Reviving The Specter Of Bond Vigilantes

Whoever coined the term TACO (Trump Always Chickens Out) was, consciously or otherwise, tapping in to a psychic need. The TACO rap was appealing to many in the Trump opposition, because, while false in a literal sense, it cut directly against the equally false, but demoralizing impression that Trump never backs down.

The truth has been somewhere in the middle all along. Trump actually backs down quite a bit, though not always in the manner of chickening out. He cares about some things more than others. When he encounters friction over matters that are of little interest to him, he may decide they’re not worth the trouble. He’ll back down, without retreating in a panic.

There are two canonical cases of him chickening out. The first was as he watched the world react to his LIBERATION DAY tariff announcement. The second was this week, as he watched the world react to his threats against Greenland and Denmark and the European Union.

Both of these retreats involved withdrawing tariff threats against angry allied nations. But the real symmetry doesn’t lie in the harsh words of diplomats or foreign leaders. It lies in the deeds of bond traders.

It turns out that Madman Theory crashes on the shoals of the bond market.

The madman theory, as indulged by Trump’s supporters (along with a variety of gullible commentators) is that there’s a method to Trump’s destabilizing bluster. He acts unpredictably and menacingly and irrationally on purpose in order to spook allies and adversaries alike into appeasing him with concessions.

Trump is really more like an actual madman than a rational person of low cunning. The idea that we’re watching The Art of the Deal at work is desperate logical backfill for cultists and propagandists. He is a textbook narcissist, terrified at the thought of failing before watching eyes, but also possessed of poor risk assessment, such that he frequently finds himself teetering on the brink of failure anyhow.

The bond market turns out to be the signal that most reliably alerts him that he’s chosen a course that will end in disaster rather than triumph. It turns out that being an extortionate shitheel of a president can cause severe, perhaps permanent economic damage to the United States.

This is Trump’s greatest vulnerability. Unfortunately, it’s the whole world’s vulnerability, too. Thus far, bond market reactions have spooked Trump, he’s backed off, the market has steadied, and the cycle has repeated. If Trump is to abruptly ruin his presidency, one likely way is by triggering a big bond market reaction that can’t be undone. We would all be collateral damage. Unfortunately, we may just have to open our hearts to that particular kind of ruin. Because other kinds are worse.

The economist Arin Dube described this cycle as a ratchet toward increasingly destructive acts.

When markets assume Trump will chicken out—when they “price in TACO” as Dube put it—they don’t respond until Trump really makes them sweat. Then they move. Then Trump backs down, or has so far. They become reinstilled in their belief that Trump Always Chickens Out. The market rebounds. He moves on to his next extortion scheme. Only this time he goes even farther, and causes more damage, before the TACO traders freak out, and he backs off.

It’s not rinse, repeat. It’s rinse, rinse, rinse, drown.

“Markets keep updating their beliefs about TACO, so it takes ever more extreme actions to convince them he might not TACO.”

In the case of LIBERATION DAY, the extreme action was a simple announcement that he would impose ludicrous tariffs on the whole world. In the case of the Greenland crisis, he caused grave structural damage to the alliance of democracies that has made the world relatively stable and peaceful for 80 years before traders acted. We do not want to run this cycle to the point where, say, Trump threatens a nuclear strike. Because the next ratchet is that he orders a strike then aborts it. And after that…

The goal should be to leave Trump sufficiently disempowered that he can’t yank the world around at his whim anymore. Dube was referring to the stock market, I’m talking about the bond market. But the dynamics are similar. And the key is that while Trump could survive a stock-market correction politically, he probably could not withstand an enduring bond market vote of no confidence in the United States.

That would likely require coordinated action among “bond vigilantes” worldwide, something that may already be happening on a small scale. If enough of them disinvested themselves of U.S. treasuries, it would cut the legs out from under the U.S. economy, and Trump would be mired in a huge, potentially fatal political crisis.

This might tragically be the least-worst option for the fate of the world. But before embracing it—unwillingly but outright—we should try to warn Americans, including Trump supporters, that this kind of thing is in the offing. Which is to say: It wouldn’t hurt if Democrats in the United States recognized this liability of his (and of ours) and got loud about it, before disaster strikes.