Ticking Time Bond

When that liquidity preference gives way to an illiquidity preference — in which they begin to feel they’re getting ripped off — the foreigners will get rid of dollars as fast as possible.

Tuesday, January 20^th, 2026

Bill Bonner, from Rancho Santana, Nicaragua

Tariffs are a kind of duct tape for this administration. An all-purpose fix-it, they are used — with equal effectiveness — to gum up trade, to stop drug trafficking, bully foreign courts and influence foreign elections, pay off campaign contributors, protect domestic industries from competition, discourage immigration, show dissatisfaction with foreigners’ opinions...try to hamstring challengers...and what else?

Oh yes...to punish foreign nations for respecting their NATO treaty obligations. The National:

Greenland tariffs: Trump imposes extra 10% tax on European countries supporting Denmark

Penalty for defenders of Arctic territory to rise to 25% in June.

Many are the different uses. All of them unconstitutional, unsuccessful — or both!

At least, that is what most serious observers say.

But from our ‘historical fatalism’ point of view, Trump’s policies play a special role. They turn the US into a pariah nation...an outlaw...a rogue; they make it weaker, poorer, and more alone.

Returning to our line of thought from last week, America’s superpower is its bubble currency, the post-1971 dollar. When the foreigners use it as a reserve currency, they have a clear ‘liquidity preference’ for the buck. They get it by sending useful things to America...and then, rather than put it back into the US ‘industrial economy’ by buying products from the US, they tuck it away in the financial economy.

Reclining comfortably in central bank reserves, the foreigners’ dollars do not compete for happy meals or sad funeral lilies. Instead, they are used to buy US bonds, helping to reduce the cost of US borrowing while also softening price increases.

But when that liquidity preference gives way to an illiquidity preference — in which they begin to feel they’re getting ripped off — the foreigners will get rid of dollars as fast as possible. That is when America’s bubble economy comes to an end.

The South China Morning Post:

China dumps more US debt, buys other assets as Trump targets Powell

China trimmed its holdings of US Treasuries in November to the lowest level since 2008, diverging from a global trend that saw total foreign ownership of the debt instruments hit a record high. Analysts say the prospect of a politicized Federal Reserve chairmanship under Donald Trump’s presidency has deepened Beijing’s concerns over its exposure to American debt, with more cuts expected.

That may be the real reason the US attacked Iraq and Venezuela; the two nations sold their oil for other currencies. With no dollars needed, none went into US debt and none helped finance US deficits.

Fans credit the Trump administration with ‘thinking through second- and third-order effects.’ But maybe they should look at the first order effects.

Weaponizing the dollar? Sanctions and tariffs? Invading foreign countries, bombing, murdering civilians and kidnapping heads of state?

Foreign nations used to want to be part of the great dollar empire because the US had the biggest economy, the most powerful military, and a reputation for generally following the rules of civilized nations. Now, the US economy has been upstaged by China...and the reputation for rule-following has been erased. That leaves the military to back up America’s position with the only thing we have left: brute force.

Ultimately, this vinegar is not likely to catch many flies. Instead, our former friends are now buzzing towards sweeter, more reliable partners. Harici:

Canadian Prime Minister Carney in China to ‘restart’ relations

China praised Canadian Prime Minister Mark Carney’s visit to Beijing this week on Thursday, describing it as “critical” in his efforts to rearrange relations after months of intense re-engagement. These statements of China’s top diplomat, Foreign Minister Wang Yi, came during a meeting with his Canadian counterpart Anita Anand, who has been on Carney’s delegation as part of the first visit of a Canadian prime minister since 2017.

CSIS adds:

America’s volatile foreign policy is forcing India to revisit its own priorities. Domestically, the Modi government seems intent to move faster on domestic reforms to buttress growth that is ordinarily fueled by commercial ties with the United States. Internationally, India is redoubling efforts to build stronger bilateral connections with key partners. Recent summits with the leaders of Russia and China received a great deal of attention.

Mr. Trump’s policies are not unpredictable — duct tape tariffs included. At home and abroad, they keep the cameras on Trump. They give Americans ‘enemies’ they can rally against. They justify more dollars for the powerful firepower industry. They help cement the bond with Israel, America’s last ally. And they distract the public from the feds’ lawlessness and corruptions.

Most important, they may keep the bubble economy bubbling along — for now.

Regards,

Bill Bonner

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The value of China’s official holdings of US Treasury bonds is $682 billion, according to the most recent data of the Treasury International Capital report. That’s down over 48% from the peak of over $1.3 trillion in November 2013. Japan is the largest holder of US bonds, at $1.2 trillion, followed by the UK at $888 billion.