For many years, Donald Trump has viewed unpredictability as one of his greatest negotiating assets.
He believes deliberately acting “crazy,” as he reportedly told aides in 2017, is a highly effective way to win concessions in advance of a deal. As I’ve written, this is akin to what President Richard Nixon dubbed the “madman theory” — that if he convinced foreign leaders he was willing to do unthinkable things, they’d back down out of fear.
The problem was that savvy observers like investors and foreign leaders caught on to this game. So during Trump’s first term, conventional wisdom set in: Trump may say scary things, but he’s typically bluffing. In the end, he is rational, knows when to step back from the brink, and does not want a truly destructive outcome. Often, there was seemingly good reason to believe this: The pre-pandemic economy remained strong, Trump avoided major new wars, and he didn’t pull out of NATO.
Now, in his second term, Trump has decided to blow up that assumption by imposing chaotic, impulsive, and bizarre tariffs that shake the global economy. He’s not just threatening anymore: He’s actually implementing his destructive and dangerous ideas. (At least for a little while — he did back off some of them on Wednesday amid market turmoil, though others remain.)
It is entirely possible — likely, in my view — that Trump’s hoped-for endgame for his trade war remains a series of “big, beautiful deals,” with details flexible and to be determined and, that in his own mind, all he’s doing is trying to increase his leverage. That is: He’s still trying to implement madman theory.
Even regarding China, where the trade war is most intense, it could well be that Trump will settle for something far short of the massive disruption that truly decoupling our economy from theirs would entail — that the endgame is a deal.
But even if all this is true and Trump’s end goals are not as unreasonable as his current behavior reflects, he’s still doing grave and potentially long-lasting damage to the United States and its reputation and position in the global economy.
Trump is shredding the US’s economic and business reputation
It turns out that trying the madman schtick, not just with individual foreign leaders but with the entire global economy all at once, is far riskier. And it turns out that by actually following through on his threats and putting giant tariffs into effect, Trump crossed an important line. He exploded investors’ conventional wisdom that he would, in the end, back down. So they’re responding — by ditching US bonds and currency.
Now, Trump’s team did anticipate that the trade war might drive the dollar down — some of them even wanted that because it would help make US exports more competitive. They did not, however, anticipate the ominous spikes in US Treasury bond yields. In fact, Trump advisers had previously said they were trying to drive bond yields lower.
US Treasury bonds are typically viewed as an extremely safe asset — they mature with interest after a set period. The interest rate, or “yield,” fluctuates based on market demand. Basically, when investors become more eager to put their money in US bonds, the interest rate drops. But when investors prefer to put money elsewhere, the interest rate goes up (demand for bonds is lower, so a higher interest rate is necessary to make it “worth it” for investors).
Typically, a crisis drives investors to the safe asset of Treasury bonds. But now a Trump-invented crisis is doing the opposite and driving them away. This is a major problem both because US interest payments on its debt will rise and because it heightens the risk of a financial crisis.
The reason for investors’ flight from US bonds seems obvious — a country run by a “madman” who’s willing to throw millions of business models into chaos on a whim does not seem particularly stable and reliable. The US’s global reputation was the safest place in a storm, but now, Trump is causing the storm, and investors are responding by fleeing the US.
I wrote back in January that “it’s very difficult to send a credibly intimidating madman message to foreign leaders while at the same time sending a reassuring message to markets.” And now, it’s clear that Trump’s attempt to intimidate the world is doing his own economy great harm, in a way that will be difficult to recover from unless he somehow overcomes his addiction to making unhinged tariff threats (or the Supreme Court reins him in).
Trump has grown more willing to embrace risk and chaos
I’ve written about the institutional guardrails that, in Trump’s first term, often effectively held him back from doing damaging things. But in some ways, the most important guardrail is Trump himself — his own instincts about political self-preservation and calculations about when it is time to step back from the brink.
Throughout his first term, Trump did many risky, controversial, and provocative things. But he also (often at the behest of pleading advisers) was willing to decide that this particular firing or that particular provocation would be going too far. He drew the line somewhere.
But as the term went on, he kept drawing that line closer to the edge of the cliff. Take, for instance, his unprecedented attempt to overturn Joe Biden’s 2020 election win, which many Republicans initially assumed was cheap talk. It took his followers storming the Capitol and sending members of Congress fleeing in terror before he backed down.
Now, back in office, and surrounded by yes-men and ideologues, Trump feels newly empowered to do what he wants — to take massive risks or do things that would have seemed unthinkable in his first term. Hence Liberation Day.
At the beginning of this week’s market turmoil, some Trump allies claimed he was totally unbothered since the economic pain was just hitting “Wall Street” and not “Main Street.” This was a ludicrous thing to say — many businesses and jobs are at risk, and American consumers’ confidence in the economy is plummeting — but some feared the Trump team was so disconnected from reality that it believed it.
Then, amidst those ominous signs in the bond markets, Trump blinked on Wednesday. This appeared to confirm that the worst-case scenario of Trump’s disconnection from reality was not, in fact, true, and investors responded with enthusiasm.
But his simultaneous escalation against China (and new tariff threats against Mexico Thursday on an entirely separate issue) shows he’s extremely reluctant to give up the tariff weapon. So as of early Friday afternoon, the markets were still tumultuous.
What will be sufficient to spur Trump to back down again? Where is the line this week, this day, this hour? And how much pain will our economy and our country suffer before he decides enough is enough?
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