After another momentous moment for the global economy, another post free for all subscribers that tries to unpick where we are now after Trump’s U-turn. If you found it helpful and you can afford it, please do consider becoming a paying subscriber. And even if you can’t, then you can still support my work by sharing this post with anyone you think might be interested. As ever, I look forward to your comments!

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Some thoughts on what just happened:

1. Donald Trump just executed one of the greatest and most humiliating policy reversals in US history. He was forced to do so because, as Wealth of Nations predicted immediately after “Liberation Day”, the global financial system was on the brink of a meltdown. The extraordinary rise in US Treasury yields on Tuesday and Wednesday was a sign of emerging extreme stress in the system. I don’t buy the idea that he buckled just because the markets had got “yippy” or the bond vigilantes had pushed up borrowing costs to a level that would hurt Main Street. According to UBS: “we think this week's chaos was an intermediation capacity story as dealer balance sheets didn’t have the capacity to grow enough to absorb Treasury selling from equity investors raising cash for margin calls after Friday's 6% drop in the S&P.”

2. Had Trump not blinked and backed down, it seems very likely that the US Federal Reserve would have had to intervene, not by cutting interest rates as many commentators were wrongly speculating, but by stepping into the markets to buy US Treasury bonds, exactly as the Bank of England was forced to do at the height of the Liz Truss madness. In technical terms, the central bank would have claimed to be acting as a market maker of last resort, simply intervening to ensure market stability. But to the rest of the world, it would have looked like a resumption of quantitative easing at a time when America still has an inflation problem and an attempt to artificially keep borrowing costs down by printing money like a troubled emerging market - which as I noted the other day, is what America today increasingly resembles. The damage to America’s credibility would have been devastating.

3. Even as things are, the damage is enormous and much of it probably irreversible. It is beyond extraordinary that the entire global financial system should be held hostage to the whims of one man, acting alone, seemingly without advice or guardrails, other than those that kicked in after the event. Even when the U-turn came, inevitably via a post on Truth Social that he typed out himself in the Oval Office without legal advice, and only published long after the news had patently leaked to some lucky insiders, the Trump administration could not get its story straight. Over the last week, we have variously been told that reciprocal tariffs were designed to reindustrialise America, raise revenue eliminate trade deficits, create leverage. Now they have been “paused” for everyone except China with nothing in return except vague promises of negotiations. The claim by Scott Bessent, the Treasury secretary, that this was the strategy all along is obviously preposterous and only further undermines the administration’s exhausted credibility.

4. This is, of course, only a partial climbdown in the sense that the reciprocal tariffs are only “paused” for 90 days to allow time for negotiations, while the new 10 percent universal tariff remains, as do the recently introduced 25 percent tariffs on imports into the US of autos, steel and aluminium. That leaves a fog of uncertainty hanging over the global economy. Meanwhile, nothing in the past three months suggests that the Trump administration possesses either the bandwidth or expertise to conduct trade negotiations with as many as 75 partners in such a short time. The best hope must be that, given the debacle of the last week, Trump wouldn’t dare reimpose the reciprocal tariffs for fear of provoking another bond market reaction and further undermining confidence in America’s global financial standing. That suggests Trump may have weakened his own leverage, allowing affected countries to buy him off with face-saving compromises.

5. Nonetheless, by far the most consequential development of Trump’s tariff disaster is that America now accidentally finds itself in a full-blown trade war with China. Quite clearly, Trump had not anticipated that Beijing would call his bluff and retaliate. Unwilling to lose face, the master of the art of the deal has ended up hitting China with a 125 percent tariff, which effectively amounts to a complete blockade on China-US trade. This trade war between the world’s two leading economic powers has now become a giant uncertainty that hangs over the global economy. The US will no doubt now seek to use the negotiations with other trading partners to co-opt them into isolating China. Many will in any case be considering how to protect themselves against Chinese dumping of excess manufacturing capacity. On the other hand, few will want to take sides, particularly when Trump is quite capable of turning around and agreeing a deal with Xi Jinping tomorrow. Trump has squandered trust in America as a good faith partner and ally.

6. Who will blink first? In the medium term, as the country with the trade surplus, China has most to lose since it is harder to make up for lost demand than lost supply. But in the immediate term, Beijing has plenty of cards, not least the potential to deliver massive domestic stimulus, devalue its currency and cut off supply to America of critical minerals. Besides, the “Trump fold” will surely have given China confidence that it can win. As Louis Gave from GaveKal notes: “In the past week, the US has been shown to be more fragile than most expected, just as US policymaking has been shown to be more capricious than anyone could have expected from decades of recent history. This is an important message. From a Chinese perspective, suddenly it looks once again as if Trump is “speaking loudly and carrying a small stick.” My bet is that Trump will have to fold on China tariffs too.

7. Obviously economic forecasting is almost impossible in this extraordinarily uncertain environment. The best that can be said is that where a global recession looked likely at the beginning of the week, it looks less likely now, hence the intial rally in stock markets. That said, US Treasury yields remain higher than they were a week ago, and have dragged global bond yields higher which will feed through to mortgage rates and business lending while the damage done to business and consumer confidence will be hard to reverse. Few businesses will want to make big investment decisions in this climate. UBS’s best guess is that if the EU ends up with a 10 percent tariff as opposed to 20 percent, then the eurozone might grow by 0.7 percent this year, still below the 0.9 percent that it was forecasting before the tariffs were introduced but at least higher than the 0.5 percent if the tariffs remained.

8. The EU does at least have options. While securing a deal with Trump to ensure that the pause becomes permanent is important, what matters far more is that it finally delivers on long overdue reforms of its single market to boost its competitiveness issues and domestic growth prospects. With global investors losing confidence in the dollar and seeking alternative safe havens, the EU has a remarkable opportunity to take advantage of its own enhanced status as a global reserve currency to attract a growing share of global capital flows. But to maximise this opportunity, it will need to issue more common debt that can act as a benchmark safe asset, as well as take urgent steps to establish its savings and investment union to ensure that the EU is providing opportunities for capital to be put to productive use. This is the key test of the seriousness of the new German coalition that will shortly take office on the basis of a coalition agreement reached yesterday.

9. As for Britain, there is very little good news at all. The “Brexit bonus” that the government and the infantile sections of the right-wing legacy media were clinging to in the aftermath of Liberation Day lasted just one week. Now the UK finds itself facing the same 10 percent tariff as everyone else. The prospects of a trade deal to secure further exemptions has slipped further from view. Meanwhile the British economy remains particularly vulnerable to weaker global growth and higher government bond yields. It is welcome, then, that government is starting to talk about a more ambitious reset with the EU ahead of a summit in May. Yet there is no sign of the government that the government is preparing to abandon some of its red lines, without which it will be impossible to reverse much of the Brexit damage.

10. The big question now is to what extent Trump has been sufficiently weakened by this debacle to limit his capacity to cause further mischief. In any other functioning democracy, a leader guilty of such a grotesque policy error would be removed from office, as was Liz Truss. Unfortunately, that is almost impossible in the US system. But Nouriel Roubini, emeritus professor of economics at New York University’s Stern Business School, who I interviewed today at an event in Greece, argues that Trump is at least now constrained by four guardrails: the bond market, the US Federal Reserve, the Republican’s thin majority in Congress, and some sensible advisers, including Treasury Secretary Scott Bessent. Perhaps that will be enough to prevent him every trying to pull another stunt as stupid and destructive as Liberation Day. But it certainly won’t be enough to restore the wrecked trust in Uncle Sam.

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