I wrote about the risks of a "sudden stop" if investors lose faith in America. The bond market is amplifying those risks minute by minute as yields shoot higher after the budget monstrosity https://paulkrugman.substack.com/p/gaming-out-a-sudden-stop
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The scarier thing for me is not just that the Economy will suddenly seize, but that the Trump Admin will be unable to do anything to fix it, as they will continue to act as if everything is fine. That original dog in the burning cafe cartoon seems to be the plan.
we might limp along with the gradual stop for a year or so, but the sudden stop will probably be completed when Trump nominates some hack like Hassett to replace Powell at Federal Reserve.
Freedom. He can do anything he wants, with no strings. Financially I doubt he has a need to be paid (or at least I hope he has that retirement money), so he can pieces as long as he wants, about what he wants, whenever he wants. That ability is priceless.
Jonathan Lamire was just going on and on about how the passing of this horrific budget-busting bill is a BIG WIN for Trump and for Mike Johnson not a massive hit to our economy and average Americans but will enrich the already rich.
This kind of horse race reporting is a big part of how we got here
I did a sudden stop and moved literally every dime I have into EU index funds, and moved to Spain. Why? Seen very stupid people create chaos working in the Bay Area many times, and this regime is like a stupid tech boss.
Dornbusch’s Law is a repeat of Seneca's observation:
Whatever structure has been reared by a long sequence of years, at the cost of great toil and through the great kindness of the gods, is scattered and dispersed by a single day-increases are of sluggish growth, but the way to ruin is rapid.
I'd add in that "more US exports" requires a sane climate for manufacturing but with Trump's whipsaw tariff decisions a business can hardly plan what's for lunch, let alone things with a 6 month or longer decision cycle. Canada is a much more sensible location for such a business to set up shop.
One thing I rarely see in these articles is an answer to the question "Where would all the investment capital go?"
I can accept that real estate is overvalued in a country with bad fiscal policy. But if big landlords like Berkshire and Blackrock lose foreign investment, who do they sell to?
And assuming we see a massive private divestment from real estate, where does all the money flow to?
Certainly not US Treasuries, given the current crisis. Does Capital flee to the BRICS? To emerging markets? To commodities? Does the MAG7 go on another tear?
That will lead to conflicts like the Balkans in the 90's.
Rural folks will be very upset when they find out exactly how much their lifestyle had subsidized by the blue cities/states before the split.
Angry uneducated young men with access to arms and with no hope for the future are dangerous.
Housing crash will be different this time. I think most people will be able to stay in their homes and there will still be enough pent up demand to swallow the ones that can’t (at lower prices but higher rates). But activity will slow even more and everyone’s house will be worth less.
Undoing the rest of environmental policy from FIFTY YRS AGO that Reagan, George W. Bush, and Trump first-term hadn't already gutted. Plus Drill Baby Drill, mining and forestry push, an Federal Lands devastation (National Parks/Monuments, etc.).
If/when the crash really starts, I kind of think they might try capital controls. It would be ineffective and stupid, but on the plus side it would unleash more corruption (bribes for exemptions, plus a run-up in crypto for evasion) so there might be enough payola for them to try it.
Don't worry though, because if the fiscal situation gets bad enough Trump will just stop making interest payments on debt held by foreign investors and that definitely will fix everything!
The bond vigilantes that they have talked about since 2001 are finally here. They came because they realized what informed people have said for decades, the GOP can't govern. The GOP is going to drive our economy off a cliff.
If Republicans' small-government ideas were good, they could persuade a majority to support them. But they're demonstrably bad, so they have to cram it through without debate.
Seems to me that those investors are increasingly wondering where to reinvest the funds they pull from the U.S. The rest of the world's economies aren't in good shape either, wars progress, and we are destroying our natural environment. Gold & silver aren't much of an answer.
Can't argue with this logic:
"…what happens if investors change their minds—if they decide that we’re an unserious country in which the governing party believes in voodoo economics and the president is an authoritarian ruler who spends much of his time rage-tweeting about popular musicians."
Ominous for sure. The charts weren’t self-explanatory to an untrained eye like mine, but what you wrote was quite clear and sobering. I lived through our last dance with stagflation, and I’d prefer to sit this one out.
The crash will hit right after Trump and the GOP lose the midterms, right? They don’t care because they’ll have a lie to tell their base, and once again Dems will have to pick up the pieces while taking the blame. Just like 2008-2010
They built the wrecking into their ‘big beautiful bill’, timed to detonate after the next presidential election, just like the 2017 tax act. If they’re not in power, they’ll block any fix. Just like last time. Only amputation of the infection will allow survival.
When you said that last night on @lawrenceodonnell.msnbc.com it sent a chill down my spine. We emphasize the cruelty of the GOP "Bankrupt America" bill but I don't think people understand how devastating to the economy it is. #MakeThe1930sGreatAgain
I pulled the majority of my 401K money out of the stock market before it started dropping and moved it into mostly the money market and then bonds. If the dollar tanks are both those going to be just as bad as the stock market? (I couldn't completely pull the money out unless I retired early)
That is what I did and that is my concern too.
We are betting that the drop in bond funds is less than the market crash after the obvious consequences of Trump's policies go into full effect.
The problem is nothing is safe under the criminal orange maniac.
This: "And the question is what happens if investors change their minds — if they decide that we’re an unserious country in which the governing party believes in voodoo economics and the president is an authoritarian ruler who spends much of his time rage-tweeting about popular musicians."
It's worked out great for some people in the past - just like the stock market manipulation going on now with tariff announcements but on a broader scale.
Yes, that is what they want to do, per the agenda of the neo-reactionary / Dark Enlightenment movement. Two of its key architects are Peter Thiel and Curtin Yarvin. JD Vance is a friend of both of them.
I’m no financial genius, but wouldn’t the extremely wealthy do better if the American economy and the dollar didn’t crash? When they bleed dry the consumer class as well, who’s going to buy their crap that made them rich in the first place. A strong middle class and a supported lower class…
Yes, the economy regularly does better under democrats. The very wealthy surprisingly don't want one party rule. Having the party in charge change regularly means they can take advantage of good economy during Ds and then low rates/exemptions during Rs to realize their gains.
It’s sad.
You need to have a smidgen of empathy to act like that if your rich.
Add to that their not quite rich enough and it’s game on.
The Bond market will reign them in.
Arrogance? A belief that since they've always won before, so they'll keep on winning? A belief in the power of bailouts for the rich? An assumption that a great business environment in the USA is the natural order of things?
It's easy for them to react. They can just transfer their wealth out of the dollar. Barring that, how much is their purchasing power reduced by going from 100 billion to 10 billion? None really . . .
These are the same people who said for at least 5 years that crypto will be great but still can’t articulate a real value for it. They will do fine only because when you have that much, you can weather the storm. Look at Trump as an example, if he hadn’t been born on homeplate, he’d be homeless.
They are starting to realize that the fancy pieces of paper their stocks, investments and other financial instruments are printed on will be just be fancy pieces of paper under this administration.
(FTR, family owns stocks. Feeling the pain. But the castle of cards must come down regardless. Only way more people will wake up to empathy, unfortunately.)
Yeah but the president can say, “There’s no inflation.” That’s what’s important. And the free money flowing from those 0% interest rates. Who cares if some kids go hungry and people die from lack of US aid. The rich think it’s their money anyway.
Professor, I am curious about your thoughts on whether this debt/yield spike would lead to a developing market-style debt crisis, and what that might look like in the US?
Good analysis on what’s happening as usual from Krugman. Hope he takes this further & explores what collapse in the bond / treasury markets & loss of reserve currency status for the dollar looks like to Main Street. We need someone with a big audience to start spelling it out with clarity fast.
Wait until many of them have to borrow against their homes because their 401K, individual investments, etc. are wiped out… and banks start taking a closer look to house valuations…
Put it another way: my family is one of those few lucky enough to have locked down a dirt cheap rate, and also the ability to pay down the loan capital.
But… the value of the house went up by about 40% this decade. It’s the same house. Very few improvements made.
Say we found ourselves in a position to have to borrow against our home. If I were a real estate banker, I would look at whether my house is really worth 1+ mil. Especially when the only reason for it is that all the other homes in the neighborhood also went up 40%…
Home prices dropped significantly during the great recession because many people took mortgages they couldn't afford (banks loosened lending standards in 2000s). People tried to sell their houses in financial distress. People's mortgages are much more conservative now
We own our home fully-and its value has gone up. So sure, if we were desperate, we could sell it for no more (or less) than we paid for it 10 years ago. But would we want to do that? Obviously not. And I think most people in our position will feel the same.
If investors lose faith in America, what happens when they use that as pretext to get rid of the petrodollar? It’s been a pillar propping up the US economy for decades and losing that will severely impact the value of the dollar permanently.
You can try to shrug off investors starting to look elsewhere for investments, but that’s happening, and there’s no propping up the most artificial of markets after that happens.
Comments
Really that simple.
In the standard of living.
Truly a perfect storm bringing historical changes.
This kind of horse race reporting is a big part of how we got here
You would say I lost my belief in our politicians
They all seem like game-show hosts to me 🎶
https://bsky.app/profile/aeternamala.bsky.social/post/3llhfd6w2jk2u
Whatever structure has been reared by a long sequence of years, at the cost of great toil and through the great kindness of the gods, is scattered and dispersed by a single day-increases are of sluggish growth, but the way to ruin is rapid.
honestly, why do I, a nobody, have to nag and nudge you to do the right thing, to be a mensch and not a schlemiel ?
I can accept that real estate is overvalued in a country with bad fiscal policy. But if big landlords like Berkshire and Blackrock lose foreign investment, who do they sell to?
Certainly not US Treasuries, given the current crisis. Does Capital flee to the BRICS? To emerging markets? To commodities? Does the MAG7 go on another tear?
Or do they just mark down book prices?
Rural folks will be very upset when they find out exactly how much their lifestyle had subsidized by the blue cities/states before the split.
Angry uneducated young men with access to arms and with no hope for the future are dangerous.
Next to cheating at golf.
"…what happens if investors change their minds—if they decide that we’re an unserious country in which the governing party believes in voodoo economics and the president is an authoritarian ruler who spends much of his time rage-tweeting about popular musicians."
For instance Trump weakening the EU by siding with Russia is a way to prevent any alternative "safe place" from emerging.
Many EU countries are a few percent voters away from Trumpism.
Enjoy.
We are betting that the drop in bond funds is less than the market crash after the obvious consequences of Trump's policies go into full effect.
The problem is nothing is safe under the criminal orange maniac.
“ Crash “.
Isn’t it???
😑😑😑
*none of this was necessary. Repeat: NONE of this was necessary. 🥸
Vladimir Ilyich Lenin
You need to have a smidgen of empathy to act like that if your rich.
Add to that their not quite rich enough and it’s game on.
The Bond market will reign them in.
(FTR, family owns stocks. Feeling the pain. But the castle of cards must come down regardless. Only way more people will wake up to empathy, unfortunately.)
Just ask Elon.
Predicted in the 2023 movie 'Leave the World Behind'
#TeslaTakedown
https://youtu.be/9xkokcGTK4k
What could go wrong?
https://www.nytimes.com/2024/04/15/upshot/mortgage-rates-homes-stuck.html?unlocked_article_code=1.JE8.2vAT.8m1OTkmsJCNO&smid=nytcore-android-share
But… the value of the house went up by about 40% this decade. It’s the same house. Very few improvements made.