In the early 1980s, strategist Ed Yardeni coined the term "bond vigilantes" to refer to investors who tried to 'discipline' the public spending of highly indebted governments through pressure on their sovereign bond yields. "If fiscal and monetary authorities do not regulate the economy, bond investors will," he explained. The 'vigilantes' are not a defined, real group, but rather an idea, an attitude that has been replicated many times since then, as seen in Greece or Spain, or as discovered by Liz Truss, Britain's shortest-serving prime minister. This approach has also been applied to monetary policy when the market demands higher compensation for lending money if it believes that central banks and governments are failing to contain inflation.
Most of the time, orthodox but mostly self-interested investors punish emerging countries, or developed economies suffocated by deep crises of liquidity, solvency, or currencies. But this week, they have acted brutally towards the world's leading power. Apparently for different reasons - the trade war and policy shifts - but upon closer inspection, striking similarities begin to emerge. Not in structure, as the U.S. economy is obviously not an emerging one. But in some of the reasons for distrust and the consequences.
"Rises in bond yields and drops in currencies are common in emerging markets, but very unusual in the U.S.: there have only been four other episodes in the last 30 years where the dollar depreciated by more than 1.5%, with a 30-year yield increase of over 10 basis points," wrote analysts from Evercore ISI. "This is not stagflation, as inflation breakevens have fallen. What this reflects is the disappearance of U.S. growth exceptionalism and the reduced attractiveness of dollar assets as reserves amid erratic decision-making in the United States." A damning verdict.
The U.S. ended 2024 with a public deficit of $1.8 trillion, 6.4% of its Gross Domestic Product. And with a debt of $36 trillion, 123% of GDP. Ratios that in the European Union would imply being in the corrective arm of the Stability Pact, adjustments, reforms. Ratios that in much of the world could imply serious financing difficulties or very high prices. But paraphrasing Jean-Claude Juncker, the U.S. is the U.S.
The largest economy in history, with the currency serving as the global reserve, is at the center of the international financial system. That is why U.S. Treasuries not only never cause concern but are considered one of the safest assets in the world, a refuge. And that is why its currency has always been strong. The rest of the world always needs dollars, to buy, sell, or accumulate, and that has allowed its economy to accumulate fiscal deficits without much concern for decades. Until now. "The United States, after World War II, was the great stabilizer. Now we are a global destabilizer," warned Larry Fink, CEO of Blackrock.
Increased federal spending
Since 2020, U.S. national debt has soared by $13 trillion, averaging $2.6 trillion annually for five consecutive years. Just this year, a quarter of it, $9.2 trillion, is due for refinancing, already raising concerns about its implications for financial markets, interest rates, and economic stability before the largest and most inexplicable unilateral trade war declaration in history. Especially because the average interest rate on Treasury debt is now at 3.2%, the highest since 2010, and renewing it will be much more expensive.
Despite Elon Musk's statements and performances, federal spending has increased since President Trump took office. An analysis by the Wall Street Journal of daily financial statements issued by the Treasury Department indicates that public spending since the inauguration is $154 billion higher than during the same period in 2024 under former President Joe Biden. The administration, in a difficult-to-believe display of revisionism, argues that the 20th century has been negative for the U.S., that free trade, globalization, the system they created and led, are harmful. "The dollar's status as an overvalued reserve currency has had, at best, advantages and disadvantages, and at this point, it has become a burden," argued Oren Cass this week, the economist who is most prominently advocating for tariffs and Trump's improvised protectionist revolution every morning.
"The events of the past 24 hours suggest that we may be heading towards a serious financial crisis entirely induced by the U.S. government's tariff policy," said Larry Summers, Harvard economist and former Treasury Secretary under Obama, on Friday. "Long-term interest rates are showing an upward trend, even as the stock market sharply declines. This highly unusual pattern suggests widespread aversion to U.S. assets. Global financial markets are treating us like a problematic emerging market," he lamented somewhat embarrassed.
"Respectfully, I disagree. This theory gives too much credit to Trump. That he is propelled by the U.S. government's tariff policy, yes, of course, but this is largely due to decades of irresponsible fiscal policies that have put the United States on an unsustainable fiscal path. Several prominent economists, including Larry, may have contributed to this by claiming that the U.S. had almost unlimited fiscal capacity in the low-rate era preceding the pandemic," reproached Hanno Lustig, a Stanford professor. "America's economists, our new 'underdeveloped' economy, should consult with those of us living in Latin America and the European periphery on how to recover from a 'sudden stop' (yes, with the dollar and all)," ironic Spanish economist Luis Garicano pointed out on Friday.
Nothing unusual in the markets?
It is the combination of both, aversion to what sounds American and fiscal fundamentals, that creates an explosive cocktail. The administration, with Treasury Secretary Scott Bessent at the helm, insists that "there is nothing unusual," that these are mere corrections, a "transition period" in the markets. "We have the preferred currency, the dollar will always be... I think the dollar is a fantastic currency," Trump boasted from Air Force One this weekend. But the response in New York, London, Tokyo, Beijing, or Singapore is that there is nothing normal about what is happening and that a post-dollar world is increasingly sounding possible.
"Bessent has said that there is nothing unusual in market movements. The 30-year Treasury bond has experienced the largest yield increase since 1982, stocks are falling, the dollar is depreciating, and gold is reaching historic highs. Economists may consider this pattern quite unusual," warned Paul Donovan of USB in a note. "The market is reassessing the structural appeal of the dollar as the global reserve currency and is undergoing a rapid de-dollarization process," wrote George Saravelos of Deutsche Bank on Friday. "Our conclusion is that, given the centrality of the dollar in the global financial system, the transformative changes in capital flow allocation that have been triggered are likely to have many unpredictable consequences."
Despite a decent auction on Thursday, amid strong pressures, the yield on 30-year Treasury bonds rose by 6 basis points to 4.849%, an accumulated increase of almost half a point, the largest four-day surge since March 18, 2020, the start of the pandemic. On Friday, the 10-year bond rose to 4.5%, the largest weekly increase since the 9/11 attacks. This while the dollar lost nearly 1.6% per day. "The major correlations are broken," explains Freya Beamish of consultancy TS Lombard. "Head to your safe zone. If it was U.S. Treasury bonds, look for a new one."
Warning Signs
The U.S. economy is not like that of an emerging one, but it does have deficits and debts like some of them. The U.S. market is not like that of emerging markets, but this week it has experienced increases of 9.5% amid 3.5% drops due to political whims, something typical of other regions. The U.S. government is not like that of developing countries, but access to the leader is open in exchange for donations, purchases of his memecoin, his watches. And policy decisions are changed, improvised, or adjusted based on the leader's mood, or the arbitrary influence capacity of an advisor or a businessman.
The U.S. is not a developing country, but the Executive is seeking approval from the Supreme Court to dismiss heads of independent supervisory bodies through the back door, which, as explained by Bloomberg this week, could be the first step to try to replace the Fed's president, Jerome Powell, before his term expires. Trump has been demanding for months that Powell lower interest rates, in terms increasingly resembling Recep Tayyip Erdogan's famous pressures on his central bankers. Ending the Fed's independence would be the final blow, the central chapter of the manual on how to trigger perfect storms and sink the ship.
"Having worked as an economist in emerging markets for many years, first at the International Monetary Fund and then on Wall Street, I recognize an emerging market economy in trouble when I see one. It pains me to say it, but the United States is showing many warning signs," wrote Desmond Lachman, a senior member of the American Enterprise Institute, three weeks ago, before the storm of 'Liberation Day'. "Under the erratic government of President Trump, the United States now exhibits all the symptoms, from high import tariffs and fiscal deficits to oligarchy and blatant corruption," he warned.
Until now, the great advantage of the United States over emerging economies lay in investors being able to fully trust in the rule of law, institutions, and the rule of law. But the constant conflicts of interest, with Elon Musk as the most visible example, and the germ of a constitutional crisis due to clashes with the courts and the growing disobedience of orders, sends a very pessimistic message. "Given that the United States remains the world's largest economy, economic damage of the magnitude that Trump is invariably inflicting will cast a long and dark shadow, and there will be no IMF bailout or structural adjustment plan that can steer the situation back on track," Lachman concluded in his essay on Project Syndicate.