Yanire Guillén

The market’s tariff tantrum is a direct result of the previous monetary bubble. Market reaction to the announcement of tariffs may have surprised many, but it is a direct result of two decades of monetary insanity and the excess of 2024.

Thus, the slump in markets cannot be explained without understanding the level of risk accumulated in 2024, with various rate cuts and further monetary easing expected.

Stocks soared despite the economic slowdown, lacklustre earnings, and soaring debt. Two generations of market participants became addicted to rising government spending, debt, and central bank printing, which led to the Tariff Tantrum.

However, we need to avoid the Keynesian messages of doom and understand the real implications of what is happening.

For example, the anti-American narrative is so strong that headlines mention a “dollar crash” with a 2.7% decline in the trade-weighted dollar index year-to-date and talk of a “bond collapse” with a 1.8% real yield.

We can expect more volatility in markets as central banks remain cautious and headlines continue to be focused on negatives. However, money supply growth does not indicate the type of inflationary spiral that some market participants assume, and the latest producer price and core consumer price figures showed disinflation in March.

What should we expect in the next months?

Process of intense negotiation

After the United States government announced the largest set of tariffs in the past hundred years, there is an ongoing process of intense negotiation.

According to a report from the Department of Commerce, “2025 National Trade Estimate Report on Foreign Trade Barriers,” tariffs and non-tariff barriers that the United States faces from its partners are unsustainable.

The administration imposed reciprocal tariffs with the aim of negotiating an improvement in a trade deficit that reached $918 billion in 2024.

The United States government does not seek to balance its trade account completely but rather to reduce the current deficit by half, according to estimates by JP Morgan and Bloomberg.

Tariffs are a last resort and aggressive measure to force a negotiation that levels the trade playing field

Mario Draghi, former president of the ECB, stated in a Financial Times article that the internal barriers of the European Union act like tariffs, raising the costs of the European manufacturing sector by 45% and the service sector by 110%, using IMF data. Even Ursula von der Leyen quoted these words in the European Parliament.

Tariffs are a last resort and aggressive measure to force a negotiation that levels the trade playing field.

The European Union exported goods to the U.S. worth 576.3 billion euros in 2024, according to Eurostat, 19.7% of its total exports.

With a 20% tariff, Goldman Sachs estimates that affected exports could amount to around 190 billion euros (40% of the total sold to the U.S.), reducing the eurozone’s GDP by up to 1%. Germany would suffer more, with an estimated contraction of 1.1%.

All these tariffs, except those to China, which have increased to 124%, have a 90-day moratorium as more than 90 countries have shown a willingness to negotiate.

The impact on inflation

The IMF estimates that tariffs could reduce global GDP by 0.5% and increase inflation by a similar percentage. However, Brevan Howard and some members of the Federal Reserve believe that the impact on inflation will be modest due to the purchasing power of U.S. companies and the elasticity of demand.

Additionally, the White House estimates that this measure will attract billions in investment and jobs to the United States.

The key thing to understand is that countries can negotiate directly with the Department of Commerce to eliminate reciprocal trade barriers, and this would benefit everyone.

Negotiations can lead to the elimination or reduction of tariffs if European countries and the EU remove their trade barriers

Additionally, companies that invest in productive capacity and employment in the United States will not be subject to tariffs. The exemptions will be made individually and by country.

Negotiations can also lead to the elimination or reduction of tariffs if European countries and the European Union remove their trade barriers, particularly bureaucratic, environmental, and fiscal ones, from the CO2 tax and phytosanitary requirements to labelling, packaging, and licensing requirements that act as an impossibility for U.S. exports.

The options for the European Union

The options for the European Union are limited due to its enormous trade surplus with the United States, estimated to be around $160 billion by 2025, according to Bloomberg.

The most efficient solution will be to negotiate the elimination of tariffs, and this can be done by removing the barriers imposed by the European Union.

In doing so, the European Union will also comply with the demands of the Draghi report on European competitiveness and the requests of industries all over Europe.

China will probably maintain the trade war, as it is not going to lift its bans and restrictions on the United States. However, it is very likely that retaliatory tariffs will have a significant impact on growth and employment.

The negotiation cannot be limited to tariff barriers

Trump knows that the world has two Achilles’ heels: overproduction capacity that can only be reduced by selling to the U.S. and the need to bring exporter dollars to support local currencies.

The U.S. is also faced with two significant challenges. Both the trade deficit and the fiscal deficit pose significant challenges for the U.S.

If urgent measures are not taken, the dollar could disappear as a global reserve currency in a few years, and the world may face a global economic depression.

Trump knows that the weakness of the U.S. is also a global weakness because the entire financial system is a carry trade to the dollar. That’s why the negotiation cannot be limited to tariff barriers but rather to the more important ones, the non-tariff barriers.

US trading partner countries have no option but to negotiate

Japan, the EU, India, and 87 nations have already started negotiating with the Trump administration.

US trading partner countries have no option but to negotiate: their trade surplus is so high that there is no possibility of responding aggressively without destroying their own economy.

China is stunned by the impact of its response on its stock market and the yuan, reaching an 18-year low that the PBOC did not expect. Trump knows that no country can replace the American consumer with the Indian, European, or Brazilian.

So far, the EU has proposed reducing industrial tariffs, but that is completely insufficient when the highest tariffs are on agriculture, livestock, and automobiles.

A “power package”

The goal of the Trump administration is to present 70 or 80 trade deals by the end of April and announce up to 6 trillion dollars in investments in the U.S. for the coming years.

Additionally, if the estimated deficit figure drops by 280 billion, the Trump administration could announce the largest tax cut in US history as early as May

Furthermore, the Trump administration wants consumers to see a real reduction in gasoline, natural gas, food, and utilities. Major distributors like Walmart, Costco, Sysco, US Foods, and PFG have communicated to their Asian suppliers that they do not accept price increases on any product under any circumstance.

In summary, Trump wants a “power package” for May in which he presents the world with a substantial number of successful trade agreements, several trillion in investment for the U.S., reduced inflation, and a severely weakened Chinese economy that agrees to open its economy.

The risks are significant. Volatility may persist, central banks may continue sending contradictory messages, China may face a large devaluation of the yuan, and the European Union may not agree to reduce its non-tariff barriers.

No US trading partner has the cards to face a large-scale trade war. That is why there are only two options: negotiate or lose.

The Trump administration has announced an important package of reciprocal tariffs. In the “2025 National Trade Estimate Report on Foreign Trade Barriers”, the US government details all the different tariff and non-tariff barriers imposed by other nations against the United States.

The US administration asserts that these mounting barriers against US companies significantly contribute to the enormous $1.2 trillion goods deficit.

These trade barriers include fiscal, administrative, licence, and so-called environmental limitations that effectively work as tariffs, apart from direct bans and thefts of intellectual property.

What I find fascinating is that most of the United States complaints against the European Union coincide exactly with the claims of the European industrial, agricultural, and farming sectors.

Enormous licence delays; gigantic bureaucratic and investment limits and burdens; senseless regulations; and excruciating taxes.

Trading in the European Union is challenging due to regulatory and economic barriers. The IMF estimates that the European Union’s hidden tariffs through internal barriers increase prices in the manufacturing sector by 45% and a whopping 110% in the services sector.

When one reads the 30-plus pages of the European Union chapter, it is evident that the problem is not the United States protectionism but the European Union’s wall of protectionist measures. Furthermore, lifting those barriers would enormously benefit the European Union and United States companies.

The EU is not willing to negotiate hidden tariffs

Unfortunately, the European Union is not willing to negotiate hidden tariffs and trade barriers. The leaders of each nation prefer to use the United States as a scapegoat, and they have proposed a package of loans, subsidies, and grants that will increase the interventionist nature of the European economies, continue to weaken their agriculture, industrial, and farming sectors, and probably limit growth and investment.

The risk of using tariffs as a negotiation tool is that the opponent might prefer to hurt its citizens rather than change its protectionist policies. The European Union leaders believe that the solution is to close their markets even more and maintain all the burdens we outlined.

Interventionists love any opportunity to be more interventionist and present themselves as the solution to the problems they create

Although the internal burdens in the European Union are so large that they have single-handedly destroyed its industry, there appears to be little to no will to eliminate destructive policies like the 2030 Agenda, the CO₂ tax and other limitations.

Despite the majority of businesses in the European Union advocating for the removal of the barriers highlighted in the US government’s report, governments appear to prioritise protecting job creators, continuing to provide subsidies to North African countries that do not bear the same burdens as US and EU companies, and causing harm to exporters.

Interventionists love any opportunity to be more interventionist and present themselves as the solution to the problems they create.

Companies can negotiate directly

The reciprocal tariffs that the Trump administration has announced can be negotiated. If governments reject this option, business associations and companies can negotiate directly.

Furthermore, European businesses should demand that the European Union abandon its self-destructive regulatory nature and finally lift the tariffs and non-tariff barriers that they impose on investors and job creators.

Regrettably, the world has identified the Trump tariffs as the most convenient target. Now, the mainstream narrative will blame the Trump administration for the inflation the government created by printing and overspending and the economic slowdown engineered by rising public spending, debt, and taxes.

Protectionism only protects governments, and the ones who will pay for all the mistakes made by their leaders will be businesses and families

The world will rejoice at the implementation of even higher protectionist measures to combat the reciprocal tariffs.

Who wins a trade war? No one. Protectionism only protects governments, and the ones who will pay for all the mistakes made by their leaders will be businesses and families.

The world understands that the solution is free trade

The United States needs to reduce its unsustainable trade and fiscal deficit. The world needs to negotiate the barriers against United States trade that have been a norm since 2001.

The rise of protectionism did not come with Trump. Trump is the catalyst who has shown everyone globally that our governments are not champions of free trade but of interventionism

American tariffs are not an optimal solution. They are not even desirable. However, they are the only available option for the United States after almost two decades of rising trade limitations against US companies.

Businesses can negotiate and must demand that their governments address and eliminate the enormous trade barriers that have plagued companies in the past twenty years. It must be a double course of action.

If entrepreneurs succumb to the trap of endorsing their governments with retaliatory measures, they will not only endure the burden of confiscatory taxes and trade restrictions, but they will also bear the brunt of the trade war’s impact on economic growth and sales.

For example, the Spanish government has promised $16 billion in cheap loans and organised various study groups and committees. This will achieve nothing and, at best, make companies more indebted while all the trade barriers remain unchanged.

Only extreme cases should warrant the use of tariffs. They are not ideal; they are neither perfect nor advisable. There are many reasons to criticise them, but we must understand that current levels of unfair treatment in the United States are unsustainable.

So far, the announcement of Trump’s tariffs has converted European and UK socialists into staunch defenders of free trade and open markets. This is already an achievement.

Furthermore, the tariff threat has made the global public realise the enormous trade barriers implemented by their governments. Finally, the world understands that the solution is free trade. It’s time to remove both tariff and non-tariff barriers. We will all win.

German bond yields have soared, with the 10-year bund yield rising to around 2.83%, a jump of 51% from the level of December 2023.

In the past month, yields have risen by 21%, triggered by Germany’s historic “paradigm shift” spending plans, which include a massive defence and infrastructure package.

The sell-off in German bonds triggered an immediate domino effect on European sovereign debt, with French, Spanish, and Italian bonds declining as the European Commission announced a “Rearm Plan” to spend 800 billion euros on defence over four years, financed by new debt.

The European sovereign bond index is down 2.8% in the first two months of 2025 and has declined an extraordinary 14% in the past four years as concerns about persistent inflation add to rising fiscal imbalances and increasing debt plans.

The harsh reality is that European sovereign bonds are not a reserve asset in most balance sheets anymore, and pension funds and institutional investors are reducing their positions in European government debt.

This is the price of inflationist policies. European Union member states believed they could continuously increase their spending and debt because the European Central Bank would always be there to monetarily support them in times of difficulty.

However, this approach has resulted in the destruction of the currency and a decline in governments’ solvency.

Merz abandoned his campaign pledge

The recent slump in German sovereign bonds was the worst since 1990. It occurred following Friedrich Merz’s announcement of a “paradigm shift” in Germany, aimed at taking on debt and increasing the deficit “to boost growth.”

Merz abandoned his campaign pledge to avoid taking on more debt and succumbed to the Keynesian trap in an attempt to attract social democrats to a coalition.

Politicians always announce a boost in growth from government spending and new debt, but it never happens

The Keynesian trap is always the same. Politicians always announce a boost in growth from government spending and new debt, but it never happens, and by the time the voter realises it, they announce that the government must increase taxes because the deficit and debt are too high.

The largest drop in German sovereign bonds since 1990 adds to four years of disaster in the price of European sovereign bonds. The popularity of the future German chancellor is already suffering before even forming a government, as he begins his tenure by breaking his campaign promise not to increase public debt.

European Rearm Plan

The announcement of the 800 billion euro European Rearm Plan, which appears highly ambitious and costly, exacerbates this situation. However, we cannot forget that 650 billion euros simply come from the sum of defence investment commitments already made by member states, and 150 billion euros are loans.

Although the European Commission insists there will be escape clauses and that increased debt for defence investment won’t be penalised, any investor understands that this makes no difference; it means much greater financial strain for states with no fiscal room and more money printing through borrowing, which translates into more inflation and higher taxes in the future.

To tackle the challenges of defence, technology, and competitiveness, the European Union must do much more than just announce more debt.

The European Union has spent over 205 billion euros on fossil fuels from Russia since the start of the war. Therefore, the first thing the EU must do to strategically and economically rearm is abandon the 2030 Agenda and the directives that hinder investment and the development of natural resources. There is no European rearmament without mining.

The EU and its member states must prioritise spending

Additionally, the EU and its member states must prioritise spending. Superfluous and politically motivated spending must be drastically cut to accommodate defence investments. Investors won’t be fooled by a façade of debt.

The European Commission’s excessive deficit protocol has become a ridiculous mechanism for disguising debt. In Spain’s case, government debt under this protocol is 1.65 trillion euros, while the total issued public debt is 2.15 trillion euros.

Germany does not need to increase public spending, deficits, and debt to grow. Copying France’s failed recipe will only lead them to end up in stagnation with uncontrolled debt and deficits.

Why has the market reaction been so negative?

Investing in defence is a necessary but not sufficient condition to innovate, grow value-added sectors and technologies, and lead. We need to do much more.

It is imperative that the European Union abandons central planning—the so-called environmental activism that only impoverishes, slashes tax and bureaucratic burdens, and stops penalising wealth creation and business growth. Every week, the European Union publishes an average of 18 regulations

Why has the market reaction been so negative? Despite a tiny rebound on Friday, Bloomberg’s index of European sovereign bonds has fallen more than 14% over the past four years.

That’s despite all the support from the European Central Bank. What happened? European sovereign debt has become almost toxic due to the inflationary policies implemented in recent years.

Eurozone states believed the European Central Bank would mask their severe fiscal deficiencies. Countries with unfunded commitments exceeding 300% of GDP also announce more debt every time they meet and expect nothing to happen.

If the European Union doesn’t abandon its policy of extending and pretending, it will spark another debt crisis. European sovereign bonds have ceased to be a reserve asset, and latent losses since 2022 are significant. The European Central Bank itself has again reported losses of nearly 8 billion euros.

Investing in defence and infrastructure is fine, but only if the enormous amount of unproductive, inefficient spending that condemns the European Union to irrelevance is slashed. The EU will require more than just spending to overcome its current situation.

Market corrections happen, and the temptation to blame it on the president of the United States rises exponentially when the person is Donald Trump.

However, market corrections have nothing to do with his policy announcements.

In 2016, Trump announced tax cuts, deregulation, government spending cuts and tariffs. In 2024, Trump also announced tax cuts, deregulation, government spending cuts and tariffs.

It makes no sense to blame the current administration after less than two months in office and ignore all the warning signs that built up in the past months.

Market busts always come because of the previous debt excess.

Five datapoints allow us to identify the real reason for the market correction.

Persistent inflation: Market participants are often hooked on easing policies because dovish central banks mean a higher money supply growth, lower rates, declining bond yields and equity multiple expansion.

However, if inflation soars, investors pull away from risky assets, expecting lower or no rate cuts and contraction in the money supply.

Inflation expectations in the United States began to rise in 2024 around mid-year, with significant shifts becoming evident by June. The Federal Reserve increased their 2024 inflation forecast to 2.6% from 2.4% in their 12 June 2024 projections.

The Federal Reserve’s policy was highly dovish

However, the Federal Reserve’s policy was highly dovish. It panicked in June, when Treasury bond yields soared, and delayed its pace of normalisation of the balance sheet, effectively signalling a dovish stance that prioritised liquidity over inflation. Furthermore, the Federal Reserve decided to cut rates in September despite persistent inflation.

The New York Fed’s Survey of Consumer Expectations shows that median one-year-ahead inflation expectations remained relatively stable at 3.0% through much of early 2024 but began to edge up later in the year.

By the end of 2024, consumer expectations had surged to a 15-month high. By December 2024, the Consumer Price Index (CPI) hit 2.9%, with a 0.4% month-over-month increase, indicating a reacceleration. The 24% cumulative inflation of the past years was followed by inflation’s stickiness—particularly in shelter and services—prompting a reassessment among consumers and businesses of the outlook for inflation.

Uncontrolled government spending and deficit: The Biden-Harris administration accelerated government hiring, spending and debt in an election year, creating a fiscal and monetary time bomb as well as perpetuating inflation.

The federal budget deficit for 2024 totalled $1.83 trillion, according to the U.S. Treasury Department’s final Monthly Treasury Statement. This marked an increase of $138 billion (8%) from the $1.69 trillion deficit recorded in FY 2023, making it the third-largest deficit in U.S. history and the largest in a year of peace, with record tax receipts, employment and economic growth.

Federal debt reached a record $35.5 trillion by the end of FY 2024, a $2.3 trillion increase from FY 2023, according to the GAO’s audit of the Bureau of the Fiscal Service’s Schedules of Federal Debt.

Furthermore, gross interest expenses reached $1.126 trillion, up $251 billion from 2023, despite a dovish Federal Reserve containing bond yields.

In the period between 2021 and 2024, government spending accounted for 24% of all economic growth

In the period between 2021 and 2024, government spending accounted for 24% of all economic growth (GDP) and government jobs soared by more than one million; spending rose by $2 trillion from the 2019 level and $617 billion (10%) in 2024 alone, reaching $6.752 trillion.

In the last months of 2024, reports of acceleration in government spending led to an $86.6 trillion 10-year spending plan (FY 2025–2034), according to the Congress Budget Office, with various senators claiming it front-loaded costs.

Debt accumulation: A dovish and confident Federal Reserve also led to market participants and consumers taking on more debt, expecting a steady path of rate cuts. The messages from the Federal Reserve changed from optimistic about inflation to cautious in the last months of 2024.

In markets, FINRA Investor Margin Debt reached $937.253 billion as of 1 January 2025, marking a record high and reflecting a year-over-year growth of 33.41%.

At the end of 2024, U.S. credit card debt reached a record high, reflecting a massive 13% increase throughout the year. According to the Federal Reserve Bank of New York, total credit card balances hit $1.21 trillion in the fourth quarter of 2024. This is a $45 billion increase from Q3 2024’s $1.166 trillion. It marks a 3.9% quarterly rise and pushes the total to an all-time high since the New York Fed began tracking in 1999.

Fed goes from bullish to bearish: The Federal Reserve changed radically its tone from optimistic to a cautious stance on inflation towards the end of 2024, with this shift becoming particularly evident around November 2024 and solidifying by December 2024.

This caution fully took hold by 18 December 2024, with the revised projections and Powell’s explicit statements

This shift marked a transition from a rate-cutting cycle initiated in September to a more deliberate, wait-and-see approach as 2025 loomed.

The time bomb was already set. Soaring government spending, federal and private debt, expecting various rate cuts in 2025, and a 180-degree policy change regarding interest rates in the last two months were aligning alongside an expensive market, as the valuation of the S&P 500 and Nasdaq reached 22 and 32 times, respectively, close to 20% above its average in the case of technology names.

Furthermore, the market was heavily concentrated in its returns. Five stocks—NVIDIA, Microsoft, Apple, Amazon, and Alphabet—contributed approximately 42–47% of the S&P 500’s 2024 market increase.

What caused the current correction is a combination of irresponsible fiscal policy driving debt to new heights. Misguided guidance from the Federal Reserve pushed private and market participants debt to record highs, expecting an easy and rapid disinflation process. This would lead to lower rates and more liquidity.

The Biden administration bloated economic growth and job gains with federal spending and debt. The Federal Reserve contributed to the excess panicking by cutting rates too much and too fast and delaying its balance sheet normalisation to try to limit the impact of the irresponsible fiscal policy on Treasury yields. The result was a perfect storm.

The Fed went hawkish, debt continued accelerating, and the economic slowdown, which was already evident in the last three quarters of 2024, all erupted at once when the market exuberance was pricked by two catalysts.

The Tech sell-off caused by the overblown Chinese artificial intelligence impact and the reduction in risk required by investment firms’ risk management teams to accommodate for a reality of persistent inflation and higher rates.

Trump may have arrived when the bubble burst, but he did not create it.

The U.S. economy will not weaken from lower government spending.

The latest figures published by the Department of Government Efficiency (DOGE) are staggering. $75 billion saved in two weeks. Some of the items they have slashed are astonishing, including payments to transgender musicals in Ireland, DEI in Serbia, or decolonization of curriculum vitae. This is a two-week result, so it should be applauded. However, there is a lot more that needs to be done.

The Congressional Budget Office (CBO) estimates that the United States will have a $6.1 trillion deficit, despite record receipts of $17 trillion, a growing economy, and declining unemployment. Furthermore, they expect an annual deficit of $5.6 trillion in the 2026-2029 period.

As Scott Bessent has correctly stated, the United States does not have a revenue problem; it has a spending problem. The CBO expects annual outlays of $23 trillion in the 2026-29 period.

What do we know?

No revenue measure will eliminate the deficit. The United States’ governments have implemented numerous tax increases in the past decades and the national debt continues to reach record levels. Additionally, when revenues rise, governments spend even more than before.

The US spending problem comes from a completely unsustainable increase in mandatory spending, which is never audited and simply rises without control. Mandatory spending is expected to increase to $14 trillion per annum. Overspending and inefficiencies in these programs have never been properly tackled.

The measures announced by the Trump administration so far may bring an additional $300 billion in revenues. If the current pace of savings announced by DOGE is sustained, it could reach $1 trillion. However, as time passes, some of the savings are more difficult to find. Furthermore, the deep state machine is doing all it can to prevent any more cost savings, even using the judicial system.

The United States needs a chainsaw, like Milei implemented in Argentina. Considering that state and local departments will resist as much as they can and try to sabotage any spending cut, the government needs to implement a mandatory zero deficit in all administrations, effectively stopping the debt hemorrhage in the system.

The United States needs to do this because it is the only way to end the persistent inflation problem that plagues America, and it is essential to maintain the United States dollar as the world reserve currency. Furthermore, not implementing these drastic cuts will likely lead the United States to an economic decline like the French and UK ones. High taxes, elevated government spending, and constant deficits have made these once strong economies stagnate, lose competitiveness, and cripple investment.

Milei proved that drastic cuts can be implemented without hurting the economy. He has slashed inflation and reduced poverty, and the economy was already in a robust growth mode by the third quarter. The Argentina case was significantly more challenging than the United States one. It is time to bring the chainsaw and end the political spending spree.

The global gold market has experienced a radical surge in demand in the past two years, with central banks leading the growth. This trend is expected to continue well into 2025.

Gold prices soared 35% in 2024 and have continued to rise in the first days of 2025, reaching over $2,700 an ounce by mid January 2025. This surge occurred despite the mainstream narrative of easing inflation and the absence of a global recession.

However, annualised inflation is not under control and gold is discounting an unprecedented monetary destruction, which is already evident in currencies like the Brazil real, the UK pound or the Japan yen reaching new lows against a US dollar that loses its own purchasing power due to persistent inflation.

Inflation is not under control

The Consumer Price Index for All Urban Consumers (CPI-U) increased by 2.9% on an annual basis in December 2024, rising 0.4% in the month of December, after increasing 0.3% in November.

Core inflation rose to 3.2% in December, a 0.2% increase in the month. This means that the cumulative inflation measured by CPI since January 2021 is 21.8% and core CPI is 23.5%.

Many market participants expect inflation to drop quickly

Many market participants expect inflation to drop quickly, leading to more rate cuts. However, commodities have soared since rate cuts started, government spending is up 10% in 2024, and money supply growth is at 27-month highs.

Without a significant decline in money supply growth and government expenditure, it will be very difficult to reduce annualised inflation significantly.

Sovereign bonds stop acting as a reserve

Persistent inflation is a sign of a de facto default. Additionally, the MSCI Government Bond Index for Developed Markets has recorded a 24% slump between January 2021 and December 2024. As such, sovereign bonds are no longer a safe, reliable and profitable asset for most central banks.

When persistent inflation and weakening government solvency create such a relevant decline in the bonds that usually acted as reserves for global central banks, monetary institutions look for better investments that will strengthen their asset base. Gold is the most obvious.

Global investors and monetary institutions are turning to gold as protection against currency debasement

Global investors and monetary institutions are turning to gold as protection against currency debasement and rising concerns about the solvency of public finances in developed economies.

Thus, many central banks are abandoning Treasuries and sovereign bonds as reserve assets and replacing them, at least partially, with gold.

Persistent inflation and the slump in currencies and sovereign bonds are clear indications that public debt is too high, governments are overspending and creating a relevant damage in the real economy through higher taxes and record indebtedness.

The central banks that are driving this change in policy see that sovereign bonds will not work as a reliable reserve asset as long as the public sector continues with out-of-control spending.

The harsh reality

The People’s Bank of China has been consistently expanding its gold reserves, with recent purchases of 5 tonnes in November 2024 and continued buying in December. Market participants anticipate that this trend will rise in 2025 and 2026.

The Central Bank of Poland has a plan to increase gold reserves from 13% in 2023 to 20%, purchasing 130 tonnes in 2023 and 61 tonnes in 2024. The Russian central bank is already the largest holder of gold reserves relative to total assets and aims to continue purchases into 2025. India, Turkey, Oman and other monetary authorities are following the same policy.

Developed economies have taken for granted that their government bonds will continue to be world reserves and now face the harsh reality: When you push the limits of solvency, demand for sovereign bonds declines and the currency slumps.

The new Trump administration and its secretary of Treasury, Scott Bessent, understand this.

“The United States does not have a revenue problem, we have a spending problem” – Scott Bessent

Bessent has recently stated that “the United States does not have a revenue problem, we have a spending problem”. “Today, spending is out of control”, “6 to 7% deficit when there is no recession or war”. What does this mean?

That the Treasury will not be able to use its borrowing capacity if there is a downturn, because all limits have been exhausted.

If the United States wants to keep the dollar as the world reserve currency and Treasury bonds as a global reserve asset, it needs to cut spending and strengthen the productive economy.

Gold is not a threat

Bessent understands that gold is not a threat, but a reminder that the US dollar can lose its global position if the government does not do its homework and puts public finances under control.

Bessent also understands that taking no action on excessive government spending will put the US currency and government bond at risk of losing its reserve status

No leader fears competition. The US dollar can strengthen its purchasing power and end inflation if the government controls public finances. It can only weaken with an irresponsible spending policy.

The rising global demand for gold, spearheaded by central banks, represents a significant shift in the international financial landscape. It is a warning sign for central banks and governments of developed economies. Those who ignore it will fail. Those who understand it will cut spending and strengthen their global position.

More countries are seeking to diversify their reserves and hedge against irresponsible developed governments, and gold has emerged as a critical asset.

This trend is reshaping market dynamics, influencing investment strategies, and potentially altering the balance of global economic power. Government bonds are not an essential item of investor portfolios, while gold is increasingly important.

Central banks are returning to a more logical approach after years of insane money printing. As I always mention, inflation is a de facto default and the trends I have outlined show that developed economies’ governments have exhausted their fiscal space and probably irreparably damaged their status as reserve assets.

The United States needs to learn the lesson quickly: Government spending makes you poorer, and excessive spending may destroy the currency you use to collect your salary and save.

In 2020, the FMI recommended global economies spend and borrow and face the consequences later. The pretend-and-extend Keynesian response to the pandemic left persistent inflation and record public debt.

The impact of the misguided recommendation to spend, print money, and bloat GDP at any cost has created a new threat: a sudden stop.

A sudden stop is the abrupt collapse in the flow of capital investment to emerging markets. An important warning sign can be identified in the year-end slump of emerging market currencies vs. the US dollar.

The most financially irresponsible government was Brazil’s Lula administration, which doubled the fiscal deficit to 9.5% of GDP in the 12 months to October and expects a significant slump in its trade surplus, projected to be between $70 billion and $74.6 billion for 2024, down from $99 billion in 2023. This has made the Brazilian real collapse to an all-time low and close 2024 as the worst major currency against the US dollar.

Other emerging economies have seen a significant decline in the purchasing power of their currency against the US dollar. From China, which finally allowed the yuan to devalue, to the Indian rupee, we have seen currency weakness as an indicator of forthcoming credit risk.

Rising yields and currency weakness are two sides of the same coin.

The strategy of extending and pretending

Many emerging economies fell again into the trap of the US dollar carry trade, expecting elevated liquidity and rising demand for their debt despite the evidence of persistent inflation, US dollar strength, and stretched solvency ratios.

The strategy of extending and pretending was prevalent between 2021 and 2024, despite the satisfactory performance of global markets. Furthermore, 2024 was a year of elections that saw more than seventy governments spending more than ever to please voters and ignoring the risks of the maturity wall arriving in 2025.

The hangover may be coming soon.

The year 2025 represents a critical juncture for emerging market debt

In 2025, emerging market economies face an enormous challenge due to the rising refinancing requirements, higher rates, and a substantial debt maturity wall. The combination of maturing debt, a weaker Chinese economy, and rising trade tensions heightens the likelihood of a sudden halt in capital flows to emerging markets.

The year 2025 represents a critical juncture for emerging market debt. S&P Global predicts that $80.5 billion in rated debt will mature in 2025. Of this total, $65 billion is investment-grade debt, primarily concentrated in China and Mexico.

Approximately 81% of rated maturities in emerging markets through 2026 are denominated in U.S. dollars. This means that these issuers will likely face a stronger dollar and higher rates at the time of refinancing.

Fiscal headwinds

The combination of persistent inflation and slower economic growth in 2025, particularly in Latin America and in China, added to the rising currency depreciation risk and may reduce investor demand.

Furthermore, many of these countries, including Brazil, Colombia, Chile, and India, are betting on high government spending to strengthen growth.

However, this strategy always fails because it ends up creating higher debt, more taxes, and lower productivity growth. Fiscal headwinds are building rapidly as many countries have taken on more debt since the pandemic, if the model of government deficit spending, higher taxes, and debt refinancing would deliver a stronger economy. It was inevitable that this model would fail, and it did.

It is always dangerous to bet on a weaker dollar to disguise fiscal imbalances

It is always dangerous to bet on a weaker dollar to disguise fiscal imbalances. It is reckless when the policies in the United States are aimed at more tariffs to exporting nations.

The US dollar is strengthening because the currencies of America’s trading partners are weakening, and their fiscal challenges are larger.

The combination of a reckless fiscal policy and mounting refinancing requirements means domestic inflation and a more expensive debt service. Add to this the threat of tariffs, and the financial challenge may prove unsurmountable.

2025 will be a year of rate cuts

Many blame the US dollar for the problems of emerging economies. However, those problems are self-inflicted. Those nations that made a massive bet on the US dollar carry trade, increased their fiscal and trade imbalances, and committed to bloating government spending will find themselves as victims of their own leveraged bet against the US currency.

I believe 2025 will be a year of rate cuts and liquidity injections despite persistent inflation. This may not avoid a debt crisis in some major emerging nations, because few governments want to implement supply-side reforms, tax, and spending cuts to strengthen the productive economy.

No one trusts a government that has doubled its deficit to cut it to zero in a year of lower growth and elevated debt maturities

With 81% of maturities in U.S. dollars, a sudden stop could trigger currency crises as countries scramble for dollar liquidity. Many central banks are selling US dollar reserves to stop the bleeding in their currency, which is a dangerous and worthless strategy when fiscal policy remains irresponsible.

The aggressive selling of US dollar reserves seen in some emerging economies like Brazil has not stopped the bleeding of the currency, and, at the same time, investors do not believe the fake promises of “next year” budget balances.

No one trusts a government that has doubled its deficit to cut it to zero in a year of lower growth and elevated debt maturities.

The winners in emerging markets

According to S&P Global, emerging market debt yields have risen to 10-year highs, and some EM bond experts see this providing a buffer against volatility.

Higher yields mean more risk, not a better opportunity, so investors will be paying more attention to the fiscal situation of each government than to an allegedly attractive yield

Few bond investors will prefer high-yield emerging debt and currency risk, which could potentially offset any positive returns compared to US 10-year Treasury yields above 4 or 4.5%.

This implies a significant withdrawal of capital from emerging economies, particularly during a year when numerous governments have pledged extravagant spending plans and socialist policies.

Credit upgrades may help some issuers, but we must remember that rating agency actions rarely change a trend of capital outflow when it starts, especially when the rating upgrades come from exceedingly optimistic expectations of growth and tax receipts.

The winners in emerging markets are likely to be those that implement strong measures to limit deficits and government spending, those nations that will cut taxes, attract capital, and return to economic sanity.

The risk of a sudden stop is real; it is not inevitable. Argentina has proven that decisive budget cuts, pro-growth policies, and deregulation work.

Countries that abandon the MMT fantasy of government spending, taxing the private sector, and printing will avoid a sudden stop. Countries that implement policies aimed at strengthening foreign investment, attracting private capital, and reducing the tax burden will win. Those countries that choose to persist with socialist policies will ultimately face failure. Again.

France is a rich and once prosperous nation with excellent human capital. It is a nation with plenty of entrepreneurs and investment opportunities. It is also on the path to a debt crisis because politicians continue to impose the same policies that have failed for decades: high government spending and confiscatory taxes.

The French budget nightmare is not a 2025 story. It is the consequence of decades of bloated government and destructive taxation. Debt to GDP is 112% even after a significant retroactive revision of GDP and the effect of inflation on the nominal GDP figure.

Moody’s slashed the French debt rating to Aa3 from Aa2, three levels below the maximum rating, matching the Fitch and S&P cuts.

After a government crisis and the resignation of Michel Barnier as prime minister, the budget plan for France in 2025 aims to decrease the deficit to 5% of GDP by reducing spending by €60 billion and increasing taxes by the same amount.

The plan is insufficient and will likely fail. Bringing the deficit down only to five percent of GDP is still an unsustainable level. The revenue estimates are incredibly optimistic, a constant in French politicians’ budget estimates.

The government cannot bring the deficit down

Considering the anaemic growth of the economy and the adverse taxation, the government is counting on questionably strong corporate earnings and a conversion of tax hikes to receipts that has rarely occurred.

Furthermore, we are used to the French PMs announcing a reduction in deficit only to revise it upward. The French government is very weak and cannot bring the deficit down from the elevated 310-billion-euro yearly figure because it does not have the power or will to truly implement structural spending cuts.

These plans to cut the deficit always fail because the spending cuts rarely happen as expected, and the tax hikes generate lower revenues than estimated.

This is typical of bureaucratic governments that see the productive sector as a cash machine that can always accept higher taxes while deeming every euro of political spending as a necessary one.

France’s problem always came from elevated spending. It never had any austerity

France’s problem always came from elevated spending. It never had any austerity. Government spending to GDP is the highest of the OECD at 58%, and government employment as a share of total employment was 21.1% in 2021.

The economy does not grow burdened by asphyxiating taxes and obstructive overregulation, as well as unions that have abandoned the idea of promoting prosperity.

The recipe of French politicians has always been to increase government spending and taxes. When the economy is in recession, government spending and taxes rise, and when there are periods of modest growth, government size in the economy rises and taxes are increased again.

With an extremely high tax wedge, France ranks a very low 36 out of 38 countries in the Tax Competitiveness Index published by the Tax Foundation.

Despite some deductions available, France’s corporate tax rate is very high, 25.8 percent. According to the Tax Foundation, “France has multiple distortionary property taxes with separate levies on estates, bank assets, financial transactions, and a wealth tax on real estate, and the tax burden on labour of 47 percent is among the highest for OECD countries.”

The tax hike will hurt investment

Emmanuel Macron will be president until 2027 but has an approval rating of less than 20%. He does not have a majority in parliament, and his prime minister, François Bayrou, comes from a political party that had less than 7% of the votes in the elections. The previous PM, Barnier, served for less than three months.

It is very typical of social democratic politicians to think that a deficit reduction plan split in half spending cuts and half tax hikes is optimal. It is not. The French deficit is a spending problem.

The tax hike will hurt investment, growth, and productivity again

That tax hike will hurt investment, growth, and productivity again, and the spending cuts are unlikely to be permanent while mandatory spending continues to rise, particularly in the pension system.

The plan has as its long-term objective the achievement of compliance with the Maastricht Treaty’s 3% deficit guideline by the year 2029. Like “mañana,” but without the urgency.

Everyone knows that France will not reach a 3% deficit by 2029. However, there is a bigger problem.

France will continue to weaken

The European Commission is turning a blind eye to the rising fiscal imbalances of Spain because France overshadows other countries. Therefore, it cannot be strict with countries that only reduce the deficit ratio by bloating GDP with public spending and inflation

The European Union is making the same mistake it made with Greece. In the 2002-2007 period, it ignored the rising imbalances of the Greek economy because it posted headline GDP growth, and it needed to deal with the weakness of Germany. Now, the European Commission is doing the same, but the risks are building in Spain and France, respectively.

The problem of all these European nations is simple and complex at the same time. The euro area is based on upside-down economics. It places government spending and bureaucracy at the top of the priority list and productive investment and private enterprises at the bottom.

France will continue to weaken because no nation can prosper by penalising the productive economy and prioritising subsidies and bureaucracy. By the time that France’s debt creates a crisis, Spain will join it.

There is only one solution to the French dilemma: pro-growth policies, cutting political spending, and reducing the insane tax wedge. It is the solution for the rest of the euro area as well. However, no politician will adopt it because they prioritise the cult of bureaucracy over the path to prosperity.

The November jobs report showed an apparently robust 227,000 addition to payroll employment. The market reaction was quite strong considering stocks had reached an all-time high after the Trump victory.

However, a closer examination of the jobs report reveals why Americans remain frustrated and unhappy, even in the face of an allegedly tight labor market.

The unemployment rate in November, at 4.2%, is higher than in December 2021, 3.9%, and the pre-pandemic low of 3.5%.

The labor force participation rate has been declining since November 2023 and, at 62.5%, remains below the pre-pandemic level of 63.3%. The employment-to-population ratio is also below the pre-pandemic level of 61.1%.

In fact, the employment-to-population ratio has slumped since May 2023 and closes November 2024 at a three-year low of 59.8%.

The number of unemployed citizens in November rose to 7.1 million, which is 800,000 more than a year ago. The number of unemployed citizens is 1.4 million higher than the pre-pandemic low of February 2020.

Given that government jobs increased by 33,000 in November and have been rising by an average of 40,000 per month for years, it is important to put these already disappointing figures in context.

Excessive government spending

In 2023, almost 25% of all jobs created were government jobs, and in the past four years almost 40% of all jobs created came from the public sector.

These figures are uninspiring, especially in light of the Biden administration’s implementation of the most aggressive fiscal stimulus in peacetime history. The trillions of dollars of deficit spending did nothing to improve the trend of job growth.

In fact, excessive government spending and printing have created elevated inflation, which has acted as a deterrent to productive growth, investment, and private sector jobs.

The government’s actions have resulted in a significant surge in spending and debt

Another piece of evidence of the poor development in the labor market in the past four years is that median real wages of full-time employees remain below the first quarter of 2021 level.

If you’re looking for proof of the ineffectiveness of the government’s so-called stimulus plans, all you need to do is look at the previously mentioned figures.

The government’s actions have resulted in a significant surge in spending and debt, heightened inflation, stagnant real wages, and the most unfavorable employment statistics, especially when we subtract government jobs and keep in mind the substantial rise in government spending.

Biden worsened the trend of private sector employment

We can conclude that Biden worsened the trend of private sector employment, eroded the purchasing power of wages, and, ultimately, made American workers poorer by implementing an aggressive neo-Keynesian policy focused on government spending and public sector jobs, adding more than $7 trillion to the national debt in the process.

Examine the egregious return on capital that these policies employ. The policies have led to an additional debt of $7 trillion, resulting in an increase in the number of unemployed citizens by 1.4 million compared to February 2020.

The primary effect of the stimulus plans was to increase debt and government employment, which in turn exacerbated the decline in private sector job growth. We must also remember that the Biden administration arrived when the economy was already bouncing back strongly in January 2021.

If the government penalizes the private sector with more taxes and bureaucratic burdens, the economy stagnates

The lessons of this disaster are clear.

There is no multiplier effect associated with government spending. Economists should stop calling these government programs “stimulus,” because the only thing that they stimulate is debt and bureaucracy. We should collectively refer to these programs as a waste of taxpayer funds.

Another important lesson is to understand that if the government penalizes the private sector with more taxes and bureaucratic burdens, the economy stagnates, and workers are the first to suffer the consequences.

Unions should be the first to fear when the government announces a Build Back Better-style plan or the Inflation Reduction Act. The latter became the Inflation Perpetuation Act, and the former became the Build Debt Faster plan.

A warning sign

The United States government must act quickly to recover the real strength of the economy and create excellent jobs with higher real wages.

To stop the cumulative impact of inflation on citizens, the administration must act quickly to cut government spending meaningfully and reduce the deficit. Additionally, the government must cut taxes to businesses and families. Those two measures would immediately support a strong improvement in real wages and private sector job creation. The result will be a stronger currency, a solid and efficient administration, and a more productive private sector

The worst thing the United States could do is copy France. The nation known for having the highest taxes in the OECD, the largest government and administration, and the highest public spending to GDP is currently in a state of disarray.

The country’s deficit has spiraled out of control, hindering growth and suffocating taxpayers. Meanwhile, dissatisfaction among all citizens, including those receiving entitlements relegated to a dependent subclass, is on the rise.

The latest jobs report in the United States is a warning sign. Things need to change fast to recover tax competitiveness, investment, and real productive job growth with strong real wages.

The final lesson is that replicating the policies of the eurozone leads to stagnation and high unemployment.