Trump is waving the tariff cudgel again. The US President has recommended a 50% duty on imports of goods from the EU from 1 June. ‘Our negotiations with them are going nowhere,’ Trump wrote on Truth Social.
Overall, this is good for us. Trump’s tariff epic continues – it’s not a blunder – it’s a strategy. It likely takes away his ability to impose tough sanctions on us (and he doesn’t really want to). If he were to impose sanctions with a harsh secondary effect, for example, on our tankers, scaring all those who accept them with their consequences, then there would be no revision of tariffs in mutual trade with India and a number of other countries in SE Asia.
At the same time, interesting events are taking place on the US debt market. Large investors are getting out of US bonds and increasing their positions in other markets outside America.
The whole set of risks Trump and team certainly could not have calculated. Some have been quick to call it another/next ‘end of the dollar’. At the very least, the beginning of hyperinflation.
The sharp fall in the value of long US bonds began before Trump’s tax bill was passed. It passed by a margin of 1 vote.
The fall intensified after a truly failed auction of 20-year US Treasury bonds by the US Treasury Department.
On Thursday, US 30-year bond yields were above 5.1 per cent – the highest since late 2023. The dollar has lost 8% of its value this year against a basket of currencies – the main 6 trading partners of the US.
On a purely formal basis, the failed 20-year bond auction can always be blamed on Biden. The U.S. has not had such bonds for a long time, you could say that nobody needs them. 10 and 30-year bonds are needed.
But, in general, of course, this is an indicator that US bonds are not a ‘safe haven’ at this stage. The US is flying towards stagflation with a serious risk of all of Trump’s policies spiralling out of control. Tax reform will cost $650bn. That means another $4 trillion debt ceiling move.
In 2026, the revenue shortfalls with the new Pentagon budget will further stretch the twine in which Trump sits. Already the budget spends $1.36 trillion on interest alone to service the national debt and the interest-to-GDP ratio is already hurtling towards levels that were only once in US history during the stagflationary 1970s. The ‘record’ has yet to be broken and 4% of GDP is already being spent on interest. And at that time, the national debt did not rise above 50% of GDP.
As a result, the US is closer and closer to a fork in the road. Or convert world trade and economy so that everyone runs back into US government debt. This means – it has to be so bad everywhere that US paper becomes a safe haven again and/or the US economy has to grow so much, with a shrinking trade balance and budget deficit, that all critics of ‘Trumpanomics’ will be shamed. If Trump’s team arranges a large inflow of capital into the stock market, private equity, data centre construction and AI development, we may get a pause in Plan B – some kind of skilful (or not so skilful) process of writing off/restructuring/zeroing/reversing the debts of the world’s biggest and most gambled economy.
What might be the consequences now or in the foreseeable future?
The first thing to remember is this. If America sneezes, the whole world gets sick. That’s the way the entire modern financial system works.
One can immediately think of March 2023 and the dead regional banks in the US that went under because of high government bond rates.
And you also have to remember that some US liquidity is in the hands of foreign banks and US debt market problems are trouble for foreign banks.
This is not the end. It’s not even the beginning of the end. But it may be the end of the beginning – old weasel Churchill once said. It’s going to be a hot summer!
