"The politician's prayer should be: Lord, make my words soft and spoken in a low voice, for the day will come when I will have to eat them." The quote is from Norman Lamont, Finance Minister of Great Britain between 1990 and 1993, reflecting his experience in the Government. On August 26, 1992, he told the conservative London newspaper The Times: "There will be no devaluations or exit from the ERM [Exchange Rate Mechanism], we will maintain the value of the pound and we will do whatever it takes. And I hope no one has any doubts about it."
Lamont's statement was directed at a specific recipient: Scott Bessent, the head of trading at the London office of the hedge fund Quantum Management. Just five days earlier, Bessent had celebrated his thirtieth birthday by betting $1.5 billion (around $3 billion in today's euros) on the devaluation of the pound against the German mark and its exit from the Exchange Rate Mechanism (ERM), a system of currency fluctuation bands that was a first step towards the creation of the euro. Bessent was a specialist in operations aimed at forcing the fall of values. He had worked for Jim Chanos, the leading figure in short selling - that is, betting on the fall of a value - before joining Quantum, founded and led by the person he most admired since reading his book The Alchemy of Finance at the age of 25: George Soros.
Today, Bessent is the U.S. Treasury Secretary. His mission is also to defend a currency, a debt, and a market that has lost some of investors' confidence. It is a position radically different from back then when "we knew we could crush the Bank of England," as he recalled in 2008 in an interview with British journalist Sebastian Mallaby for his History of Hedge Funds More Money Than God.
Lamont failed. Just three weeks after speaking to the Times, on September 16 at twenty minutes to eight in the evening, he had to issue a statement declaring that "the Government has decided that it is in Britain's interest to immediately suspend our membership in the Exchange Rate Mechanism." The pound had been devalued.
Bessent's mission today has few precedents in U.S. history in the last century. The three U.S. public debt issuances last week were closely monitored by investors to see if demand had fallen. This, in the words of former Treasury Secretary under Bill Clinton, Larry Summers, is characteristic of an emerging market. It is a more extreme case than Lamont's but also with more room for maneuver. However, if in 1992, British Prime Minister John Major did not listen to Lamont, in 2025, U.S. President Donald Trump does not listen to Bessent. His partners - basically, the rest of planet Earth - ignore him, just as Germany ignored Lamont.
Normally, in the struggles between markets and Governments, the former tend to win, although in the case of the U.S., the former has the advantage of being at the forefront of the global economy. In reality, Governments' reaction to market crises follows, point by point, the famous pattern 'denial-anger-negotiation-depression-acceptance' designed by Swiss-American psychologist Elizabeth Kluber-Ross to refer to human beings' reaction when they receive really bad news, such as the diagnosis of an incurable disease or the death of a loved one. The first step is to deny that there is a problem. Or, if there is, that it is unsolvable.
Background
This attitude was exemplified by Indonesian dictator Suharto when in 1997 the Asian crisis began to hit the country's economy. Seven months later, Suharto left power, with the country on the brink of civil war, the banking system bankrupt, and external debt in covert suspension.
A financial crisis questions a Government's economic policy, and naturally, no one wants to admit they have done things wrong. In Spain, José Luis Rodríguez Zapatero (and the Bank of Spain) were convinced that there would be no crisis due to the real estate bubble. In the U.S., the tendency is more to trust in the miraculous ability of the market to regenerate like a phoenix. From the idea of then-Vice President - and now a declared enemy of Donald Trump - Dick Cheney to let failing banks go bankrupt to the even more extreme one of Treasury Secretary Andrew Mellon to let basically the entire economy collapse after the 1929 crash, there are many examples, from Madrid to Washington, that the best way to solve a problem is by ignoring it.
If it does not disappear, blame others. Either "international speculators who do not want to see us prosper," as then-Malaysian Prime Minister Mahatir Mohamed proclaimed in 1997. Or the "globalists" spoken of by Trump last Friday, although it is difficult to find anyone more 'globalist' than a Treasury Secretary like Bessent, who was Soros' right-hand man for three decades.
And then comes negotiation. That is, admitting the facts. Trump is there now. First, he reduced the tariff increase to 10% for everyone except China. Yesterday it was announced that he has established a series of exceptions for imports of electronic products from that country, such as mobile phones and microchips, aimed at saving companies like Apple and Nvidia, which are part of the Magnificent Seven, that is, the major Wall Street tech companies representing over 15% of the value of the entire S&P500, the index of large U.S. companies.
Trump believes that if the shares of these companies, which have been hammered in the last week and a half, start to stabilize or rise, their impact on the indices and the funds linked to them will be positive and may allow, perhaps, to leave the crisis behind. Additionally, he will use any concessions - real or fictitious - from third countries to try to declare victory.
Signals for the worse
The issue is whether that will be enough. Even after the much-touted reduction of the tariff increase to 10%, U.S. average tariffs stand at 14%. It is their highest level since the Smoot-Hawley Act was repealed in 1924, which, with its extreme protectionism, contributed to the Great Depression due to its devastating effect on world trade at a time when it was much lower and economies had minimal integration compared to today. Average tariffs of 14% instead of the 2.5% the U.S. had on April 1 will inevitably impact inflation and growth and eat into companies' profits, which in turn will influence their stock prices.
But the problem now lies not in the stock markets, but in the bond market. And that is a sign that things are getting worse. "The bond market is a very complicated thing," said Trump on Wednesday. Others see it more dramatically. Bill Clinton's political strategist, James Carville, said in 1993, "I always thought that if reincarnation existed, I would want to come back to Earth as president, as Pope, or as a baseball star. But now I want to come back as the bond market, to scare everyone." Carville knew what he was talking about. The bond market's reaction to Bill Clinton's initial economic policy measures forced him to dismiss former Senator Loyd Betsen as Treasury Secretary and replace him with a Wall Street man - Robert Rubin, co-CEO of Goldman Sachs - to steer his economic policy to the right. Three decades later, the Democratic left still does not forgive Clinton.
The fact that Trump's tariff hike is affecting bonds is a qualitative leap because it affects U.S. financing and may even question the dollar's role as a reserve currency in the future. This reduces the U.S. president's room for maneuver, and introduces a more complicated element: his personality and beliefs. Trump firmly believes in tariffs. This crisis has been self-inflicted. Decisions like Britain's entry into the ERM or the establishment of fixed or semi-fixed exchange rates in emerging economies in the 1980s and 1990s - by Indonesia and Malaysia - were in line with economic consensus.
Donald Trump's tariff hike is like British Prime Minister Liz Truss's 'mini-budget' in 2022, which set a tough fiscal adjustment and threatened to cause a financial collapse in Britain. It is unnecessary. This generates the 'moron premium,' a term coined by Dario Perkins from the British analysis company Global Data as a consequence of Truss's mini-budget.
In recent days, many have compared Truss to Trump. But the equivalence is not exact. The US president cannot be fired. Trump has a lot of leeway. Liz Truss was said to last less time as prime minister than a lettuce outside the fridge. In fact, the sensationalist tabloid Daily Star created a competition to see who would last longer between a lettuce and the head of government, with the vegetable overwhelmingly winning. However, as explained by a person from a major regulator on Thursday, "with his skin color, Donald Trump is not a lettuce, but a pumpkin. Pumpkins take up to six months to spoil." The crisis, therefore, may last until we reach "acceptance." Bessent would probably prefer to be in Lamont's shoes in this 2025.