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King of Debt Seeks Presidency

May 5, 2016

On a lengthy interview on CNBC this morning, Donald Trump, the now presumptive Republican nominee, looked back on his business history to lay the groundwork to what he would do as President. He came as close as any major presidential contender to saying that America's formula for economic recovery might involve repaying our creditors less than what we owe. This is a major development that should be rewriting the playbook on Wall Street and call into question the risk-free nature of U.S. Treasuries.

Despite his public image as a premiere pitchman, marketeer, and builder of some of the world's most heavily gilded residential properties, Donald Trump owes his business success to his ability to walk into a roomful of people to whom he owes money and, through the use of threats, promises, bluster, and hardball negotiations, convince them to accept less than what he owes. Time and again he has used competitors' prior lending mistakes as a lever to get what he wants. That's why he has said repeatedly that he is "the king of debt."

Now that he has dispensed with all Republican rivals, the Donald is free to stake out economic positions that are in fact to the left of his likely opponent, Hillary Clinton. He made it clear that his priorities would involve massive infrastructure spending on America's roads, bridges, and airports. He also proposes some vague replacement for Obamacare, which certainly would involve some government financing. Given that such moves could massively increase the Federal budget deficits, these are positions that the Republican Congress has refused to touch.

But Trump also acknowledged a hint of realism that other politicians can't. He said that the U.S. economy remains extremely dependent on ultra-low interest rates, and that even a 1% increase in rates could be devastating. As a serial borrower, Trump "loves low interest rates" and made it clear that he would replace Janet Yellen with aRepublican Fed chairperson who feels the same (this is a bit like finding a vegetarian that loves cheeseburgers). But he also seems to understand that rates can't stay this low forever.

But how can we borrow more, in an environment where rates are bound to rise, without making our debt service costs rise substantially? Simple, you renegotiate, and force your creditors to either take less than what they are owed, or to wait longer before we pay (i.e. extending maturities, turning 3-year notes into 30-year Treasuries bonds with the same coupon.) He seems to understand that such radical moves would convince international investors to seek greener pastures, which would then devastate the value of the dollar. But he seems to be just fine with that.

In the CNBC interview he said that a strong dollar sounds good "on paper" but that a weak currency offers much greater benefits in the real world. In fact, he credits weak currencies as the primary weapon used by China to engineer its own success. He wants to do the same for America. Will voters support a plan whereby we stiff the Chinese and use the money to build shiny new airports and to finance health care options? I think they will.

Of course the Achilles heel of such a plan is that a significantly weaker dollar is bound to usher in a wave of inflation that could rival that of the 1970s. If Trump and his new lackeys at the Fed are unwilling to raise rates to counter that trend, the poor especially will suffer as purchasing power evaporates and poverty rates could soar. Debt has been his friend his entire career. Why should the leopard change his spots now? Especially as he has been so successful in taking down all the prey in his path.