Mind the Gap

The US transferred real wealth? Not exactly. The foreigners gave us cars, T-shirts, gizmos and gadgets. That was real wealth. What did we give them in return? Debt securities — dollars and Treasuries.

Wednesday, April 9^th, 2025

Bill Bonner, writing from Youghal, Ireland

On Monday, White House advisor Kevin Hassett stoked rumors that the president will ‘pause’ the tariffs to give nations a chance to come to terms with the Trump Team. Stocks shot up…appearing, for a while, to reverse the downward trend.

And again, yesterday morning, it looked like ‘the bottom was in.’

But then, The Donald put to rest any lingering hope that he is a reasonable man. CNN:

President Donald Trump is set to impose an astounding 104% in levies across all Chinese imports on Wednesday, White House Press Secretary Karoline Leavitt announced on Tuesday…China was already set to see tariffs increase by 34% on Wednesday as part of Trump’s “reciprocal” tariffs package.

But the president tacked on another 50% after Beijing didn’t back off its promise to impose 34% retaliatory tariffs on US goods by noon Tuesday, adding an additional 84% in duties.US stocks, which soared Tuesday morning, began moving lower off Leavitt’s comments. By 3 p.m. ET the Dow, Nasdaq and S&P 500 were all in negative territory.

Leavitt:

“President Trump has a spine of steel, and he will not break.”

The ‘spine of steel’ got hammered into its present shape by toady ‘advisors’ — prominently, Pete Navarro.

According to press reports, others insiders preferred to use tariffs as a bargaining tool. But Navarro is not really interested in a way to encourage free trade. Navarro:

“To those world leaders who, after decades of cheating, are suddenly offering to lower tariffs — know this: that’s just the beginning,” he wrote.

‘The beginning of what,’ we might wonder? Nothing good, is our guess.

Elon Musk says Navarro is ‘truly a moron… dumber than a sack of bricks.’ Musk:

“What he says is demonstrably false.”

Elon is probably right about that. Still, it is a helluva thing for White House insiders to say in public. Besides, Navarro’s tariffs are the centerpiece of Trump’s economic policy. If the architect is a moron, what does that make the builder? Why is Musk on the team?

Musk is the biggest backer…and now a prominent part…of the Trump Team. With his support, Trump and Navarro have up-ended the more-or-less free trade system that has lifted more people out of poverty than any economic policy in history.

In China alone, some 800 million people have been brought into the modern economy in a single generation, with standards of living now almost comparable to those in Europe or the US.

Navarro misunderstands this phenomenon in simpleton terms:

‘The US cumulative trade deficits in goods from 1976 — the year the chronic deficits began — to 2024 have transferred over $20 trillion of American wealth into foreign hands. That’s more than 60% of US GDP in 2024. Foreign interests have taken over vast swaths of US farmland, housing, tech companies, and even part of our food supply.’

The US transferred real wealth? Not exactly. The foreigners gave us cars, T-shirts, gizmos and gadgets. That was real wealth. What did we give them in return? Debt securities — dollars (bearer notes)…and Treasuries.

That’s what a deficit means. If we had given them real output, of real value equal to what they gave us, there wouldn’t be a trade deficit. Instead, we gave them output of less value than what they gave us…leaving us with a deficit and them with a surplus. This gap was filled with dollars.

They gave us things of real value. We gave them I.O.Us…

As we discussed yesterday, Trump’s advisors take the volume of the trade deficit as a measure of “cheating.” If a country is giving us more than we give it, it is ‘ripping us off,’ they say. This claptrap is typical of the ‘blame someone else’ approach that works so well in politics, but never in economics.

But by this formula, the US was a cheater for the 100 years — roughly from the 1870s to the 1970s. It ripped off the rest of the world by sending it tractors, tanks, oil, food, clothes, movies — you name it.

In return, it received its trade surplus in the form of gold. That’s why the US has more gold than any other nation.

But then, something changed. What? How can you explain a complete turnabout… wherein Americans went from being the world’s largest exporters to its biggest chumps?

The fault, dear reader, was not in our stars, nor in our neighbors, but in ourselves. What really happened was that the US changed the international money system.

After 1971, America was still the world’s largest exporter…but it was exporting its new, gold-free paper dollars (and other debt instruments), not real goods. The US produces dollars (bearer notes) as well as long-term Treasury bonds. These are much easier to manufacture than automobiles or underwear.

Elon Musk produces real goods. A machine that drills huge holes. A car that is now a worldwide leader. A spacecraft program capable of rescuing NASA astronauts. A satellite system that allows communications all over the world.

He’s built a worldwide empire of real companies producing real things (though perhaps grossly over-valued in the US by investors). He understands how a real economy works. What he doesn’t understand is politics.

And Navarro? What does he know? Does he know anything at all?

Musk:

“He ain’t built s#!%.”

More to come…

Regards,

Bill Bonner

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Market Note, by Dan Denning

We mentioned the US Treasury market yesterday and that it had been quiet…so far. It woke up last night. US 10-year yields are up 66 basis points in the last three days. Overnight, the 30-year yield briefly went over 5%. What now?

Well, it could be China selling its Treasuries to push US rates higher. Lower rates are critical to Treasury Secretary Scott Bessent’s plan to refinance close to $10 trillion in government debt this year. But get ready to become familiar with the term ‘basis trade.’

Hedge funds have bet $1 trillion buying Treasury bonds and selling Treasury futures. They make money if the gap between the two—which shouldn’t ordinarily be that great—converges. They make even more money when the trade is ‘leveraged’. The trouble?

The gap between Treasury bonds and Treasury futures does not always converge. An ‘exogenous’ event can cause it to blow apart (this is what happened when Russia defaulted in 1998 and bond yields in emerging markets no longer converged with Western bond yields…Long-Term Capital Management blew up and the Fed under Alan Greenspan intervened to ‘save’ markets.) Bet gone bad.

When a ‘basis trade’ is massively leveraged, it can only be closed (in an orderly fashion) by selling bonds and buying back futures. If there happens to be a lot of selling (by whomever), yields rise until there’s a buyer (‘Chairman Powell, the bond market is on line one.’) If there’s NO buyer, the trade is closed in a disorderly fashion (ka-boom).

We don’t know if a hedge fund with a leveraged basis trade blew up late night. Or if China dumped Treasuries to retaliate on Trump’s tariffs. We do know that, weirdly enough, that a paper was published in late March called Treasury Market Dysfunction and the Role of the Central Bank. In the paper, the authors practically beg for a bail out of hedge funds using the basis trade—to save the bond market from blowing up and taking the stock market with it, of course.

If bond yields keep rising, the paper’s authors may get their wish. The Fed is charged with providing liquidity to markets when it disappears—something that rarely if never happens in the US government bond market. Powell bailing out leveraged hedge funds seems like a crisis for Wall Street, not for Main Street. But if lower rates and bond buying (Quantitative Easing) bail out hedge funds AND lower US borrowing costs, Trump and Powell may find themselves in agreement (for a while).