A default on U.S. Treasury debt is highly unlikely – that’s if you assume a rational President that follows decision-making protocol and prioritizes beneficial national and global outcomes. It’s true if you assume a Republican party that has the courage to control and remove a president if necessary. It’s true if you assume a qualified cabinet that will push back on a president’s decisions. And if you assume an informed electorate that won’t ignore a candidate’s felonies, lies and lack of integrity.
Think again. As President, Trump launched his steel and aluminum tariffs in 2017 out of anger at Chief of Staff John Kelley’s downgrade of Jared Kushner’s security clearance, Attorney General Jeff Sessions’s handling of an investigation of a Trump campaign associate, and Hope Hicks’ testimony before Congress regarding Russian meddling. In other words, his decision had nothing to do with the national or global good.
There were no approved explanations of why Trump issued his tariffs, no strategy to alert foreign trade partners or Congress, and no vetted communication other than an email that hadn’t been approved by White House advisers. No one at the State, Treasury or Defense Departments were notified in enough advance to react.
Donald Trump’s threatened tariffs will put pressure US profit margins, lead to job loss, weaken wage growth, and lower consumer spending – all classic causes of a recession. His tariffs are likely to lead to renewed trade hostilities that disrupt global commerce, create supply chain bottlenecks, and increase costs for consumers and businesses alike. The economies closely tied to US trade policy would bear the brunt and respond with retaliatory tariffs and replace the US with friendly trading partners as they did in reaction to Trump’s 2017 tariffs. Add to all that, Trump’s promise of a massive deportation of immigrants that will create a labor shortage and wage inflation.
Even worse, Trump could mismanage it into another depression. We came close during the Great Recession of 2008, but Presidents Bush and Obama’s cabinets had Treasury Secretary Henry Paulson (previously Goldman Sach CEO), Fed Chairman Ben Bernanke, and NY Fed President Tim Geithner , all qualified and experienced advisers who saved us from another depression. Every one of them had extensive experience in US and international monetary and economic policy. To get a sense of the challenge Trump would face in a financial crisis, take a look at how they were able to engineer a recovery.
They convinced Congress to pass a $700 billion bank bailout and an economic stimulus package in the face of public outrage. Then they coordinated the major central banks to announce that they’d lower interest rates at the same time and followed by cutting them by 50 basis points. Even China joined in. The Fed and five other central banks created a dollar liquidity facility across the major central banks to facilitate trade.
In stark contrast, Trump tossed experience, expertise and integrity to the wind in choosing his cabinet, and replaced them with loyalty and obedience to himself. The cabinet Trump’s chosen is the least qualified in American history compared with cabinets going all the way back to President Reagan.
Yet, Donald Trump Jr. warned Senate Republicans, “If you are on the wrong side of the vote, you’re buying yourself a primary…. And there’s a guy named Elon Musk who is going to finance it. The president gets to decide his Cabinet, no one else.” President-elect Trump’s proposed cabinet reveals the contempt he holds for the Senate Republicans in believing that they’ll surrender to his son’s threat and move Trump closer to a dictatorship.
Could all this lead to a second depression? It’s not so far-fetched. It took Presidents George W. Bush and Barack Obama’s cabinet to prevent the Great Recession from leading to another depression. Trump would be incapable of responding to a similar crisis.
Clearly, we’re better equipped now than in the 1930s to avoid a depression. In the 2008 recession, we lowered interest rates, back-stopped failing banks and money market funds, increased the money supply and bank capital, bailed out auto companies, gave tax rebates, stemmed mortgage foreclosures and purchased distressed mortgage-related assets. Economists suggest these moves avoided another depression. If interests stay where they are we could lower them as we did in the 2008 recession. Moreover, today, deposit insurance prevents runs on banks, nor is there the deflation that stifled investment and spending in the 1930s.
But the US was a large creditor nation then with the flexibility to borrow and provide liquidity and stimulus. However, in the 3rd quarter of 2024, the ratio of US debt was 120% of Gross Domestic Product, which would limit the flexibility to borrow our way to a recovery.
There are also similarities between the 1930s and today. Extensive tariffs, which economists believe deepened the Depression, are common to both. And there’s no telling whether Trump will double or even triple down on his tariffs, nor can we predict the extent to which countries might retaliate. Like Trump, President Hoover ignored many economists who warned against the risks that attend tariffs.
Trump has already signaled his fiscal irresponsibility in insisting that Congress cancel the debt ceiling and by his attitude towards debt. On the 2016 campaign trail Trump bragged “I’ve borrowed knowing that you can pay back with discounts, and it was good for me. I would borrow knowing that if the economy crashed you could make a deal.
At least, given Trump’s long history of defaulting on his debts, including in 6 bankruptcies, Congress was wise enough to stop him from eliminating the debt ceiling.
Republicans would be wise to accept the impossibility of predicting what Trump is capable of and reject his cabinet picks and what else is necessary to control his actions. A condition referred to as sociopathy might help though. It refers to people who lack empathy and are incapable of appreciating the pain of others. It seems that Trump checks all the boxes. So he can’t relate and is therefore unencumbered by the concerns of others. That allows him to effortlessly disrespect soldiers who were captured or killed defending their country, tether to White Supremacists, threaten Senate Republicans with primary challenges, all of this without a spec of guilt, shame, regret or remorse.
