April 12, 2024

U S and Trump debt solutions

Today’s Events in Historical Perspective                                                                     
America’s Longest-Running Column Founded 1932
U.S. and Trump debt solutions
By Douglas Cohn and Eleanor Clift         
          WASHINGTON — The apparent dichotomy between Donald Trump’s debt and the U.S. federal debt may at first glance appear to be a correct description, but upon closer analysis the solution to both these financial dilemmas is the same.
          First, the national debt is now in excess of $34 trillion, but of this approximately $14 trillion is owed to itself. This includes $7 trillion to the Federal Reserve banks and $2.71 trillion to the Social Security Trust Fund, and the balance to other agencies and funds. Of course, this is nonsense. It is as though parents set up a college savings account for their children and then borrowed and spent the money from the account. In other words, the college savings account never existed.
          Interest on the national debt last year amounted to $.659 trillion. However, $14 trillion/$34 trillion equals 40 percent. This is the portion of interest due on debt the government owes itself. This leaves 60 percent of interest that is actually owed to people and entities outside the U.S. government. As a result, after subtracting 40 percent the actual total debt amounts to $20.4 trillion (rounded to $20 trillion). By likewise eliminating 40 percent of the imaginary interest owed to itself, the government is actually obligated only to pay 60 percent of the $.659 trillion interest for a total of $.3954 trillion (rounded to $.4 trillion)
          Dividing actual interest paid of $.4 trillion by the actual national debt of $20 trillion results in a real annual interest rate of just 2 percent. Despite conventional wisdom to the contrary, this is a very manageable debt, and the solution to reducing it is the same as it has been throughout our history. Just as the country overcame the enormous debt required to wage World War II, it can do so today: the nation can grow itself out of the debt with a strong economy. After all, the current GDP (Gross Domestic Product), the total of goods and services that represent the wealth of the nation, is currently at 3.3 percent annually.
          Returning to the college example, when a child eventually comes to the parents and seeks to cash in on the college savings account (which the parents have taken and spent), the parents can only produce the money through earnings or borrowing. If, like the U.S. government, the parents have thrived, the money will come from earnings, but not from some phantom savings account.
          Now, we come to the Trump analogy. His current debts due to judgments are in excess of $.5 billion. To appeal the decisions, he must provide the courts with that sum or post a bond, but no company is going to provide such a bond without him pledging solid collateral. Since he is known for leveraging his properties, the collateral would have to be a property’s value less mortgages on it, but a bonding company will make the evaluation on a fire-sale appraisal rather than a current market appraisal. In other words, pledging a billion-dollar property encumbered by $500 million in debt will not work. More likely, a bonding company would want a $2 billion property encumbered with no more than $500 million debt.
          If Trump actually has this sort of equity in his properties, his solution – should his appeals fail – will be the same as that for the U.S. government: he will need to grow his way out through increased revenue. Alternatively, he may choose to fall back on the source his son acknowledged in 2008: “In terms of high-end product influx into the U.S., Russians make up a pretty disproportionate cross-section of a lot of our assets.”
          Eleanor Clift’s latest book Selecting a President, and Douglas Cohn’s latest books The President’s First Year: The Only School for Presidents Is the Presidency and World War 4: Nine Scenarios (endorsed by seven flag officers).
          Twitter:  @douglas_cohn
          © 2024 U.S. News Syndicate, Inc.
          Distributed by U.S. News Syndicate, Inc.

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