

In addition to demanding that the Fed cut interest rates below zero, Trump declared that “we should then start to refinance our debt,” because “the USA should always be paying the lowest rate.” Observers were left scratching their heads, wondering what he was talking about.

Actually, however, it’s fairly obvious. Trump thinks that federal debt is like a business loan, which you can pay down early to take advantage of lower interest rates. He’s clearly unaware that federal debt actually consists of bonds, which can’t be prepaid (which is one reason interest rates on federal debt are always lower than, say, rates on home mortgages). That is, he imagines that the government’s finances can be managed as if the U.S. were a casino or a golf course, and it never occurred to him to ask anyone at Treasury whether that’s how it works.

Apparently, some of his readers were confused (imagine that), so Krugman went into further detail on Twitter:

Paul Krugman
Quite aside from his demand that the Fed adopt emergency stimulus measures when the unemployment rate is 3.7%, Trump’s tirade included the idea that the US should “refinance our debt.” Why is that a stupid, ignorant remark? 1/

Paul Krugman
The answer is that federal debt isn’t like a mortgage you can prepay; it’s bonds that promise a fixed yield until maturity. The government could issue new bonds and buy the old bonds back, but this wouldn’t reduce interest payments at all … 2/

Paul Krugman
·.. because while there are outstanding bonds yielding more than current rates — say, 10-year bonds yielding 3 percent — those bonds sell at a premium. So buying back, say, $1 trillion in debt wld cost more than $1 trillion — enough more that the interest wld be the same 3/


Print Friendly, PDF & Email

Hold dit netværk orienteret

READ ALSO  OPEC+ Cancels Its Press Conference