Date: 28 May 2025 (delayed public release 28 June 2025)

Recently we said that a massive economic jolt was underway. The deficit was one of our main concerns, because the Trump Trade Push could backfire .. and it is backfiring. As a result Washington is closer to Europe than at any point in time since US Election Day. Both America and Europe are in the same boat – facing a massive Deficit Disaster.

As we have been writing since 2015 organically weak economies that are kept alive with never ending fiscal-monetary stimulus end up with giant deficits, inner conflicts and wars. That is what we’ve learnt of deficit-spending economies over the past 4’000 years.

What went wrong?  

Washington hammered foes and allies alike with stiff tariffs and far-reaching threats, but it underestimated the resourcefulness, coordination and strength of foes and competitors alike. They teamed up and managed to hurt America where it is most vulnerable, in its bloated Treasury Market.

President Trump is desperate for lower interest rates to fuel US growth. And that is what China & Co. did – They pushed up US bond yields higher and higher. It is tough for the FED to cut rates.

While many would argue the Trump administration is doing many good things on other domestic fronts, the Trade War and the Threat Escalation the White House has unleashed is not going as planned and could overshadow everything else.

A second more violent round of tariff threats is likely

For now there are many announcements but not yet much concrete action. It is thus likely that President Trump may have to double down on his threats – as part of his signature deal making style – in order to force more nations into big trade deals. But many of these deals will be hard to be enforced. Most of those nations are not feudal states nor dictatorial regimes where the government can tell people and businesses where to buy and invest. Thus, while a wave of announcements could lead to a victory lap at the home front, the subsequent loss of trust could lead to a global economic recession or financial crisis.

Don’t watch trade, watch the Bond Market! 

Although the first few months looked promising, once again President Trump seems to have chosen a team of experts that lacked critical voices. You need diverse opinions in a winning team.

Yes, you can threaten other nations into buying more of your products and not so much your debt? That destroys trust and that is the path for open hostilities and war. We are moving from information warfare, technology warfare, commercial warfare ..  to financial warfare and ultimately open hostilities.

Misreading how the world economy works? 

President Trump was right about the elevated tariffs many nations lay on US products. Truth is many countries have taken advantage of the USA. But it takes two to dance.

You also have to think about the long term implications of threats and make an effort to safeguard long term US interests, not just short term growth goals. To sell more overseas you need to cater to other cultures in order to meet their needs – To coerce others to buy your products can work at the beginning, but not long term. In the course of a short term trade war, you can score many points at home, but lose all friends and allies around the world.

The point is this: Global Trade can only partially be influenced by government edicts in the short term. Well, unless governments seize markets, introduce martial law or the state of war. We might be going in that direction, but we are not there yet. It is tempting to be able to say “Your country has buy USD 100 Bn of US products over the next three years!”, but that is not how most economies work. Governments make up only 10%-25% of real final demand. Thus many of those agreements will end up being declarations of intentions and may even lack the legal basis to be ratified by many parliaments. But the damage on America’s image around the world may not be easy to be undone.

To get the trade deals it desires, Washington inadvertently is forcing other governments to intervene more in markets and seize control of what people & businesses buy. That is not positive for democracy nor market economies. 

Deals go that far ..

Let’s put it this way: The French government cannot order every French household to consume a certain amount of US beef or US corn. As most Europeans would tell you, they have little interest in US food. They simply don’t like what it is in it. Add to it that very few Europeans like over-sized cars. Take a small cup of coffee in America – that is probably the largest cup of coffee many Europeans would ever order at a bistro.

Worse yet, what sounds great at a rally, doesn’t add up at aggregate economic levels: as long as Americans live beyond their means, America is likely to have a trade deficit with other countries. Actually the twin deficits are part of an informal “deal” that allows Americans to live beyond their means at the expense of the rest of the world. Of course as long as people spend and save .. kind of freely .. the incentives and comparative factors are at work.

The world economy is in balance on any given day. Which doesn’t mean the largest economies aren’t on track for a debt implosion, painful reset or war. Possibly all of them. We may not like what we see, but overall it is balanced. If you don’t save and live on pump and debt, you have an external deficit. That is America’s case. In a way part of the US trade deficit reflects its global status and its big fiscal deficits – you could also say its overconsumption. The rest of the world has financed it. Well, so far it did.

Our main concern – America has signalled its debt is risky 

In our analysis – the “Trump Trade Push” could have worked with short term and long term benefits if the US President had avoided threatening foreign investors and .. if flanked by a global investment & charm offensive including Asia, Africa and LatAm. China builds infrastructure in those regions, while we are keen to export our new laws, values and ESG rules. France, Germany and Britain are trying to re-engage in those regions’ infrastructure projects. But America is still kind of out.

There are actually nations that can afford to buy more US assets. But instead of making long term investor-allies, the White House has threatened harsh measures on any ally or foe that dares to sell US assets if it hurts the US currency.  Any seasoned economist would tell you it is in those cases when investors may need to sell. To compensate for the loss of international investors Trump got the likes of Saudi Arabia and Qatar. Something many say comes at a high price. Behind the short term trade victories the White House is announcing lies a problem. You have threatened and forced foreign investors to not sell the US treasuries and USD. Further down the road a major sell-off of USD and a massive spike in US Yields is now only a matter of time. There is no free lunch – the quick trade victories come at a price. Americans will be forced to buy more domestic products, but US products are simply not the best in every area. Top quality foreign products will be more expensive.

When you have to force or coerce people to hold your debt, you are telling them, it is more risky than what the markets say. In fact this is how it comes across for many foreign investors: it is risky to buy it in the first place, because no one seriously has so far thought of paying an “unwinding premium” for holding US debt. You have to hope never having to sell it in meaningful quantities. This kind of talk by Washington has de facto hurt the US Treasury Market irreversibly and increased the cost of servicing US debt for US citizens for years to come.

Simply said – America is still a superb and powerful super-power, but its economy is far from healthy. It is highly inflated – and that inflated unhealthy economy is about to get both a growth shock, but also a negative competitive shock. When your government shields you – you grow at first, but become less competitive internationally.

The USA is already sitting on the biggest set of bubbles in recorded history and probably ever in human history. We have been inflating everything over the past 50 years. America is not invulnerable. In my personal view, the White House advisers failed to inform the President of the US’ achilles heel. It is remarkable, because when you listen to Secretary Rubio you can tell he has a balanced picture of America’s greatness and America’s vulnerabilities.If Washington can grow the US economy faster than the deficit, great. If not, either interest rates or the USD will have to yield. The problem with big geopolitical investors is that they get something immediately, while you have to wait years to be able to prove they never invested all they promised to.

Further down the road these three problems could all converge: USD sell off, sharp rise in US Yields and exploding deficits. And our combined experience tells us they will …

 

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Geopolitical Research Team  –  28 May 2025 (public release 28 June 2025)
info@geopoliticalresearch.com

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