Neil McManus

We just learned that the world’s most powerful person, Donald Trump, has a boss: the bond market. He may not have acknowledged this to himself, yet, but the global financial tumult he caused - and has temporarily eased - has locked him in a fiscal prison. Because, as I have been saying for 24 hours, he came perilously close yesterday to having caused such an extreme fall in the price of US government debt that it would have become prohibitively expensive for his administration to fund a large deficit - more than 6% of GDP - and also to refinance the almost $8 trillion of government debt that matures in the coming year (almost a third of America’s sovereign debt). The point is he is totally in hock to the good will of bonds investors. And when he announced his reckless roster of massive tariffs eight days ago he alienated them, because they feared he would tank the economy such that tax revenues would plummet and the deficit would balloon. So they sold US government bonds, Treasuries, and the yield on the bonds - the de facto interest rate - soared. Which is why Trump blinked, and put on hold the more extreme tariffs, except for the 140% on China, for 90 days. You might think the worst part of this is the uncertainty he has created for businesses and investors for the next 90 days. Since no one in their right minds would make a major US investment till the final tariff determinations are made. But the cancerous uncertainty is not the worst of it. The worst of it is he has shredded any respect that overseas governments and investors might have had for America’s economic and fiscal competence. Shades - you might say - of how Truss and Kwarteng’s unwise unfunded tax cuts undermined the perceived fiscal competence of the UK. But unlike Truss and Kwarteng, there is pretty much no mechanism for removing Trump. All of which means that bond and stock markets will remain fragile and volatile - fearful that Trump will regain his mojo and engage in some other fiscal extravagance. He has also handed a loaded gun to his perceived enemy, China, and his supposed ally Japan. This matters in both cases, because he is engaged in the mother of all trade wars with China - and Japan wants a trade deal with him that would see it escape mega tariffs. The loaded guns they have are their massive loans to the US government. Japan owns more than a trillion dollars of US Treasuries and China not much less. If they were to sell those bonds, or even if they chose not to refinance maturing bonds, that could be a disaster for Trump. Because it could cause another potentially crippling spike in bond yields. Here is the measure of Trump’s debacle. He may well have trashed America’s single most important financial competitive advantage, namely that investors have traditionally bought the dollar and US Treasuries at a time of economic and political uncertainty. No more - because he personally has become the world’s source of economic uncertainty snd anxiety. So, as I say he, is now in a fiscal prison. And if bond investors, including Japan and China, see him imposing tariffs or cutting taxes in ways they don’t like, they learned yesterday they have the means and power to stop him.