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Who holds all the cards? (It is not DJT) [1]

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Date: 2025-04-14

So we have been through liberation day (or whatever it was) and then DJT blinked on tariffs. We know that the new administration was spooked by happenings in the bond market (here, here, and here), blaming jittery investors. Who were those jittery investors? Why would the bond market be so important, you ask? I came across an interesting take on a Canadian substack.

Some key parts of it are unconfirmed, but here is what we know.

The U.S. Treasury market is a key part of the global financial system. It consists of US government debt, with about $28 trillion of Treasury securities outstanding. Around $900 billion of this is traded in a typical day. The US has the world’s largest economy and our ability to issue debt keeps the wheels rolling for a government that has not balanced the budget in several decades. Interest on the debt is generally quite low, making the entire thing manageable within the confines of the federal budget. Much of this debt is held by foreign governments: 1+trillion by Japan, 760 billion by China, 720 trillion by the UK, 379 billion by Canada, 320 billion by France, etc. These bonds are considered safe investments, backed by the full faith and credit of the US government.

With the current chaos, it is tempting to just think that some investors began to consider the “full faith and credit” a bit less reliable, but that may not be the entire story.

We also know that the new prime minister of Canada, Mark Carney, is one of the foremost economists on the planet. Educated at Harvard and Oxford, he has worked at for Goldman-Sachs and has held high level positions helping to direct the economies of the UK during BREXIT and Canada during the pandemic. He knows how to deal with economic crises, what strings to pull and when to pull them. Consider for a moment how this compares with the clown show of advisors that DJT has gathered around him.

We know that Carney has had one phone call with DJT, after which the 51st state and Canadian prime minister as governor talk ceased. Carney has also traveled to Europe and consulted with leaders there. Carney is also happy to postpone any further talks with DJT until after the Canadian election, in spite of White House desires. He knows that Canada holds more cards than its smaller size might suggest. Canada has some things the US needs and Canada is holding some 379 billion dollars worth of US treasury bonds.

The US treasury bonds are a boon to the worldwide economy but they also represent a key US vulnerability. And Carney knows this only too well. A coordinated sell-off of these bonds by major world holders, not a massive sell-off but a slow and controlled one, would minimize any negative impacts on most of the major bond investors. But it would also raise the interest rates that the US would have to pay to get people or institutions to buy and hold those bonds. The national debt would become less manageable. Bank interest rates for loans and mortgages would rise. Ultimately, the US would face a serious recession, much deeper than the one that is probably on the way in any case. A hard enough treaasury bond selling push and the situation overall could get much much worse. The Dean Blundell substack piece cited above lays out the possibility. We may never know if the conversations between world leaders behind closed doors went the way they are described in the substack article. What is clear is this: The US economy may be the world’s largest but it may also be the most vulnerable. World governments being targeted by DJT tariffs have plenty to push back with and the ability to make life in the US extremely uncomfortable. China is also unperturbed by the actions of DJT, another country whose leaders know just where the soft spots are. This trade war really is dumb in a way that deserves the description of “dumb” famously provided by Forrest Gump.

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