That remark wasn’t exactly crazy. It echoed one by former Federal Reserve Chairman Alan Greenspan, who said in 2011:
People said I want to go and buy debt and default on debt – these people are crazy. This is the United States government. First of all, you never have to default because you print the money, I hate to tell you, okay? So there’s never a default.
Paying the government’s debts by just issuing the money is as American as apple pie – if you go back far enough. Benjamin Franklin attributed the remarkable growth of the American colonies to this innovative funding solution. Abraham Lincoln revived the colonial system of government-issued money when he endorsed the printing of $450 million in US Notes or “greenbacks” during the Civil War. The greenbacks not only helped the Union win the war but triggered a period of robust national growth and saved the taxpayers about $14 billion in interest payments.
The United States can pay any debt it has because we can always print money to do that. So there is zero probability of default.
Apparently he was referring to the fact that when interest rates go up, long-term bonds at the lower rate become available on the secondary market at a discount. Anyone who holds the bonds to maturity still gets full value, but many investors want to cash out early and are willing to take less. As explained on MorningStar.com:
I said if we can buy back government debt at a discount – in other words, if interest rates go up and we can buy bonds back at a discount – if we are liquid enough as a country we should do that.
But critics still were not satisfied. In an article titled “Why Donald Trump’s Debt Proposal Is Reckless,” CNNMoney said:
If a bond with a 5% coupon and a ten-year maturity is sold on the secondary market today while newly issued ten-year bonds have a 6% coupon, then the 5% bond will sell for $92.56 (par value $100).
Trump, however, was not talking about borrowing the money. He was talking about printing the money. CNNMoney’s response was:
[T]he federal government doesn't have any money to buy debt back with. The U.S. already has $19 trillion in debt. Trump's plan would require the U.S. Treasury to issue new debt to buy old debt.
The Hyperinflation that Wasn’t
That can cause inflation (or even hyperinflation), and send prices of everything from food to rent skyrocketing.
Central banks have been pumping money into the global economy without a whole lot to show for it other than sharply higher stock prices, and even that has been on the downturn for the past year. Growth remains anemic, and worries are escalating that the U.S. and the rest of the world are on the brink of a recession, despite bargain-basement interest rates and trillions in liquidity.
As Dean Baker, co-director of the Center for Economic and Policy Research in Washington, wrote in response to the debt ceiling crisis in November 2010:
Advocates of helicopter money do not really intend to throw money out of aircraft. Broadly speaking, they argue for fiscal stimulus—in the form of government spending, tax cuts or direct payments to citizens—financed with newly printed money rather than through borrowing or taxation. Quantitative easing (QE) qualifies, so long as the central bank buying the government bonds promises to hold them to maturity, with interest payments and principal remitted back to the government like most central-bank profits.
An even cleaner solution would be to simply void out the debt held by the Fed. That was the 2011 proposal of then-presidential candidate Ron Paul for dealing with the debt ceiling crisis. As his proposal was explained in Time Magazine, today the Treasury pays interest on its securities to the Fed, which returns 90% of these payments to the Treasury. Despite this shell game of payments, the $1.7 trillion in US bonds owned by the Fed is still counted toward the debt ceiling. Paul’s plan:
There is no reason that the Fed can’t just buy this debt (as it is largely doing) and hold it indefinitely. If the Fed holds the debt, there is no interest burden for future taxpayers. The Fed refunds its interest earnings to the Treasury every year. Last year the Fed refunded almost $80 billion in interest to the Treasury, nearly 40 percent of the country’s net interest burden. And the Fed has other tools to ensure that the expansion of the monetary base required to purchase the debt does not lead to inflation.
Get the Fed and the Treasury to rip up that debt. It’s fake debt anyway. And the Fed is legally allowed to return the debt to the Treasury to be destroyed.
The combination of fiat money and Globalization creates a unique moment in history where the governments of the developed economies can print money on an aggressive scale without causing inflation. They should take advantage of this once-in-history opportunity . . . .