Tariffs, the Next Day for the Eurozone, and the Open Wound of U.S. and European Debt

The ‘earthquake’ has happened; the percentages of losses in the form of tariff restrictions have now become specific for each country. And the market reacted so strongly that we didn’t even notice who was smiling… broadly. At OikonoKlastika, we’ve insisted since February that the biggest issue for the U.S. and the Trump 2.0 administration is the now-uncontrollable public and private debt. The strategic choice on how this will be ‘controlled’ and by whom it will be attempted to be paid remains a major concern. The options discussed across economic levels, regardless of political affiliation among economic figures and economists, have been especially significant over the last 2-3 years, particularly after the pandemic, posing a ‘bipartisan’ problem with all answers still open. Meanwhile, however, the public deficit in the U.S. steadily hovered between 7% and 8% of GDP. But everyone preferred to talk about American growth (i.e., the growth bubble) that maintained this deficit rather than the erosion of the foundation upon which the famous American growth was branded as an ‘American exception.’ The plan and choices brought the Trump administration’s duo of Besset and Miraan, whose economic strategy is presented on stage by Mr. Trump. This choice, as noted repeatedly since the beginning of the year, focuses on significantly reducing the yields of government bonds to minimize refinancing costs, as within the current six months, new debt must be sold to refinance old debt worth $7 trillion issued at interest rates around 2%-2.5%. When this ‘option’ began under Trump’s team, yields on U.S. ten-year bonds exceeded 4.6%, more than double the rate at which the debt needing refinancing today was issued. Yesterday evening, on the secondary bond market, yields on the U.S. ten-year fell to 3.99% for the first time in a while. However, this refinancing cost remains very high because the annual refinancing cost, i.e., the interest due in one year for public debt, reaches $1 trillion, constituting one-third of the total public deficit. No economy can sustain this level without defaulting. Strengthening bond prices and thus reducing their yields could only happen with a violent influx of capital into this market. This has been happening for 10 weeks, but especially since yesterday’s announcement of tariffs, it has intensified. Mass exodus from Wall Street and mass influx into the ‘safe haven’ of government bonds. Some readers ask, does Trump want to destroy his financier friends and the Magnificent Seven? Obviously not. Have you seen any of them shouting at Trump, asking what he’s doing? No, because all those who needed to have started preparing since late 2024 in collaboration with Trump for this. What are they doing? They’re doing what Warren Buffet started mid-2024: quietly offloading stocks and loading up on government debt and liquidity, waiting for the big crash with massive liquidity reserves. This unprecedented scale of capital and income transfer occurs both domestically within the American economy and financial markets and internationally toward the internal American financial market. Of course, this has its side effects, as it simultaneously drives up product and service prices violently inside the U.S. due to tariffs. Simultaneously, the dollar weakens, improving the exportability of American products against competitors, especially in critical energy and armament markets. This combination, however, creates parallel conditions for a domestic recession in the U.S., which doesn’t seem to bother the Trump administration for now. This is because it further strengthens American bond prices at the expense of American incomes (inflation and reduced real purchasing power) and opens the way for the ‘legalization’ of a forced return of the Fed to monetary ‘quantitative easing’ policies (QE) in whatever new or old form they choose to implement. And somewhere here, new survival problems for the Euro begin… But this is another chapter of this story whose end no one knows yet.