Trump’s Tariff War Just Went Nuclear

So Donald Trump's tariff war just got much worse, because he just threatened to stop trading with about half of America's trading partners. And that includes Mexico, Canada, China, Japan, Germany, South Korea, India, Taiwan, right? Altogether, that's about $300 billion a month in trade. Some countries are paying a half a point, and we're paying four points. And yet, we're a much stronger credit than they are, because if we don't trade with them, they don't have any money to pay the bills. And if we're not going to be treated properly, we're going to do that. And all we have to do to cut our trade deficit with the country is not trade with them. But now, those lender nations are pulling their gold out of the U.S., and they're starting to do this more and more, and they're walking away from U.S. debt. Here's why this is such a big deal. Remember, a trade deficit is just when these countries sell America more than they buy from it. And for 80 years, those countries bought U.S. treasuries with those dollars, and that's what allowed the U.S. to keep buying from them. Now, when Trump threatens every country we run a deficit with, he's basically threatening the countries that hold America's debt, which is the whole world. And that's not good. Why would he do that? The story that we're being told is that the president is now at war with his own central bank, and he's using trade as a nuclear option to get what he wants. And what he ultimately wants is lower interest rates. And that's because even just 1% higher on the rates is costing the U.S. a lot of money in interest. We should be paying the lowest interest rate in the world. Each point in interest in this country that we pay costs us $650 billion. We should be at 1% or a half a percent. We shouldn't be at 4%. We have other countries at a half a percent. And yet, if it weren't for us, they'd be bankrupt countries. So Trump wants cheaper debt, and he's threatening the world to get what he wants. Now, the man who could give him what he wants is Kevin Warsh. The chairman of the Federal Reserve, a.k.a. the central bank. But he doesn't want to give Trump what he wants. At least not publicly. Privately, he does. Let me explain this dynamic. Every year, the government collects taxes, right? That's its income. And from that income, there's three bills the U.S. can't stop paying. Interest on the debt, Social Security and Medicare, and veterans' benefits. Now, if you add those up, you get what Luke Groman calls the true interest expense, which right now is 105% of everything the government takes in. And that spending is growing at twice the speed of tax revenues. Every time interest rates go up, the debt gets worse. Now, publicly, Kevin Warsh can't agree with Trump and just lower the interest rates because things like diesel refinery rates have tripled since the Strait of Hormuz closed, right? Something called the Commodity Index just broke out to a 10-year high. Businesses are reporting the highest prices paid in about four years. Basically, what all this means is that the price of stuff is going up. So, if the Fed is going to lower interest rates while the prices are going up like that to appeal to Trump, then the bond market says to itself, well, okay then, I guess you guys don't care about my income, right? I lent you my money. My money is sitting in your bonds. You're just going to let inflation run higher than what you're paying me? You know what? I want to be paid more to hold your bonds. And that's when long-term rates go up on their own. That's also when mortgages, car loans, right, corporate borrowing, all of that becomes more expensive. So, publicly, Kevin Warsh has to look tough on inflation. He has to pander to the bond market because if the Fed lowers the short-term rates, long-term rates go up anyway because it upsets those bond investors. Privately, though, Kevin Warsh needs interest rates to go lower as well because of that true interest expense that we talked about. And he can't raise the rates either because if he does, he could blow up the stock market because it would reprice trillions of dollars of loans on the balance sheets of American life insurance companies that nobody really knows the real value of. So, he's stuck. What's he going to do? Come September 16th, the market is pricing in a 40% chance he holds and a 60% chance he increases the interest rates. The market wants us to believe that rates will probably go up, which is why Trump is threatening half the world to get what he wants, which is lower interest rates. So, those are the trillion-dollar questions, right? What's going to happen on September 16th? Will they lower rates? Will they stay the same? Or will they go up? I'm going to tell you what I think they'll do, but I don't think that's the real story. The real story is what's really happening, which is that the countries that have been lending money to America for 80 years have started to leave that system, right? Germany, France, the Netherlands, they're moving their gold out of New York. Japan just potentially sold more US debt in one month than ever before and the United States plans to keep on borrowing anyway without those lenders and without it showing up in the data. How are they going to do that? It's been done before and I want to show you how history might actually repeat itself so you can hopefully protect your wealth. So, with that said, let's get into it. Hi, my name is Andrei Jikh. Hope you're doing well. Come for the finance and stay for the financial repression. So, in a nutshell, here's what I think is happening. The United States owes more than can afford, right? And the people who lent it money are starting to leave that system. So, the government's like, how do we borrow money at interest rates those lenders cannot set? It's like, how can I borrow money from the bank at an interest rate the bank can't set for me? And here's what their plan to do that is going to look like. The Fed first acts tough on inflation, right? Maybe even raises interest rates a little so bond investors think they're being responsible and they actually care about them. Behind the scenes, the Treasury will move the debt from the long-term bonds where investors decide that rate to short-term bills where the Fed decides the interest rate. Then, using a combination of some policy, they'll change the rules so that banks, stablecoins, and pension funds or money market funds have to buy that debt whether they want to or not. Anyone who tries to leave the dollar system will be given a deal, right? They'll be lent money at favorable terms so they never have to sell their US Treasuries. Anyone who doesn't play ball, right? Sanctions and a lot of mean tweets. All of this is effectively what's called QE or quantitative easing aka printing money. But this will not be like 2020 printing money where everyone is making fun of it and is making memes because everyone could see what they were doing by looking at this chart, right? The Fed balance sheet. This QE is not going to show up in this chart as the Fed printing money. It won't be in that data, but it will have the same effect. The power to set America's interest rates will move from the bond market to the central bank and the bill will be paid by anyone who's holding dollars or bonds at a rate below inflation. And that is probably you, me, and all of us, right? That is called financial repression. Now, if most of that made very little sense, let me explain what all of this means and why people think this is going to happen. See, a lot of people think that the president runs the country, right? Or Congress or the Fed. That's normally true under normal conditions, right? But there is something that sort of supersedes their power and that is capital aka the flow of money and what it costs to borrow it. And the biggest pool of money in the world is something called the bond market. When the government spends more than what it makes, it has to borrow and it does that by issuing these IOUs, the bonds. You give the government $1,000 and in 10 years from now, they give you the money back plus interest, right? The interest that it has to offer on that is called the yield. Now, the government does not get to pick the yield. It's the buyers, right? The people lending the money. And if enough people want their bonds, the government can offer a lower rate. And if fewer people want to buy them, then the government has to offer a higher yield to incentivize them to buy it. Makes sense, right? Less people want my stuff, I'll have to offer more. And remember, these aren't just people, by the way, buying these bonds. These are also nations, right? Countries. So you can think of the yield on a U.S. Treasury as kind of like a real-time vote by everyone who lends money to America. And it's based on a very simple idea. How much do I want to be paid to trust this person or this nation? That means if the government is not trustworthy, then people want to be paid more. For example, if a country spends recklessly, if it can't afford to start wars with people, right, or it prints money to cover the gap, lenders get nervous and they demand a higher rate. That higher rate affects everything because the 10-year Treasury yield is what determines our rate for things like mortgages, right? But what all of this really means is that effectively the bond market sort of controls a nation. And that's why for 80 years, the bond market was the only force in the world that could sort of tell the United States what to do. Like presidents come and go, but capital, that's what drives their actions. Now, after a long time of an empire ruling, there does come a point where a lot of lenders will start to want to hedge their bets. They'll want to protect some of their wealth, right? Japan, China, Europe, the Gulf, for example, were the biggest lenders to the United States. And it was understood that as long as the world was orderly and there was peace, access to capital, that would be cheap. But that's not the world we live in, obviously. Take a look what's happening to interest rates right now. The 10-year yield, for example, is at like 4.76%. The 30-year is above 5.2%. It's the highest since before the financial crisis. Mortgages are at 7%. What we're watching is something called the long end of the bond market, meaning long-term durations, their yields are going up. And that's because the people who used to buy are slowly starting to sell, and it's getting faster and faster. The cost of borrowing money is going up, and that's bad because the total of interest, and Social Security, and Medicare, and veterans' benefits is now 105% of everything the government makes. So the government needs long-term rates to come down as fast as possible to afford it. And the only people who can bring those costs down are no longer buying from the US. Now, let me show you that. Now, before I show you who's leaving, everything in this video really depends on where you get your information from, and that's where today's sponsor, Ground News, comes in. Ground News is an app that shows you the same story from hundreds of outlets at the same time, and it tells you which ones lean left, right, or center, so you can see how the story changes depending on the source. And a perfect example is this story. Europe and Canada just announced a far-reaching new partnership covering trade, defense, supply chains, and raw materials, and 60 news sources covered it. And here's what Ground News shows. Left-leaning outlets frame it as Canada responding to an assertive United States, and they lead with the defense side, like Canada joining Europe's military programs and growing defense cooperation with Europe, and a plan to ramp up defense spending by 2030. Right-leaning outlets frame it as a counterweight to both the US and China, and they lead with Carney's words. But now look at the bias comparison. Left coverage calls it a chance to seize Canada's shift away from Trump's America, right coverage calls it an intensifying trade war, and warns Canada could become a de facto European protectorate. Basically, one side says opportunity, and the other side says surrender of sovereignty. And the center outlets skip both and go right to the numbers. Canada sends 70 cents of every export dollar to the US, and Carney addresses the European Parliament on September 16th, which is the same day as the Fed decision. That's what Ground News makes visible. I use it when I'm researching for these videos, so I can separate what's actually happening from how it's being told. If you want to see the full picture of global events and not just one side, go to ground.news.com or click the link down below, and you'll get 40% off the Vantage Plan, which is the one I use, and you'll be supporting independent journalism and the channel. Thank you to Ground News for sponsoring this segment, and now let's get back to it. All right, so here's all the countries leaving the dollar system, and keep in mind, this is a very gradual process. It doesn't happen overnight. For all we know, this could take decades to play out, but it started sometime around 2014, when Russia annexed Crimea and the US hit it with sanctions, and the year the world's central banks basically stopped buying the US debt, a.k.a. US Treasuries, right? We can see this in the data. At the end of 2014, foreign central banks and sovereign funds held about $4.1 trillion of US debt, and then 11 years later, they hold about $3.9 trillion. While that was happening, though, US debt went from $18 trillion to now roughly $40 trillion. Now, if the central banks of the world stopped lending to the US, then where did the US borrow the money from? Where it came from was from private investors, right? Hedge funds and the Japan carry trade. The governments of the world have been buying gold instead, and check this out. This is from Luke Groman at FFTT. The link is down below. As measured in gold, long-term treasuries have lost 85% to 90% of their value since 2014. The point is that this has been happening for over a decade, and people are now finally starting to feel the squeeze of how little their money is able to buy them. And then two weeks ago at the G20, Scott Besant said this about Iran and the Strait of Hormuz. We can see the Iranians are trying to use the Strait of Hormuz as a choke point. It's not a choke point for the US, but it is a choke point for many, many other countries. And, but, you know, that will be bypassed in two years. In two years, the Strait of Hormuz will be like a worthless piece of water. Now, the thing about a choke point of the world is that the moment a country uses this choke point, as a weapon, everyone who depends on it will start to build a way around it, so they don't have to rely on it. And for 80 years, the dollar was a choke point too. The United States has been using it as a weapon against everyone, including its allies. And that is why they are now gradually leaving that system. And here's some recent examples of this. This is Norway's data. Its $2.3 trillion sovereign wealth fund, the biggest in the world, just announced a huge cut to its US Treasury holdings. They're cutting about $80 billion. There's also Europe. 10 trillion euros of household savings remain in bank deposits today. And a significant portion of European savings is invested outside our continent. Europe must now put them to work for its businesses. And that is the goal of the Savings and Investments Union. That was Ursula von der Leyen. She said about 300 billion euros worth leaves the continent every year, mostly to the United States, and that from now on, it's going to be invested in Europe instead. All 27 members of the EU signed this new savings and investment plan to make that happen. That's Europe basically saying they're not going to continue funding the US. Then there's China. Xi Jinping signed a declaration with Russia, India, and Pakistan condemning US strikes and sanctions on Iran. So China has also picked which side they're on. And almost nobody in the Western financial press talked about it, which I thought was interesting because this is a really big deal. But wait, there's more. China also put a 20% tax on the dividends its citizens make from foreign stocks. They're also now starting to audit their offshore trusts. China is also doing the same thing Europe is. They're making it more expensive to keep their money in the US. And they're making sure that their capital comes home. And then there's the Netherlands. The Dutch Central Bank just moved 86 tons of gold out of New York to London because of geopolitical unrest. France also took every ounce they had in New York, which is about 129 tons worth, back to Paris between last July and January. Germany also brought 300 tons home and is now debating what to do with the other 1,200 tons it still keeps at the Fed. And historically speaking, when gold is leaving a country, that's not a good sign for that country. And then, of course, there's Japan, which is the biggest foreign holder of US debt. Japan sold about $88 billion worth of foreign securities in August. We don't know for sure that those were US treasuries or not, but that is the biggest monthly sale in Japan's history. And it's bigger than what Norway announced. On top of that, the Bank of Japan also pushed its 10-year yield to 3%, which is the highest since 1996, which basically incentivizes Japanese investors to stop lending to the US and start lending to Japan instead. So basically, the world is redirecting the flow of capital. Where's it going? It's going to places like Hong Kong. Gold imports from Russia, for example, hit a record this year. That's oil being sold and settled outside the dollar system. And if we put all of this together, this is what it looks like. The dollar's share of global reserves is now less than 57%, which is the lowest on record. And the share held in currencies outside the big four is also at an all-time high. Now, if all of this is true, then how will the US continue to borrow money and defend its bond market if all these nations and central banks are slowly selling them? Scott Besant strongly hinted that he's willing to use something called the TGA to buy back US debt. The TGA is the money inside the Treasury General Account, which is basically the government's checking account. Right now, they have about $950 billion, which sounds like a lot of money, but it's actually not that much. If all the nations we talked about just said, eh, we think we're going to trim like 10% of our holdings of US treasuries, then that alone would be bigger than all the dollars the Treasury has. So with all of this in mind, here's what the US plans to do about it. There's two options. Option one is to make it worth it to stay in treasuries, and option two is to make it really painful if you leave treasuries. And the US is doing both, and it starts with oil, right? Because oil is what drives inflation. Inflation is what drives bond yields, and bond yields, most importantly, the long-term interest rates, are what they're trying to push back down. This is why every time the price of oil went up this year, the government sold from something called the Strategic Petroleum Reserve to push those oil prices down. That's why the reserve is now at around 287 million barrels, which is the lowest level since like 1982. Oil is getting harder and harder to control because now there's a new, very big buyer that's entering the market, and that, of course, is China, right? China is one of the biggest problems for the US because the US can't sanction Chinese banks without breaking its own bond market. And also, threatening China doesn't work either because remember, the world sells America stuff and gets dollars. China has been running a trade surplus of about $1.2 trillion a year. It's the biggest in the world. And for 80 years, a surplus of roughly that size, that came back as treasury purchases. Now, think about what a country with that much money can do when it stops lending it to you. It can buy oil from anyone at any price they want because they have more purchasing power than every other nation bidding for those same barrels. And that's happening right now. Check this out. The price China pays for oil is called Shanghai crude. That just crossed $100 a barrel. The price the rest of the world pays is called Brent. Normally, China pays a little less than everybody else because it's such a big buyer. But right now, China is paying $5 more than everyone else. And that's because China is outbidding the world. They're doing that because when the trade agreement was closed, China stopped buying. They lived off their own oil that they've stored up. Its imports dropped by about a third, right? But now their storage is running low, so China has to buy more to refill it. So the biggest buyer of oil in the world is now coming back into the market and they're paying whatever it takes. So the supply of oil is getting squeezed, which is also why we are seeing oil and diesel prices going up substantially right now. China buys oil, oil goes up, oil drives inflation, and inflation drives U.S. bond yields, right? So long story short, that means China can basically push U.S. interest rates higher just by buying oil for themselves. They don't have to sell U.S. treasuries to do it. And there's nothing the U.S. can offer China to stop. So what's happening now is the U.S. is basically incentivizing lenders. They are paying lenders not to sell U.S. treasuries because again, that would make U.S. interest rates go up even more. That is why Scott Besant allowed Japan to borrow up to $60 billion a day against its treasuries instead of selling them. Because remember, Japan's currency is collapsing. They have over a trillion dollars in U.S. debt they could sell to protect the yen. The U.S. is like, please don't do that. Do not sell our debt. The same deal is being extended to the Gulf. Their currencies are also pegged to the dollar. And remember, defending a peg means they would have to sell something, either gold or treasuries. So the UAE got the same deal. Park your treasuries at the Fed, get dollars, and please don't sell our debt. That is why Saudi Arabia got a $58 billion loan. It's the same idea. Do not sell U.S. treasuries. So all the stuff that you're seeing in the news, whether it's about the yen or swap lines, loans, buybacks, all these things, that's all the U.S. paying nations, incentivizing them not to leave that system, right? The tariff threats are all part of that, which is why Trump is threatening to stop trading with half the world unless interest rates come down. Now, the truth is the U.S. can't just stop trading with places like Canada and Mexico in the middle of a diesel shortage, right? Because it's importing their fuel. It cannot force Norway and Europe to keep buying treasuries because they're leaving that system. It can't stop Japan from selling treasuries, potentially, because Japan has already started to sell. The U.S. can't really touch China because China does not need the U.S. It's not dependent on the U.S. So ultimately, none of what the U.S. is doing right now is going to bring the buyers back. And I think the market knows this, which is why interest rates are going up right now. But what all of this means is there's only one buyer left that can buy an unlimited amount of U.S. debt. And that, of course, is the Federal Reserve. And that is why all eyes are on September 16th. So here's how I think about all of this. Right now, the market is split. It's divided into two camps. Camp one says the Fed and the president are two separate entities. The Federal Reserve really cares about inflation and the bond market more than it cares about Trump. So on September 16th, rates will either stay the same or they'll go up. That's what the majority of the market believes today. Camp number two says that is naive. You guys are being fooled. Of course, these guys are working together. Trump picked Kevin Warsh, right? Trump picked Scott Besant. The whole team was chosen to get interest rates down. And the true interest expense means they have to. But they can't just lower the rates right away. Kevin Warsh can't be like, OK, guys, diesel prices are going up, so we'll be cutting interest rates because the president asked me to. The bond market would punish him and long-term rates would go up anyway. They don't want that to happen. So they need an excuse. They need something that lets them say, we're lowering rates now because we have to. We're forced to. And here are the candidates for that reason and what it might eventually be. For example, it could be a jobs number that suddenly breaks, right? Or a stock market that breaks. Maybe the conflict with Russia and Ukraine and Germany drags the whole world in and we get World War III. Or there could be massive food shortages thanks to an Iran-driven oil crisis. It could be the bond market itself breaking so hard that the Fed has to step in to restore order the same way the Bank of England did in 2022. Trump's tariff threats could be that cover. Threaten to shut off half the world's trade. Growth forecasts get cut in half, right? And the Fed has its reason. I have no idea what that reason will be, but eventually they will have to lower rates for some reason. For now, it looks like the market believes they're going to raise their interest rates. My guess is they'll probably increase interest rates by the lowest possible amount, a quarter percent, if anything. Maybe keep it the same. I think the Treasury will continue to shift the long-term debt to the short end while the Fed holds or basically creates the illusion of being tough on inflation. But how you know what their real intention is going to be is to pay attention to what they're actually doing. Because they will be very sneaky about it. They don't want the bond investors to realize this is happening by looking at some simple chart like the Fed balance sheet, right? Don't expect the Fed to just start buying bonds to lower rates because that would be visible in this data. Investors would catch that and they would demand a higher rate. The strategy that they will most likely use to hide this mechanic was the same one that was used after World War II, which was to change the rules so that banks, insurance companies, pension funds, right, they had no choice but to hold the debt. Watch what's happening right now. They loosened the rule that limited how many treasuries big banks can hold. They even passed a law that forces every stable coin to be backed by treasuries and they're racing to get the Clarity Act approved as fast as possible. They're also lending to nations like Japan and the Gulf so that those countries don't sell our debt. This is them managing it in the meantime. So on September 16th, the Fed could be like, look, our balance sheet is getting smaller. We're not printing money because we care a lot about our bond investors. And it'll be partially true. They'll have the plausible deniability, but the big print will have moved somewhere people are not looking. That's what I think will most likely happen. There's a word for it. It's called financial repression. And that deserves a video all by itself. If you want to watch it, I'll probably make it sometime this week or next week. And if you want to see it and how I'm personally preparing for it, you can subscribe to the premium membership where you can get access to my videos earlier and more of my thoughts. If that's valuable to you, the link is down below. Thank you for being a premium member. I'd love to hear your thoughts on what you think is happening. And as always, I'll see you here next time. Take care.