[et_pb_section fb_built=”1″ theme_builder_area=”post_content” _builder_version=”4.27.4″ _module_preset=”default”][et_pb_row _builder_version=”4.27.4″ _module_preset=”default” theme_builder_area=”post_content”][et_pb_column _builder_version=”4.27.4″ _module_preset=”default” type=”4_4″ theme_builder_area=”post_content”][et_pb_text _builder_version=”4.27.4″ _module_preset=”default” theme_builder_area=”post_content” hover_enabled=”0″ sticky_enabled=”0″]<\/p>\n
Donald Trump does not understand how international trade works. So in an effort to enlighten him, even though I doubt he reads this blog, and if he did he probably would not understand what I am about to explain, I will go through an economics lesson at a very basic level.<\/p>\n
A country, say the US, imports goods and services from the rest of the world. It also exports goods and services to the rest of the world, but much less than what it imports. This results in a trade deficit for the US. Note by the way, that the US is usually running a trade surplus in services (banking, insurance, Internet etc.) but this only partially offsets the trade deficit in goods.<\/p>\n
As a result of this trade deficit, the rest of the World accumulates a surplus of US Dollars. With that money they purchase US government bonds. In other words, they finance, at least partially, the chronic US budget deficits. This is the way it used to work until Donald Trump came and claimed that trade deficits were a national emergency and tariffs were needed to address them.<\/p>\n
This is, of course, complete nonsense. Fortunately for the US, the crazy duties Trump imposed to address this imaginary “emergency” have failed to restrict imports to the US in any meaningful way. The trade deficit in the fall of 2025 was roughly the same as a year earlier. If it had decreased substantially, the “rest of the World” would have had fewer US Dollars to buy US government bonds with, putting upward pressure on medium and long-term interest rates in the US. Why? – see below.<\/p>\n
First a word about interest rates: People believe that the Federal Reserve (the “Fed”) sets interest rates. Trump certainly believes that and he has been after the Fed in every possible and impossible way to get its’ board of governors to lower interest rates. But the Fed can influence only short-term rates when its’ open market committee decides at which rate it is willing to purchase US Treasury bills and US government bonds from the banks. Most of these purchases are on a so-called “repo” basis, i.e. the banks sell government securities they hold to the Fed but commit to re-purchasing them from the Fed in the very near future, sometimes just the next day. These transactions define the short-term interest rates.<\/p>\n
Long-term interest rates, however, are determined in the bond market, where sellers (e.g. the US government) and buyers agree on a price. Every few weeks the US government auctions off a series of US government bonds which makes for a steady supply of bonds for the market. Buyers are banks, insurance companies, pension funds and, among many others, the foreign exporters who have exported to the US now are are holding US Dollars they seek to invest. Usually, the foreign exporter will have sold the US Dollars he received to his bank in exchange for local currency, so it will be the bank or the central bank of the exporting country that actually buys the US government bonds.<\/p>\n
If buyers reduce their purchases, the demand for long term government bonds weakens and interest rates go up. Buyers may become reluctant to purchase US government bonds if they start having concerns about the reliability of the US government and its policies. In addition, foreign buyers may have fewer US Dollars to invest, if the US trade deficit narrows substantially.<\/p>\n
There was a brief scare in the US bond markets in early April when traders believed that Trump’s tariffs would indeed reduce the trade deficit by a large amount. Long term treasury yield spiked above 5 percent, and the 10-year yield went to 4.51 percent. But once it became clear that most of the tariffs were going to be revised again by Trump and that those that remained had numerous exemptions and would not reduce trade deficits in any meaningful way, markets calmed down and long-term US government yields settled in the 3.5 to 4 percent range.<\/p>\n
But they are still relatively high and have not come down further. US long-term interest rates, and all the various interest rates consumers pay (e.g. mortgage rates, auto loans etc.) which are pegged to US long-term interest rates, remain high not because of the Fed, but because of US government policies. It may sound paradoxical, but it is straightforward economics: Demand for US government bonds suffers and long-term interest rates remain high, because of the efforts to reduce trade deficits<\/strong>, even though these efforts have only had a marginal effect so far, and the erosion of confidence in the US and the US Dollar due to the erratic way in which economic policy is implemented<\/strong>. For both of these, Donald Trump is responsible, not the Fed.<\/p>\n One afterthought: What do foreign exporters do with the US Dollars they receive if they don’t want to buy US government bonds? \u2013 They buy Gold instead. The increased demand for Gold has driven up the price by almost 75 percent over the past year. The price for Gold is rapidly approaching USD 5’000 per ounce, a level never seen before.<\/p>\n [\/et_pb_text][\/et_pb_column][\/et_pb_row][\/et_pb_section]<\/p>\n","protected":false},"excerpt":{"rendered":" Donald Trump does not understand how international trade works. So in an effort to enlighten him, even though I doubt he reads this blog, and if he did he probably would not understand what I am about to explain, I will go through an economics lesson at a very basic level. A country, say the […]<\/p>\n","protected":false},"author":2,"featured_media":0,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"_et_pb_use_builder":"on","_et_pb_old_content":"","_et_gb_content_width":"","_s2mail":"yes","footnotes":""},"categories":[1],"tags":[],"class_list":["post-592","post","type-post","status-publish","format-standard","hentry","category-uncategorized"],"_links":{"self":[{"href":"https:\/\/blog.dafko.ch\/index.php?rest_route=\/wp\/v2\/posts\/592","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/blog.dafko.ch\/index.php?rest_route=\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/blog.dafko.ch\/index.php?rest_route=\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/blog.dafko.ch\/index.php?rest_route=\/wp\/v2\/users\/2"}],"replies":[{"embeddable":true,"href":"https:\/\/blog.dafko.ch\/index.php?rest_route=%2Fwp%2Fv2%2Fcomments&post=592"}],"version-history":[{"count":2,"href":"https:\/\/blog.dafko.ch\/index.php?rest_route=\/wp\/v2\/posts\/592\/revisions"}],"predecessor-version":[{"id":595,"href":"https:\/\/blog.dafko.ch\/index.php?rest_route=\/wp\/v2\/posts\/592\/revisions\/595"}],"wp:attachment":[{"href":"https:\/\/blog.dafko.ch\/index.php?rest_route=%2Fwp%2Fv2%2Fmedia&parent=592"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/blog.dafko.ch\/index.php?rest_route=%2Fwp%2Fv2%2Fcategories&post=592"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/blog.dafko.ch\/index.php?rest_route=%2Fwp%2Fv2%2Ftags&post=592"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}