Donald Trump suggested America default on its debt. That would be a massive mistake: In this week’s town hall event televised by CNN, Donald Trump mentioned something alarming – but this might be his most insane idea to date. He said that if the Democrats do not give in to Republican pressures for spending cuts, it would be fine to let the government default on its debt of $31.4 trillion. This type of political brinksmanship is nothing new for Donald Trump, but it shocked financial experts and lawmakers from Trump’s party.
Consequences of Default
Negotiations between Republican and Democrats on Capitol Hill continue to be stuck in the mud ahead of the June 1 deadline to lift the debt ceiling. A default would shut down the government and create a ripple that could result in a financial crisis in markets around the world. The value of stocks and bonds would be negatively affected and ordinary American investors with 401k and IRA accounts would be particularly damaged. Payments to government workers, retirees on pensions, and veterans who look for monthly payments would cease. It could also result in layoffs and lower economic growth leading to a recession.
It’s Nearly Happened Before
Treasury Secretary Janet Yellen has stated a default could cause “financial chaos” and have an “adverse impact” on the dollar’s prominence as the global reserve currency. This doomsday scenario could begin June 1 if Congress doesn’t raise the borrowing limit.
Republicans in the Senate Do Not Support Trump’s Sentiment
GOP lawmakers mainly agreed with Yellen that a default would be disastrous, and that Congress would find a way to avert it. Republicans on Capitol Hill worked to create distance between their financial views and Trump’s.
Senator John Cornyn of Texas said to The Hill that, “Nobody thinks default is a good idea. Nobody.”
Senator Lisa Murkowski of Alaska said, “I don’t think anybody suggesting that ‘we have to do a default’ is wise policy, wise strategy for this country,” She said that Trump “certainly doesn’t impact” her thinking on the subject.
Senator John Thune of South Dakota explained that “most people recognize we need to do a deal here.”
Thorny Talks Could Take Another Two Weeks
On the House side of Capitol Hill, Republicans are confident in the bill they passed that would raise the debt ceiling to $1.5 trillion in exchange for cutting spending by $4.8 trillion. Yet President Joe Biden is not in favor of such a drastic red lining of the government budget. Negotiations between the president and top lawmakers will continue May 12.
The talks will likely go down to the wire as they have done before, although there is likely to be a compromise to avert catastrophe. Trump as a candidate and not a policy maker is never afraid to shake up the status quo as he attempts to appeal to his populist base. This take no prisoners strategy when going up against Biden is popular with the MAGA faithful. But many of these voters do not likely understand the consequences of a default.
Disastrous for Trump Supporters
They could lose in their investment accounts and perhaps fail to receive government transfer payments that they depend on to pay bills. Of course, Trump made more of a throw-away comment at the CNN town hall. He is known for musing about certain outcomes and playing the provocateur to make headlines. If there were a default, he could point to the chaos and say that he was the kind of negotiator who could have avoided the situation. It is a cynical ploy to get votes, his critics would say.
Judging from what Republicans support in the senate, it appears there is room for compromise coming from the right. The more conservative populists in the House may not agree with the senators, but they will eventually get in line, and hopefully the president and his Democrat allies in Congress can agree to a compromise and allow some spending cuts. Trump’s outlier comments on the debt default will then be forgotten.
Author Expertise and Experience:
Serving as 19FortyFive’s Defense and National Security Editor, Dr. Brent M. Eastwood is the author of Humans, Machines, and Data: Future Trends in Warfare. He is an Emerging Threats expert and former U.S. Army Infantry officer. You can follow him on Twitter @BMEastwood. He holds a Ph.D. in Political Science and Foreign Policy/ International Relations.