Bond Vigilantes Are Now the Unchallenged Kings Thanks to a Feckless Congress and Reckless Trump
After weeks of playing chicken with the global economy by launching a mindless tariff war against more than 180 countries, Donald Trump blinked. On Wednesday, Trump announced a 90-day pause on many (although not all) of those tariffs. This gave the stock market a brief respite from its steep decline of the last few days. However, once the reality that China was still subject to harsh tariffs became clear, the market tumbled the next day.
The good news is that even as uncertainty continues to hobble the global economy, the limits of Trump’s ability to capriciously sabotage global trade are becoming clear. The bad news is that these limits are not being imposed by the democratically elected body that has the constitutional power to check a dangerous president—and the legal authority to set tariffs: Congress. In fact, Congress has become even more irresponsible and cowardly, cowering before Trump and irresponsibly ceding its tariff powers to the executive.
In April’s continuing resolution to the budget (which was supported by Chuck Schumer and nine other Democrats in the Senate), Congress explicitly renounced the ability to end the emergency power declaration that underwrites Trump’s tariff policy. The budget resolution passed by the House on Thursday went even further. As Sahil Kupar of NBC News reported on Wednesday: “House Republicans tucked language into the budget [resolution] ‘rule’ that bans the House from voting to terminate Trump’s emergency declaration used to impose tariffs…. lawmakers who vote for this are officially giving up their power to revoke his tariffs until October.”
As I noted in a previous column, the tariff crisis is also a constitutional crisis. Constitutional powers are also constitutional duties. Congress, with the same abdication of responsibility that led them to hand over war-making responsibility to the commander in chief, have now surrendered their responsibility to set tariff rates, further empowering the imperial presidency. The centralization of power in the oval office is bad enough when the president is a power-hungry goon like Nixon or George W. Bush, but even more disastrous when the chief executive is imperial in the sense of having the character of a mad emperor like Nero or Caligula. Nero, as the saying goes, fiddled while Rome burned. How much worse is Trump, who dances while lighting the world on fire.
To the extent that the arsonist has been—temporarily—stopped from some of his incendiary activities, this is due not to the proper constitutional and democratic actions of Congress but by the actions of the ultra-wealthy. Wall Street played a role, not only with the stock market tumble but also by lobbying the White House and Trump’s GOP allies. But much more important was the intervention of bond holders, who started selling Treasury bonds at a rate that could easily have precipitated an economic meltdown on the order of the Great Depression. It’s worth remembering that bond holders are overwhelmingly the economic elite—much more so than the stock market. While the stock market is hardly a democratic institution, pension funds give a majority of the population some stake in stocks. By contrast, a 2016 report found that only 1.3 per cent of the population—almost all of them very rich—directly participate in the bond market.
Initially, Treasury Secretary Scott Bessent and Secretary of Commerce Howard Lutnick were touting the possibility that a stock market correction would lead to more money going into Treasury bonds, which would help the US government deal with its debt by allowing for lower rates. Unexpectedly, there was a move away from Treasury bonds. As Willian D. Cohan of Puck explains:
On Monday, the 10-year Treasury yield backed up from 3.89 percent to around 4.12—a 6 percent move in one day, and a clear signal that bond investors are getting very nervous about whatever the heck is going on at the White House. On Tuesday, it backed up even more, to 4.25 percent—a 9 percent increase over two days. By Wednesday, the 10-year Treasury was yielding 4.54 percent. (After Trump announced the 90-day pause, the yield moved down slightly, to 4.4 percent; I’m sure he was hoping for more.)
In his substack Chartbook on Monday, Columbia University historian Adam Tooze, who has written extensively on economic crises, laid out a scenario where a run on Treasury bonds could lead to a wider economic crisis:
What if providing liquidity does not cool the panic? What if investors, both American and foreign decide, that they no longer wish to hitch their wagon to the empire of the mad king? What if they decide that the US is indeed exceptional, but that it is exceptional in rather nasty ways? What if the report in the UK Telegraph is more than mere rumor and Germany’s leaders are seriously considering pulling its remaining gold reserves out of the USA, because of Trump-risk? Well in that case, holding billions in dollars newly created by the Fed does not give you the security you want.
So you sell the dollars. You just want out of the mad house.
This, Ladies and Gentleman, would be the truly big disaster. It would be a sell out not just of US stocks. Not just of US fixed income. But of dollar assets tout court. This would be the long heralded crisis of the dollar.
While Tooze described this scenario as “unlikely,” the panic of Tuesday and Wednesday suggests at least the beginning of a nightmare crisis. This is why Trump blinked. Explaining on Wednesday his 90-day tariff pause, Trump told reporters:
“Well I think people were jumping a little bit out of line. They were getting yippy…. Bond market is very tricky. I was watching it. But if you look at it now, it’s beautiful. The bond market right now is beautiful. But, yeah, I saw last night where people were getting a little queasy.”
To be sure, Trump isn’t the first president who has had to learn the hard way that finance capital calls the shots. In 1994, Bill Clinton was quoted in Bob Woodward’s book The Agenda lamenting, “You mean to tell me that the success of the program and my re-election hinges on the Federal Reserve and a bunch of fucking bond traders?” In the same book, Clinton adviser James Carville is quoted memorably as saying, “I used to think that if there was reincarnation, I wanted to come back as the president or the pope or as a .400 baseball hitter. But now I would like to come back as the bond market. You can intimidate everybody.”
As powerful as bond traders have long been, they are even stronger now. They have been empowered by both Trump (whose reckless policies gives them even greater leverage over the US government) and by the pusillanimity of Congress. At the end of the day, it shouldn’t be the job of bond traders to rein in an out-of-control president. That’s the duty of Congress, but that august body has gone AWOL. The infamous bond vigilantes didn’t need more power. But they have it now.
Jeet Heer is a national affairs correspondent for The Nation and host of the weekly Nation podcast, The Time of Monsters. He also pens the monthly column “Morbid Symptoms.” The author of In Love with Art: Francoise Mouly’s Adventures in Comics with Art Spiegelman (2013) and Sweet Lechery: Reviews, Essays and Profiles (2014), Heer has written for numerous publications, including The New Yorker, The Paris Review, Virginia Quarterly Review, The American Prospect, The Guardian, The New Republic, and The Boston Globe.
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