Brother, Can You Spare A Bond?

Why Trump Blinked and Why You Should Be More Concerned Than You Already Are

Photo by Sonder Quest on Unsplash. A portrait of the Great Depression. “Brother, can you spare a dime?”

Yesterday, Trump announced a sudden change in plans after threatening to completely upend the world economy.

Just another normal day in the Administration, where Trump’s chief bank roller (Elon Musk) apparently thinks Trump’s top trade advisor and confidante is “dumber than a sack of bricks.”

It is a confused mess, and the stock market is reeling from the Trump-created economic rollercoaster ride.

Yet, to paraphrase the old saying from James Carville, the bond market can intimidate anybody, even a tariff-obsessed madman. And the “queasiness” of the bond market ultimately stayed Trump’s hand, thankfully.

Still, to leave it at that would not fully do justice to the possible spiral effects we could have witnessed had Trump damned the torpedoes and went full speed ahead. To understand why, let’s take a little closer look at the bond market. Without getting too technical about it, of course.

To put it very simply, there are short-term investments and then there are long-term investments. Daily stock trading is more of a short-term investment, and 10-year and 30-year Treasury notes are more of a long-term investment.

Up to now, Treasury notes have been viewed as a particularly safe kind of long-term investment. Why? Because they had the full faith and backing of no less than the United States federal government. In fact, they are investments in our own government’s debt.

In short, investors in these bonds bet on the continued great economic performance of an economy once called “the envy of the world” under the leadership of President Biden. In normal times, that is why Treasurys actually do well “during a sharp selloff in stocks.” Investors in these types of bonds can wait out a normal boom-and-bust cycle. They can even wait out many international conflicts and short-term political feuds.

However, both our short-term and our long-term economies are built on one thing: confidence. Without confidence, a U.S. dollar is worth no more than the paper you print it on, at the end of the day. Investors have confidence in our willingness to honor our obligations and our Constitution’s “full faith and credit” clause. Investors have confidence in our continued economic stability.

If we show signs of short-term shakiness, investors in Treasurys are willing to overlook that and wait out the recovery period that comes with even the worst recession. If our long-term future looks shaky, on the other hand, long-term investors will get, as Trump put it, “queasy”—and perhaps more than queasy.

It’s almost like this: say a bunch of men make a long-term bet in Mr. Financial Whiz’s new business. When they do so, they are basically saying, “we have confidence in Mr. Financial Whiz’s plan, his judgment, and his ability to do what he says he will do.” If Mr. Financial Whiz has some setbacks, that might not necessarily make these types of investors jumpy.

But if, say, investors start to wonder whether Mr. Financial Whiz has gone crazy, or whether he’s losing his memory, then they are much more likely to have second thoughts. Because their investment in Mr. Financial Whiz reflected, above all, their confidence in his judgment.

On the whole, the world has had confidence in America’s judgment and its ability to maintain its economic powerhouse. Up to now, no country looked like it was in a better position to pay its outstanding obligations and then some than America. Even as we saw China make great advances in semiconductors, AI technology, electric cars, and so many other things.

This time, though, we got a taste of what could happen if investors lose confidence in America’s judgment. Again, in normal times, when the stock market takes a hit, investors flock to the Treasurys as a safety valve. Except this time, even America’s safety valve was not thought of as a safe place to be.

You see, Trump’s unpredictable and nonsensical tariffs—extending even to the penguin islands—are not just material for jokes at America’s expense. To the contrary, they bring into question America’s role as a reliable trading partner. They also bring into question America’s role as a foundation for the entire world economy—something that so much of the international business world has taken for granted for decades.

That, you see, is why Trump blinked. Obviously, I do not want to overstate the crisis. It is very very hard for one man to completely break the spell of the dollar. On the other hand, the more unpredictable our economic policy gets, the more Trump tariffs come and go in the blink of an eye, the more House Republicans threaten to default on our national debt, the more our national debt will actually become a problem.

Confidence in America’s full faith and credit can die a sudden death or a death by a thousand cuts. Either way, trust and faith in U.S. stability has clearly been shaken for now. And by itself, no sudden rise in the stock market can cover over that.

Keep that in mind, Trump supporters. These types of moves are exactly the ones that eventually create fearful creditors ready to collect whatever they can get. That will be when we have a true “debt crisis.”

So make your voices clearly heard now. Before you get crushed under the burden of foreign and domestic investors trying to collect on their “sure bet.”