No Mercy / No Malice

United States of Debt

“I would like to come back as the bond market. You can intimidate everybody.”

— James Carville

America is blinking. The day after April Fool’s Day, President Trump “liberated” the United States from an eight-decade run as the world’s economic superpower, raising the cost of capital for the federal government, American companies, and consumers. If this sounds like stupidity, i.e., hurting others while also hurting yourself, trust your instincts. But don’t trust America. A blackout drunk is behind the wheel of the U.S. economy. All around us, horns (bear markets; consumer confidence plummeting to historic lows) are blaring. In the backseat is a cultist (GOP) who thinks the red lights Trump has blown through, and the accidents in his wake, are baller moves. Also in the backseat: a sulking teen (Democrats) who’s visibly upset but can’t articulate what they want or suggest a better route. Riding shotgun, though, is an adult the driver can’t ignore, the bond market.

(Dis)order

First-year economics students are taught that money evolved to make early barter systems practical. In his book Debt: The First 5,000 Years, anthropologist David Graeber argues that the barter story was likely a fiction created by Adam Smith; Graeber believes the earliest coins were actually tokens used to keep track of debt. “The moment one starts framing things in terms of debt, people will inevitably start asking who really owes what to whom?”

Debt is both a financial instrument and a social construct that binds people, firms, and nations to one another and links together the past, present, and future. As many anthropologists have pointed out, debt has moral implications around fairness, responsibility, and obligation, as it’s a tool through which we impose order. Historically, Judaism, Christianity, and Islam outlawed interest under most circumstances, counseled their followers against taking on debt, and advised debtors to repay loans promptly. When someone saves another person’s life, the person they rescued is said to be in their debt. When a criminal has served their sentence, they’re said to have repaid their debt to society. In a debt crisis, the real risk is not default, but a breakdown of the economic, social, and political orders.

How bad is this debt crisis? It’s too early to tell. But as former Treasury secretary Lawrence Summers explained, what has people most scared is the real-time erosion of the American-led economic order. Our reputation as a bastion of strength and stability, with our dollar and Treasuries representing safety, is in jeopardy. Increasingly, we resemble an emerging economy, where a crisis in confidence sends stocks, bonds, and currencies down and spikes interest rates. “If the United States isn’t credible, that makes the whole financial system less stable,” Summers said, adding, “we are more vulnerable to bad surprises from here than to good surprises.” One potential bad outcome? A stagflation cocktail of high interest rates, low growth, and high unemployment. This week, Fed Chair Jerome Powell warned that Trump’s trade policy and the resulting uncertainty may put us in a “challenging scenario” in which the Fed’s dual-mandate goals of maximum employment and stable prices are “in tension.” That’s Fed-speak for: This could be a clusterfuck.

Exorbitant Privilege

Since World War II, the U.S. dollar and U.S. Treasuries have been the backbone of the global economy. Charles de Gaulle called this “exorbitant privilege,” as it creates an asymmetrical financial system where foreign governments effectively subsidize American living standards and firms. Just how exorbitant is difficult to quantify, but, as economist Barry Eichengreen argued, the privilege isn’t what it was in the 1960s when de Gaulle complained that America was far too powerful. Still, our exorbitant privilege is a benefit, not a liability, as reliance on U.S. currency and debt lowers our cost of capital and increases the punching power of our economic sanctions. But in the wake of “Liberation Day,” analysts at Société Générale, Deutsche Bank, and Goldman Sachs expressed concern that America’s privilege is eroding.

Drunk on Debt

A financial adage frequently attributed to John Maynard Keynes, John Paul Getty, and others: “If you owe the bank $100 that’s your problem. If you owe the bank $100 million, that’s the bank’s problem.” This is the paradox of debt. The bigger the outstanding balance, the more the risk shifts from debtor to creditor … for a time, anyway. Trump, who bragged that he was “the king of debt” during the 2016 campaign, has leveraged this paradox his entire career, filing for bankruptcy six times. But compared to the federal government, Trump is a lightweight.

Bipartisan

Despite decades of warnings from economists and business leaders, increasing the debt is one of the longest-running bipartisan traditions in Congress. Conservatives (teetotalers) campaign as deficit hawks, then vote to increase the debt for unfunded tax cuts. Liberals (social drinkers) deprioritize debt by pairing big spending initiatives with modest proposals to increase revenue, i.e. taxes. And progressives (full-blown alcoholics) champion Modern Monetary Theory, which holds that governments with control over their own currency can finance spending without worrying about deficits or debt, as long as they manage inflation. How’s that working out?

America is drunk on debt. We continue to drink at the bar long after last call. Spiking bond yields and the declining dollar are interventions. It’s not too late to get sober, however. I believe we should do it for our kids, as debt is a tax on future generations. But as I argued in my Ted Talk, despite saying we love our children, we’re waging war on them. There’s another reason to sober up: self-preservation. Sovereign debt crises have been the green mile of empires, from ancient Rome to the French monarchy to the Ottoman and British empires to the Soviet Union. America is exceptional in many ways, but we’re not exempt from history. Countries typically are not conquered, but go broke.

Vig

In budgetary terms, some people call the U.S. an insurance company with an army. This is correct insofar as our largest deliverables are the greatest military in history and a social safety net that lags behind those of other industrialized nations. But our fastest-growing spending priority is the interest on our debt. If current laws remain the same, net interest payments will total $13.8 trillion over the next decade, rising from an annual cost of $1.0 trillion in 2026 to $1.8 trillion in 2035, according to CBO projections. Rising interest rates increase the vig, crowding out mandatory and discretionary spending, as well as our capacity to respond to future crises.

Bonds Away

General Omar Bradley once said, “Amateurs talk strategy, professionals talk logistics.” His point was that war plans, even when the defense secretary doesn’t drunkenly share them with the Atlantic’s editor-in-chief on Signal, don’t count for much. It’s the unsexy stuff — supply lines, resources, and infrastructure — that wins wars. The world’s least-sexy financial instruments are U.S. Treasuries. They have historically been viewed as the safest bet in uncertain times. U.S. debt is both a shield that protects us from higher borrowing costs and a sword that, when used in conjunction with the dollar as the global reserve currency, guarantees American economic hegemony. But as with any weapon, if we lose control of it, our debt can be used against us.

The U.S. debt is roughly $36 trillion. Nearly three-quarters of that debt is held by U.S. investors, the Fed, and various federal agencies, including the Social Security Administration; the rest is held by foreign investors. China is currently the second-largest foreign holder of Treasuries, behind Japan. After last week’s shit show, some analysts asked, without hard evidence, whether China was to blame for bond market volatility. That question misses the point. It’s not what China did or didn’t do, but rather what it’s capable of doing now that the Blinker-in-Chief has put a spotlight on our Achilles’ heel.

Dumping Treasuries raises U.S. borrowing costs, and, more important, undermines global trust in American leadership. It also hurts China, as a fire sale means they’ll take losses too, and a possible recession hurts everyone. Beijing’s fear of that economic pain has been a strong deterrent … until now. A trade war makes the pain real, meaning China has a lot less to lose (and potentially something to gain) by using our debt against us. And China has a pain-multiplier here: An increase of 50 basis points on a $36 trillion debt adds about $180 billion per year in additional interest — the equivalent of 13 aircraft carriers (we currently have 11), or $30 billion more than DOGE claims it’ll save taxpayers this year.

Game Theory

Our debt isn’t our only vulnerability. China holds $3.2 trillion U.S. dollars, more than any other foreign nation. Devaluing the U.S. dollar in the face of rising inflation would hurt Americans, as they’d pay even more for less. China’s mortgage-backed securities position is less clear, but as one of the top three foreign MBS holders it has the power to spook an already troubled housing market. China’s leading export partners are ASEAN (a 10-nation trading bloc in Southeast Asia) and the EU, followed by the U.S. Decoupling hurts both countries, but it hurts us more, as our exposure is greater and our pain tolerance lower. Remember, Americans freaked out about toilet paper and masks during Covid; China did actual lockdowns. We lost 36,000 service members fighting in Korea; before tapping out, China suffered 10x the casualties. We don’t have the tolerance for pain to exchange fire in an economic war with China. Ask Bowen Yang who’s more willing to endure hardship for the glory of their nation.

In Bund We Trust?

In the same week that U.S. Treasuries surged 50 basis points, yields on German bunds were largely unchanged. According to Bloomberg, that’s the biggest underperformance since 1989. In nonfinancial terms: As investors lost trust in the U.S., they found safety in Germany. One fixed income portfolio manager put it this way: “Bunds have been one of the only rate markets that has acted as a risk-off asset during recent volatility.” Are bunds the new T-bill? Too soon to tell. But if last week kicked off a debt crisis that unravels the world order, Germany — even allowing for a recent increase in defense spending — looks like a paragon of fiscal responsibility compared to other industrialized nations.

Lannisters

Ostensibly, HBO’s Game of Thrones was a show about knights, dragons, arctic zombies, and hot people. But underneath the veneer of sex and violence, the show was an epic story about the relationship between debt and power. As three economists who analyzed the political economy of Westeros wrote, “those who control the purse strings of the realm thereby acquire political power … [and] although it is a foreign institution, the Iron Bank becomes a key political player in Westeros.”

“Full faith and credit” is American for “a Lannister always pays his debts.” Instead of a mad king sitting on the Iron Throne, we have a very unstable genius (minus the genius) sitting behind the Resolute desk. His small council of sycophants know better, but, drunk on a cocktail of fear and greed, they cheer him on, claiming “He’s playing 4D chess.” This is the bullshit we hear from the Sparrows who can’t offer a counterargument to what is depressingly clear: The president’s actions are nuclear-grade stupidity.

Chess? At this point, the Western world is expecting him to eat the pieces. Trump’s game isn’t chess or checkers, but Russian roulette with bullets in five of the six chambers. The interpretive dancing and intellectual pretzeling of the remaining cultists doesn’t fool the Iron Bank, aka America’s creditors. In Season 1 of True Detective (#awesome), Matthew McConaughey needs something from his former partner, Woody Harrelson. McConaughey convinces him with a simple statement: “You have a debt,” calling on his sense of equity and a bond they share to reciprocate. Europe, China, the Middle East, and America all, at one time, imprisoned people who couldn’t pay their debts.

With 4% of the world’s population and 25% of global GDP, we have a debt to our allies, who’ve engaged in relationships that provide roughly 6x the prosperity relative to the rest of the world. However, that hasn’t been enough, and we’ve accrued unsustainable debt. From George Washington through George W. Bush, we borrowed $10t. During the first Trump administration, we borrowed $8t (Biden was $4t). We find ourselves ignorant of our debts and in a prison of our own making — a giant with feet of clay, ignorant to our vulnerabilities. In sum, we (America) are acting like assholes.

Life is so rich,

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