Note: Behind the green door, there is a post about Russell Brand and what his case suggests about the state of the law, a post about using AI as an editorial team for the posts on this site, and the Sunday podcast. Subscribe here or here.
One of the questions rarely asked regarding the ongoing American crisis is whether we have passed the point where reform is possible. Few want to consider that possibility for obvious reasons. If reform through the regular political process is no longer possible, then only unpleasant alternatives remain. One of those alternatives is some form of collapse. Like Gorbachev’s Soviet Union, America may be headed over the cliff with nothing to prevent it.
Last week, we caught a possible glimpse of the answer. Trump rolled out his tariff regime, and the stock markets went wild. It was not just a global selloff; volatility was off the charts, which is worse than the decline itself. A steady selloff occurs during a correction when markets are overbought. A chaotic, erratic decline signals panic setting in among the algorithms. It means their code cannot interpret the conditions they are programmed to use for trading.
Just as things began to stabilize, the bond market started to “get the yips”, as Trump noted on Thursday. No one in the mass media understands this, so they kept claiming the bond market crashed, which is far from accurate. The issue was that market players were dumping treasuries. It is unclear why, for instance, the Japanese central bank was selling treasuries. This uncertainty is just as worrisome as the actual dumping, so everyone was spooked.
Typically, the reason for dumping treasuries is a liquidity issue, either in the system as a whole or in a segment of it. In this case, the consensus is that hedge funds were raising cash due to the market decline. That could be true, but it is also possible the basis trade was unraveling. This is when hedge funds bet on tiny changes in treasury yields—a major way they generate profits within the system.
Here is how it works: Imagine you believe the value of an asset like a treasury will decline over the next six months. You hold this asset, but it is collateral for another transaction. You cannot sell it now, so you agree to sell it in the future at the current price rather than the market price at that time. If the price surges, you lose potential profits when the contract expires, but if the price drops as expected, you are protected from those losses.
There is much more to it, but that is the gist, and this happens across markets for everything, even treasuries, which have been very stable. Even earning a tiny percentage on these transactions can net millions for a fund handling tens of billions in trades. In fact, the financial system relies on clever quants coding models to exploit these small discrepancies between current and future prices to generate wealth.
When Trump’s tariffs caused this system to go haywire, triggering a panicked demand for cash, he had no choice but to back off. It was not that the bond market revolted due to a philosophical disagreement with the policy. Rather, this massive system is a house of cards that cannot tolerate even minor disruptions. Trump’s tariff regime should not have caused chaos, but the fact that it did suggests even small changes are no longer viable.
That is not the end of it. The central bank could mitigate this by injecting enough cash to resolve the liquidity issue. In fact, it can inject enough to counter deliberate revolts. You cannot beat the Fed. This should have happened last week, but Jerome Powell either refused to act or was too inept to grasp the situation. He has been the worst Fed chair since Arthur Burns, so incompetence is a strong possibility.
That said, the Fed held an emergency meeting just before Trump announced his tariff plan last week, likely in response to it. Given the Federal Reserve’s composition and its attitudes toward the American public, it is possible they intended to undermine the process. The Bank of England toppled Liz Truss’s Tory government, so it is not unthinkable. The head of the Bank of England at the time was Mark Carney, who is now the dictator of Canada.
This would imply that normalizing the American economy is no longer possible, at least not through standard political processes, because the entrenched interests profiting from the system will not allow it. That is what we will discover in the next ninety days as the Trump team navigates this challenge. Bessent has suggested they will use this time to strike individual deals with countries rather than unilaterally imposing a tariff schedule.
Of course, they could also have Jerome Powell killed, thus sending a message to the parasite class that they must fall in line or else. They never take no for an answer, so this approach never works. The Russians had to execute a lot of oligarchs before the rest finally fell in line with the new program. Falling in line usually meant fleeing the country with their cash. Maybe it does not have to come to that with the bankers, but last week was not a positive sign.
What the events of last week show is that normalizing American economic policy is not going to be easy within the current process. It also suggests it may not be possible without radical approaches to implementation. We may have reached the point where even with enough coercion, the system cannot be reformed. We may have blown past the point of no return as far as the political and economic order, so what lies ahead is chaos no matter what is done.
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This Wednesday, Paul and I will be talking religion, specifically the state of the Christian churches in America, Christian Zionism and the growth of traditional churches.
I look forward to that podcast. Christian Zionism is a pestilence upon the United States, say no more than Mike Huckabee as ambassador to Israel.
Then the traditional mainline churches counter Zionism with rainbow flags and female ministers.
It’s tough being a christian now days.
Interesting economic analysis as always. Don’t have much more to comment. So, hey, totally off topic, but – I wonder if anyone else was annoyed by the interracial romance in the Alien Romulus movie (he was a robot and her programmed “brother” but it was basically a romance). It one more movie where a self-disciplined competent black man makes sacrifices for the greater community, acts for the common good, places their honor above their comfort or desires (or even survival), and is in general the noble protector of white community and specifically white women, while white men are self-indulgent childish conniving… Read more »
Also, I forget the name, but there was some stupid horror movie a while back where a white couple went on vacation to some amusement park. The park turned out to be evil, and characters started being killed. It gets revealed that the white boyfriend/husband guy was the evil mastermind behind it all. When there were only two survivors left from the victims, the black guy heroically defended the white lady from her now ex, bravely and nobly almost dying the process. Then, at the end, after killing the white guy, the white girl sweetly falls in love with black… Read more »
Why does corruption in government always surprise us? Why do we expect anything else from it? Government is organized force. It takes our wealth and makes war. And we think honest men would do that work? Well, honest men have sincerely tried, but look at the results and ask yourself whether honesty has any inherent tendency to prevail in politics. War, taxation, waste, debt, inflation, hatred, hypocrisy, cynicism, social disorder. And also — amazingly enough! — corruption. As I often say, expecting government to produce good results is like expecting a tiger to pull a plow. After the twentieth century,… Read more »
“ In fact, the financial system relies on clever quants coding models to exploit these small discrepancies between current and future prices to generate wealth.”
If you are doing a transaction where only a financial instrument is exchanged and you make money, then the other side has lost money. No wealth is generated only exchanged. Equal parts gain for the winner, equal parts loss for the loser. That is why this system will fall.
On this topic Morgoth has the most insightful perspective I have seen.
https://morgoth.substack.com/p/western-perestroika-is-trump-the
Trump said a lot of his friends got richer last week. Gee, I take some solace in that in my personal decline. It feels like the meme that the stock market is a jewish casino. we now have an excess of card counters in our midst.
We’re watching the last season of “Shysters Gone Wild”.
Except instead of T & A, it’s an increasingly debauched train wreck of noses and derivatives.
The alternatives are very scary.
No, what’s scary is that there is no alternative to the Eurodollar system.
Yes, it IS too late to fix it. When I taught American Politics, I used to devote a week or so per semester to macroeconomics, government debt, budgeting, etc. Years ago I concluded that it was impossible to actually make sense out of it. Keneysianism ruled from the 1930s to the 1970s, but by the 1980s deficits had become chronic whether the business cycle was in recession or growth, so monetarism became dominant while the deficits continued to balloon. From 1961 to the present there have only been six years when the government has not run a deficit. The national… Read more »
Yes. We are at that point IMHO. The economy has not been real for a long time. You can’t go on forever with a mafia system and no real production of wealth. It is amazing that we have not crashed hard before this.
Four boxes to maintain a republic
The soap box
The ballot box
The jury box
The cartridge box
Trying to change such a large complex system like the US/global economy is bound to have unanticipated changes. It would be bad enough if it were a computer program following rules, but at the root of the system are human beings making individual decisions for various reasons, often known only to themselves.
“This would imply that normalizing the American economy is no longer possible, at least not through standard political processes, because the entrenched interests profiting from the system will not allow it.” Not sure about this. Team Trump could have handled this better, far better. They could have increased tariffs a bit — but not to the ridiculous level they did last week. They could have explained the rationale, and argued that is was part of a larger strategic plan to onshore manufacturing capability and as a consequence reduce unsustainable current account deficits. They did none of this. The only conclusion… Read more »
100% The system has to change, but a lot of people and countries like the system as it is and are going to push back. Even if everyone was on board, upending the old system and replacing it with something was going to cause a huge amount of chaos. Trump and Bessent are attempting the biggest change in the global trade and finance system since Bretton Woods, except they don’t have the power, control and cooperation that the US had after WWII. It’s a monumental task, one that absolutely needs the help of fed chairman. But Powell won’t play ball.… Read more »
It hasn’t gotten nearly enough press, but stealing Russia’s $300 billion in foreign reserves will loom large in the collapse of the western financial system.
James Carville, a political adviser to President Bill Clinton, famously said in 1994, “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.”
(yes, he’s an awful human being. But he was right about this)