2025 Week 13

The Brief

In the wake of global economic uncertainties, policymakers and investors find themselves at a crossroads, grappling with divergent views on the future of the U.S. and global economies.

Parallels Between Current Economic Policies and the Smoot-Hawley Era

Recent discussions at high-level financial forums, including the Blockworks Digital Assets Summit in New York, have revealed a striking dichotomy in economic outlooks. Mohamed El-Erian, Chief Economic Advisor at Allianz, noted that expert opinions are largely divided between two scenarios: positive restructuring and stagflation. However, this binary view overlooks a third, potentially more disruptive possibility: a return to protectionist policies reminiscent of the Herbert Hoover era, specifically the implementation of tariffs akin to the Smoot-Hawley Tariff Act of 1930.

The current administration's economic blueprint, as outlined in "A User's Guide to Restructuring the Global Trading System" by Stephen Miran, now the Chairman of the Council of Economic Advisers, forms the basis for the Trump 47 administration's economic policy. This document advocates for significant changes to the international trade system, including the use of tariffs as a negotiating tool and the potential for graduated tariff scales based on various criteria. The parallels between this approach and the protectionist measures of the 1930s are striking and deserve careful consideration.

Historical Context: The Smoot-Hawley Tariff Act of 1930

The Smoot-Hawley Tariff Act serves as a cautionary tale of how protectionist policies can spiral into a global trade war with severe economic consequences. This legislation increased import duties by approximately 20% on average, translating to a 5-6% increase in the relative price of imports. While the direct impact of these tariffs on trade was initially modest, the indirect effects and retaliatory measures from other countries significantly exacerbated the economic downturn.

The act was passed despite vociferous opposition from diplomats, economists, newspaper editors of all political persuasions, and leading figures of American business. This disregard for expert opinion and potential consequences bears an unsettling resemblance to the current administration's stance on trade policies.

Current Policy Proposals and Their Implications

The Miran blueprint suggests imposing a 10% tariff on global imports, with the potential for higher rates on specific countries. It also proposes using tariffs as leverage to negotiate better terms on both trade and security issues.
This approach, which intertwines economic and security concerns, could easily lead to escalating tensions with trading partners and potential retaliatory measures.

The proposed policies bear unsettling similarities to those of the Smoot-Hawley era. The blueprint outlines a system where countries could be placed in different tariff tiers based on various criteria, including their currency policies, bilateral trade agreements, and security arrangements. This approach could easily lead to retaliatory measures from trading partners, potentially sparking a wider trade conflict.

Moreover, the document's emphasis on linking trade policy with national security and defense burden-sharing adds another layer of complexity and potential for conflict. This interconnection of economic and security issues could make it more difficult to resolve trade disputes without escalation.

The Case of Canada: A Historical Precedent

The case of Canada during the Smoot-Hawley era provides a stark example of how quickly trade disputes can escalate. Even before the Smoot-Hawley bill was passed, Canada increased its duties on certain American products and widened the margin of preference accorded to British goods. This was swiftly followed by an "emergency tariff" in September 1930.

The impact on Canada was significant. The Smoot-Hawley Tariff provided the Canadian Conservative party with the final component necessary to win the national election. By arousing nationalistic sentiments and contempt for the United States in Canada, the tariff created a climate in which ultra-protectionist rhetoric had greater appeal.

This historical precedent demonstrates the potential for rapid escalation of trade conflicts and their far-reaching consequences, not only economically but also politically.

Overlooked Risks and Potential Consequences

The current economic discourse, as evidenced by El-Erian's observations, suggests that investors and policymakers are not adequately considering the possibility of a large-scale trade war similar to the 1930s. This oversight is particularly concerning given the aggressive stance on trade policy outlined in the Miran blueprint.

The economic landscape that could emerge from the implementation of these policies is troubling. The U.S. economy may find itself facing an unprecedented combination of headwinds: austerity measures, a large-scale trade war, increased debt service costs, all within a supply-side economic framework. This scenario could potentially lead to economic outcomes more severe than either the positive restructuring or stagflation scenarios currently being considered by most investors.

It's worth noting that during the Smoot-Hawley era, the fear of foreign retaliation was largely dismissed by policymakers. The Republican leadership in Congress at the time refused to recognize the link between imports and exports or even consider the possibility of retaliation. This dismissal of potential consequences bears an unsettling resemblance to the current administration's stance, as evidenced by President Trump's 2018 statement that "trade wars are good, and easy to win."

Conclusion

The evidence suggests that there is a significant risk of the U.S. embarking on a trade war similar in scale to the 1930s, a possibility that many market participants seem to be overlooking. The aggressive approach to trade policy outlined in the Miran blueprint, combined with the historical precedent of the Smoot-Hawley Tariff Act and its consequences, provides a strong basis for this concern.

As investors and policymakers navigate these uncertain economic waters, it is crucial to consider this third scenario alongside the more commonly discussed outcomes of positive restructuring and stagflation. The lessons of history, particularly those from the Smoot-Hawley era, should serve as a stark reminder of the potential consequences of protectionist policies and the importance of maintaining a balanced and cooperative approach to international trade.

The potential for rapid escalation, as demonstrated by Canada's response in the 1930s, further underscores the risks associated with such policies. In an interconnected global economy, the ripple effects of a large-scale trade war could be far more severe and far-reaching than many currently anticipate.

Before We Continue ...

Hegel continued in The Philosophy of History:

Each period is involved in such peculiar circumstances, exhibits a condition of things so strictly idiosyncratic, that its conduct must be regulated by considerations connected with itself, and itself alone. Amid the pressure of great events, a general principle gives no help. It is useless to revert to similar circumstances in the Past. The pallid shades of memory struggle in vain with the life and freedom of the Present. Looked at in this light, nothing can be shallower than the oft-repeated appeal to Greek and Roman examples during the French Revolution. Nothing is more diverse than the genius of those nations and that of our times.

Who am I to disagree with him, but what the market taught me is that people often make the same mistakes and commit huge blunders when decisions are made under pressure and uncertainty (Nobel Prize for Kahneman). Human nature stays the same, which is why Justin Mamis was able to construct an idealized investor sentiment cycle. History does not repeat, but it sure does rhyme.

History or Historiography?

I've seen Treasury Secretary Scott Bessent say he is a student of history so many times during interviews. According to WSJ:

People who have worked with Bessent describe him as reserved and professorial. He once taught economic history at Yale University, his alma mater, and, as an investor, he would often research forgotten financial analogues to inform his views on current events.

"We are going to have to have some kind of a grand global economic reordering," Bessent said at a June event. "I'd like to be a part of it. I've studied this."

By grand global economic reordering, he meant the blueprint that is A User’s Guide to Restructuring the Global Trading System (PDF) written by Stephen Miran, who was confirmed on March 12, 2025 as Chairman of the Council of Economic Advisers. We reviewed the contents in Week 02, Week 03 and Week 08.

Secretary Bessent earned a B.A. in political science at Yale, which probably qualified him to be a teaching assistant in his own major at best, so we must ask, what sort of economic history would he have taught from 2006 to 2011 as adjunct professor? This man misattributed perhaps the most famous line in investing to the wrong guy on Meet the Press. It was Ben Graham, not Warren Buffett who said, "In the short run, the market is a voting machine but in the long run, it is a weighing machine."

The Battle of Ideas

I am not nit-picking. There is a subtle but important distinction between history and historiography. Historiography is the critical study of how history is written, interpreted, and documented, examining the methods, perspectives, and theoretical frameworks historians use to research, analyze, and construct historical narratives. It focuses on understanding the processes of historical knowledge production, revealing how different intellectual, cultural, and ideological contexts shape our comprehension of the past.

Facts per se can neither prove nor refute anything. Everything is decided by the interpretation and explanation of the facts, by the ideas and the theories. ~ Ludwig von Mises

While we might accept "history," especially ancient history, to be the version of events that the winners wrote, the first draft while "history" is being made is a story, a narrative based upon the ideas and the theories of the writer.

The relationship between historical facts and historical interpretation is how events are framed. Von Mises aligns closely with postmodern and post-structural approaches to historiography, which argue that:

1. Historical narratives are constructed, not discovered
2. Historical "truth" is contextual and perspectival
3. Objectivity in historical writing is an illusion

We need to check our notions of history at the door every time we read anything, because news and history as a purely empirical discipline, emphasizing the interpretative and theoretical nature of historical understanding is not, or at least no longer, a thing.

So how do we come up with our own conclusions about events? First, we locate primary sources, that is, an original document, artifact, or record created during the time period being studied, providing direct, firsthand evidence about a specific event, person, or historical phenomenon. Second, we review a variety of secondary sources, scholarly works that analyze, interpret, or discuss primary sources, providing commentary, evaluation, or synthesis of historical events and evidence, typically created by historians or researchers after the time period being studied.

This process takes time and effort, but the work is required in order to construct a reasonable and cogent investment thesis.

Primary Source: Donald Trump

His mind map has not been updated in 40 years, except for his opinion on Canada.

Primary Source: Mohamed El-Erian

Something interesting happened at the Blockworks Digital Assets Summit in New York last week. For some reason, El-Erian was the #2 speaker and this perennial gasbag went on about debt problems facing the United States and of course, "growth" is the only solution out of the death spiral.

There's no need to watch the whole thing because I did it for you, and found one very important clue to where we are in the sentiment cycle. First, let's sum it up:

El-Erian discussed the current economic situation, its potential outcomes and described a significant divide in economic outlooks among experts, which he framed as two distinct camps:

The Reagan/Thatcher supply-side camp: This group believes that the current economic challenges could lead to a fundamental restructuring of the economy, similar to what occurred under Ronald Reagan and Margaret Thatcher. They argue that policymakers are willing to absorb short-term economic, social, and political costs because they believe the end result will justify these sacrifices.

This camp envisions an economy emerging from the current turmoil with:

1. A streamlined government
2. A more unleashed private sector
3. Debt dynamics under control
4. A fairer trading system where other nations pay more for their own defense

The Carter stagflation camp: This group fears that current policies might push the economy into a prolonged period of stagflation, reminiscent of the Jimmy Carter era.

They worry that:

1. Policy choices could lead to persistent stagflation
2. The economy might dig itself into a deeper hole
3. Escaping from this situation could become increasingly difficult over time

El-Erian noted that when he posed this question to a group of respected individuals, the range of opinions was striking. Some believed there was an 80% chance of the positive restructuring scenario and a 20% chance of stagflation, while others held the opposite view, seeing an 80% chance of stagflation and only a 20% chance of positive restructuring.

"Where people disagree violently is on the destination."

He emphasized that while most experts agree the immediate economic journey will be bumpy, there is significant disagreement about the final destination. This uncertainty, according to El-Erian, is a crucial factor that policymakers and investors must grapple with as they navigate the current economic landscape.

Whatever we think of El-Erian, of one thing there is no doubt: as Chief Economic Advisor at Allianz, the corporate parent of PIMCO, we can bet he has unfettered access to troves of data, fund managers and institutional investors. What we learned from him is that 100% of the investors he spoke to at that other event failed to consider a third possibility: the Herbert Hoover camp.

Primary Source: Stephen Miran

Here's a quick refresher of A User's Guide to Restructuring the Global Trading System. Miran's policy prescriptions are aimed at:

1. Rebalancing global trade in favor of the United States.
2. Addressing persistent dollar overvaluation that hinders U.S. export competitiveness.
3. Improving burden-sharing among trading partners for the provision of reserve assets and the global defense umbrella.
4. Leveraging tariffs and currency policy to achieve these goals.
5. Integrating trade policy with national security considerations.
6. Implementing these changes while minimizing adverse economic consequences and market volatility.

The core objective is to restructure the global trading and financial systems to better serve U.S. interests, particularly in manufacturing and exports, while maintaining America's global economic leadership.

The plan proposes to use carrots and sticks to encourage other nations to accept a rebalancing of global trade in favor of the U.S.:

Carrots:

1. Inclusion in the U.S. security umbrella
2. Access to the U.S. consumer market
3. Lower tariff rates for cooperative nations
4. Access to Federal Reserve swap lines or Treasury's Exchange Stabilization Fund for liquidity
5. Potential removal of existing tariffs in exchange for cooperation

Sticks:

1. Imposition or threat of higher tariffs
2. Graduated scales of tariffs based on a country's cooperation
3. Potential exclusion from the U.S. security umbrella
4. User fees on foreign official holders of Treasury securities
5. Restrictions on access to U.S. financial markets or SWIFT system
6. Pressure to join U.S. tariffs against non-cooperative countries (e.g., China)

The approach aims to create a system where countries are incentivized to cooperate with U.S. trade goals through a combination of economic and security benefits, while facing potential economic costs for non-cooperation.

Miran recommends gradual implementation, tailored to different countries based on their strategic importance and level of cooperation.

Miran's Assumptions

These are the key assumptions in the Miran blueprint with regard to potential retaliation.

1. Historical precedent: Miran acknowledges that retaliation occurred in response to the Smoot-Hawley Tariff Act of 1930. He notes that 33 countries filed formal protests against the act.
2. Risk of retaliation: Miran recognizes that retaliatory tariffs by other nations can nullify the welfare benefits of tariffs for the U.S.
3. Importance of preventing retaliation: He emphasizes that preventing retaliation will be of great importance for the success of any new tariff policy.
4. U.S. advantages in trade conflicts: Miran argues that the United States, as a large source of consumer demand with robust capital markets, can withstand tit-for-tat escalation more easily than other nations. He suggests this natural advantage limits the ability of countries like China to respond to tariff increases.
5. Merging trade and national security policy: Miran proposes that explicitly merging national security and trade policy could provide some incentives against retaliation. For example, the U.S. could declare that it views joint defense obligations as less binding for nations that implement retaliatory tariffs.
6. Potential positive outcomes of retaliation: Interestingly, Miran suggests that some forms of retaliation might actually achieve U.S. goals. For instance, if Europe retaliates but also boosts its own defense expenditures, it could alleviate the United States' burden for global security.
7. Gradual implementation: To minimize the risk of retaliation, Miran suggests a gradual implementation of tariffs, similar to the approach taken in 2018-2019.

Primary Source: Peter Navarro

Peter Navarro is the White House Senior Counselor for Trade and Manufacturing. Navarro is basically Steve Bannon's man on the inside. He is always hanging around the Oval Office and takes a more confrontational approach to everything, from re-drawing the border with Canada, kicking Canada out of the Five Eyes, to his focus on reciprocity and combating unfair practices, particularly from China.

Navarro and Miran both address the U.S. trade deficit in their writings, but they have different perspectives and proposed solutions.

Both view the trade deficit as a significant issue for the U.S. economy. Both believe that policy changes are necessary to address the trade imbalance.
Differences:

Navarro sees the trade deficit as a critical problem, describing America as "the globe's biggest trade loser and a victim of unfair, unbalanced, and nonreciprocal trade". He attributes the deficit largely to unfair trade practices by other countries, particularly China's "economic aggression".

Navarro argues that the trade deficit suppresses wages of American workers, denies job opportunities, and weakens the manufacturing and defense industrial base and advocates for reciprocal tariffs, implementing the U.S. Reciprocal Trade Act, and taking a tough stance against China. Navarro strongly links trade policy to national security, stating "economic security is national security".

Miran sees the trade deficit as a symptom of deeper structural issues, particularly the persistent overvaluation of the dollar due to its status as a reserve currency. He frames the issue within the context of the Triffin dilemma, where providing reserve assets requires running persistent current account deficits.

Miran focuses on improving burden-sharing for the provision of reserve assets and the global defense umbrella. He proposes a more nuanced approach, including gradual implementation of tariffs, potential currency policy adjustments, and multilateral negotiations. Miran places more emphasis on financial market implications and the need to minimize volatility when implementing policy changes.

Primary Source: Douglas Irwin

Douglas Irwin is considered to be one of the top historians specializing on tariffs.

Summary of Irwin's findings on the Smoot-Hawley Tarrif Act:

1. Immediate International Response: Irwin notes that the Smoot-Hawley Tariff Act served as a catalyst for higher protection within the international economy and retaliation against the United States. He reports that thirty-three countries filed formal protests against the Smoot-Hawley Tariff.
2. Canadian Retaliation: Irwin highlights that even before the bill was passed, Canada increased its duties on certain American products and widened the margin of preference accorded to British goods. This was followed by an "emergency tariff" in September 1930.
3. European Responses: Irwin documents that several European countries also took retaliatory measures. For example:Spain raised its tariff in July 1930 and entered into bilateral treaties with France and Italy which effectively withdrew most-favored-nation status from the United States. Italy increased its duties on automobiles in July 1930 and, in September 1931, raised nearly all duties by 15 percent ad valorem. Switzerland began a public boycott of American products. France gradually placed quotas on 1,131 formerly dutiable items starting in July 1931.Great Britain returned to general protection in 1932.
4. Complexity of Retaliation: Irwin points out that it's difficult to establish the precise role of the Smoot-Hawley Act in stimulating this outbreak of protectionism. He notes that the increased international instability of the late 1920s and the growing depression are, in many cases, sufficient explanations for the protectionist reaction.
5. Disguised Retaliation: Irwin observes that few countries were willing to single out the Smoot-Hawley Act as the cause of their own tariff increases, partly due to the threat of additional penalty duties under Section 338 on their exports if they discriminated against the United States.
6. Timing of Retaliation: Interestingly, Irwin notes that while some countries reacted almost immediately, most retaliations occurred only after a substantial period of time had passed. This lag provided a significant period in which the United States was effectively insulated from imports while its export markets remained at essentially the same level of openness that had existed before 1930.
7. Impact on U.S. Exports: As a result of retaliation and other factors, Irwin reports that American exports declined from $5,157 million in 1929 to a low of $1,576 million in 1932. This decline was much steeper than the reduction in world trade as a whole.
8. Shift in U.S. Trade Strategy: Irwin argues that once retaliation had pushed tariff levels to prohibitive levels, the national trade interest of the United States shifted from preemptive protection to modest protection coupled with the rebuilding of export markets.

Irwin's work suggests that the direct economic impact of Smoot-Hawley itself was not as severe as sometimes claimed, but he clearly documents the significant international retaliation it provoked. This retaliation, combined with other factors, contributed to a severe contraction in global trade and ultimately led to a shift in U.S. trade strategy towards more openness in an attempt to rebuild export markets.

Primary Source: Game Theory

Both Miran and Bessent have emphasized the need for giving markets forward guidance in order maintain an orderly stock market and not shock investors.

After watching 65 days of the new administration's trade wars starting with Colombia, Mexico and Canada, we know implementation is chaotic. In practice, cooperative nations do not necessarily get the lower tariff rates. If anything, allies with auto industries are being hit with the bulk of the tariffs. There are examples of stacked tariffs and extraterritorial tariffs.

If the European Union works with Canada in order to do economic harm to the USA, large scale Tariffs, far larger than currently planned, will be placed on them both in order to protect the best friend that each of those two countries has ever had! ~ March 27, 2025 @RealDonaldTrump on Truth Social

We have also witnessed episodes of immediate tit-for-tat escalation, including what we might call pre-emptive threats that some might view as escalate to de-escalate.

Investment Thesis: The Herbert Hoover Camp

As investors we now have two important facts:

1. the Miran blueprint is the basis for the economic policy of the Trump 47 administration, and given its contents,
2. 0% of the investors El-Erian spoke are in what we will call the Herbert Hoover camp

One Big, Beautiful, Bust?

With April 2, 2025 hailed as Liberation Day, the 2018 idea that "trade wars are good, and easy to win." is being tested. On that day, the U.S. economy will find itself facing an unprecedented combination of headwinds: austerity, trade war, debt service, all in a supply side setting.

First, the ripple effect of sudden austerity. The DOGE layoffs, the USAID cuts on U.S. farmers, and the proposed Medicaid cuts, just to name a few. On their own, these cuts would already rival the 1980s UK austerity program, and we know exactly how that ended for the British masses.

Second, there is an impending trade war. Markets have so far not believed this will happen, and even at this late date, still believe there will be a reprieve. Miran himself has made the rounds on TV (Bloomberg, CNBC, FoxBusiness) to pooh-pooh the potential of damage to the U.S. economy. He addresses the potential for retaliation from other countries by saying they will knuckle under because the United States holds all the cards.

Meanwhile, many analysts are repeating a version of, "He's a business person by nature, so there are deals to be done at some point. That's why the market's been measured (in its response)." Even today, there is

To this I say, the risk of retaliation is real. The U.S. may have many advantages, but there is a pesky thing called just-in-time supply chain, especially in the auto industry that binds Canada, Mexico and the U.S. The assembly lines might stop a week or two after the auto tariffs go into effect, not to mention abrogating a trade agreement does not inspire confidence that a deal made today will be a deal a year from now.

“If the tariffs go through this time, by mid-April, we expect disruption to virtually all North American vehicle production amounting to 20,000 fewer vehicles produced per day, which is about a 30% hit to production,” Smoke said.

Furthermore, what is never mentioned is the fact that the U.S. has a $300B services trade surplus. The dirty secret is that "economic activity in the United States has transitioned from manufacturing towards services over the past five decades. Notably, U.S. manufacturing firms account for almost a third of this transition." Even if manufacturing returns to the U.S., it won't employ the number of workers like it did in the 1970s and 1980s.

According to Modeling a US-EU trade war by PIIE,

We have assumed for this analysis that the EU would respond by increasing tariffs on US goods by 25 percent. But European retaliation might not be limited to tariffs or even the merchandise trade sector. Services, digital trade, intellectual property protection, and even government procurement could potentially be subject to retaliation.

Retaliation with the aim of inducing the US to remove the original tariff is a dangerous strategy: desirable if the US backs down but risking additional debilitating protection if the US does not. The US still maintains a 25 percent tariff on light trucks as a legacy of a 1960s trade dispute with Europe over frozen chicken parts.

Third, there is historical precedent. Miran is correct to point out retaliation occurred in response to the Smoot-Hawley Tariff Act of 1930. I remember the old adage that it wasn't 1929 that killed 'em all; it was 1930, '31 and '32. This is really all I knew about The Depression until I spent the week doing the deep dive using what I consider to be academically rigorous secondary sources.

The graph is over at Fred along with some background on the crash from the perspective of the Federal Reserve, if you want to look for yourself. Suffice to say that the Dow Industrials closed at 243.15 in June 1930 when Smoot-Hawley was passed, above the 1929 crash low. The ultimate low was at 46.85 in June 1932.

Oh, Canada! I was surprised to learn Canada was hit hard. McClean's magazine was there to report on it then, and it is still here to report on it now:

Meanwhile in Canada, Liberal Prime Minister William Lyon Mackenzie King was watching the scene in Congress, but like many Canadians both then and now, he was unconvinced that an aggressive tariff would ever really come to pass. The Liberals had faced tariffs before, after all—notably on wheat, dairy and cattle—and Canada had survived. But Smoot-Hawley was much more aggressive, and even the Americans were divided.

But first, a timeline of events.

1928:

• Herbert Hoover elected president, endorsing higher tariffs on agricultural imports

1929:

• August: Stock market begins to show signs of instability
• October 24-29: Wall Street Crash occurs. Hoover calls conferences with business leaders to maintain employment, wages, and production

1930:

• March: Senate passes Smoot-Hawley Tariff bill
• June 17: Hoover signs Smoot-Hawley Tariff Act into law. The Act raises average tariff rates to 40.1%. Canada immediately increases duties on certain American products. Spain raises its tariff in July. Canada implements an "emergency tariff" in September. Italy increases duties on automobiles in July. Switzerland boycotts U.S. products

1931:

• September: Italy raises nearly all duties by 15% ad valorem. Britain abandons the gold standard and devalues the pound

1932:

• January: France abandons gold standard. Bilateral trade agreements proliferate, bypassing most-favored-nation principle

1933:

• World trade volume falls to 70% of its 1929 level, value to 35%
• U.S. exports decline to 52% of their 1929 volume and 32% of their value

1934:

• June: U.S. passes the Reciprocal Trade Agreements Act (RTAA) in an attempt to reverse protectionist trends

This timeline shows how the Smoot-Hawley Tariff Act triggered a wave of retaliation by countries around the world, contributing to a global trade war and a significant decline in international trade during the early years of the Great Depression. Douglas Irwin's analysis suggests that the tariff itself (combined with deflation-induced increases in effective tariff rates) accounted for about 22% of the observed 40% decline in U.S. imports between 1930 and 1932.

Last, but not least

There are two other issues unique to 2025.

Debt crisis or technical default?. Let's skip over the budget battles and the cost of debt service because the drama plays out daily in news cycle. Investors have been warned so many times that the only surprise would be that it took this long for a crisis to happen when it finally happens. The only item that might have gone under the radar is IRS officials are expecting tax revenue to drop by more than 10% by April 15, which means the X date for the debt ceiling might arrive sooner rather than later.

What is concerning is Miran's plan to deal with the debt. He can propose novel mechanisms and use fancy terms, but it's simply an admission the debt needs to be restructured because the country cannot afford to pay the interest on it. In other words, a default by other means.

Duration Extension: Miran proposes a strategy of extending the duration of Treasury holdings, particularly for foreign holders. He suggests that trading partners could be encouraged to term out their reserve holdings into ultra-long duration UST securities. This approach would: a) Alleviate funding pressure on the Treasury b) Reduce the amount of duration Treasury needs to sell into the market c) Improve debt sustainability by reducing the amount of debt that will need to be rolled over at higher rates as the budget deteriorates over time
Century Bonds and Perpetuals: Miran even suggests the possibility of issuing very long-term debt, such as 50-year debt, century bonds, or even perpetual bonds. This would be designed to create significant demand for US long-term paper and offset potential declines in demand for long-term Treasury securities.
Swap Lines: To mitigate the risks associated with holding longer-term debt, Miran proposes the use of swap lines with the Federal Reserve or the Treasury's Exchange Stabilization Fund. These would allow foreign holders to access short-term dollar liquidity against their long-term Treasury holdings. This approach is modeled after the Bank Term Funding Program used during the regional bank stresses of spring 2023.
Linking Trade and Security: Miran suggests tying the purchase of long-term Treasury securities to security arrangements, effectively making the financing of US debt part of the broader geopolitical and economic relationship with trading partners.
User Fees on Foreign Holdings: In a more aggressive approach, Miran discusses the possibility of imposing a user fee on foreign official holders of Treasury securities, such as withholding a portion of interest payments. This would be designed to disincentivize excessive reserve accumulation and potentially improve the US trade balance.
Exchange Stabilization Fund: He mentions the potential use of the Exchange Stabilization Fund to help reduce volatility in the bond market.

Third time not a charm?

I somehow doubt that allies hit by tariffs would willingly swap their Treasuries for new ones termed out to Never-neverland. As for merging trade and national security policy, it is obvious the U.S. role leading NATO is fading fast, and joint defense obligations have been threatened so many times what leader can possibly take Article 5 seriously. To start, the 408 F-35 fighter jets on back order at Lockheed Martin could be first on the chopping block.

In terms of potential positive outcomes due to increased European defense spending that Miran conjectured, that also means they have more incentive to fight a trade war. The gradual implementation envisioned in his blueprint and endorsed by Bessent is not happening. What is happening are repeated threats to take Greenland and to erase the border with Canada. And just as it happened in the 1930s under Hoover, there were the McKinley Tariffs of 1890. Back then, tariffs and annexation were a losing proposition for the American president, but a winning one for the Canadian prime minister.

The Charts

We only need to look at two charts.

The S&P 500 Index has had a great run. After failing to breakout to the upside in February, price went down below both the 50- and the 200-day moving average. The bounce since mid-March is technically called an ABC Correction that reached the target, which was the underside of the broken moving averages. Short term volatility exceeds longer term volatility.

Bonds have been in the wilderness for some time, but at this juncture, recent price action is the mirror opposite to stocks, which tells us there has been some safe haven buying. Personally, nothing can get me to put money into U.S. government securities, but at least there could be short-term diversification benefits to those who must own them.

I never liked trading gold because the price action is also a tad diabolical, but investing in it because central banks around the world are buying it has sure paid off. Note how the upward price move is not accompanied by higher short term volatility (a measure of "risk")? That means it's just grinding up, slowly but surely, a good example of the High Returns-Low Risk Paradox that Pim van Vliet explained so well.

So, let's wrap it up here. We shall soon see if the crowd's disbelief that the tariffs would really be implemented is what caused them to ignore the subtle and overt warnings that the market gave us.