If you think it’s alarming now, just wait for Trump to wreck the bond market
The White House’s push for for expanded presidential power threatens US economic stability
Donald Trump is systematically purging every US government institution, a pattern familiar to anybody who has studied the caudillo regimes of Latin America, or the playbook of today’s Putin-Orbán-Erdoğan prototypes.
It is a racing certainty that he will soon do the same to the Federal Reserve, forcing the central bank to cut interest rates into the teeth of rising inflation, with epic consequences for the world’s dollarised financial system and for €39 trillion (£33 trillion) of offshore dollar debt contracts and swaps.
Late last week he fired the head of the National Security Agency and its top officials at the behest of Laura Loomer, a fringe conspiracy theorist, who whispered into Trump’s ear that they were disloyal to the Maga movement.
He has already fired the heads of the FBI’s intelligence division, its counterterrorism division and criminal investigations division, as well as the heads of the Washington and New York offices.
He has fired the top brass of the US military, starting with a preemptive strike on the chairman of the joint chiefs of staff. An earlier chairman – General Mark Milley – refused to ratify Trump’s attempted coup d’etat on Jan 6 2021.
“We don’t take an oath to a king, or to a tyrant or dictator, and we don’t take an oath to a wannabe dictator. We take an oath to the constitution,” said Milley in his parting shot.
But Trump also fired the three judge advocates general, who are legally independent by Congressional statute and have the authority to decide which military orders should be disobeyed – such as Trump’s order to “just shoot” American protesters, on American soil, during the Black Lives Matter saga.
That obstacle will not recur. Pete Hegseth, the defence secretary, said the three judges had been sacked to stop them posing any “roadblocks to orders given by the commander-in-chief”.
You can go through the list, agency by agency, extending to the universities and private law firms, and even to the muzzled editorials of some of America’s once great newspapers: the purge is Bolshevik in ambition.
Does anybody in their right mind think that Trump will spare the Fed’s Jerome Powell as the two men gear up for an almighty clash over US monetary policy? “CUT INTEREST RATES, JEROME, AND STOP PLAYING POLITICS!” bellowed Trump in capital letters on Truth Social on Friday.
The Fed will indeed cut rates this year but not until it is able to see through the confusing blizzard of tariffs and the ricochet retaliation of an angry world.
Powell told Congress that the tariff shock is much bigger than expected and may set off “persistent” inflation rather than just a one-off jump in the price level. He came close to damning Trumponomics as a recipe for low-growth stagflation. That is a red flag to a bull.
The current debate over whether or not Trump has the legal power to fire Powell entirely misunderstands the character of the Maga revolution. America’s rule of law is for guidance only these days.
You could say it was ever thus. Franklin Roosevelt tried to pack the Supreme Court after it blocked the New Deal. He failed, and unleashed tax investigations to settle scores, as did Richard Nixon. But Trump is an order of magnitude more outrageous.
Powell will not go without a fight. “I will never, ever, ever leave this job voluntarily until my term ends under any circumstances,” he said during Trump 1.0.
Scott Bessent, the Treasury secretary, said the administration could sideline Powell by appointing a “shadow” Fed chairman, who could steer the markets by issuing forward guidance. But this does not overcome resistance from the Fed board and the hawkish regional presidents.
A secretive team of Trump loyalists drew up a 10-page report before the election proposing more radical measures. These include forcing the Fed to “align policy with administration goals” or even to make the president an “acting” member of the Fed board.
Trump could purge members of the seven-strong Fed board one by one until they get the message. The law states that the president can terminate the 14-year term of a Fed governor “for cause”, usually meaning malfeasance or neglect.
But Trump has just abused his tariff powers on an heroic scale by invoking fictitious “emergencies”. He could no doubt stretch the meaning of “for cause” to anything he wants. The Supreme Court has the last say, but Trump-appointed justices have already shown a strong leaning towards an imperial presidency.
In any case, there are other methods to bring the Fed to heel.
Maga vigilantes are intimidating American judges by having pizzas delivered to their homes – a mob tactic to say “we know where you live”. So we can assume that recalcitrant members of the Federal Open Market Committee will face this sort of treatment.
The major US banks are raising their inflation forecasts to 4pc or higher this year. This inflation will hit before the last three price shocks – Covid, the Putin commodity spike and Biden’s overspending – have faded from immediate memory. It is exactly how inflation psychology becomes embedded.
A variant happened in the 1970s. Nixon bullied the Fed into expansionary policies, with some choice language on “the myth of the autonomous Fed” that later surfaced in the Oval Office tapes.
Loose money stoked inflation, so Nixon ordered a freeze on prices and wages in 1971, declaring war on “gougers”. It was very popular. Illiterate policies often are.
If Trump succeeds in extracting rate cuts from the Fed and tax cuts from Congress, the same problem is going to arise. So my assumption is that he will blame the symptoms and will resort to price controls.
The elephantine difference is that US federal debt was 34pc of GDP in 1971. Today it is 122pc on the Fed measure, and galloping upwards. The fiscal deficit is over 6pc as far as the eye can see.
The US does not have the domestic savings to fund this debt appetite. The savings rate has collapsed to 0.6pc of national income. It was 12pc in the 1960s.
Foreign investors have been plugging the gap. This soaks up a large part of the world’s savings – the underlying cause of America’s trade deficit.
If you think the stock market gyrations of the last few days are terrifying, just wait until Trump destroys the credibility of the Fed and of US treasury debt, the anchor of the global system.
He could order a captive Fed to relaunch quantitative easing and buy the bonds, but to do that when inflation is running hot would be seen by the whole world as naked fiscal dominance. It would set off a price spiral and a collapse of the currency – the sort of outcome seen over the decades in Latin America, or Erdoğan’s Turkey.
The end destination is a return to US capital controls to stop foreign funds and US investors from taking their money out of America. A man willing to impose 116pc tariffs – including pre-existing ones – on Chinese goods and shut down the biggest bilateral trade relationship in the world as if it were a TV reality show will stop at nothing.
https://www.telegraph.co.uk/business/2025/04/08/trump-sell-off-is-bad-wait-until-wreck-us-bond-market/
