While Europe slept last night, a legal bombshell exploded over Trump’s trade policy. The U.S. Court of International Trade—America’s specialist federal court with exclusive jurisdiction over trade disputes—delivered what can only be described as a devastating blow to presidential overreach. In simple terms, a three-judge panel told Trump: No, you cannot do this.

This is genuinely remarkable.

The Court of International Trade has traditionally shown considerable deference to presidential trade actions, making this unanimous rebuke all the more significant.

The court found that Trump had exceeded his constitutional authority under the International Emergency Economic Powers Act (IEEPA)—a 1977 law that grants presidents certain emergency powers but, as the judges made crystal clear, does not permit circumventing Congress’s constitutional role in setting tariffs.

The Magnitude of What Just Happened

The implications are massive. The court has blocked Trump’s entire “Liberation Day” programme announced for April 2nd: the 30% tariffs on China, the 25% tariffs on certain Mexican and Canadian goods, and the 10% universal tariffs that would have affected virtually all U.S. imports. The whole edifice has crumbled.

Importantly, however, the ruling does not affect the 25% tariffs on automobiles, auto parts, steel, or aluminium imposed under Section 232 of the Trade Expansion Act. These remain in force, as they were implemented under different legal authority with proper procedural safeguards.

For us Europeans, this is particularly significant. Trump announced 20% tariffs on all EU imports on April 2nd, subsequently suspended for 90 days while threatening to escalate them to 50%. Just two days ago, he was boasting about how his threats had encouraged accelerated EU trade negotiations. Well, that leverage has just evaporated.

Why This Matters Beyond Trade Policy

This ruling means, in principle, that Trump’s ability to arbitrarily adjust tariff rates is finished. If he wants permanent tariff increases, he must pursue legislation through Congress, where securing support for comprehensive trade barriers will prove far more challenging. This could spell the end of Trump’s trade war madness—the most destructive element of his economic policy.

Let me be clear: this is THE MOST POSITIVE DEVELOPMENT IN THE US THIS YEAR.

Market reaction was immediate, though perhaps more muted than one might expect — U.S. equity futures are up 1-1.5% as I write this, with similar gains across Asian markets this morning.

This relatively modest response likely reflects partial anticipation of the ruling and awareness that the Trump administration has already appealed.

But make no mistake—this is profoundly positive. Trump has been significantly constrained, dramatically reducing uncertainty about global trade policy. This doesn’t mean everything is rosy, and I predict markets will soon shift attention to the next problem: the gaping hole in the U.S. federal budget.

A Personal Note on Constitutional Victory

I’m especially pleased to note that my friend Ilya Somin played a pivotal role in this case. As co-counsel with the Liberty Justice Center, Ilya was instrumental in challenging these tariffs and defending constitutional limits on presidential power.

His argument was elegantly simple yet devastatingly effective: “If starting the biggest trade war since the Great Depression based on a law that doesn’t even mention tariffs is not an unconstitutional usurpation of legislative power, I don’t know what is.“

Following yesterday’s ruling, Ilya emphasised that the court “unanimously ruled against this massive power grab by the President.”

This wasn’t just a technical legal victory—it was a triumph for the principle that even presidents must operate within constitutional boundaries.

The Constitutional Economics at Stake

The case, V.O.S. Selections, Inc. v. Trump, consolidated with challenges from twelve states, produced a unanimous verdict from a politically diverse panel: Judge Timothy Reif (Trump appointee), Judge Gary Katzmann (Obama appointee), and Judge Jane Restani (Reagan appointee).

When judges appointed by three different presidents spanning four decades agree, you know the constitutional violation was egregious.

The court’s reasoning cuts to the heart of American constitutional structure. Congress alone has the power to “lay and collect Taxes, Duties, Imposts and Excises” under Article I, Section 8. No president—regardless of claimed emergencies—can usurp this fundamental legislative prerogative.

The judges explicitly rejected the notion that persistent trade deficits constitute the “unusual and extraordinary threat” required to invoke emergency powers.

What’s particularly satisfying from an economic perspective is the court’s recognition that trade imbalances represent “normal ongoing problems” rather than emergencies.

Average U.S. tariff rates had risen from 2.5% to 27% between January and April 2025—a tenfold increase that would make Smoot and Hawley blush. The court understood that accepting Trump’s theory would permanently transfer Congress’s trade powers to the executive branch.

Why Markets Should Celebrate This Constitutional Victory

Policy uncertainty—particularly trade policy uncertainty—acts as a poison for market expectations and business investment. Trump’s arbitrary tariff threats created precisely the kind of regime uncertainty that makes corporate planning impossible and freezes capital allocation decisions.

When businesses cannot predict next quarter’s input costs, they stop investing. When supply chains face constant disruption threats, efficiency collapses.

Yesterday’s ruling doesn’t just constrain Trump; it establishes precedent limiting all future presidents.

The application of the “major questions doctrine” to trade policy means executives cannot make sweeping economic changes without clear congressional authorisation. This return to constitutional order should reduce the trade policy volatility that has plagued global markets since 2017.

This is how constitutional constraints create economic value. By limiting arbitrary executive power, courts reduce the risk premium businesses must factor into every decision. Lower uncertainty means lower required returns, which means higher asset values and more investment. It’s not complicated—it’s basic finance.

What Happens Next

The Department of Justice has appealed to the U.S. Court of Appeals for the Federal Circuit, with the White House predictably declaring that “unelected judges” shouldn’t decide national emergencies.

Supreme Court review seems inevitable given the constitutional stakes. But even if the high court eventually hears the case, the immediate blocking of these tariffs provides crucial breathing room for the global economy.

Today, I celebrate with markets that the US still has checks and balances, that constitutional limits mean something, and that economic sanity can occasionally prevail over populist madness. The fact that my friend Ilya helped architect this victory makes it even sweeter.

Congratulations, Ilya—you’ve literally changed the world for the better. Sometimes David really does defeat Goliath, especially when David has the Constitution on his side

On Friday, Moody’s delivered a sharp warning to U.S. policymakers, downgrading the government’s credit rating from Aaa to Aa1.

While this is not yet the beginning of a full-blown fiscal crisis, it may very well represent the first spark that sets one in motion.

The bond market responded immediately. Today, the yield on 30-year U.S. Treasuries surged above 5% for the first time since October 2023, briefly touching 5.03% before settling just below that threshold.

This is not a trivial technical move—it signals that financial markets are starting to lose patience with Washington’s fiscal recklessness.

It’s the Level, Not Just the Change, That Matters

As most economists understand, it’s not merely the fact that yields are rising—it’s the relationship between interest rates and nominal GDP growth that determines debt sustainability.

The graph below illustrates this dangerous dynamic. When the interest rate on government debt rises above the nominal growth rate of the economy, the debt-to-GDP ratio starts to increase automatically. Without meaningful fiscal reform, this leads to an accelerating debt burden and, eventually, a loss of investor confidence.

This was precisely the trap that ensnared the PIGS economies—Portugal, Italy, Greece, and Spain—during the euro crisis from 2009 to 2015. Nominal growth collapsed, interest rates shot up, and debt burdens exploded. Fiscal austerity, IMF and EU bailouts, and a lost economic decade followed.

The United States is not there yet—but it is dangerously close to the critical threshold where markets will no longer tolerate inaction.

The Return of the Unpleasant Monetarist Arithmetic

Back in the 1980s, economists Thomas Sargent and Neil Wallace described the “Unpleasant Monetarist Arithmetic,” and it’s just as relevant today.

If fiscal authorities refuse to consolidate deficits, the central bank eventually becomes the only institution capable of preventing a sovereign debt crisis—by monetizing the debt. But that solution comes with a heavy price: higher inflation, currency depreciation, and the erosion of the central bank’s credibility.

This is not a theoretical concern. The Federal Reserve may soon face a brutal choice:

• Tolerate higher long-term interest rates and risk a fiscal doom loop.
• Cap yields through aggressive bond buying, risking a dollar crisis and elevated inflation.

Neither path is attractive. But unless fiscal policy changes dramatically, one of them will become unavoidable.

The Political Class Is Asleep at the Wheel

Rather than confronting the fiscal reality, the Trump administration is doubling down on pro-cyclical policies. The proposed “One Big Beautiful Bill Act” promises sweeping tax cuts that would add an estimated $3.3 trillion to the deficit over the next decade—with no serious spending reforms in sight.

Treasury Secretary Scott Bessent understands the risks, but he has failed to generate the necessary crisis awareness in Washington.

The Dollar’s Exorbitant Privilege Has Limits

The U.S. does have one major advantage over the PIGS economies: it issues the world’s dominant reserve currency and controls its own central bank. But that privilege is not unlimited.

If markets start to believe that the Federal Reserve will be forced into yield curve control (YCC) and large-scale debt monetization, the dollar will come under intense pressure. Capital will flee U.S. assets, the dollar will weaken sharply, and inflation expectations will rise.

A full-scale dollar crisis would likely unfold in five brutal phases:

1. Rising Term Premium and Yield Curve Steepening.
2. Sudden Capital Flight from Dollar Assets.
3. Forced Federal Reserve Intervention through YCC.
4. Surging Inflation and Loss of Dollar Confidence.
5. De Facto Debt Restructuring via Inflation.

This isn’t just theory—it’s the historical script from Latin America in the 1980s, the UK in the 1970s, and even the U.S. during the Great Inflation era.

We’re Not in a Crisis Yet—But the First Spark Has Been Lit

Let’s be clear: the U.S. is not yet in a full sovereign debt or dollar crisis. But the market signals are unmistakable, and the critical threshold is fast approaching.

The bond vigilantes have not fully reawakened—but they are stirring. And history tells us that when the bond market finally asserts itself, it does so quickly and mercilessly.

Washington still has time to avert this crisis. But that window is closing rapidly. If policymakers continue to ignore the warning signs, the fiscal reckoning may arrive far sooner—and hit far harder—than anyone expects.

Today, 17 May 2025, US President Donald Trump took to Truth Social and delivered yet another economically illiterate proclamation.

In a characteristically bombastic post, Trump lashed out at Walmart, the world’s largest retailer, for daring to suggest that his newly imposed tariffs would lead to higher consumer prices. Trump thundered that Walmart should simply “EAT THE TARIFFS” rather than pass the cost on to customers, warning ominously, “I’ll be watching, and so will your customers!!!”

For those of us who remember the tragic farce of Zimbabwe’s hyperinflation under Gideon Gono, this is depressingly familiar.

Back in 2007, Gono, as Zimbabwe’s central bank governor, physically threatened shopkeepers in Harare for raising prices in response to the collapsing Zimbabwean dollar.

He demanded they hold prices flat while the printing presses ran wild. The result? Empty shelves, a flourishing black market, and eventually a currency so worthless it had to be abandoned.

Now, Trump is playing a similar hand. Rather than accept the obvious—that tariffs are taxes on American consumers—he has resorted to blaming businesses for following the basic laws of economics.

This is not “America First.” It’s economic populism dressed up as patriotism, and it risks doing to the U.S. economy what Gideon Gono did to Zimbabwe’s.

Basic Economics 101: Tariffs Are Taxes on Consumers

Let’s be clear: tariffs are nothing more than import taxes. When Trump slaps a 30% tariff on Chinese goods or a 25% tariff on Mexican imports (or whatever the rates are this week…), it raises the cost of those goods by exactly that amount unless offset elsewhere.

And contrary to the magical thinking on display in the White House, businesses with razor-thin margins—like Walmart—cannot simply “absorb” those costs without severe consequences for profitability and investment.

Walmart’s net profit margin hovers around 3%.

A 10% tariff already eats through that margin, and Trump’s proposed tariffs are significantly higher. This isn’t rocket science; it’s Econ 101.

Yet, Trump continues to pedal the fiction that tariffs are somehow “paid by foreigners.” Empirical studies from the Peterson Institute and the Federal Reserve have shown that nearly 100% of the cost of previous tariffs during Trump’s first term was passed directly on to American consumers.

As Walmart’s CEO Doug McMillon bluntly told investors, “There’s only so much we can do before these tariffs hit the consumer directly.”

And hit they will. Expect significant price increases across essential categories—from groceries to household appliances—as these tariffs take full effect.

Déjà Vu: Populists Blaming Business for Inflation

Does this all sound familiar?

It should. Back in 2021–22, the left-wing populists, led by then-Vice President Kamala Harris, blamed rising prices on so-called “greedflation.”

Harris accused businesses of price-gouging and demanded regulatory crackdowns. Yet, as I wrote at the time, this was pure economic nonsense.

Greed doesn’t suddenly appear or disappear—it’s a constant. What changed was the policy environment: massive fiscal stimulus and extremely easy monetary policy created a tidal wave of demand chasing limited supply.

I correctly forecasted that the U.S. was heading for double-digit inflation before the end of 2021—an out-of-consensus view at the time but one that proved painfully accurate (See link to my post from April 2021 below.)

That inflationary surge wasn’t caused by greedy CEOs; it was driven by the largest fiscal expansion since WWII and a Federal Reserve asleep at the wheel, maintaining ultra-loose policy while the money supply exploded.

The result? Inflation peaking near 10% in mid-2022.

Now, we’re witnessing the same intellectual laziness from the populist right. Trump and his tariff czar, JD Vance, have resurrected the greedflation narrative, merely swapping out Kamala Harris for Walmart’s boardroom. This is the same fallacy, just in a different political costume.

The Real Culprit: Trump’s Self-Inflicted Supply Shock

Unlike 2021–22, the inflation pressure we’re seeing today in 2025 isn’t driven by excessive demand. This time, it’s a classic negative supply shock created by Trump’s own policies.

His sweeping tariffs are raising input costs across the board, from raw materials to finished consumer goods. And with global supply chains already fragile, this couldn’t come at a worse time.

Former Treasury Secretary Larry Summers recently warned that Trump is repeating exactly the same mistakes he accused Biden of making: engaging in policies that fuel inflation while denying responsibility for the inevitable consequences. As Summers put it, “Trump’s inflationary errors are on track to exceed those of the Biden administration.”

Indeed, we’re already seeing this unfold. The University of Michigan’s consumer sentiment survey shows a sharp uptick in inflation expectations, with over 75% of respondents citing Trump’s tariff policies as a direct cause for concern.

Bond yields are rising as the market begins to price in higher inflation and the likelihood that the Federal Reserve will be forced back into a tightening stance.

Nixon Redux: The Ghost of 1970s Stagflation

If all of this sounds eerily like the 1970s, that’s because it is. Richard Nixon famously imposed tariffs, pressured the Federal Reserve to maintain easy monetary policy, and capped it all off with wage and price controls.

Initially, it seemed to work. Inflation was suppressed temporarily, and Nixon won re-election in a landslide in 1972. But as Milton Friedman warned at the time, this was a temporary illusion. When price controls were lifted, inflation exploded. The result? A decade of stagflation, culminating in the brutal recessions of the early 1980s.

Trump is following Nixon’s failed playbook almost to the letter. He demands easy money from the Federal Reserve, imposes protectionist tariffs, and now bullies private companies to hide the inflationary consequences of his own policies. The parallels are so strong that we might as well call this economic agenda “Trumpflation.”

And the risks don’t end there. Trump is also politicising America’s regulatory institutions. The SEC, now headed by loyalists, is reportedly being used to harass companies that fall out of favour with the administration. This is a dangerous path toward market dysfunction and authoritarian control over the economy.

Conclusion: The Markets Are Not Wrong — Policy Is

When I predicted double-digit inflation in 2021, I based that view on sound monetarist principles. I saw the liquidity overhang, the explosion in broad money supply, and the refusal of the Federal Reserve to act.

Today, I see a different but equally dangerous dynamic: a negative supply shock engineered by reckless tariff policies, coupled with political interference in market processes.

The lesson remains the same. You cannot defy the laws of economics indefinitely. Prices will adjust. Markets will clear. And if policymakers refuse to accept that reality, they will face the wrath of both markets and voters.

Expect more volatility in bond and equity markets. Expect higher inflation prints in the months ahead. And unless there is a dramatic reversal of course, prepare for the possibility that the U.S. economy will once again flirt with stagflation.

Trump’s message to Walmart may have been “I’ll be watching,” but the real message from the markets should be this: We’re watching too. And we’re not buying the nonsense.

And let me add a final, more ominous warning. The real economic and political danger will surface when bond yields start to surge in earnest. Trump will not stop at blaming Walmart and other retailers. The financial sector will inevitably come under attack as interest rates rise and financial markets become more volatile.

Expect banks, asset managers, and financial institutions—those the MAGA movement derisively labels as “globalists”—to be the next scapegoats. Apple, Amazon, and other iconic American technology companies, already frequent targets of populist ire, will find themselves in the crosshairs again, accused of everything from offshoring profits to conspiring against American workers.

And it won’t stop there. If Trump and his economic enforcers truly follow the logic of their interventionist policies, we may soon see demands for not only price controls on groceries and essential goods but also capital controls to prevent financial outflows and currency weakness.

This is a dangerous road—one that risks undermining America’s standing as the world’s premier financial safe haven. Capital controls may start as temporary measures to “protect American jobs” or “stabilise the dollar,” but history teaches us that once such controls are introduced, they are politically difficult to unwind.

In short, the slide from protectionism to outright economic repression is steep and slippery. The populist rhetoric that begins with tariffs and scapegoating Walmart can quickly escalate to attacks on financial freedom and property rights. Investors, business leaders, and policymakers alike should be deeply concerned. History may not repeat, but it certainly rhymes—and the echoes from Zimbabwe and the 1970s are growing louder by the day.

Further Reading and Sources

• Trump’s Truth Social Post on Walmart (17 May 2025) – PBS NewsHour
• Walmart Earnings Call Transcript – CFO John David Rainey on Tariff Impact (May 2025)
• Peterson Institute for International Economics – Who Paid for Trump’s Tariffs? (2020)
• Federal Reserve Bank of Dallas Survey on Tariff Impacts (2025)
• Milton Friedman on Nixon’s Price Controls – Free to Choose Documentary (1980)
• Larry Summers’ Warning on Trump’s Tariff Policies (Politico, 2025)
• University of Michigan Consumer Sentiment Index – May 2025 Report
• The Great Inflation and Its Aftermath – Robert J. Samuelson (Book)
• Cato Institute: Why Price Controls Fail – Historical Analysis (2021)
• Market Monetarist Archive – Leavitt & Gono: When Amazon-Bashers Meet Zimbabwe’s Hyperinflation Houdini (April 2025)
• Market Monetarist – Heading for Double-Digit US Inflation (April 2021)

Introduction

(If you don’t want to read the whole article – you can instead do your own simulations of how much revenue tariffs vs VAT can bring in here.)

The United States is staring at a structural budget deficit of about 6.5% of GDP – roughly a $2 trillion annual gap.

In plain terms, the federal government consistently spends far more than it collects, even in good economic times.

With no political will to cut spending, the uncomfortable reality is that taxes will eventually have to rise to foot the bill. The only question is how and who pays.

Policymakers essentially have two broad options to raise such a vast sum: make Americans pay more for the goods they buy from abroad (tariffs), or make Americans pay more for everything they consume (a value-added tax, or VAT).

In either case, the American consumer is in the firing line, whether they realise it or not.

In this post I will explore these two tax approaches.

We start from the premise that the bill is inescapable – one way or another, American households will bear the cost.

We’ll compare a general import tariff versus a broad-based national VAT, examining how much revenue each could raise, what rates would be required, and the economic side effects (deadweight losses, inflationary impact, and overall efficiency). As we shall see, neither option is pain-free – but the magnitude of pain differs greatly.

The Inescapable Bill: Consumers Will Pay Either Way

There is a widespread political illusion that a tariff is somehow paid by ‘foreigners’—a misconception that becomes quite clear after just five minutes of listening to Donald Trump talk about tariffs

It might feel satisfying to imagine funding the US Treasury by taxing Chinese or European goods.

In reality, tariffs are simply a sales tax on imported products, and their costs are largely passed on to domestic buyers.

When the US imposed tariffs in recent years, studies found American firms and consumers bore the brunt through higher prices.

A trip to the store will confirm it: a tariff on imported appliances means higher sticker prices for U.S. shoppers, not a charity cheque from abroad.

A VAT, on the other hand, is more straightforward: it’s a general consumption tax added at each stage of production and ultimately paid by consumers on almost everything they buy (though often with some exemptions).

Unlike tariffs, a VAT doesn’t discriminate between foreign and domestic products – it taxes all consumption. In Europe, where governments are larger, VATs have become a fixture of life.

If US federal spending continues to grow unabated, American taxpayers may face “European-style” taxation in the end – meaning broad-based consumption taxes akin to VAT.

Either route – tariffs or VAT – leads to Americans paying more out-of-pocket. The key differences lie in how visible the tax is, how efficiently it raises revenue, and how much collateral damage it inflicts on the economy.

Option 1: Taxing Imports – The General Tariff Temptation

Imagine the US government slaps a uniform tariff on all imported goods – this is essentially what the Trump administration is now heading towards.

The appeal is obvious: at first blush it sounds like taxing “others” (foreign exporters) rather than U.S. citizens. Historically, tariffs did fund much of the U.S. budget in the 19th century – as Trump so often has been arguing.

Today, however, imports are a large share of the economy’s consumption basket, and any significant tariff would immediately translate into higher prices at Walmart, Target, and the petrol station.

In effect, it’s a consumption tax with a narrow base – only imported goods – and a heavy built-in distortion: it makes imported products more expensive relative to domestic ones.

How much money could an import tariff raise?

Currently, U.S. imports of goods and services are on the order of 13–15% of GDP. To raise revenue equal to 6.5% of GDP from that base in theory, you’d need a tariff of roughly 40–50% (since 0.15 × 45% ≈ 6.5%).

But that simple arithmetic assumes imports wouldn’t shrink. In reality, tariffs cause a collapse in import volumes – Americans would buy fewer foreign goods or find substitutes – shrinking the tax base.

This is the classic Laffer curve effect: beyond a certain point, higher tax rates erode the base so much that revenue gains stall or reverse.

I here assume a price elasticity of -1.5 (meaning a 10% price increase reduces imports by 15%). This I believe is a realistic assumption for the medium-term. In the short term the elasticity might be lower.

Laffer Curve Analysis with Elasticity of -1.5

The graph below shows the Laffer curve for an general tariff on all US imports assuming a -1.5 price elasticity.

With this higher elasticity assumption, our calculations show that:

• A 10% tariff would raise approximately 1.2% of GDP in revenue
• A 20% tariff would raise approximately 2.0% of GDP
• A 30% tariff would raise approximately 2.3% of GDP
• A 40% tariff would yield 2.2% of GDP (note we’re already seeing diminishing returns)
• A 50% tariff would only raise 1.8% of GDP as the import base significantly erodes
• By 70% tariff rates, revenue collapses to nearly zero as imports are almost completely choked off

The revenue-maximizing tariff rate under these conditions is approximately 33%, which would generate only about 2.3% of GDP in revenue – far short of the 6.5% target.

The sobering message is that with this elasticity of -1.5, tariffs cannot raise anywhere near 6.5% of GDP in revenue at any rate.

Even the maximum possible revenue (2.3% of GDP) falls far short of the target. The tax base simply evaporates too quickly before you get close to the revenue goal.

Collateral Damage

The collateral damage such tariffs would cause remains severe. Imports don’t exist in a vacuum – they are inputs for U.S. factories and retailers, and often essential goods for consumers.

A blanket tariff would send shockwaves through supply chains – as we already are seeing as a result of Trump’s tariffs on China. Domestic prices of many goods would jump (even domestic producers might raise prices, facing less foreign competition).

We’d see cost-push inflation, not just on imported consumer products but on capital goods and raw materials used by American businesses.

In fact, a study from Yale’s Budget Lab found the recent mix of U.S. tariffs already in place by 2025 has raised the overall price level by about 2.3% (costing the average household $3,800) – and those tariffs are nowhere near the magnitude we’re contemplating here.

Inefficient Revenue Generation

Economically, a tariff remains a highly inefficient way to raise revenue. It introduces a large distortion between imported and domestic goods. Consumers substitute towards (potentially more expensive or lower-quality) domestic products or forego purchases entirely.

This creates a deadweight loss – lost economic welfare that doesn’t even benefit the Treasury.

With a price elasticity of -1.5, a 33% uniform import tariff maximizes government revenue. At this rate, the deadweight loss can be calculated using standard economic welfare analysis.

Starting with imports at 14% of GDP, the 33% tariff reduces import volume by 49.5% (elasticity × tariff rate), leaving new imports at 7.07% of GDP. This generates revenue equal to 2.33% of GDP (33% × 7.07%).

The deadweight loss equals half the product of the price change and the quantity reduction:
0.5×33%×(14%−7.07%)=1.14% of GDP.

This is pure economic waste — benefiting neither consumers, producers, nor the government.

For every dollar of revenue collected, the economy loses an additional 49 cents in deadweight loss. The total economic cost is therefore $1.49 per dollar of revenue.

In the case of the U.S. economy, this translates to approximately $623 billion in tariff revenue and $305 billion in deadweight loss, costing the average household about $7,086 annually.

Foreign Retaliation

Furthermore, tariffs invite foreign retaliation. If the US tried to raise revenue via big tariffs, trading partners would almost certainly strike back with tariffs on U.S. exports – exactly as we have seen both the Chinese and the Europeans doing.

That would hurt American exporters (farmers, manufacturers) and could set off a trade war, reducing overall economic output. The tariff revenue itself could be partially offset by declines in income and other tax receipts due to a smaller economy.

The Hidden Tax

From a political perspective, tariffs have a sneaky advantage: the cost to consumers is somewhat hidden in the form of higher retail prices, rather than an explicit tax line on a receipt. Politicians might hope the public blames “greedy foreigners” or businesses instead of the tax.

However, the reality of who pays is inescapable – at the end of the day, it’s American shoppers and firms who foot the bill. And with the higher elasticity assumption, it becomes even clearer that a tariff-based approach cannot generate the target revenue of 6.5% of GDP.

Before we write off the American consumer as a cash cow to be milked via pricier imports, we should examine the alternative: a broad-based tax on consumption – essentially, bringing the U.S. in line with how most advanced economies fund their governments.

Option 2: Taxing Everything – A Broad-Based National VAT

The second approach is a national value-added tax (VAT), akin to what nearly every European country (and many others worldwide) employs.

A VAT is essentially a general consumption tax, collected in pieces along the production chain but ultimately borne by the final consumer.

It is broad-based, typically covering most goods and services, with a few exemptions or reduced rates for necessities.

Crucially, a VAT taxes domestic and imported goods equally (and usually zero-taxes exports), so it doesn’t favour home goods over foreign – it’s trade-neutral (despite what the Trump administration has argued).

This makes it WTO-compliant and avoids the retaliation problem: no foreign government is going to retaliate against the U.S. for adopting a VAT, since it’s not targeting any one country’s products.

How high would a VAT need to be to raise 6.5% of GDP in revenue?

The answer, surprisingly, is “not as high as you might think”. Americans already spend a lot on consumption – personal consumption expenditures are roughly 68–70% of U.S. GDP.

If all of that were taxed, a 10% VAT (with perfect compliance and no exemptions) could theoretically raise about 6.8–7.0% of GDP.

Of course, in practice no VAT covers absolutely everything consumers buy – most countries exempt certain items like basic food, healthcare, education, etc., or have reduced rates. Let’s assume a broad base but with some modest exemptions, such that the effective taxable consumption base is around 60% of GDP.

In that case, a VAT of roughly 11% would net 6.5% of GDP (0.60 × 11% = 6.6%).

Even with a narrower base (say only 50% of GDP effectively taxed), the required rate would be on the order of 13%.

In other words, a national VAT in the 10–15% range could plug a gap of 6.5% of GDP. This is very much in line with international experience.

European VAT standard rates today range from 17% to 27%, with an OECD average around ~21%.

Those VATs typically raise about 6–8% of GDP in revenue for those countries.

The U.S., by virtue of not having a VAT yet, actually has a relatively clean slate – it could design a broad base with fewer loopholes (for example, New Zealand’s GST/VAT is famously broad and efficient, 15% rate raising about 8-9% of GDP – or Denmark’s MOMS, which at a rate of 25% brings in a revenue of close to 10% of GDP).

In fact, if the U.S. implemented, say, a 15% VAT with minimal exemptions, it could likely raise on the order of 8–10% of GDP – more than enough to cover a 6.5% gap and then some. Even a 10% VAT, if broadly applied, would get very close to the target.

For context, Americans already pay state/local retail sales taxes that average about 7.5%, albeit on a narrower base; a federal VAT would layer on top of that, potentially bringing total consumption taxes in the mid-teens – still around the lower end of European consumption tax burdens.

The graph below shows a Laffer curve for a broad-based VAT, assuming consumption elasticity = –0.5 (relatively inelastic demand).

Even at a modest rate of ~10%, a VAT could raise roughly 6.5% of GDP.

The broad tax base (close to total consumption) means revenue scales up nearly linearly with the tax rate for moderate rates.

Unlike the tariff case, there is no sharp revenue-maximising point short of extremely high rates – revenue continues to rise with higher rates, albeit with increasing economic distortions. This illustrates that a VAT can achieve the needed revenue with a far lower rate and less risk of “tax base collapse” than a tariff.

As graph illustrates, the VAT’s strength is its fiscal efficiency: because the base (consumer spending) is so large, a relatively low rate generates a lot of revenue.

The assumed elasticity of –0.5 means consumers reduce their spending somewhat when prices rise, but not drastically.

Thus, the Laffer curve for VAT is gently upward-sloping with no quick peak – in fact, under these assumptions, there is no revenue peak at any finite rate; revenue would keep rising (in reality, very high VAT rates would encourage evasion and underground activity, but at the 10–20% range we’re well within normal international practice).

The key takeaway is that a VAT can raise the required 6.5% of GDP with a tax rate on the order of one-tenth of what the tariff would need. A 10% VAT vs an 80% tariff – that’s a night-and-day difference in terms of feasibility. And we can only do this calculation assuming a lower (-1.0) price elasticity of imports than assumed above (-1.5).

To make this concrete, let’s compare it to Europe.

The graph below compares the hypothetical “necessary” U.S. VAT rate to standard VAT rates in selected European countries.

The U.S. rate (15%) shown here is an estimate assuming a relatively broad base.

It is lower than the VAT in every EU country, where standard rates range from 17% (Luxembourg) to 27% (Hungary).

Many European countries sustain government revenues with VATs around 20–25%, which typically bring in 6–8% of GDP. This suggests the U.S. could fill its deficit with a VAT even lower than the European average – highlighting the fiscal potency of a broad consumption tax.

As the graph highlights, the U.S. would not be an outlier if it adopted a VAT in the low-to-mid teens – in fact, it would be at the low end by European standards.

The difference is that Europe uses those VATs in addition to steep income and payroll taxes to fund a somewhat larger public sector.

The U.S. would be using it primarily to compensate for chronic deficits. Politically, of course, introducing a VAT in America would be a seismic shift.

Past proposals for a federal sales tax or VAT have met with resistance from both left and right – seen as either regressive (hitting the poor proportionally more) or as a “money machine” enabling bigger government. Yet, faced with ever-mounting debt and deficit, the alternative may well be worse (massive future tax hikes or financial crisis).

In terms of economic impact, a VAT is generally considered more efficient and less distortive than most other taxes.

It doesn’t penalise savings or investment (unlike income taxes), and it treats all consumption equally, whether the good is imported or domestically produced.

There is still a distortion – any tax on consumption can discourage some marginal consumption (people might save a bit more or participate in the informal economy to avoid the tax).

But given our elasticity assumption (–0.5), the deadweight loss from a 10% VAT is relatively small – certainly much smaller, per dollar of revenue, than the deadweight loss from an equivalent revenue-raising tariff or highly progressive income tax.

Moreover, VAT revenue comes in with less drag on economic growth: studies find that consumption taxes are less harmful to growth than taxes on capital or highly progressive taxes on income.

A VAT would cause a one-time increase in the price level – essentially a burst of inflation in the year of implementation. For example, if a 10% VAT were introduced, one might expect roughly a 10% jump in consumer prices (assuming it’s fully passed on) spread over a short period.

Central bankers typically view this as a level shift rather than ongoing inflation – in other words, a VAT causes a one-off rise in the price index, but it doesn’t necessarily mean continuing inflation if money supply is kept in check. (The Federal Reserve could accommodate or offset this as needed.)

By contrast, a tariff-driven price increase is more piecemeal and can create ongoing inflationary pressure if tariffs ratchet up or if domestic producers repeatedly raise prices under protection.

One valid concern about a VAT is distributional fairness.

By itself, a VAT is regressive relative to income – poorer households consume more of their income, so they’d pay a larger share of income in VAT than richer households.

European countries mitigate this through exemptions or reduced VAT rates for necessities like food, children’s clothing, etc., and by using part of the revenue to fund welfare benefits or income tax credits for the poor.

The U.S. could do similarly: for instance, a federal VAT could be paired with an annual “VAT rebate” or prebate to all households (as was proposed in some FairTax plans) to offset taxes on basic consumption.

Alternatively, exemptions for basic groceries and utilities could be enacted, though that narrows the base and requires a higher rate to compensate.

In any case, VAT’s regressivity can be addressed within the overall fiscal system, whereas a tariff’s incidence is hidden and its burden could also fall disproportionately on lower-income families (who spend a higher fraction of their budget on tradable goods like food, clothing, and electronics).

Finally, consider administration. The U.S. has no federal VAT machinery currently, but implementing one is a well-trod path globally – the know-how exists.

Businesses would face new compliance costs (filing VAT returns, remitting tax on their sales minus credits for tax on inputs).

The federal government would need to coordinate with states (some of which might adjust their sales taxes). It’s a big shift, but not an insurmountable one – Canada introduced a national GST in the 1990s, for example, despite provinces having sales taxes.

A tariff, on the other hand, can build on the existing customs apparatus – the U.S. already collects tariffs at ports of entry. In that sense, tariffs might seem administratively simpler. But keep in mind: the U.S. currently collects only a few tens of billions in tariff revenue; scaling that up to trillions would likely spur a proliferation of avoidance schemes (smuggling, re-routing of trade through third countries, mislabeling of products to evade tariffs, etc.), requiring much more enforcement.

A VAT’s enforcement challenge is mainly ensuring businesses report sales – not trivial, but again, very familiar to tax authorities worldwide.

Tariff vs VAT: Weighing the Trade-offs

Bringing the threads together, let’s directly compare the two strategies for raising 6.5% of GDP. Table 1 summarises the key outcomes and characteristics of a broad tariff vs a VAT:

Table 1: Tariffs vs VAT – Summary of Outcomes

Looking at the comparison, the VAT emerges as the more efficient and effective tool for raising a large chunk of revenue.

The tariff route, by contrast, is riddled with economic landmines – it’s a bit like trying to fill a leaky bucket. You can pour more water (higher rates) in, but most of it spills out as the base leaks away, and you risk breaking the bucket (the broader economy) in the process. The VAT is a larger, sturdier bucket: it can hold the needed revenue with far less spillage.

Conclusion: Confronting Reality – and the Lesser of Two Evils

Facing a structural deficit of 6.5% of GDP, the United States must eventually confront a tough choice.

If spending isn’t reined in, then taxes must rise – that is arithmetical reality, not ideology. In fact I would personally favouring entitlement reforms to reduce the size of the US government, but realistically that seems very unlikely in the present political environment.

My exploration above has contrasted two very different ways of extracting more revenue from the economy, and how they ultimately boil down to American consumers footing the bill.

A general tariff might appeal to populist instincts, masquerading as a charge on foreigners but ultimately acting as a stealth tax on every American family.

It fails to raise the required revenue even when pushed to absurd extremes, and along the way it would distort markets, raise domestic production costs, and invite international reprisals.

As an economic strategy, it’s the fiscal equivalent of eating candy for dinner – seemingly satisfying in the short run, but unhealthy and unsustainable in the long run.

A national VAT, on the other hand, is an overt, broad-based tax.

It squarely admits: yes, everyone will pay a bit more on what they buy.

Politically, that’s a hard sell in a country long accustomed to low consumption taxes and skeptical of European-style solutions.

Yet, the numbers make a compelling case that a VAT is far more capable of raising big revenue reliably.

It does so in a transparent way and is a staple of tax systems in over 160 countries. While regressive on its face, it can be coupled with measures to protect lower-income households. It would align the U.S. with a more balanced tax mix (most other rich nations rely more on consumption taxes than the U.S. currently does).

In that spirit, one might quip with mild irony that Americans have a choice of how to pay for their dessert: either pay a visible service charge (VAT) or have it hidden in the cost of the meal (tariffs).

But either way, the dessert will be paid for.

There is no free lunch – and no free import or consumption binge – when the government’s bills come due.

In an ideal world, of course, the U.S. would address the fiscal gap from both sides: trim excessive spending growth and implement efficient taxes for what remains.

However, given the premise of political gridlock on spending cuts, taxes like a VAT may become not just an option but a necessity.

The experience of other nations suggests that broad-based consumption taxes are the workhorse for funding modern governments – not because politicians love them, but because they get the job done with relatively less economic harm.

The American consumer, in the end, will shoulder the cost of fiscal adjustment, either through higher prices at checkout or higher tax-inclusive prices on imported goods. The VAT path at least has the virtue of clarity and effectiveness: you’ll see it on your receipt, and it will reliably fill the Treasury’s coffers.

The tariff path is a roundabout maneuver that might feel like someone else is paying until you realise the costs have merely been passed along in disguise – and meanwhile, the plan didn’t even raise enough revenue to stop the deficit bleeding.

As unpleasant as new taxes are, choosing the lesser of two evils matters. A broad VAT is not a pain-free solution, but compared to sweeping tariffs, it’s a much sharper knife – cutting into consumers’ purchasing power, yes, but cleanly and predictably, rather than hacking away at the economic fabric.

In a world of unsavoury options, a VAT may well be the more sensible bitter pill for America’s fiscal diabetes, while a tariff overdose could send the patient into shock.

Bottom line: The U.S. can’t wish away a structural deficit of ~6.5% of GDP.

If spending isn’t curbed, taxes will rise. We’ve seen that tariffs simply can’t carry that load without collapsing the load-bearing structure (the import base), whereas a VAT can.

Ultimately, it’s the American consumer who will pay, so the aim should be to design the taxation in a way that raises the needed revenue with the least disruption and long-run cost to the economy.

In that respect, a broad-based VAT is the clear winner over a general tariff.

The sooner the political conversation in Washington shifts from whether Americans will pay for their government to how they will pay for it, the sooner we can have a serious, pragmatic discussion about solutions like a VAT—before financial reality forces the decision upon us.

Let me be clear: this is not because I like taxes. Frankly, I don’t. But it’s hard to ignore the facts.

Americans don’t seem particularly fond of cutting public spending, nor do they show much appetite for serious public sector reform—certainly not at the scale we’ve seen in the Nordic countries.

That leaves an inconvenient truth: sooner or later, Americans will end up paying European-style taxes. And frankly, that’s a far better outcome than sliding into economically destructive protectionism and tariffs.

…

Links you should have a look at

PAICE – the AI consultancy I have co-founded

“Globale tanker” – if you want to book me for a keynote speech, a lecture or a workshop

The American political circus continues.

Today, President Trump’s press secretary, Karoline Leavitt, lashed out at Amazon. The reason? Amazon was considering showing customers how much Trump’s own tariffs have made goods more expensive. This prompted Leavitt to call the initiative a “hostile and political action,” exclaiming:

“Why didn’t Amazon do this when the Biden administration hiked inflation to the highest level in 40 years?”

It’s almost like being back in Zimbabwe in 2007, where central bank chief Gideon Gono threatened shops if they raised prices in line with costs.

The parallels are striking – Leavitt, much like Gono, seems determined to shoot the messenger rather than address the underlying economic reality. Gono blamed shopkeepers; Leavitt blames Amazon. Different continents, same playbook.

Products disappeared in Zimbabwe, shelves stood empty, but the authorities just kept insisting that the price was wrong – not the policy. One wonders if Leavitt has been studying Gono’s press conferences for inspiration.

And here we stand in 2025, where Republicans during the campaign spent countless hours calling Kamala Harris both a socialist and a communist.

But as they say: “The pot calling the kettle black.”

For who is it really that’s behaving like a state-controlling price control fanatic? It’s Trump, with Leavitt as his Gono-esque spokesperson, pointing fingers at retailers instead of policies.

Threats against private companies, state intervention in the market, attempts to hide the real costs from consumers. This isn’t classic capitalism – it’s socialism disguised as patriotism.

And it probably won’t be long before JD Vance – whom Trump himself has appointed as “tariff czar” – starts running around Walmart and Costco threatening store managers to lower prices, completing the transformation to America’s very own Gideon Gono.

PS: Gideon Gono has, by the way, written an unintentionally hilarious book titled “Zimbabwe’s Casino Economy: Extraordinary Measures for Extraordinary Challenges” – perhaps future required reading for the White House press office?

In the past three months, I haven’t written much positive about market developments – especially not regarding American stock and bond markets and the dollar.

BUT the last 24 hours have brought positive news – and this brings some calm to the markets.

I want to highlight two very important statements from Donald Trump himself:

“I have no intention of firing him. I would like to see him be a little more active in terms of his idea to lower interest rates. This is the perfect time to lower interest rates. If he doesn’t, is it the end? No, it’s not.”

And secondly:

“The tariff on China won’t be as high as 145%. It’ll come down substantially, but it won’t be zero.”

These are two clearly important statements. The first is basically an announcement that Trump says he respects the Federal Reserve’s independence, and he cannot force the Fed to lower interest rates.

And the second is that he is prepared to substantially reduce tariff rates against China.

Both make good sense – and indeed are what any normally thinking economist would have urged Trump to do. And yes, all economists would naturally have told Trump to completely stop his tariff madness, but this is definitely a step in the right direction.

The financial markets reacted quite positively – and unsurprisingly – to yesterday’s announcements.

In fact, I’m a bit surprised that the reaction wasn’t even more positive. For what we’re actually seeing now is that those with some economic sense around Trump – probably primarily Treasury Secretary Scott Bessent – have convinced Trump that what he has been doing could potentially have catastrophic consequences for the American economy – and for Trump’s own ability to survive as president.

I simultaneously interpret this as a certain admission from Trump that he has thrown himself into a multi-front war – illegal deportations, war with the judicial system (including the Supreme Court), war with the Federal Reserve, Pete Hegseth’s total chaos in the Pentagon, etc.

And it’s becoming increasingly clear that investors are simply losing confidence in the USA. And in America’s institutions.

But Trump is backing down now. And this is actually the first time in three months.

And in this connection, it’s worth noting that following Tesla’s catastrophic financial report yesterday, Elon Musk also announced that he was on his way out of the Trump administration and DOGE.

All in all, I think we’re seeing rather clear signs of a retreat from Donald Trump. His own chaotic behaviour has simply defeated him.

And that is, in my opinion, quite positive for the American financial markets.

That said, the following should be emphasised:

1. It’s difficult to restore confidence once it has been destroyed.
2. Trump is and remains a “loose cannon” – if we see signs of “recovery” in the markets, Trump can quickly come up with something insane again. He loves tariffs (as he says himself), so he won’t stop talking about them.
3. Even without the Trump chaos, the American stock market – and partially the dollar – already looked overvalued.
4. The coming period will be characterised by extremely negative American economic indicators, which will hardly do much to lift the mood in the stock market.
5. The USA faces massive fiscal policy challenges, and there is nothing to suggest that the Republicans in the House and Senate intend to do anything about it, and Trump has no ideas about what to do (without breaking his promises not to touch pensions and the healthcare system).
6. The Trump administration is clearly marked by massive internal power struggles – and it could get much worse.
7. The prospect of rising inflation AND higher unemployment will significantly weaken popular support for Trump.

FINALLY, given the unrest that has been in the markets, something systemic may have been broken, so there is a risk that new news will emerge, for example losses in banks and financial institutions.

All in all, I believe that Trump’s announcement MUST be taken as fundamentally positive, and therefore it’s also possible that the “haemorrhaging” in American stock markets and in the dollar is over, but I find it very difficult to see much “upside”.

Trump has simply created too many problems for himself.

If I am to become more positive – then something of the following must happen:

1. Trump’s advisor Peter Navarro, Trump’s hyper-protectionist advisor, must be fired, and Treasury Secretary Scott Bessent’s role must be substantially strengthened. It must be clear that it is Bessent who leads economic policy.
2. Defence Secretary Pete Hegseth must be fired and replaced by a former general or similar, who actually has the experience and insight to be Defence Secretary.
3. There must quickly be a significant rollback of the tariff madness. Not just in trifles – but in relation to China, the EU, Canada, Japan and Mexico.
4. The Trump administration must present concrete and radical plans to permanently improve public finances.
5. The Federal Reserve’s independence must be guaranteed. It would be best if Trump announced that Powell will be reappointed in 2026.

It requires quite a bit, but this is the sort of thing that is needed – otherwise there is a risk that the markets will again go into meltdown mode. But Trump has created so much uncertainty that it now requires a lot to restore confidence.

What do you think? Will Trump go berserk again, or can Bessent control him?

…

Links you should have a look at

PAICE – the AI consultancy I have co-founded

“Globale tanker” – if you want to book me for a keynote speech, a lecture or a workshop

I have always considered myself a non-American American patriot. I grew up with a deep admiration for the United States — for its ideals, its energy, and its global leadership. But after the events of the past few months, I find it increasingly difficult to view the US as a friend of Denmark.

Jay Nordlinger’s piece in National Review — “America Rattles Denmark” — captures this shift with precision and gravity. It’s rare to see an American conservative describe, so clearly, how deeply disillusioned many pro-American Danes now feel.

The Trump administration’s reckless rhetoric about Greenland, the open threats towards an ally, and the abandonment of Ukraine — a country fighting for its survival — have left many of us stunned. But perhaps even worse is the silence. The lack of outrage. The apparent indifference from much of the American public.

What was once an alliance based on shared values now feels transactional, conditional, and hollow.

This is not a policy disagreement. This is a break in trust.

I urge my American friends to read Nordlinger’s article — not defensively, but reflectively. There is still time to repair the damage. But for the first time in my life, I’m no longer sure we’re on the same side.

There are certain moments in economic history where lessons from the past should not merely inform us – they should warn us. We are at such a juncture right now.

Under normal circumstances, I would be reluctant to draw parallels between Turkey’s monetary experiments and American monetary policy. However, in light of Trump’s recent verbal attacks on the Federal Reserve and Jerome Powell – declaring on Truth Social that Powell’s “termination cannot come fast enough” and labelling him as “always TOO LATE AND WRONG” – we are witnessing concerning signs of a politicisation of monetary policy typically associated only with emerging markets.

The Turkish Monetary Collapse – A Case Study in Central Bank Independence

Let us examine the data. The graph below tells a frightening story about the consequences of political interference in monetary policy:

You might notice I’m using the Danish krone – that boring, stable, low-inflation currency – as my reference point rather than the increasingly shaky-looking dollar. One must maintain certain standards in monetary analysis, after all!

Perhaps this is my Danish heritage showing through, but when tracking monetary disasters, it helps to use a measuring stick that isn’t itself beginning to resemble a piece of uncooked spaghetti.

From 2000 to approximately 2016, Turkey experienced relatively moderate developments in both inflation and exchange rates. The blue line shows the price level, whilst the red line shows the TRY/DKK rate. Note that when the red curve rises, it means one must pay more Turkish lira for one Danish krone – effectively a weakening of the lira.

The drastic deterioration begins around 2016 (first dotted line), precisely coinciding with Erdogan’s initial interference in central bank independence. The subsequent red dotted lines mark further interventions in the central bank’s independence – particularly the dismissal of governors who attempted to combat inflation with interest rate increases.

The result has been catastrophic: The Turkish lira has collapsed from approximately 1 TRY/DKK to over 5 TRY/DKK. Simultaneously, the Turkish price level has increased eightfold in just eight years.

Market Mechanisms Do Not Respect Nationality

The fundamental mechanism is simple, yet often overlooked by politicians: For monetary policy to work, the central bank must have credibility. Without credibility, even correct monetary policy decisions become ineffective because the market anticipates future politicisation. And the market prices in not only current policy but also expected future interventions.

Particularly alarming is the development after 2020 (fourth dotted line), where the graph shows an almost vertical increase in both inflation and currency depreciation. This illustrates how a breakdown in confidence can become self-reinforcing.

The American Parallel

Trump’s signals are creating precisely this dynamic in the US. He needn’t even sack Powell – the threat alone is sufficient to influence market expectations. The US appears to be moving down the Turkish path – a route characterised by eroding central bank independence, rising inflation expectations, and gradual pressure on the currency.

This is not an exaggeration. The most frightening aspect of the graph is how clearly it demonstrates that economic mechanisms do not respond to nationality or tradition – they respond to incentives and expectations.

America’s economic strength might create a false sense of immunity to such dynamics, but the data from Turkey clearly shows that no economy is immune to the consequences of politicised monetary policy.

Combating inflation requires an independent central bank with the mandate to act, even when unpopular. Undermining this institution invites precisely the problems it was designed to prevent – and the speed at which matters can deteriorate once confidence is broken is evident from the last five years of the graph.

The Practical Implications

It is worth noting that Trump actually faces significant difficulties in firing Jerome Powell, but he doesn’t even need to sack Powell.

He can simply tell the world that he will appoint some reckless candidate who will do as instructed when Powell’s term expires in 2026. And every time this Trump lackey speaks, it will effectively ease US monetary policy.

Powell will be increasingly powerless – gradually losing control over monetary policy despite officially remaining Fed chairman.

Given these developments, I certainly wouldn’t wish to be “long” dollars right now… Perhaps it’s time to reconsider the virtues of the humble Danish krone or Swiss franc.

…..

Links you should have a look at

PAICE – the AI consultancy I have co-founded

“Globale tanker” – if you want to book me for a keynote speech, a lecture or a workshop

You really couldn’t make it up.

Just months ago, Vice President J.D. Vance – then a senatorial Cassandra – sat down with Tucker Carlson to warn the world of a looming “bond-market death spiral.”

“I really worry about the bond markets. Do the international investors, the people who are getting rich off globalization, the people who have gotten rich from shipping our manufacturing base to China, the people who have gotten rich from a lot of wars — do they try to take down the Trump presidency by spiking bond rates?” Vance told Carlson.

The scenario he described was dire: interest rates rising so rapidly that debt service would crowd out everything else – infrastructure, defence, even Social Security.

At the time, he suggested Wall Street might be behind such an assault, out to sabotage a second Trump presidency.

Well, Mr. Vice President, congratulations: the spiral has arrived. But it didn’t come from the shadows of globalist boardrooms or the bowels of Davos.

It came from exactly where everyone with a basic grasp of macroeconomics said it would — the Resolute Desk.

Liberation Day… From Market Confidence

On April 2, 2025, Donald Trum at the White House, declared “Liberation Day.” With a flourish befitting an empire in decline, he imposed a 10% universal tariff on all imports, rising to as much as 145% on goods from China. This was not a policy tweak. It was a policy grenade.

Within hours, the global financial system reacted — not because it “hates Trump” or wishes to undermine American sovereignty, but because it functions on trust, rules, and predictability. And Trump had just dynamited all three.

Global equities tanked. Wall Street suffered one of its sharpest drops in over a decade. But more tellingly — and more dangerously — U.S. Treasury yields has surged.

And the dollar? Instead of rallying as it usually does in a crisis, it fell. Investors, for the first time in living memory, were bailing on both the greenback and U.S. debt simultaneously.

This is not a normal market correction. This is a crisis of credibility.

Markets Aren’t Political. They’re Rational.

Vance’s original “death spiral” concern was that the bond market might be used as a political weapon against Trump.

But this reflects a fundamental misunderstanding of how markets operate.

Markets aren’t partisan. They don’t care about your slogans or rallies. They care about risk. And what Trump has introduced — with Vance cheering him on — is unprecedented policy risk.

Trump’s tariff barrage has not only upended trade flows; it has also jeopardised the foundational belief that U.S. institutions are stable, policy is predictable, and debts will be honoured under a rules-based system.

When you threaten to default “as a negotiating tactic,” when you undermine the Fed, when you launch economic nationalism at full throttle, markets take notice. And they raise bond yields accordingly.

To be clear: this is not the bond market punishing Trump. This is the bond market pricing him in.

A Trussonomics Encore, but Bigger and Louder

Vance drew a parallel with Liz Truss — the UK Prime Minister whose tenure was shorter than a head of lettuce. It’s an apt comparison, but not quite in the way he meant.

Like Truss, the Trump-Vance administration announced sweeping fiscal policies with no credible framework for institutional support. Like Truss, they blindsided markets. And like Truss, they watched in real time as yields exploded and confidence evaporated.

The key difference? Britain has a smaller economy and a flexible, politically independent central bank. It also has the IMF, the EU, and institutional partners ready to step in.

The US has none of these luxuries when the credibility of its leadership collapses. What it has is the world’s reserve currency — and now even that is starting to look less like an anchor and more like a liability.

The Spiral in Motion

Let’s revisit the mechanics of the spiral, not in theory, but now in practice:

1. Tariffs trigger market uncertainty.
2. Bond yields rise sharply as investors demand a premium for holding U.S. debt.
3. The dollar falls, as confidence in U.S. institutions wanes.
4. Debt servicing costs explode, making fiscal management nearly impossible.
5. Further policy responses (like more tariffs or capital controls) exacerbate the panic.

And just like that, the United States — the issuer of the safest asset in the world — begins to look, act, and smell like an emerging market in crisis.

Even the temporary suspension of some tariffs has done little to soothe markets. Investors, once burned, are not easily coaxed back. The trust deficit is growing faster than the fiscal one.

Vance’s Prophecy Fulfilled — By His Own Administration

The greatest irony is that Vance was right — just not in the way he hoped.

The “death spiral” is here, but it wasn’t orchestrated by Wall Street. It was summoned into being by the reckless, chaotic, and deeply unserious governance of the very administration he now serves.

In February, I warned on this blog that if trust in U.S. governance breaks, interest rates will explode.

I called it “The Trump Superspike.” And now, here we are.

Yields are soaring. The dollar is sliding. Risk premiums are rising. The world is beginning to price in the possibility that the United States is not a safe place to park capital.

And that’s what a real “death spiral” looks like.

The End of the Illusion

For years, populist-nationalists like Trump and Vance have promised that they could tear down the old order and build something new — stronger, more independent, more free.

But they forgot that the scaffolding they’re destroying is the very system that gives the U.S. financial credibility. Take away the scaffolding, and all you’re left with is a façade.

You can bully NATO, fire Fed chairs, and raise tariffs until the cows come home. But you can’t bluff the bond market. You can’t impose your will on investors with press conferences and slogans.

Markets aren’t woke. They’re just sober. And right now, they are sober and fleeing.

If the Trump-Vance administration wants to avoid full-blown financial crisis, it will need to do something it’s shown little talent for: restore trust. That means real fiscal frameworks. That means independent institutions. That means talking less and instead respecting institutions, rules and norms – domestic and international.

Until then, the death spiral will continue. And J.D. Vance will have no one to blame but the man whose shadow he walks in — and himself.

…..

Links you should have a look at

PAICE – the AI consultancy I have co-founded

“Globale tanker” – if you want to book me for a keynote speech, a lecture or a workshop

In 2022, then-British Prime Minister Liz Truss announced an unfunded plan for tax cuts, convinced that the markets would welcome her “pro-growth” policies.

Instead, the markets panicked.

The pound plummeted, UK government bond yields surged, and the Bank of England was forced to intervene to prevent a complete financial meltdown.

Truss remained in office for just 44 days.

Back in February, I warned in an article on this blog that we risked a “superspike” in US interest rates if markets lost confidence in American institutions (see the article here).

My point was that Trump’s behaviour could undermine investor trust in the US government’s willingness to meet its obligations.

If Trump refuses to honour defence commitments or international trade agreements, then why should anyone believe he will respect America’s debt obligations?

Right now, we’re seeing a sharp rise in US Treasury yields – at the same time, equity markets are falling and the dollar is weakening.

THIS IS A VERY CLEAR SIGN OF A COLLAPSE IN CONFIDENCE.

If this continues to accelerate, the US government will rapidly find itself in a position where it simply cannot service its debt – and then there is only one option left: to rely on the Federal Reserve to start printing money to finance the ongoing budget deficit.

We may well be witnessing the beginning of something very, very serious.

There are also unconfirmed reports circulating in financial markets that the Chinese may be behind the sharp rise in US bond yields, at least in part. China holds a significant portion of the outstanding US government debt, and if they are now beginning to offload that holding on a larger scale, it will further accelerate the rise in US bond yields.

The question is: where will investors flee to? The most obvious destination is Europe – and specifically towards safe and liquid government bond markets. Switzerland and Germany stand out as the most likely havens.

So, as US interest rates soar and the dollar falls, capital inflows into Europe will help keep European bond yields down, while strengthening the euro and the Swiss franc.

All of this has been triggered by Donald Trump’s erratic behaviour over the past three months – and particularly his full-on assault on global trade just a week ago, which sent shockwaves through the global economic and financial system.

And yes, it is easy to see why the Chinese are especially angry – with a 104% US tariff on all imports from China, virtually all trade between the two countries comes to a halt. If China wants to retaliate further, there’s really only one path: begin offloading US government bonds.

Unfortunately, this is far from over – and it’s likely to get worse from here.

…..

Links you should have a look at

PAICE – the AI consultancy I have co-founded

“Globale tanker” – if you want to book me for a keynote speech, a lecture or a workshop