Donald Trump's Treasury Buyback Plan

Republican presidential candidate Donald Trump has made news in the past week with several comments about the national debt. In his remarks, he said that if interest rates on Treasury securities rise, he would buy back debt at a discount. He also said that the US would never need to default because it can always print money to finance debt. As part of our Fiscal FactCheck project, we explained how Trump's debt buybacks would work and discussed his comments about printing money.

Read the full explainer at Fiscal FactCheck.

Treasury buybacks have been done a few times historically during periods of large surpluses, most recently being undertaken from 2000 to 2002. The purpose of these buybacks has been to bring the amount of Treasury securities in line with borrowing needs and ensure that new more highly-traded Treasury securities continue to be issued. By contrast, Donald Trump’s proposed buybacks would be occurring in the context of deficits rather than surpluses. These buybacks could happen if interest rates increase as expected, providing an opportunity to buy back old debt at a discount. The result is that the total value of federal debt would fall, but the higher interest rates on the new bonds issued to finance the purchase would cause the federal government’s interest payments on the debt to remain about the same as before. Thus, the impact on the federal government's finances would be insignificant.

With regards to Trump's comment about default, it is true in a mechanical sense: because the US has its own currency and monetary policy, it can print money to buy bonds if investors are unwilling to buy debt at all or only at very high interest rates (assuming that the Federal Reserve is willing to print the money to do so). Of course, there are clear limits to this policy, and running up large amounts of debt and financing it by printing money would cause a jump in inflation and interest rates; at some point, default may actually look to be a more attractive option.

Read the full explainer at our Fiscal FactCheck page.

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