Long-term British government bond yields are now at their highest level in almost 30 years.

What is even more concerning is that the UK economy is actually slowing down, which means that nominal GDP growth must now be considered significantly lower than long-term interest rates.

This is extremely critical, as it means that public debt as a percentage of GDP is now on an explosive rise, and if the UK government cannot convincingly demonstrate to financial markets that it will address the large budget deficit, currently around 5% of GDP, then expectations that the Bank of England will have to step in and run the printing press to finance the deficit will explode.

In that situation, the pound will collapse, and inflation will soar dramatically. And we are already on the way – despite the Bank of England lowering its monetary policy rate this year, long-term rates are rising – and yes, inflation is again rising sharply. We are currently at almost 4% – and there are indications that it may soon become much worse.

And the UK government is paralysed, and there is no indication that Prime Minister Keir Starmer has support within his Labour party to address the fiscal problems, while voter support for the populist Reform Party grows day by day, which is hardly encouraging if one believes there is a need for fiscal tightening and major macroeconomic reforms.

Public debt in the UK is already above 100% of GDP, and with interest rates as we see now, interest payments are consuming an increasing share of the state budget. This creates a vicious cycle where the government must borrow more to cover interest payments, which in turn increases debt and future interest payments.

And yes, it all looks very similar to the US, but unlike the dollar, the pound is not a global reserve currency.

So there is no mercy, and things could soon go very wrong in the United Kingdom.

The American economy stands at a critical juncture. President Trump’s assault on the Federal Reserve has reached an intensity that threatens the very foundations of independent economic institutions.

Lisa Cook, a Federal Reserve Board member, has become the primary target of Trump’s political pressure. Despite repeated claims of dismissal, Trump has encountered formidable legal barriers.

The Federal Reserve Act’s protective provisions are crystal clear: Board members can only be removed “with cause” – a legal standard requiring documented inefficiency, neglect of duties, or malfeasance in office.

Trump’s rhetoric has been unrelenting. He has repeatedly branded Federal Reserve Chair Jerome Powell a “stubborn MORON” and demanded the Fed Board “ASSUME CONTROL”. These are not mere political utterances, but a calculated strategy to undermine the institution’s credibility and independence.

The nomination of Stephen Miran to the Board represents a strategic manoeuvre. Miran, a key architect of Trump’s protectionist tariff policies and an overt critic of Fed independence, epitomises the administration’s approach to institutional capture.

Equally troubling is the nomination of E.J. Antoni to lead the Bureau of Labour Statistics, revealing a broader pattern of institutional pressure. Antoni’s background is particularly concerning. Present in Washington during the 6 January 2021 events and lacking formal statistical training, he has described BLS methodological changes as “Orwellian tricks”. His predecessor, Erika McEntarfer, was summarily dismissed following a jobs report revealing weak growth and significant downward revisions.

These are not isolated incidents, but a systematic strategy to erode the boundaries between political leadership and independent economic institutions.

The parallels with Turkey’s macroeconomic experience over the past two decades are stark and deeply troubling.

When politicians systematically attempt to control statistical narratives and pressure monetary authorities, the consequences are predictable and potentially catastrophic.

To understand the potential trajectory of these institutional pressures, I turn to an in-depth analysis of Turkey’s economic and financial data.

By examining the structural breaks in Turkey’s exchange rate and consumer price index, we can map the precise mechanisms through which political interference destabilises economic institutions and forecast the potential risks facing the United States.

The Method: Identifying Structural Breaks

To examine how institutional credibility manifests in economic data, I employ piecewise-linear regression on the logarithm of Turkey’s exchange rate (TRY/USD) and consumer prices (CPI):

Breakpoints are identified through a recursive residual minimization algorithm with minimum segment length constraints to prevent overfitting. The fitted model highlights trend accelerations indicative of collapsing policy credibility.

Structural Breaks in the Data

Based on CPI (all-items, 2015=100) and OECD TRY/USD data from 2000 to mid-2025, the model detects the following breakpoints:

ln(CPI, All-Items)

• April 2004
• January 2009
• July 2012
• December 2021

ln(TRY per USD)

• August 2001
• May 2008
• June 2016
• January 2021

The 2021 break is common to both series and corresponds to an inflection point in Turkey’s macroeconomic credibility.

Institutional Context

2001-2004: Turkey enters an IMF-supported stabilization program. Initial credibility gains follow structural reforms.

2008-2009: The global financial crisis provides cover for credit expansion via state banks. The exchange rate trend weakens.

2012-2016: President Erdoğan intensifies public attacks on the central bank, calling interest rates “the mother and father of all evil.”

2016: Following the July coup attempt, massive institutional purges and emergency rule accelerate TRY depreciation.

2021: Multiple central bank governors are fired in rapid succession. Interest rates are cut amid soaring inflation. The head of the statistical agency is replaced following public scrutiny. Both inflation and the exchange rate experience their sharpest accelerations.

The Cumulative Cost

Turkey’s all-items CPI rose from 9.5 in January 2000 to 74.36 in June 2025. The chart below shows the dramatic shift in inflation dynamics after 2021:

Similarly, the Turkish lira depreciated steadily until 2016 and then began to collapse after 2021:

The timing aligns precisely with political interference in core institutions.

Parallels to the United States

The U.S. now faces its own institutional tests:

• Trump has called Powell a “stubborn MORON” and demanded the Fed Board “ASSUME CONTROL.”
• He has threatened lawsuits over Fed building renovation costs.
• Trump claims to have sacked Lisa Cook.
• Stephen Miran, a prominent critic of Fed independence, has been nominated to the Board.
• E.J. Antoni, who lacks formal statistical training, has been tapped to lead the BLS.
• The federal deficit will reach $1.9 trillion in FY2025 (6.2% of GDP), while unemployment is at 4.2%.
• Federal debt held by the public is projected to rise from 100% of GDP in 2025 to 118% by 2035.

These dynamics echo the institutional erosion seen in Turkey during its slide into macroeconomic instability.

The eerie resemblances between Turkey and the US

The structural parallels between Turkey’s economic trajectory and the current United States landscape are far more than academic coincidence. They represent a precise roadmap of institutional decay.

In Turkey, political interference transformed a functioning economic system into a case study of monetary mismanagement. Our data analysis reveals how repeated attacks on central bank independence created predictable, catastrophic outcomes: hyperinflation, currency collapse, and total loss of economic credibility.

The United States is traversing an eerily similar path. Political pressure on the Federal Reserve, repeated attempts to undermine institutional independence, and strategic appointments designed to capture economic institutions mirror the early stages of Turkey’s economic unravelling.

The risk is not hypothetical. Each politically motivated intervention increases the probability of a return to double-digit inflation and challenges the dollar’s global reserve currency status.

The mechanisms of institutional erosion are identically structured: politically controlled statistical agencies, central bank leadership under constant threat, and monetary policy increasingly subordinated to short-term political calculations.

Market signals already indicate growing vulnerability. Dollar weakness, shifting international trading patterns, and increasing institutional uncertainty suggest we are not merely at risk, but already in the initial phases of potential systemic transformation.

The Turkish case study is not a warning, but a blueprint. Without immediate, robust defence of institutional integrity, the United States risks replicating a path from economic stability to monetary chaos with remarkable precision.

Suppose I came to you and said: “I would like to borrow a very large sum of money in order to buy massively overpriced shares. By the way, I am already drowning in debt.” What interest rate would you charge me?

The answer would be either prohibitively high or a flat refusal.

Yet this is precisely the course the United States government has embarked upon.

The Intel Purchase: A Costly First Step

Only days ago Washington acquired around ten per cent of Intel, spending close to nine billion dollars by converting subsidies from the CHIPS and Science Act into equity. The US Treasury now holds more than four hundred million non voting shares at roughly twenty dollars each.

Markets offered a modest applause, with Intel’s share price ticking higher. But the company remains far below its past peaks and management has already warned that government ownership could complicate global sales.

Officials present this move as the foundation of a new American sovereign wealth fund. The difference from Norway is obvious. Norway’s fund is backed by oil revenues. The United States has no such cushion of accumulated wealth, only mounting debt.

Next Target: Defence Contractors

US Commerce Secretary Howard Lutnick has confirmed that the administration is considering taking direct equity stakes in Lockheed Martin, Boeing and Palantir. His rationale is that defence contracting has become a giveaway and that taxpayers deserve equity in return for financing the industrial base.

It sounds like logic. In practice it risks transforming the United States government into both regulator and shareholder of strategic industries. To many observers that is not market capitalism but a slide into state capitalism or what I have called ‘Red hat socialism‘

Palantir’s Extraordinary Valuation

The inclusion of Palantir Technologies makes this strategy especially alarming. Palantir’s price to earnings ratio currently sits somewhere between five hundred and seven hundred times trailing earnings. Even forward estimates remain stratospheric, around two hundred to three hundred times earnings.

To put that in context, the S&P 500 trades at about twenty two times earnings. Palantir is thus one of the most richly valued large cap stocks in the world. For any rational investor it represents significant downside risk. For a government already weighed down by record deficits it borders on financial recklessness.

The Risk Cascade

If the US government continues down this path, the sequence of risks is straightforward. Overvalued markets always correct. When that correction comes, Washington will book enormous losses directly onto the public balance sheet.

A political leader faced with such an outcome may not accept failure. Instead President Trump could choose to double down by buying even more equity, perhaps in weaker or more speculative firms. It would be the gambler’s fallacy applied to fiscal policy.

As this desperation becomes visible, confidence in US Treasuries may fracture. Investors would start to wonder whether the American government is a sovereign borrower or a speculative hedge fund. The response would be simple. Yields would climb as bondholders demanded higher compensation for risk.

Higher borrowing costs would arrive just as debt levels are exploding. Mortgages, corporate credit and municipal borrowing would all become more expensive. Financial conditions would tighten dramatically and growth would stall. Rising interest costs would in turn swell the deficit, fuelling perceptions of fiscal irresponsibility and intensifying the pressure on both equities and bonds.

This is how a misguided equity gamble could spill over into a sovereign debt crisis made in America.

Argentina, Not Norway

A genuine sovereign wealth fund requires wealth. Norway built its fund on decades of oil revenues. The US by contrast is building what amounts to a sovereign kamikaze fund, financed not by surpluses but by debt and managed not with prudence but with political bravado.

In this sense the US increasingly resembles Argentina under Juan Perón, where populism, intervention and debt blended into a destructive mix.

The real danger is not only that Washington loses taxpayer money on overpriced equities. The greater risk is that such policies undermine trust in US Treasuries, the bedrock of the global financial system. If desperation drives the administration into doubling down on failed bets, America could face spiralling bond yields, collapsing market confidence and a fiscal crisis of its own making.

Donald Trump calls it a win for American industry. Trump’s economic advisor (or what ever it is he is doing) Kevin Hassett calls it the first step towards a sovereign wealth fund. I call it Red Hat Socialism.

The United States government has just taken a near ten per cent stake in Intel. Officially it is about safeguarding domestic chip production. In reality it is subsidies converted into equity in a company that continues to lose ground to TSMC and Nvidia. The deal gives Washington no real control but leaves American taxpayers exposed when the share price falls.

And it does not stop there. Only a month ago the Pentagon bought into MP Materials, the United States’ only rare earths miner. The state is now the largest shareholder and has promised a minimum price for output at nearly double the Chinese market rate. In Washington this is described as national security. From abroad it looks like state-sponsored market distortion.

The US stock market is, by most measures, massively overvalued. At the same time, the US federal government is running a massive deficit. These two things cannot coexist for long: buying overvalued US companies financed by government debt issuance.

A sovereign wealth fund works when you invest fiscal surpluses into undervalued assets. Norway is the textbook example. What the United States is building is the polar opposite. Overvalued assets financed by record deficits.

The arithmetic is brutal. When the market reprices lower and it will be taxpayers who will take the hit. At the same time bond investors will wake up to the reality of ever-expanding debt and rising issuance.

I suggest you sell your US Treasury bonds before the double-whammy hits – a massive sell-off in the US stock market combined with skyrocketing US bond yields.

If you’re a heavy user of language models, as I am, you’ll have undoubtedly noticed that the various AI models, such as ChatGPT and Claude, aren’t behaving quite as they used to.

This has particularly come into focus since OpenAI launched ChatGPT 5.0 a fortnight ago.

One must say that the reception has been anything but favourable. It’s been difficult to spot the improvements (unless one uses ChatGPT for coding…), and criticism has indeed rained down upon OpenAI for failing to live up to the hype surrounding 5.0, which OpenAI’s CEO Sam Altman had particularly attempted to create.

The Symptoms of Strain

Some of the problems surrounding ChatGPT have been shorter responses and poorer answers. A feeling that communication is different and, in some cases, longer response times as well.

And it’s not only ChatGPT that has had problems. Similarly, Claude has increasingly shown signs of “sycophantic” behaviour – that is, the model telling users what they want to hear. And sometimes this contradicts the facts.

It’s even the case that I have anecdotal stories that Google Maps and iPhone navigation have begun behaving strangely. But that’s my observation and to a lesser extent something others have written about.

The Root Cause: Capacity Pressure

But what’s happening?

In my view, it’s about massive capacity pressure. Demand for computing power has exploded, and this is particularly in step with the use of language models for IT development and coding driving this development – so-called “vibe coding”.

And this is where code tools like Lovable and especially Cursor come into play – these are the tools that have truly created the possibilities for effectively using AI in coding.

The first chart below shows an index for the number of Google searches for precisely “vibe coding”. If we compare this with the price of computing power in the USA, we see there’s a rather close correlation – more on that below.

The Economics of Computing Power

As the graph below shows we took the first jump in computing prices in December-January, after which it flattened somewhat, but the last couple of months it has risen further.

From December last year to the end of July, the price of “data processing, hosting and IT infrastructure” rose by over 11%.

And it has accelerated dramatically recently. In July alone, the price of computing power in the USA rose by over 5%.

And this is, in my opinion, the reason why users of AI models are now experiencing a poor product.

Thus, companies like OpenAI (ChatGPT) and Anthropic (Claude) are FORCED to do something to ensure their profitability, now they see their costs rising sharply. And therefore they’re attempting through the back door to reduce the performance delivered to customers.

The End of Free AI and possibly the end of the tech stock market boom

But I think it’s obvious – one way or another, this bill must be paid – and therefore we must also expect that the time when AI models were free or nearly free is over.

Finally, we must see whether the rapidly rising prices of computing power will affect earnings expectations in the large American tech giants, which have largely driven the massive share price increases we’ve seen in recent years on the American stock market.
In recent days we have seen a bit of weakness in the US tech stocks and I think we might be heading for more bad news going forward as tech companies struggle to maintain profitability as computing power prices continue to rise and capacity problems in the sector become a lot more obvious to investors.

Inflationary Pressures Mounting

This computing power crisis brings another inflationary pressure “out in the open” that comes on top of the negative supply shock arising from Trump’s immigration crackdown and his massive tariff increases.

Trump’s immigration policies have created a significant labour supply shock. Net immigration has fallen by over 90% compared to previous years, equivalent to a slowdown in labour force growth of more than 2 million people and this in fact in my view might be a far more sustained negative supply shock for the economy than Trump’s tariffs.

Simultaneously, Trump’s tariff regime has imposed duties averaging close to 20% – the highest level since 1933.

The combination creates a perfect storm: reduced labour supply pushing up wages, higher import costs from tariffs, and now spiralling computing infrastructure costs all feeding into broader price pressures.

So overall it is clear that US inflation already is in the process of heading higher.

The New Economic Reality

And that’s why I now say that the price of computing power is probably the most important price in the global economy right now.

The implications extend far beyond AI companies. As computing power becomes more expensive, it affects everything from financial services to manufacturing, from entertainment to logistics. Every industry now depends on computational capacity, and this bottleneck threatens to constrain economic growth whilst simultaneously driving up costs.

For investors and policymakers, monitoring computing power prices may prove more crucial than traditional indicators. We’re witnessing the emergence of a new economic paradigm where computational capacity, rather than traditional factors of production, becomes the binding constraint on growth and prosperity.

The most important lesson is that computing is getting rapidly more expensive and that will very soon show up in prices across the wider economy.

In my three decades as an economist—including 15 years as Chief Analyst for Emerging Markets at Danske Bank—I’ve seen some truly bizarre economic episodes.

I’ve watched Argentina default on its debt. I’ve analysed Turkey’s monetary policy madness under Erdoğan. I’ve observed Venezuela’s descent into hyperinflation. But what happened today in the United States might top them all.

This morning (US time), President Donald Trump fired the Commissioner of the Bureau of Labor Statistics, Erika McEntarfer, because he didn’t like the jobs numbers. Let that sink in. The leader of the world’s largest economy, the issuer of the global reserve currency, just sacked his top statistician for doing her job.

This is one of the most insane thing I’ve witnessed in my entire career.

The Numbers That Should Have Set Off Alarm Bells

The U.S. employment report for July 2025 should indeed be setting off alarm bells in the White House—but for entirely different reasons than Trump imagines.

The BLS delivered numbers that not only show weak job creation but revealed that for months we’ve been living under an illusion about the labour market’s strength.

July brought only 73,000 new non-farm jobs, with the private sector contributing a meagre 52,000. Unemployment rose to 4.2 percent. But what’s truly striking are the massive revisions: May was slashed from +144,000 to +19,000 jobs. June from +147,000 to +14,000 jobs.

These are NOT minor adjustments. We’re talking about 258,000 fewer jobs than initially reported. The BLS itself calls the revisions “larger than normal”—a rare admission from an agency that typically uses understated language.

Within hours of this sobering report, Trump took to Truth Social with a deranged rant, accusing McEntarfer of having “faked the Jobs Numbers before the Election to try and boost Kamala’s chances of Victory.” He ordered her immediate termination, declaring she would be “replaced with someone much more competent and qualified.”

America’s Authoritarian Turn

This isn’t just about economic statistics. It’s about the systematic dismantling of American democracy’s checks and balances. One by one, the institutions that have safeguarded American democracy are being shot down.

We’ve watched Trump attack the judiciary when rulings go against him. We’ve seen him undermine the intelligence community when their assessments contradict his worldview. He’s waged war on the media as “enemies of the people.” And now he’s destroying the credibility of federal statistics because they don’t support his narrative.

This is how democracies die – not in dramatic coups, but through the gradual erosion of institutional independence.

Each fired official, each attacked institution, each norm violated moves America further down an authoritarian path. Today’s firing isn’t an isolated incident; it’s part of a pattern that should terrify anyone who values democratic governance.

The Real Story: A Labour Market in Clear Deceleration

Looking at the actual data that triggered Trump’s rage, the pattern is undeniable: The U.S. labour market has slowed substantially. We now have enough data points to conclude this isn’t a statistical fluke.

Most concerning is the trend in private employment. Job growth in the sector that actually drives the economy has practically stalled throughout 2025. Government jobs don’t create American prosperity. When the private sector stops creating jobs, it’s a clear warning sign.

The numbers don’t necessarily indicate recession. But they tell of an economy that has lost its breath. Most worrying is the timing—the slowdown is occurring before the full effects of Trump’s tariff increases have hit. When businesses truly feel those effects, we should expect further weakening.

But instead of addressing these legitimate economic concerns, Trump shoots the messenger.

Why This Is Worse Than Any Emerging Market Crisis

During my years at Danske Bank analysing emerging markets, I became intimately familiar with data manipulation and authoritarian interference. I remember when Christina Kirchner’s government in Argentina essentially hijacked INDEC, the national statistics institute, because they didn’t like the inflation numbers.

But here’s the crucial difference: everyone expected this from Argentina. It was a country with weak institutions and a history of authoritarian interruptions to democracy. The United States is—or was—different. The US’s checks and balances were supposed to prevent exactly this kind of abuse.

That’s what makes today’s events so shocking. We’re watching the world’s oldest continuous democracy adopt the playbook of tin-pot dictatorships. The guardrails that were supposed to protect American institutions from political interference have failed.

The Banana Republic Playbook

What’s most disturbing is how familiar this feels. In my years covering emerging markets, I’ve seen this movie before. Economic data turns negative, populist leader blames the messenger, independent officials get fired.

During my time analysing Turkey, I watched Erdoğan systematically dismantle every institution that challenged his authority. Central bank governors, statisticians, judges—anyone who wouldn’t bend to his will was purged. Each firing moved Turkey further from democracy and deeper into authoritarianism.

Now we’re watching the same drama in Washington. Trump’s simultaneous attack on Fed Chair Jerome Powell—saying he should be “put out to pasture”—shows this isn’t about one bad jobs report. It’s about crushing any institution that maintains independence from presidential control.

The Death of Checks and Balances

The American founders understood that concentrating power in one person’s hands leads to tyranny. That’s why they created a system of checks and balances – independent institutions that could constrain executive power.

But what happens when those institutions are systematically attacked and undermined? When inspectors general are fired for investigating corruption? When the Justice Department becomes a tool of presidential vengeance? When federal statistics become subject to political approval?

You get authoritarianism with American characteristics. Not the crude military dictatorship of a banana republic, but a sophisticated dismantling of democratic norms while maintaining the facade of constitutional government.

The Mechanics of Statistical Credibility

The accusation that McEntarfer “faked” the numbers is preposterous to anyone who understands how the BLS operates. This is a career civil servant with over 20 years in government, confirmed by the Senate 86-8 just last year.

The Bureau employs hundreds of economists and statisticians who follow rigorous methodologies developed over decades. This isn’t some black box where numbers can be manipulated at will. It’s a professional statistical agency operating according to international best practices.

But in Trump’s authoritarian worldview, expertise is subordinate to loyalty. Professional integrity is less important than political convenience. Truth itself becomes negotiable when it conflicts with the leader’s narrative.

A Personal Reflection

I’ve spent my career analysing the economic consequences of institutional failure. I’ve seen how quickly things can unravel when democratic norms erode and authoritarian tendencies take hold. But I never imagined I’d see it happen in the United States.

In 30 years of watching economies and institutions evolve, nothing has been more surreal than witnessing American democracy’s checks and balances fail in real time. Each norm violated, each institution corrupted, each official fired for doing their job – it all adds up to a fundamental transformation of American governance.

The foundation of both democracy and capitalism is trust. Trust in institutions. Trust in data. Trust in the rule of law. Today, another pillar of that trust was demolished.

We’re watching the United States transform from the world’s leading democracy into something darker, more authoritarian, more arbitrary. And the most insane part? It’s all happening in plain sight, one fired official at a time.

I must say that the commentary surrounding Sunday’s so-called trade agreement between the US and EU has been almost universally “Trumpian” in its analysis.

Nearly every commentator emphasises that Trump has “won” whilst the EU has capitulated. From Frankfurt to Paris, from Dublin to Copenhagen, the narrative is one of European defeat in the face of American economic bullying.

So let’s examine the facts instead of the rhetoric.

The Pre-Trump Baseline

Before Trump’s return to the White House, there was widespread free trade between the EU and USA, save for a handful of selected goods. The average US tariff on EU imports stood at a mere 1.2%—a testament to decades of trade liberalisation.

This was an excellent situation. Economists have known since Adam Smith’s Wealth of Nations in 1776 that free trade trumps protectionism. David Ricardo subsequently taught us that the value of trade lies in each country producing what it is RELATIVELY best at—the principle of comparative advantage that has underpinned global prosperity for two centuries.

Prior to Smith, mercantilism dominated economic thinking. According to mercantilist doctrine, the purpose of trade policy was to maximise the trade surplus—or exports. This is precisely how Trump thinks about trade.

But the lesson from Smith and Ricardo is that we should focus on the division of labour and the consumer, not on crude trade balance arithmetic.

The New Reality: A 15% Baseline

When Trump threatened to impose tariffs, the EU had limited options. The deal, which imposes a 15 percent tariff on most European goods, came after a private meeting on Sunday between US President Donald Trump and European Commission President Ursula von der Leyen in Scotland. Yes, this disrupts the division of labour. But this was also the situation BEFORE Sunday’s “agreement” (we still don’t know the full details—as always with Trump, there’s more bluster than substance).

What would the perfect agreement look like? If we’re to heed Ricardo and Smith, it would be zero tariffs—both ways.

We haven’t achieved that, but here’s what’s remarkable: Announcing the agreement, Trump said the E.U. will not impose a tariff on U.S. imports. In other words, the EU has moved towards MORE free trade, not less. The bloc has committed to maintaining zero tariffs on American goods whilst accepting a 15% levy on its own exports.

This is, all else being equal, GOOD for European consumers and producers.

The Asymmetry That Matters

What isn’t good, naturally, is Trump’s 15% tariff on European exports to the USA. This certainly affects European exporters. But let’s be clear about who bears the greatest burden here: American consumers and producers will pay the lion’s share of these costs through higher prices and reduced competitiveness.

It’s worth remembering that trade is a positive-sum game, not a zero-sum contest. When I hear commentators proclaim that Europe has “lost,” it sounds eerily like Trump himself, who persistently misunderstands trade as a win-lose proposition.

The EU could have escalated the trade war. Brussels had prepared a long list of retaliatory tariffs targeting everything from beef and beer to Boeing aircraft and car parts. That would have been a replay of the 1930s trade catastrophes when global commerce collapsed.

We’re not getting that. Instead, we’re getting LOWER EU tariff rates—indeed, zero tariffs on US goods. Yes, we face tariffs on our exports. That’s not ideal, but it’s primarily American consumers who will foot the bill.

The Numbers Tell a Different Story

Consider what Trump initially threatened versus what materialised:

• Initial threat: 30% tariffs on all EU goods
• April position: 20% “reciprocal” tariffs
• Final agreement: 15% baseline with significant carve-outs

A “zero-for-zero” scheme will apply to aircraft and related components, semiconductor equipment, critical raw materials and some chemical and agricultural products. Moreover, For the auto industry, for which the current tariffs of 27.5% were almost halved to 15%.

I’m genuinely pleased that the EU has let reason prevail and avoided escalating a trade war. It would have been economically senseless and would have led to inflation and stagnation across Europe. Now we get to maintain ZERO import tariffs—likely contributing to lower inflation in the coming period.

The Broader Economic Context

We must also remember that the USA today consumes excessively—both publicly and privately. A correction is inevitable. Americans must pay higher taxes to close the massive federal budget deficit.

Tariffs are an absurdly inefficient way to raise revenue, but the alternative would have been lower public spending combined with the introduction of a federal VAT (which would have been my recommendation). Regardless, Americans must consume less. And they will. Yes, this means reduced European exports to the USA.

The Investment “Promises”

What about the EU’s “pledges” to “invest” in the USA? Trump, the deal also includes that all European Union countries will be “opened up for U.S. goods” at 0% and the bloc will invest $600 billion in the U.S. Frankly, I doubt this will amount to much. This is vintage Trump theatre. We saw the same performance with the Japan trade agreement—Trump announced massive Japanese “investments” that Tokyo couldn’t recognise in the actual agreement.

The Bottom Line

So what should we conclude? We’ve secured an agreement that leaves European consumers BETTER off than before. We’ve avoided or postponed a trade war. American consumers will bear the cost of Trump’s tariff folly.

All told, whilst everyone claims the EU has “lost,” European consumers have actually WON. Credit to the EU’s negotiators for this outcome. They may not even realise it, and they’ll be savaged in the press, but this is actually a good day for Europe.

We must lament that Trump behaves like an economic illiterate, attacking international trading systems and attempting to dismantle the liberal world order. But escalating the trade war would have been monumentally stupid.

The Path Forward

The EU should continue down this path—we need ZERO tariffs on even more goods and with even more countries. “We have a deal. We have a trade deal between the two largest economies in the world, and it’s a big deal, it’s a huge deal,” she said. “It will bring stability. It will bring predictability.” The EU must urgently begin negotiating with major trading partners—Japan, South Korea, and the UK—for zero-tariff agreements.

And again, let’s stop thinking about trade like Trump does. It’s not about maximising exports. It’s about the division of labour and lower prices for consumers. The mercantilist obsession with trade surpluses died with Adam Smith in 1776. Let’s not resurrect it now.

A Final Thought on Economic Literacy

What’s most disturbing about this entire episode isn’t the tariffs themselves—it’s the economic illiteracy they reveal. When supposedly sophisticated European commentators adopt Trump’s zero-sum view of trade, we’ve truly lost the plot.

The gains from trade don’t come from running surpluses. They come from specialisation, from competition, from the creative destruction that forces firms to innovate. When we impose tariffs, we don’t protect jobs—we protect inefficiency.

The EU’s negotiators may have just pulled off one of the cleverest moves in recent trade diplomacy: maintaining completely open access for American goods whilst accepting temporary tariffs that American consumers will largely pay. It is not perfect (that would be complete free trade), but it is much, much better than European consumers would pay massive higher prices than today.

The Hidden Third Mandate

The Federal Reserve Act may soon create serious problems for Jerome Powell – or perhaps I should say “Too Late” Jerome Powell, as President Trump has taken to calling him.

Most economists discuss the Federal Reserve’s “dual mandate”—to secure both “stable prices” and “maximum employment”. The Fed has interpreted this more specifically as a 2% inflation target, with room to support employment so long as it doesn’t conflict with price stability.

But here’s the truth: the Fed doesn’t have a dual mandate—it has a triple mandate. The actual language in the Federal Reserve Reform Act, dating from 1977, states that it’s the Fed’s responsibility “to promote effectively the goals of maximum employment, stable prices, and moderate long-term interest rates.”

There it is – a third goal: to ensure “moderate long-term interest rates”.

This has rarely commanded much attention, as economists generally assume that low inflation automatically leads to low inflation expectations, which in turn ensures moderate long-term interest rates.

When Goals Collide

What’s striking is that the law doesn’t discuss what the Fed should do when these three goals conflict.

There’s now consensus amongst economists (less so in 1977) that monetary policy cannot permanently hold unemployment below the “structural unemployment” rate, and attempting to do so will cause inflation to spiral out of control.

That’s why the Fed has interpreted the law for at least 30 years such that the inflation target takes precedence over the employment goal.

But for the past three decades, there hasn’t been a test of the interest rate goal. What happens when long-term rates begin rising sharply, so we can no longer say they’re “moderate long-term interest rates”?

The Warning Signs Are Flashing

This is hardly a hypothetical scenario. The 30-year Treasury yield today rose above 5%.

This could happen if markets lose confidence in the US government’s willingness and ability to repay its debt. Given how the Trump administration (and previous ones) and both Democrats and Republicans seem utterly indifferent to public debt dynamics, the risk of a sudden and severe spike in interest rates is increasing.

What then?

The Fed could argue that rising rates reflect irresponsible fiscal policy and do nothing. Just as they’ve never assumed “maximum employment” means zero unemployment, recognising structural labour market conditions.

But they’ve only been able to take this position because monetary policy genuinely can control inflation long-term but cannot control unemployment long-term (which is structurally determined).

Interest rates are different. When fiscal policy becomes unsustainable, what economists call “fiscal dominance” emerges – where expectations arise that unsustainable public finances will eventually force the central bank to “rescue” the government by monetising the deficit.

In this situation, expectations of monetisation cause inflation expectations to explode, and it’s fiscal policy, not monetary policy, that effectively determines inflation.

If the central bank attempts to tighten policy, it merely exacerbates the fiscal problem and potentially increases inflation expectations further.

This is typically what happens in countries where massive public finance problems create expectation dynamics leading to hyperinflation.

Thankfully, the US isn’t there yet. But we’re moving in that worrying direction.

The question now is: when can we say the Fed isn’t meeting its “triple mandate”? What if rates rise to 6% or 7%? Or 10%?

The Fiscal Dominance Trap

In that situation, there are certainly good grounds to claim the Fed should buy US Treasuries to push down government bond yields.

But in that situation inflation expectations would explode – and the dollar would weaken markedly. And yes, actual inflation would shoot up dramatically.

The Fed would thus be forced to abandon its inflation target – even though it all stems from irresponsible fiscal policy over which the Fed has no influence.

We see here that economic gravity determines the hierarchy of the three goals.

Under normal conditions, the Fed can focus on ensuring low inflation and, when there’s room, support employment – and interest rates will remain “moderate”.

But if fiscal policy becomes truly unsustainable, the Fed essentially loses control. Expectation formation will completely undermine the Fed’s ability to control inflation. And worse – according to the Federal Reserve Reform Act, it’s actually the Fed’s obligation to ignore inflation (which it can’t control in this situation anyway) and focus on keeping rates low.

Trump’s Dangerous Game

This is an extremely worrying scenario, and one must say it’s becoming increasingly likely given that US fiscal policy is clearly completely unsustainable, there’s no political will to address it – and yes, it’s simultaneously clear that President Trump believes it’s the Fed’s job to solve the problem by cutting policy rates.

President Trump recently suggested that the Federal Reserve should substantially cut policy rates to help lower the mounting interest rate cost associated with servicing the massive government debt. Last week, the president sent Powell a handwritten note: “You should lower the rate — by a lot! Hundreds of billions of dollars being lost!”

Trump hasn’t yet focused on long-term rates, but with continued rises in Treasury yields, it’s surely only a matter of time before he realises the Federal Reserve Reform Act might be used to twist Jerome Powell’s arm.

The conditions for fiscal dominance — when a central bank’s ability to control inflation through monetary policy is effectively negated by a government’s high debt and deficits — are falling into place.

The Independence Illusion

That said, the Federal Reserve Reform Act also guarantees the Fed’s independence, and there are no sanctions in the law against the Fed if it doesn’t meet the “triple mandate”.

What’s frightening, however, is that we even need to discuss these matters, but it would be deeply irresponsible to ignore these risks.

The bond market is already sending warning signals. Moody’s downgraded the U.S. government’s credit rating earlier this year, citing the increasing burden of financing the government’s ballooning budget deficit.

The Price of Recklessness

We’re witnessing the early stages of what could become a full-blown fiscal dominance crisis. The Fed may soon face an impossible choice: follow its triple mandate and facilitate fiscal irresponsibility, or maintain its inflation-fighting credibility and risk being accused of violating the law.

This is the price of decades of fiscal recklessness. And I fear we’re only beginning to pay it.

As a classical liberal economist, I ought to be thrilled about Javier Milei. A self-proclaimed libertarian winning the presidency of Argentina on a platform of radical economic liberalisation? It sounds like something straight out of a classical liberal dream.

And to be fair, there’s plenty to like about Milei. He’s an economist — not just another lawyer or career politician. I agree with perhaps 95% of what he says on economics.

But I must admit: I prefer the Friedman-Hayek approach — radical in substance, conservative in method. Milei’s theatrical style may be effective (at least in the short term), but it’s not my cup of tea.

Let me also be frank: I’ve previously spoken favourably about Milei and his reform agenda. I still hope his reforms succeed. Argentina desperately needs them. The country needs structural reforms to break with decades of economic mismanagement.

But concern has gradually crept in. Not over Milei’s results per se — they are what they are — but over how we classical liberals around the world may have overestimated him. That we’ve allowed ourselves to be dazzled by rhetoric and short-term wins, while ignoring a fundamental truth: He’s not delivering the lasting reforms Argentina needs.

Let me be absolutely clear: I didn’t buy the hysterical warnings from the left about Milei — and I still don’t. That criticism has largely been ideological and overwrought.

My concern is not that he’s doing too much — but rather that he’s doing far too little. That much of it is political theatre.

When I take a closer look at what has actually happened in Argentina since December 2023, I get worried. Not so much because of Milei’s outcomes — but because we classical liberals have constructed a narrative that has surprisingly little to do with reality.

Then there’s the matter of character. The shitcoin scandal of February 2025, in which Milei promoted a cryptocurrency called $LIBRA that collapsed within hours and wiped out $250 million in investor value?

That raises serious questions about judgement and integrity. Even if he was misled, as he claims, it suggests a troubling naïveté for a head of state. Yes, he was formally cleared of legal wrongdoing — but the episode still casts doubt on his judgement.

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The Uncomfortable Truth About the Reforms

And here’s the crux: Milei’s style and rhetoric are one thing. Implementing lasting reforms is something else entirely.

Real reform work is difficult — and often boring legislative work. It requires patience, political craftsmanship, and coalition-building. This is where Milei falls short.

In fact, Argentina saw more far-reaching market-oriented reforms during the 1990s under Carlos Menem. Those reforms were far from perfect, but they were largely enacted through the legislative process and institutionally anchored via Parliament — not simply decreed from the presidential palace.

Let’s begin with the facts: Milei’s most high-profile campaign promise was to dollarise the Argentine economy. That hasn’t happened. His promise to shut down the central bank? Abandoned.

What about privatisation? Of the 41 state-owned enterprises originally targeted, only between 2 and 8 have actually been approved for sale. Major SOEs remain firmly in state hands.

His flagship reform package — the so-called Ley de Bases — was trimmed down from 664 articles to just 232.

His labour reforms were declared unconstitutional. With just 15% of seats in the lower house, Milei simply lacks the political capital needed to push through serious structural reform.

So what has he actually achieved?

The key result is, in fact, quite simple: Through decree, he has frozen nominal public expenditure. With inflation running above 200%, this results in massive real cuts — up to 35% reductions in pensions and public sector wages.

It’s a clever trick — and yes, it worked. Argentina recorded its first primary budget surplus in 123 years.

But let’s be honest about what that is: It’s not structural reform. It’s not legislation. It’s effectively an inflation tax applied to the state itself. And it’s certainly not sustainable in the long run.

Lower Inflation, But Deep Structural Problems

Even these headline “successes” come with major caveats. Yes, inflation has dropped dramatically — from 25.5% monthly to around 1.5% in May 2025.

Annual inflation now stands at 43.5% — which sounds impressive until you realise that’s roughly where Argentina was back in 2019–2020. In other words, we’re merely back where we started 4–5 years ago.

The economy is indeed showing signs of recovery, but that comes after a sharp recession — with GDP contracting by 3.5% in 2024. More worryingly, unemployment is rising — now at 7.9%, the highest since 2021.

The peso remains another weak spot. Rather than stabilising the currency, Milei has presided over continued depreciation. If that trend continues, any disinflation gains will eventually be reversed. It’s basic macroeconomics: a persistently weakening currency will feed back into prices.

And then there’s the method behind the “miracle cuts”. Milei exploited a particular institutional quirk: If Parliament fails to pass a new budget, the previous year’s budget is automatically extended — but in nominal terms. In a high-inflation environment, this effectively creates sharp real cuts without lifting a finger. Clever? Yes. Sustainable? Hardly.

The Echo Chamber

And yet, what do we hear from classical liberal and libertarian commentators globally?

“Milei’s miracle!” they proclaim. Reason Magazine, the Cato Institute, and a chorus of free-market advocates celebrate his “shock therapy” as a triumph of market economics. And yes, I too have been among those praising the results.

We highlight falling inflation, the budget surplus, and a 160% rally in the stock market as signs of success. We talk about renewed growth — but fail to mention that it’s growth from a deeply depressed base.

This is dangerous for several reasons:

First, it simply overstates the extent of reform. To call Milei’s programme a “libertarian revolution” is misleading when most structural reforms were never enacted, and most changes were made by decree, not legislation.

Second, it ignores how fragile the methods are. Decrees can be reversed as quickly as they were issued. Without legislative backing, nothing is durable.

Third — and perhaps most importantly — we risk discrediting the entire case for liberal reform by overselling the Milei experiment.

The Risk of Overselling

Here’s my greatest concern: What happens when reality catches up with the narrative?

What if the Argentine economy — as it has many times before — collapses under the weight of an overvalued currency, rising unemployment, and unfulfilled reforms?

If we classical liberals have spent years celebrating Milei as a free-market hero and his policies as a miracle, who will take us seriously the next time we argue for market reform?

We risk becoming the ideological boys who cried wolf — too eager to claim victory, too blind to the obvious weaknesses.

A More Honest Assessment

Let me be clear: Many of Milei’s spending cuts were both necessary and sensible. I would have voted for them all.

Argentina urgently needed to regain control of its public finances. Fighting inflation remains essential. Reducing the chronic fiscal deficit was a vital step. And I genuinely hope Milei finds a way to implement the structural reforms Argentina so desperately needs.

But let’s not confuse emergency crisis management by decree with long-term structural reform through legislation. When the next president can undo everything with a stroke of a pen, we haven’t achieved change — we’ve merely delayed the reckoning. Perhaps not for long.

The real problem isn’t that Milei cut spending — it’s that he did so without securing the institutional foundations to make those changes permanent. Without parliamentary support, broad political consensus, or legislation that binds future governments, nothing is truly anchored.

What We Should Learn

The real lesson from the Milei experiment is likely more nuanced than either supporters or critics admit:

1. Decrees are not reform: Real structural change requires legislation. Without parliamentary backing, it’s all temporary.
2. Argentina’s root problem is constitutional: The country lacks the institutional framework to deliver long-term reform. What’s really needed is constitutional reform — a Herculean task Milei hasn’t even attempted.
3. Timing isn’t enough: Crisis may make reform possible, but that doesn’t make it lasting.
4. Institutions cannot be bypassed: The attempt to govern by decree shows exactly why institutional anchoring is essential.

A Warning to My Classical Liberal Friends and Colleagues

So here is my appeal to my fellow classical liberals around the world: Let’s be honest about what is happening in Argentina.

Let us acknowledge both the successes and the shortcomings. Let us not oversell the results or exaggerate the scale of reform.

Because if we elevate Milei as a free-market champion, and the Argentine experiment fails — as it very well might — then we haven’t just damaged our own credibility.

We’ve also made it harder for future reformers to make the case for the market-based policies so many countries desperately need.

The truth is, Milei has delivered something — but almost entirely by decree. The economic results are mixed, not miraculous. And without institutional anchoring, even the positive changes are extremely fragile.

Let’s tell that story instead. It may be less sexy, less ideologically gratifying — but it is honest. And in the long run, honesty serves the cause of economic liberty better than propaganda ever will.

Because if we truly believe in free markets and classical liberal reforms, we should also believe in the importance of strong institutions and democratically grounded change — not just quick-fix decree solutions that can vanish as easily as they appeared.

Argentina needs constitutional reform to lay the foundation for long-term economic policy. That’s the truly difficult task.

It requires political courage, broad cooperation, and long-term thinking. And that, quite frankly, is what Milei has failed to deliver.

And perhaps most importantly: we should insist on character and judgement in those we elevate as champions of liberty. A president promoting dodgy cryptocurrencies? That’s not the example we need.

After Trump announced “Liberation Day” on 2 April, US government bond yields began to rise – and even after the announcement on 9 April of a “pause” in the implementation of Trump’s massive tariff increases, yields continued to climb.

It was especially the 30-year Treasury yields that rose to alarmingly high levels, reaching just above 5% by the end of May.

However, in June, things seemed to calm down somewhat – partly because the economic data turned out slightly better than expected, keeping the door open for further interest rate cuts from the Federal Reserve.

Now, though, we are once again approaching the 5% mark on the 30-year US yield, after several weeks during which long-term interest rates have ticked upwards – not only in the US, but also in Japan, the Eurozone, and the UK.

So far, the equity markets have largely ignored the renewed rise in yields, but I firmly believe there’s good reason to keep a close eye on interest rates. Given that Trump and US politicians seem unwilling to take the country’s enormous fiscal challenges seriously, there is every reason to believe that we may be heading for a fresh wave of market turmoil. This could trigger a drop in US stock prices, a further weakening of the dollar – and yes, we might well see the 30-year Treasury yield rise above 5% again within the next few days.

The question is whether calm can be restored as easily as it was in May–June, or whether we’re in for a much rougher ride this time.

And yes, Trump’s tariff circus is also playing a role again – we are, as I’ve noted in recent days, effectively heading towards 1 August, when tariff levels could return to those originally announced on Liberation Day.

The Unpleasant Arithmetic Returns

Regular readers will recall my May post “The US Consumer Goes to Fiscal Reality Mart: Tariffs or VAT?” about what I’ve termed the “unpleasant arithmetic.” With US federal debt held by the public now at 100% of GDP, the United States has crossed a critical threshold where traditional monetary policy tools become dangerously constrained. The maths are brutally simple: with total US federal debt at $36 trillion, each percentage point rise in rates adds approximately $360 billion to annual interest costs.

This creates what economists call “fiscal dominance” – a situation where monetary policy becomes subservient to fiscal needs. When the US Court of International Trade struck down Trump’s Liberation Day tariff programme in April, they didn’t just deliver a legal judgement; they exposed the fundamental fiscal constraints facing the US administration.

As I wrote then, once you breach the 7-8% threshold on government borrowing costs, you enter an explosive feedback loop. Higher rates generate larger deficits, which require more debt issuance, which pushes up term premiums, which drives rates even higher. It’s a self-reinforcing spiral that, at 119% debt-to-GDP, becomes mathematically impossible to escape through conventional means.

Why This Time Is Different

Back in 2013, I argued in “Be right for the right reasons” that 5% yields on the 30-year US Treasury would signal the end of the Great Recession and a return to the nominal GDP growth rates of the Great Moderation. But context, as they say, is everything. Then, 5% yields meant healthy growth expectations; now, they signal something far more ominous – the stirring of the bond vigilantes.

The temporary calm in June shouldn’t fool anyone. Yes, US inflation expectations dipped from 6.6% to 5.1% according to the Michigan survey, and yes, some economic data surprised to the upside. But these are merely ripples on the surface whilst the underlying currents grow stronger.

Consider the global nature of the current yield surge. It’s not just US Treasuries – Japanese, European, and UK yields are all rising in tandem. This isn’t a story about relative growth differentials or monetary policy divergence. It’s about a fundamental reassessment of sovereign credit risk in an era of fiscal profligacy.

The August Deadline Looms

US Treasury Secretary Bessent’s announcement that tariffs will “boomerang back” to Liberation Day levels by 1 August for countries without trade deals represents more than diplomatic brinkmanship. It’s an acknowledgement of fiscal desperation dressed up as trade policy.

As I demonstrated in “The US Consumer Goes to Fiscal Reality Mart: Tariffs or VAT?”, even revenue-maximising tariffs at 33% would generate only 2.3% of GDP whilst creating deadweight losses of 1.14% of GDP. For every dollar collected, the economy loses an additional 49 cents. It’s fiscal madness masquerading as “America First” economics.

The court’s April ruling was clear: the US president cannot simply declare economic emergencies to impose tariffs at will. Yet here we are, three months later, with the administration attempting to achieve through negotiation what it couldn’t accomplish through executive fiat. The markets aren’t impressed, and neither should they be.

What the Markets Are Telling Us

The renewed talk about Trump potentially firing Powell is particularly troubling. Over the weekend, National Economic Council Director Kevin Hassett said the administration is “looking into” whether Trump has the authority to fire the Fed Chair, suggesting the $2.5 billion renovation of Fed headquarters could provide “cause.” This comes as Trump faces mounting pressure from his MAGA base over the Epstein files debacle, with many calling for Attorney General Bondi’s resignation.

When US presidents face political heat, they often create diversions. And with Trump defending Bondi while his base revolts – the first major split we’ve seen in the MAGA movement – firing Powell would certainly change the subject. It would also be catastrophically stupid from an economic perspective.

Through the lens of MV = PY, such a move could trigger the velocity shock I’ve been warning about. When central bank independence is questioned, households and businesses reduce their money holdings. Velocity accelerates, creating inflation without any increase in the money supply. It’s the mirror image of 2008, when velocity collapsed and the Federal Reserve struggled to prevent deflation.

The Fed now faces an impossible trilemma: they can’t simultaneously maintain price stability, fiscal sustainability, and financial stability. Something has to give. Powell’s recent comments about “staying the course” on inflation ring hollow when everyone knows that above 7-8% rates, the US fiscal arithmetic explodes.

This is why US equity markets’ current complacency strikes me as dangerously misguided. They’re pricing in a Goldilocks scenario where the Fed defeats inflation without triggering a fiscal crisis. The bond market, always the adult in the room, is telling a different story. And now we have the added risk of Trump doing something monumentally foolish to distract from his domestic political troubles.

What Happens Next

The risk I highlighted in May remains very real and is growing: the US could face a multi-phase crisis where rising term premiums lead to capital flight, forcing Fed intervention that sparks surging inflation and ultimately results in de facto debt restructuring. The probability of this scenario is increasing.

The approach to 5% on the 30-year US Treasury yield is the canary in the coal mine. Cross that threshold decisively, and we enter the danger zone where fiscal mathematics overwhelm monetary policy. The June respite bought time, nothing more. Unless US politicians suddenly discover fiscal religion – and Trump’s weekend theatrics defending Bondi whilst his own base calls for her resignation suggests otherwise – the unpleasant arithmetic will assert itself.

For investors, the message is clear: don’t mistake temporary calm for permanent resolution. The bond vigilantes are stirring, and they have mathematics on their side. When US sovereign debt reaches 100% of GDP, 5% long-term rates aren’t a sign of healthy growth expectations; they’re a warning that the game is nearly up.

As I’ve said before, whilst politicians debate, mathematics calculates. And right now, the sums are looking increasingly brutal. The question isn’t whether we’ll see fresh market turmoil, but when – and whether this time, the traditional policy tools will be enough to restore calm.

I suspect we’ll have our answer soon enough. The 1 August tariff deadline may prove to be about more than trade policy. It might just be the date when fiscal reality finally trumps political rhetoric.