Puerto Rico: Could Donald Trump Deploy the “Debt Bomb”?

After visiting Puerto Rico which had been devastated by the hurricanes, President Trump suggested that the island’s debt should be “wiped out”.  Immediately, Wall Street went into a panic mode and the mainstream media spouted that a.) he can’t do it; b.) he doesn’t know what he’s talking about; and c.) Cabinet members are “walking back” his comments. But they all missed the most obvious point — which is that there is no way that Puerto Rico can pay back the debt!  Trump is right, it must be written-off.

Puerto Rico’s economy is in an advanced state of collapse, and the Obama administration’s solution, the PROMESA bill, set up a financial oversight board to impose austerity in a futile effort to collect debt, which has instead accelerated the collapse.

In fact, it was under the Bush and Obama Administrations that the island’s circumstances deteriorated. Puerto Rico’s debt was downgraded to below investment grade in 2014.  In August 2015, it defaulted on $58 million in bonds.  Under the austerity regime brought in by PROMESA, the poverty rate soared to 45%, Medicaid health care for the poor was slashed, along with pensions — and the debt rose to over $74 billion.

After the underfunded and inadequate infrastructure that did exist had been destroyed by the hurricanes, Trump called for federal funds to be spent to upgrade the island’s infrastructure. In addition, he said to Fox News correspondent Geraldo Rivera: “They owe a lot of money to your friends on Wall Street and we’re going to have to wipe that out.  You’re going to say goodbye to that, I don’t know if it’s Goldman Sachs but whoever it is can wave goodbye to that.”

Wall Street went into a frenzy, and by the end of the day, Puerto Rico’s bonds had fallen to an all-time low, to 33 cents to the dollar. But the financiers’ reaction was not to the $74 billion of Puerto Rico’s debt that Trump mentioned, but to the principle behind it: what if Trump is serious about no more bailouts to banks, financial firms and hedge funds, with their exposures today larger than in 2008, including hundreds of trillions of dollars in derivative obligations carried on their books?

An increasing number of economists, including from the IMF and the BIS, have come to the same conclusion as American economist Lyndon LaRouche, that this debt will never be repaid, and is a nuclear time bomb waiting to blow up the global financial system, far beyond what happened nine years ago.  Trump’s statement on wiping out the Puerto Rico debt echoes a proposal made by LaRouche in 1982, when he advised Mexico’s President Lopez Portillo to use the “debt bomb” — to adopt a debt moratorium — to end the imperial looting system that was destroying nations and killing people then.

That is what is driving the panic on Wall Street.