Public Debt and Treasuries: The Fragile Pillar of the New Global Economic Order

The bond market, particularly U.S. Treasuries, emerges as the weak link in the new global economic framework that the Trump administration ambitiously seeks to establish. This assessment is supported by a key document titled A User’s Guide to Restructuring the Global Trading System. Although not an official publication, this document, released in November 2016 by Stephen Miran, then a fellow at the Manhattan Institute and now a chief economic advisor in the Trump administration, carries significant weight.

The document not only provides a detailed blueprint of the economic policies shaping U.S. governance but also connects these plans to national security. According to this approach, global trade, the reindustrialization of America, and military strength are inextricably linked. A strong industrial base will sustain military dominance, which in turn will ensure national security. Achieving these objectives requires a radical rethink of trade relations and international partnerships with allies, rivals, and neutral players.

The Critical Role of Public Debt

Miran identifies public debt management and interest rate control as the central challenges of this economic strategy. Surprisingly, many traditional concerns do not appear as threats: economic growth is expected to be robust; the dollar, despite planned devaluation, will remain the global reserve currency; the stock market is predicted to thrive on economic dynamism; and employment will be bolstered by industrial recovery and stricter immigration policies. Even the fiscal deficit is not considered a major issue, as it will be mitigated by increased tax revenues and more efficient resource allocation.

The real challenge lies in keeping Treasury yields at manageable levels. Excessively high interest rates could strain the Treasury and hamper economic growth. This issue is further complicated by the unique nature of Treasuries: traditionally viewed as safe-haven assets during economic downturns, they may lose their appeal in an environment of economic expansion.

The Fed and the Bond Market

The Federal Reserve, at least until 2026, with its predominantly Democratic leadership, is unlikely to ease the Treasury’s burden. Its current stance on quantitative tightening (liquidity reduction) could exacerbate rather than alleviate pressure on the bond market.

Another key factor is the role of foreign investors. Today’s global economic system operates on a cyclical mechanism: the U.S. imports goods from China, Japan, and Europe, paying in dollars. These dollars are then reinvested in U.S. assets, including Treasuries. This virtuous cycle supports the dollar, equity markets, and bonds.

The Risk of a Reversal in the Virtuous Cycle

Miran’s proposed strategy envisions two distinct phases. In the first phase, expected to last six months to a year, the dollar will remain strong, buoyed by newly imposed tariffs on imports. However, in the second phase, tariffs may be reduced if trading partners agree to revalue their currencies – yuan, yen, and euro. This rebalancing of current account flows could reduce the influx of dollars into U.S. assets, disrupting the mechanism that has so far propped up Wall Street and Treasuries.

A persistently weak dollar could also prompt many investors to diversify their portfolios, reducing exposure to U.S. bonds and equities. At that point, America might find itself with a stronger industrial base but a weaker demand for its debt instruments.

Proposed Solutions

To address these challenges, the U.S. administration may seek binding commitments from trading partners. In exchange for tariff reductions, these partners could be asked to invest in ultra-long-term Treasury bonds, such as those with 50- or 100-year maturities, keeping them frozen for the duration of the issuance. This would stabilize long-term interest rates by removing a significant portion of debt from the market.

A New International Agreement

The overall strategy requires international coordination reminiscent of the 1985 Plaza Accord but with far broader ambitions. It would not only manage currency exchange rates but also redefine geopolitical relationships, encompassing military spending and direct industrial investments.

Conclusion: Preparing for the Future

The bond market is currently in a transitional phase. While today’s weakness in bonds might seem excessive by past standards, it is likely to become the new normal. In the coming months, there may be room for bond yield recovery, but over the long term, investors must prepare for a more uncertain and complex environment.

The challenge will be navigating this intermediate phase while anticipating the structural shifts that will shape the new global economic order. The path is far from obstacle-free, but careful management could turn these challenges into opportunities for the United States and international investors alike.