Reviving The Specter Of Bond Vigilantes

The scare story is true this time. Democrats should use it to warn Americans—even to oust Trump—BEFORE he wrecks the country. But they'd have to stop being so scared.

(Photo by STEFANI REYNOLDS/AFP via Getty Images)

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.

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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.

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Republicans know how to scare the bejesus out of Americans and American elites by allusion to the bond market. After Barack Obama became president, at the nadir of the Great Recession, they glommed on to a bit of shoddy economic analysis to whip up a panic over bond vigilantism. They did this purely for partisan and ideological reasons. Obama had to stimulate the economy. That meant getting money out the door. Their ominous bond-vigilante warnings were meant to transform those outlays into a fatal dilemma for Obama’s presidency. If he didn’t get deficits under control lickety split, America would, in their words, “end up like Greece.” They simultaneously put him on notice that they would link arms against even a penny-sized tax increase. So he had a choice: cut spending abruptly, right away—tipping the recession into a depression—or savage the social safety net long term.

This gambit worked. It spooked Obama and Democrats into making a hard, damaging turn to austerity amid a struggling labor market and anemic growth. And the real kicker is that they milked the risk of a global flight to safety from the U.S. even though it did not exist. The specter of bond-market vigilantism was entirely fictional.

Republicans continue to deploy similar tactics against Democrats, though in coarser ways. Why mess with success?

Trump doesn’t use high-fallutin’ language or bad-faith argumentation in the same way Obama-era Republicans did. He simply asserts: my opponents will bring ruin. Elect me or you won’t have a country anymore.

My contention is: Democrats can do this, too—but in an honest way. Not to the end of imposing austerity, but to the end of straightjacketing Trump.

The fact that Trump routinely spooks the actual bond market provides ample justification for Democrats to issue similar warnings: We need to get this guy out of office before he destroys the economy.

Democrats, alas, are terrified of the word impeachment. They fear backlash, not so much from Trump’s voters, but from swing voters and independents who might hear “impeachment” and interpret it to mean Democrats are out of touch with their kitchen-table concerns¹.

This is dumb. But, to the extent that the word “impeachment” pertains to abuses like the malicious prosecution of Trump’s enemies, it does contain some logic. What’s Jim Comey got to do with the price of eggs?! But in the case of episodes like LIBERATION DAY and Greenland, the logic falls in on itself, because the purpose of the threatened impeachment wouldn’t be principally to uphold laws or norms, but to save the country from economic collapse. Impeachment has become a kitchen-table issue.

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Unfortunately, I rate the likelihood of Democrats engaging in any kind of concerted hardball politics lower than the odds that an actual bond-market rebellion wrecks the global economy. A historic calamity, but—as a silver lining—one that might take fascism down with it.

What would it look like in practice?

It could take many forms. But one way is essentially through discourse. The formation of a new, global conventional wisdom that patience should be wearing thin. It may be that this time last year, most Americans didn’t realize they’d elected a madman. But once it became clear, a functioning democratic superpower worthy of low borrowing costs would have used its constitutional mechanisms to oust him. Alas, it seems as though they may not. Perhaps Trump should thus be subject to an informal three-strike-and-you’re-out rule. No more TACO standoffs.

Institutional investors have already hinted at their misgivings.

Over at The Bulwark, Catherine Rampell noted recently that after Trump tried to orchestrate the prosecution of Federal Reserve Chairman Jay Powell, “some European bond traders finally began digging into Project 2025, the Heritage Foundation playbook for Trump’s second term. When they did, they were apparently aghast to discover its proposal to ‘effectively abolish’ the Fed.”

One Danish pension fund sold $100 million worth of U.S. treasury bonds, citing America’s “poor government finances.” A thimble in the ocean, but also an omen.

There’s no reason this kind of awakening couldn’t become memetic, until, say, Trump revives his threat to seize Greenland again, and a critical mass of institutional and sovereign debt holders aligned to sell.

To say, you could not promise us enough interest to buy your cheap debt, because you are no longer trustworthy.

This would, I’m afraid, be horrific. (It would be much better if Democrats would find a voice and if Republicans would open their hearts to impeachment.) The interest rate spikes we’ve seen over the past year have been bad, and largely self-inflicted, but survivable. They’ve made it harder for people to afford homes, harder for the U.S. to service its debt.

In a big sell off, interest rates would become much higher, and stay there, threatening a debt spiral that would push the country into crippling austerity. In a total collapse scenario, the U.S. would simply become insolvent. The federal government would not be able to finance all of its many payment obligations. Our money would become worthless.

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It speaks volumes of our predicament that we’re contemplating the merits of a cleansing fire.

But better an economic fire than the other kind. Better that Trump and MAGA and fascism fully discredit themselves before they engulf the globe in slaughter.

A Trump induced depression would ring a very loud bell. Many millions of Americans voted for fascism for economic reasons. Tens of millions more voted for Trump because they like his shitheel behavior. They would learn the hard way (along with the rest of us) that low character in high places can wreak havoc on the world. They might finally lose their taste for scumbag antics, which would render the modern GOP a pariah party.

That might free us to build a more robust democracy.

What I really want, though, is for historical actors here and abroad to take their obligations to the world more seriously, and study their pain points. To consider questions about how Trump’s domestic politics would hold up under various circumstances. E.g.:

• If the E.U. were to place a moratorium on U.S. tourism?

• If E.U. governments led boycotts of U.S. based A.I. companies?

• If they formed trading relations with the rest of the free world, then cut the U.S. loose?

The writer Ryan Cooper has other good ideas along these lines. Before joining a run on treasuries, for instance, he suggests Europe should issue a bunch of its own E.U.-backed debt. “The world is crying out for some safe asset that isn’t the dollar. Europe could provide that, while undermining the American economy, and also funding European rearmament and economic revitalization on the cheap.”

Likewise, I want Democrats to ask themselves what the fuck they’re so scared of?

Trump’s antics really do threaten our economy. Not with just a minor, tariff-induced recession, but with total ruin. It’s not a lie. It’s barely hyperbole at this point. It’s worth a bit of collective shrieking. Get rid of him before we all regret it.

In an unlikely scenario, they manage to spook Republicans out of complacency—enough to rein him in, if not remove him from office. In another, Republicans don’t budge, leaving us right back here in the status quo. No harm done. Democrats would still be favored to win the midterms, only they’d have made rescuing the economy from Trump, through severe intervention, part of their pitch. A mandate for impeachment

And if that didn’t change things for the better… well, at least they’d have a real claim to prescience when the house of cards tumbles. When Americans would have to decide which party they trust more to rebuild.

1. Yes, this is literally how they think about politics.