Why Trump Backtracked so Quickly

On the Logic of a Money Crisis; or "As the hart pants"

“As the hart pants…”

Preface

Almost all of this post was written between the time on Tuesday afternoon (US time) when the bond markets fell apart, and the time on Wednesday afternoon (ditto) when the Trump administration dramatically reversed course and eliminated tariffs on everyone but China. As my new title indicates, the post itself serves to answer a question that can only be raised now: why did Trump, who supposedly never backs down, relent? And what changed between the massive stock sell-off on Thursday, Friday, and Monday, and the events of Tuesday.

The short answer is that on Tuesday the trouble in the bond market portended a genuine, and truly terrifying, money crisis. My British readers will be reminded of the shortest tenure of any Prime Minister in history: Liz Truss didn’t even make it 50 days. And what was her undoing? Not political opponents, not war or famine, but the lowly bond market. Trump just messed with the same money-power forces, and came out a loser (not that that’s how he’ll spin it!).

What, then, explains the inexorable force of the bond markets? Why are they such a crucial site of money/power today? Why did Trump backtrack so quickly?

From “Liberation Day” to Money Crisis

Lots and lots of people can explain clearly why Trump’s “Liberation Day” implementation of his so-called “reciprocal”¹ tariff regime is profoundly stupid and incredibly dangerous. And absolutely no one can tell you what’s going to happen to the stock market and the wider money markets of which equities only form one key part (the easy “headline” number).

I’m not a macro economist, and I’m not a social scientist who makes predictions, but I still feel confident enough to boldly declare that that the three most important metrics to gauge the health of “the economy” – namely, GDP, unemployment, and inflation – will all be worse in January 2026 than they were when Trump was inaugurated in January 2025.

But that claim could hold true under a wild variety of different scenarios, and perhaps the most important political economy question at the moment can be framed in terms of the following simplistic options:

1. Has the new administration simply steered the economy into really choppy waters, perhaps even toward an iceberg – have they merely made everything worse?

2. Or have they set the timer on a bomb that will blow up the entire ship? Are we at the beginning of a full-on economic crisis?²

I don’t know, of course.

But yesterday afternoon the warning klaxons started blaring, and the smoke signal is not coming from the stock market – it’s coming from the bond market.³

The financial press has a lot to say on this:

• Here’s Bloomberg on the “fire sale” in US Treasuries (but also global sovereign bonds).

• Here’s Bloomberg again on the unwinding of the hedge fund swap trade that might be partial fuel for this fire.

• Here’s the FT worrying that this might be the collapse of the dollar-reserve international monetary system.

There’s a ton of important detail in those pieces, but the overall through-line is clear as mud. So I’m not going to try to explain the nitty-gritty; I won’t attempt the impossible task of turning that muddy water transparent. Instead, I’m going to shift up multiple levels of abstraction and try to say something helpful about the logic of a financial crisis.

What does any of this have to do with an out-of-breath deer?

Not every capitalist crisis starts with a financial crisis. For example, some begin with shutting down worldwide capitalist production because of a global pandemic. But every capitalist crisis eventually includes a crisis of money. Moreover, the crisis moment lays bare the fundamental and paradoxical nature of money.

No one understood this better than Marx. In his 1859 Contribution to the Critique of Political Economy he explains that once you have built up a sophisticated network of banks and other financial intermediaries, the payments function normally as a complicated yet somehow seamless series of balancing acts. For money to flow across the various balance sheets, all that really needs to happen is for various +’s and –’s to be drawn.

When payments cancel one another as positive and negative quantities, no money need actually appear on the scene. Here money functions merely as measure of value with respect to both the price of the commodity and the size of mutual obligations. Apart from its nominal existence, exchange-value does not therefore acquire an independent existence in this case, even in the shape of a token of value, in other words money becomes purely nominal money of account. (link)

Here it begins to seem as if money is nothing but the ledger itself. The only “tokens” are the digits on the balance sheet, and massive money flows can occur without anything actually going anywhere – it’s all just a series of payments clearing. A sophisticated and healthy monetary system renders almost invisible the risk and precarity of money as a contingent claim on a debtor.

As Marx puts it, money “contains a contradiction” because when all the payment flows properly balance, money “acts merely as a nominal measure.” It’s as if money was nothing more than the name for this abstract measure of economic value, as if dollars were just like meters.

Many theorists of money have themselves been tempted to render this analogy tight and complete, to define money in just this way. But money is both a way to name value and always also a concrete claim on a specific debtor. I can specify this theoretically in my own account of money and money/power, but Marx shows that a crisis always proves the point in practice. Marx explains that sometimes it will not do to simply offset balances on the spreadsheet; sometimes “actual payments have to be made.” Sometimes money must appear on the scene “as money.”

This leads Marx to his most important point, formulated this way in the Contribution:

Where chains of payments and an artificial system for adjusting them have been developed, any upheaval that forcibly interrupts the flow of payments and upsets the mechanism for balancing them against one another suddenly turns money from the nebulous chimerical form it assumed as measure of value into hard cash or means of payment. (Ibid)

In a crisis, everyone rushes to “cash,” and because they all rush at the same time, we have a number of very big problems: everyone rushing to cash means everyone selling other financial assets simultaneously, so the price/value of those assets plummets. More subtly, everyone rushing to cash may put pressure on what even counts as “cash.” At the limit, it could even reshuffle the hierarchy of money, changing what counts as “better” or “worse” (higher or lower in the hierarchy) of money.

Eight years later, when Marx published the first volume of Capital, he added a number of literary flourishes, and expanded on his account of the rush to cash in a crisis:

As the hart pants after fresh water, so pants his [the bourgeois’] soul after money, the only wealth. In a crisis, the antithesis between commodities and their value-form, money, is raised to the level of an absolute contradiction. (link)

Marx mocks the Silicon Valley Bros (avant la lettre, of course!) for their drunken faith in a limitless future of ever-increasing value. In the boom (the bubble?) they are convinced beyond questioning that real wealth lies in their founders’ stock and their world-changing technology. But then the sell-off begins, and now it sure would feel better to have actual money-credits (held on a viable, sustainable, credible debtor) rather than the made-up stock they issued themselves.

Marx helps us to remind ourselves of a really banal, but ultimately important point about what’s happening when the equities market plummets. It’s not as if some truth is being re-established by an invisible hand, about the proper value of all these companies. No, it’s much simpler than that: almost everyone is selling and no one is buying. Everyone wants cash (many want it now so that later, when the market is down 20%, 30%, 50%, they can buy back in, on the cheap).

In a relatively stable form of stock market crash, everyone selling stocks would be buying bonds, and the more conservative among them would be buying long-dated US Treasury bonds, the safest asset in the world. This would mean that as stocks go down, bond prices go up (and since bond yields are the inverse of bond prices, bond yields would go down).

And this is why I said above that the first warning signs for a real financial crisis came yesterday, because rather than rallying, the bond market also sold off massively (pushing yields up). Why? There are a lot of specific details in the articles I linked to above, but I want to sketch a much broader line of argument here, one that takes one step beyond Marx’s analysis. After the passage I quoted above, Marx makes clear that “cash” could take different forms, saying it did not matter if it was gold or banknotes. “Money’s form of appearance is here also a matter of indifference.”

If we read this as Marx resisting a crude and firm distinction between “money” and “credit,” then he’s absolutely right, because no such distinction can ever hold permanently or ontologically. Yet surely Marx cannot mean to say that it really doesn’t matter at all what form our money-credit takes, because that’s absolutely what matters most.

If I hold my money-credits in a Schwab money-market fund (MMF) – disclosure, I do hold some money there – then I would be keenly aware of the fact that this is not an FDIC bank account, but a regulated (!!) shadow bank account.⁴ If Schwab fails and cannot meet their promise to pay me $1 in real bank money for each share I hold of the MMF, then I’m in trouble.

At the level of the largest and most important monetary institutions, including globally, “cash” often takes the form of US Treasuries. One reason for this is that commercial banks cannot hold bank deposits as their asset; rather, bank deposits are their liabilities, and they need a higher form of money as assets. Central Bank reserves serve this function, but simplistically speaking, those reserves pay no or little interest and the goal of most banks is therefore to hold the smallest amount of assets in this form. US Treasury bonds are the ultimate safe, higher money for banks, because they should have slightly higher yield than central bank reserves, but due to the massive, deep Treasury markets, they are incredibly liquid. “Cash” is one name we give to a money-credit that can immediately be swapped for any other money-credit, and Treasuries fit this bill nicely.

A second reason that banks want Treasuries: the repo markets allow banks to use Treasuries both as safe assets stabilizing their balance sheet, and as overnight sources of cash. Banks can hold the very lowest amount of needed reserves because they can borrow those reserves overnight in the repo market. A refresher for how that works: rather than offer partial collateral in the event the bank (as borrower) defaults, in a repo loan a bank literally sells their Treasuries tonight for a price less than market value, while promising to buy them back for slightly more money tomorrow morning.⁵ Really good collateral, especially US Treasuries, are what make the repo market tick, and much of the liquidity for the entire financial system is provided by repo markets.

This is why, today, it is essential that the Treasuries market remain, in money-market parlance, liquid. To call a market (rather than an asset) liquid, means that there are always market-makers standing ready both to buy and sell, so that if any particular agent wants to buy (or sell) they can do so immediately. The more “liquid” the market, the deeper are the standing orders to buy and sell, as set by dealers and other market makers, and the narrower the gap (the spread) between their bid (buy) and ask (sell) prices.

And it almost goes without saying, but when Treasuries plummeted on Tuesday afternoon, this meant there were way more sellers than buyers. More than this, it meant that the most important “stable” asset, the money-credit that anchors so many balance sheets across the global monetary system – that asset was itself changing in value far too quickly. Every financial entity was required to update their balance sheet by marking down the value of their Treasury holdings. And whenever you have to mark down your assets, you move closer to (and risk ultimately crossing into) insolvency. To solve that problem, you may find yourself needing to sell the very selfsame “safe” assets that just got marked down. This only leads to their being marked down further for you and everyone else. You’ve all heard the phrase death spiral? In this paragraph, I’ve just sketched its swirls.

So far, things seem, as I write on Wednesday (April 9th), to have stabilized for now, but that makes the Tuesday bond market madness even more illustrative. Because a case like this tells you where to look: not simply at the assets that are getting marked down, but the rush for cash that leads to a destabilization of “cash” itself. Both the US and the global monetary system can survive steep stock-market devaluation – paper money disappears in an instant. But if the rush to cash, the rush to claim credits on viable debtors, starts to destabilize those very credits – then chaos ensues.

postscript

As noted in my preface, only after I finished drafting this post did I check the news, then to discover that Trump had changed his mind or lost his nerve (or “blinked,” which in American politics, according to pundits, is an evidently bad thing) and undone (almost) all the tariffs. Of course the stock market reacted as expected – with a massive surge. Treasury yields also eased and the bond market has stabilized for now. For now – everyone reading this should expect to see moves like those we saw in the first half of the week happen again during Trump’s second term (and perhaps in his third as well).

1. Proper grammar and style would dictate either using scare quotes or prefacing the term with “so-called,” but in this case I have done both, and I’ve italicized “so-called” because one cannot do enough to undermine the idea that there is anything rational, planned, systematic, thoughtful, or reasonable about the ChatGPT-generated, worse than random numbers that the administration came up with.

2. It goes without saying that the political crisis is already here, already real, and it started almost immediately after Trump’s inauguration. More to the point, how the political crisis plays out will have a massive impact on whether or not there is a major economic crisis, and how it plays out. For purposes of analytic clarity, this post tries to work through he logic of the economic crisis, but that logic always remains intertwined with, partially determined by, the political logic.

3. As I was copy-editing this completed piece I saw Adam Tooze’s headline, making the same argument about the importance of the bond markets: https://substack.com/inbox/post/160779502?utm_source=unread-posts-digest-email&inbox=true&utm_medium=email&triedRedirect=true

4. Unlike, for example, Tether, which is an utterly unregulated shadow bank account. Indeed, if I held my money in tether tokens, the Tether institution would not even be required – by their own rules – to redeem those tokens for me, as in individual who only holds a few (to be clear, this example is completely hypothetical, as I never intend to loan Tether my money). The Schwab mutual fund is regulated by the SIPC. If things went horribly wrong, the Schwab MMF might “break the buck,” which would mean paying me back, say, 95 cents on the dollar. Tether, of course, could simply disappear with all my money (the money I swear I’ll never give them).

5. The difference between the contractual sales price and the contractual repurchase price (higher) constitutes the repo rate – interest rate on the loan (with duration usually overnight, but it can be longer). The difference between the contractual purchase price and the going market price (higher) for the bond constitutes the haircut; it’s what the bank will lose if they fail to pay back the loan. And they lose this money because the bond is gone already, sold last night for a below-market price.