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US Bonds Crashing

Alright, everyone, we’re dealing with multiple crises unfolding at the same time, and they all serve as evidence that U.S. tariffs are backfiring in real-time. This is your warning for the turbulent times ahead, and we need to address the brewing economic troubles in the U.S. that will have global consequences.

At this point, whatever Trump has planned is irrelevant—his trade war is spiraling out of control, threatening not just the U.S. economy but the global market as well. The first major victim? The U.S. bond market. The value of U.S. debt plummeted right after the CPI report, showing that inflation is still running hot. The idea that the Federal Reserve can bring inflation down to 2% is almost laughable, especially when government policies continue to fuel inflationary pressures.

This is a serious problem. U.S. bonds are meant to be stable borrowing assets that maintain their value with minimal price fluctuations. But now, they’re moving like volatile stocks. If you're holding U.S. debt, you're faced with a tough choice—sell now before values drop further, or hold until maturity and risk losing money in real terms as inflation rises.

The numbers speak for themselves: headline CPI has jumped back to 3%, marking the largest increase in six months, with consumer prices rising another 0.5% in January. Core inflation, which excludes food and energy, has been stuck at 3.3% since June of last year. Simply put, the Federal Reserve is losing its battle against inflation.

This volatility in the bond market is bad news. Countries and investors hold U.S. debt for its stability and predictable returns. But how can they rely on it when inflation expectations—and reality—keep climbing at unprecedented rates?

The situation has become absurd. At the end of January, markets expected the Fed to cut rates at least twice by the end of the year. Now, even a single rate cut would seem like a lucky break. The core issue? Uncertainty in the bond market.

Meanwhile, Trump’s aggressive rhetoric in the Middle East and his tariff policies are adding fuel to the fire. Tariffs function as a direct tax on consumers, effectively acting as inflation. When tariffs go up, prices rise, and the value of people’s money declines.

Take steel tariffs as an example—a 25% tariff on steel imports drives up the cost of everything made from it, especially cars. This isn’t a complicated concept. If Trump pushes forward with more tariffs at full speed, the middle class will take the biggest hit, with the bottom 40% bearing the brunt of the economic fallout.

Trump Tariffs Inflation Shock

Households will effectively face an additional tax of over 5% of their income due to these tariffs. For the middle class, the burden will be around 4%. This is an unseen inflation tax that few are discussing. While it won’t significantly impact the top 20%—especially those at the very peak—it will severely limit the purchasing power of the broader consumer class. For the average person, it will feel just like inflation, making the Federal Reserve’s fight against rising prices even more difficult.

The Fed will find itself in a bind: cutting interest rates will be nearly impossible if prices remain high or continue to rise. However, if they don’t lower rates, they risk driving the U.S. economy off a cliff. A major warning sign is already flashing red. As soon as the latest CPI report was released, bond yields surged. The critical 10-year yield spiked by 10 basis points within minutes, signaling a deep distrust in the U.S. bond market. Investors are demanding higher returns to hold U.S. debt because the inflation crisis remains unresolved.

Now, we need to revisit Trump’s trade war, which is making this situation even worse. The U.S. has imposed an additional 10% tariff on Chinese goods. That alone would drive up consumer prices, but the tariffs on steel and aluminum create an even bigger problem. Here’s why: nearly 45% of U.S. imports are intermediate inputs—materials used to produce American goods.

Take a Tesla EV, for example. While the car itself is an American-made product, the steel and aluminum used to manufacture it are imported inputs. By slapping tariffs on these materials, Trump is not only increasing costs for consumers but also for manufacturers and industries, worsening the inflation crisis at multiple levels.

This is a crucial issue we cannot overlook. For over a year, U.S. producer prices have been climbing, hitting a two-year high of 3.5% between December and January. The sharp increase from November to December coincided with Trump taking office, and the full impact of these tariffs hasn’t even been felt yet. That’s alarming for businesses trying to produce goods.

When manufacturers face higher input costs, they have two choices: either absorb the tariff and see their profit margins collapse or pass the cost onto consumers, which fuels further inflation. But if prices rise beyond a certain threshold, even consumers will push back, refusing to buy U.S.-made products. And the economic damage doesn’t stop there...

Global Reciprocal Tariff Danger

Yet, the U.S. is now moving to punish the entire world. Trump is preparing to unleash a new wave of tariffs on as many countries as possible.

Regarding trade, he stated: "For the sake of fairness, I will implement a reciprocal tariff—meaning whatever tariff a country imposes on U.S. goods, we will charge them the exact same rate. No more, no less. If a country taxes our imports at 20%, we’ll do the same in return. In most cases, they’re charging us significantly more than we charge them, but those days are over."

Here’s the crazy part—Trump still refuses to acknowledge that tariffs ultimately backfire on U.S. consumers. He continues to insist that it’s China and other exporting nations that bear the cost of import taxes. In his view, tariffs will generate massive wealth for the U.S. economy. When questioned about the possibility of rising prices, he simply responded: "Well, if prices go up, we’ll see what happens. Nobody really knows."

On the surface, reciprocal tariffs might seem fair—if one country taxes U.S. imports at 20%, the U.S. responds with the same rate. In reality, consumers on both sides end up paying the price. However, Trump’s interpretation of a "reciprocal tariff" is far more extreme. He has broadened the definition to the point where almost every country falls into his crosshairs.

Here’s what he wrote: "We will consider countries that use the VAT system—which is far more punitive than a tariff—as equivalent to imposing a tariff. Additionally, nations that use non-monetary trade barriers, such as import quotas, will also face repercussions."

This means countries with import restrictions could also be penalized. But for now, let’s focus on the global VAT system, which Trump has wrongly categorized as an unfair trade practice.

VAT (Value-Added Tax) is not a tariff aimed at any specific country—it’s essentially a sales tax that governments apply to consumer transactions to generate revenue. Nearly every country on Earth has some form of VAT. For example, in Singapore, it’s called GST and is set at around 9%.

Trump’s misunderstanding of VAT could cause unnecessary damage to the global economy. If you think your country will escape this trade war, think again—Trump is determined to reshape U.S. trade policy in the most radical way possible.

Now, let’s quantify the impact. Some nations will suffer more than others. Under a baseline scenario, developing economies in the Global South—such as India, Vietnam, and Indonesia—will be hit the hardest, with U.S. tariffs on their products potentially rising by 10% or more. These countries impose some of the highest tariffs on U.S. goods, making them primary targets for retaliation.

However, when VAT is factored in, the scope of Trump’s tariffs expands dramatically, impacting the entire world. India, for instance, could face a reciprocal tariff exceeding 30%—essentially blocking many Indian products from entering the U.S. market. And the fallout doesn’t stop there...

U.S. Industries Sound the Alarm

Denmark, Italy, Germany, France—the entire European Union is set to be hit with tariffs of 20% or more in some cases. The Eurozone already imposes a significant VAT on consumers, and now that policy is about to backfire. This is why definitions matter—Trump’s lack of understanding is poised to further cripple the EU economy.

Even a 10% tariff is enough to disrupt exports, but a 20% tariff could be devastating for industrial powerhouses like Germany. Under a standard reciprocal tariff model, the EU would only face a 2% tariff—excluding VAT. However, when VAT is factored in, the entire equation changes. The U.S. would effectively impose an 18% tariff on EU goods, which is the economic equivalent of carpet-bombing European exporters. Only India and Indonesia would face higher tariffs than the Eurozone.

And the chaos doesn’t stop there. If you have an economics textbook, you might as well throw it out. If you’re an economics professor, you’re probably pulling your hair out. Trump is rewriting the rules of global trade, turning the entire world into a contestant on his own version of The Apprentice—except, this time, the world is getting fired.

But make no mistake—this isn’t just bad for the EU. It will ultimately backfire on the U.S. economy as well. These tariffs will drive inflation higher and weaken American manufacturing. CEOs are already sounding the alarm. Jim Farley, CEO of Ford, is panicking over Trump’s 25% steel tariff, which would impact Canadian and Mexican steel exports to the U.S. This means Ford—and other automakers—will face significantly higher production costs just from steel alone.

If Trump continues with his 25% tariff on Mexico and Canada, Ford may be forced to shift production back to the U.S. But here’s the problem: the company would then be burdened with higher raw material costs, expensive labor, and rising energy prices. Competing with China and other global manufacturers would become nearly impossible.

As one industry leader put it: "If these tariffs persist, the impact on the domestic auto industry will be catastrophic—billions in losses, thousands of jobs at risk, and a major blow to U.S. manufacturing."

Congress and the administration are well aware of these consequences, yet the U.S. manufacturing supply chain remains in disarray. Trying to slap tariffs on the world without addressing fundamental economic issues is a losing strategy.

China spent decades and trillions of dollars building its industrial dominance. Trump is attempting to shortcut the process, but the reality is simple—this isn’t a video game where you can speed-run to economic revival in an hour.

And Ford is just one example of the broader crisis brewing…

New Inflation Party

Ford employs 170,000 workers and is a $44 billion company—but all of that could be at risk. While they may manage to hold onto their workforce for now, long-term competition will erode their position. And we can’t ignore the inevitable retaliation from China.

If Trump follows through with his reciprocal tariffs on Beijing, that would mean an additional 15% tax on Chinese goods. So, what do you think China will do? Of course, they’ll retaliate. They’ve already targeted U.S. liquefied natural gas (LNG) and, more recently, U.S. automobiles. But no matter how China responds, one thing is certain—a massive number of American jobs are on the line.

Exports to China support nearly a million U.S. jobs, and certain states will be hit the hardest:

• California: 126,000 jobs at risk

• Texas: 99,000 jobs at risk

• Illinois: 54,000 jobs at risk

• Rust Belt region: Over 300,000 jobs—mainly in manufacturing—at risk

Trump’s trade war is placing countless jobs in jeopardy, and that’s just from China’s retaliation. We haven’t even accounted for potential countermeasures from Mexico and Canada. So, buckle up—things are unraveling fast. U.S. bonds are in trouble, the trade war is escalating, and American manufacturing is waving the white flag.

What do you think? Will Trump push the world even further? And with everything going on, who would still be willing to buy U.S. bonds today?

Disclaimer: I want to make it clear that I am not a financial advisor, and nothing I say is intended to be a recommendation to buy or sell any financial instrument. Additionally, it's important to remember that there are no guarantees or certainties in trading or investing, and you should never invest money that you can't afford to lose.

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