The elders of America’s Republican Party have been pulling their hair out trying to understand why loudmouthed New York property mogul Donald Trump leads the race for the 2016 presidential nomination. One explanation they may not have fully considered is monetary policy.
Cheap money has helped the brash billionaire become rich as Croesus while his companies have serially reneged on their debts. While it is true that bankruptcy codes long ago undermined “dictum meum pactum” – or my word is my bond – in dealings between creditors and borrowers, there’s still something unsettling about a potential leader of the free world whose word seems to be worth so little.
As a businessman, Trump is a creature of the Federal Reserve’s decades of easy money. Low interest rates lift all economic boats, but few more so than real estate assets – the main source of Trump’s financial success. His wealth, which Forbes pegs at $4 billion (the candidate suggests twice as much), not only helps him to fund his primary campaign, it shapes his narrative as an entrepreneur and outsider to the Washington establishment.
Trump succinctly summed himself up in last week’s GOP debate this way: “I’m Donald Trump. I wrote ‘The Art of the Deal.’ And I say this not in a braggadocious way – I’ve made billions and billions of dollars.”
For once, Trump is unequivocally right about something: He needn’t brag. Trump’s career has perfectly coincided with a 30-year mega-cycle during which the cost of money has marched ever downward. The nominal rate on the 10-year U.S. Treasury has slipped to about 2.2 percent today from 15 percent in 1981, the year in which Trump said money is “totally unessential – but something you should certainly try and have enough of.”
As risk-free rates decline, future projected cash flows look more attractive. Consequently, investors have flocked over the years to Trump’s many projects, even though he has a history of defaulting on his obligations. As his rival Carly Fiorina put it to him at last week’s GOP debate: “You ran up mountains of debt, as well as losses, using other people’s money, and you were forced to file for bankruptcy not once, not twice – four times.”
As Trump is quick to rejoin, his great familiarity with the bankruptcy process is a sign of his business acumen. But he is not appealing to the American people to become the CEO of a corporation governed by the laws of Delaware. He wants to be president of the United States – a nation with more than just financial promises to honor. He would be the first contender for the Oval Office with so demonstrable a record of broken vows.
Though all of his transgressions were perfectly legal, Trump’s bankruptcy recidivism suggests a flawed character. It is deeply embedded in Judeo-Christian philosophy that an honorable man sticks to his vows. In the book of Numbers (30:2), Moses tells the heads of the tribes of Israel: “If a man vows a vow to the Lord, or swears an oath to bind himself by a pledge, he shall not break his word. He shall do according to all that proceeds out of his mouth.”
And while there are no doubt many financiers of the leveraged buyout variety who would argue otherwise, many business people still consider it dishonorable to break promises, even if the law is forgiving. And though there is a difference between personal and corporate bankruptcy, Trump has often blurred the line, for instance by very often using the Trump name for his companies and in negotiations.
“It is not good thinking – either at the corporate level or at the personal level – to believe you can simply walk away from your circumstances,” was how Gerard Arpey, who resigned as chief of American Airlines in 2011 to protest the board’s decision to seek bankruptcy protection, put it to Michael Lindsay, author of a book on executive leadership and president of Gordon College, a Christian liberal arts college. Arpey also provided a pragmatic justification for keeping promises in business. “It’s important to the character of the company and its ultimate long-term success to do your very best to honor those commitments.”
Bondholders have not always been indulgent about Trump’s bankruptcies. They nearly swiped his yacht and shuttle airline in the 1991 bankruptcy of the Trump Taj Mahal casino in Atlantic City. From that episode, Trump figured out that he should not put his personal assets at risk for his companies. The lenders seem not to have learned much, as Trump and his companies rolled them on three more occasions.
That is their stupidity, but it is also reflects a wider market failure to price credit risk in an era where the cost of money is so low. “I like low interest rates,” Trump told Bloomberg TV in August, adding that “from the country’s standpoint, I’m just not sure it’s a very good thing, because I really do believe we’re creating a bubble.”
The question is whether the Trump political bubble will be as difficult to deflate as the monetary one.