Donald Trump has now suggested that America should “renegotiate” its national debt, similar to what has been done in Argentina, Greece and other low or middle income states.
That has upsetted some writers because it would jeopardize the status of U.S. Treasuries as “risk-free investments”. In a way they have a point as the higher borrowing cost this would mean would most likely outweigh any gains from debt writedown for the U.S. government, so Trump’s suggestion would be as he would put it, “a terrible deal”. While Trump may be a good businessman, he sure doesn’t understand economics.
One much smarter way to in effect repudiate its national debt is to use the old fashioned method of pursuing more inflationary policies by the Fed. That way the debt burden will decline even as Treasuries remain formally “risk free”. Because of money illusion and accounting rules, de facto debt writedowns through inflation are feared much less by investors than formal debt writedowns and would mean much lower borrowing costs for the U.S. government.