On Trump's Capitulation and Why Jaishankar Should Be Careful Before Pledging Allegiance

Finally, a debt market meltdown in the US has brought Donald Trump down on his knees.

The US president was thus forced to announce a 90-day pause on the draconian import tariffs against 75 countries which would have wreaked untold havoc on global trade, causing a combination of high inflation and economic stagnation in the near term and severe recession in the longer term.

The debt market got a severe jolt as Japan and other large holders of US treasury assets sold heavily – signifying loss of confidence. Stock market falls show loss of confidence in companies, but a government bond market meltdown directly reflects loss of trust in the sovereign. The integrity of sovereign debt is far more sacrosanct. Trump was clearly made to understand this by some of his saner advisors.

A 'beautiful' debt market

After pausing the implementation of the tariffs, Trump publicly admitted that the "debt market was tricky". He suggested that the debt market participants had got "queasy" and "afraid". After he paused the tariffs, the debt market had become "beautiful again", Trump claimed. The choice of the word 'beautiful" was interesting.

Indeed, the beauty of the debt market is that it acts as lifeblood for the global financial system but can overnight cause the equivalent of a severe heart attack in the same system if there is a loss of confidence and trust. Trump soon realised his actions had caused a severe crisis of confidence among those who hold US debt worth trillions of dollars. This includes countries like Japan, China, the UK, France, Saudi Arab, the UAE, India and many others who together hold upward of $ 6 trillion worth of US treasury assets. The central banks of these countries still hold at least 60% of their reserves in US dollar denominated bonds. Historically, this also signified the long term trust reposed in the US dollar-led financial architecture.

Donald Trump lost a lot of that trust and confidence in just one week by threatening to wreck the global trading system on the pretext bringing manufacturing back to the US.

The big mistake Trump made was he was threatening countries from whom the US has borrowed trillions of dollars over the years to feed US consumption, as also its trillion-dollar wars in Iraq, Afghanistan, Syria and North Africa.

The iconic investor Warren Buffet was candid when he suggested that the American tax payer was not really paying for the US government's excess spending and ever growing national debt which is at 130% of GDP.

According to Buffet, the excessive US consumption and spending in recent years is mostly met by borrowings from abroad.

Essentially, the rest of the world has been mostly funding excess US consumption in recent times.

Also read: Modi’s Tariff Silence: Is India No Longer the Voice of the Global South?

A ballooning trade deficit

Trump was brazenly disregarding this reality when he put a gun to the heads of nations from whom America has been borrowing heavily to meet its consumption and its growing current account deficit.

How can you accuse nations of unfair trade when they have lent you money for consumption and for fighting forever wars. Little wonder that when US vice-president J.D. Vance made a cheap remark – "We borrow from Chinese peasants and then buy goods made by the same peasants," Chinese social media influencers asked Vance to at least say thank you for the money lent to the US!

So clearly the trade deficit that Trump is constantly railing against is nothing but the US borrowing from the rest of the world to feed American excess consumption over its income. It is a very simple and straightforward math. If this is so unfair then the US should consume less and implement austerity measures while incentivising savings by its own people. US national debt was roughly 50% of GDP at the turn of this century. It has ballooned to 130% of GDP today. Can the US blame its large trading partners like China, Japan, the EU and Mexico for this state of affairs over the last quarter century?

The US should be happy that in spite of being in a debt trap the world still honours the dollar as a reserve currency. Many experts are betting on a decline of the dollar if the current debt mountain persists.

In fact Trump's belligerence on trade deficit hides anxiety about the ballooning US national debt over the past quarter century and its inability to generate enough growth to repay the debt. When annual interest payment exceeds your long-term growth rate, the inevitable consequence is a debt trap which worries the US to no end. The problem is Trump is bent upon blaming the rest of the world for America's widening trade deficits and the consequent ballooning of national debt.

A borrower sets conditions

No wonder an integral part of Trump's plan to make America great again is also what is called a Mar-a-Lago project in which a new coercive global financial architecture is proposed to rid America of its existing debt burden and such burden be shifted to the other major economies of the world! This does sound as audacious and loony as the Trump tariff plan. The US has $9 trillion of debt repayment coming up this year. It will have to be redeemed and re-rolled. Someone must pick up the tab.

So the new coercive project is to approach nations like China, Japan, the EU, the UAE, Saudi Arab, Brazil, etc. and coerce them to convert the 10-year US bonds they are holding to a 100-year zero coupon bond.

The most astounding aspect here is that the borrower (United States) will dictate terms to lenders like Japan and China, and pressure them to convert the tenure of their lending from 10 years to 100 years. This would ensure that successive American generations will not have to repay the debt, at least for 100 years.

Such outrageous ideas getting packaged along with the Trump tariffs will surely result in what reputed economist Paul Krugman describes as the inevitable erosion of "US exceptionalism". The US itself is responsible for making other emerging economic powers lose trust in the global trading and financial system it had nurtured after World War II. Last week the Russian foreign minister reiterated on a Russian TV channel that the multipolarity of currency and the creation of new payment systems within BRICs was an inevitable consequence of US imposing sanctions on a large number of countries. This process will only deepen further now, said Sergei Lavrov.

Recently there were reports of China evolving its own highly sophisticated digital version of SWIFT, an international payment clearance mechanism controlled by the US. As part of its heavy sanctions, the US threw Russia out of the SWIFT mechanism after freezing its dollar reserves. This crippled Russia and prevented it from doing any global financial transactions. The Chinese digital payment clearance system is a parallel institution which many might find attractive as they lose faith in US "exceptionalism" , especially in the wake of all that Trump is throwing at them.

Which is why external affairs minister S. Jaishankar must be very careful before publicly asserting India would readily be part of a US-led financial architecture. Will India openly support some of the disastrous aspects of the Mar-a-Lago project? One would like to hear the EAM's views on that even as Trump creates more uncertainty over trade pacts with 75 countries over the next 90 days.

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