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While I decided not to claim I was right in predicting 2024 would be “The Year of Chaos,” that was mostly because ’24 felt like a respite compared to the crazy Covid years. Those were so bizarre that we all felt like we had just walked right into the pages of 1984.

“No More ’24!”

That’s the cheer that might easily have sounded around the world on New Year’s Eve. Compared to auld standards, almost forgot (as in pre-Covid), 2024 was a pretty crazy year with two attempted presidential candidate assassinations, the incumbent president pulling out of the race under pressure from his own party because they couldn’t maintain the charade of his mental competence any longer, while apparently still qualified in their eyes to pretend to run the country, and the Middle East more ripped apart in war than I’ve seen since my childhood.

In spite of my reluctance to think calling ’24 “The Year of Chaos” as a win, there are a couple of writers worth noting in The Daily Doom this morning who saw it somewhat that way:

In an article highlighted in the headlines below, Bill Bonner writes,

As we left 2024, we left behind a jolly, wacky year… and many unanswered questions … we raise a glass… and sing a maudlin chorus … glad to see 2024 go. (Bill Bonner)

Bonner also confirms two other predictions, adjoined at the hip, that I spent a lot of time on in 2024:

Inflation has not been beaten. Despite the Fed’s efforts to bring them down, interest rates are going up. Since the rate cutting cycle began in September, long-term interest rates are up about 100 bps

And Politico starts off an article this year by saying,

2024 often felt manic, with assassination attempts on Donald Trump, war in the Middle East and the implosion of Joe Biden’s presidential campaign. But there’s no reason to think 2025 will be any calmer.

Somehow, I have the feeling I was simply a couple of months premature in declaring the “Year of Chaos.”

2024 is gone … but at least we have 2025. A plot that defies easy understanding … with a star-studded cast of clowns and grifters. So, pull up a chair.

Says Bonner at the end of his article.

Yes, I think 2025 is going to be particularly wacky. I’m still working out my predictions for 2025 for a Deeper Dive sometime this month, maybe even this weekend. Right now, the upcoming year looks so likely to be more “jolly and wacky” than 2024 that I can’t settle on anything. Maybe I won’t make any predictions.

In fact, I’m thinking I should have just waited with bated breath to call the “Year of Chaos.” Had I held off, I could just capture 2025 in one sweep because it looks to be unpredictably wacky. (I always thought that was “baited breath,” like “your breath stinks like fish bait,” and I wondered why we would wait around with breath like that. Can’t imagine too many would want to wait with us. Anyway…)

The Tariff Time Bomb

This weekend’s Deeper Dive, for those who don’t get it, could have been called “The Trouble with Tariffs.” What I delved into was something I’ve not heard from anyone about the way in which tariffs could blow up the national debt and demolish the dollar to where it is no long the global trade currency. If you’ve read here awhile, you know I’m not big on the whole rapid dollar-collapse hypothesis, but this is seeming I had NEVER thought about, and it has nothing to do with other nations trying to ditch the dollar just to end US global dominance.

To keep it short, without the explanation of how it works, I’ll just say the blind spot is that, if Trump’s tariffs come in as high as he is threatening (and that may just be a bargaining stance), they could crush trade (both ways because the other side will retaliate with the same). After all, that is what tariffs are usually intended to do, and we haven’t had a tariff war of the scale Trump is now proposing in many decades.

Economically bad as that could be, it is only what arms the bomb. The critical factor is what comes next. If tariffs crush trade, they could greatly diminish international purchases of US Treasuries because Treasuries are a primary vehicle for foreign exchange. (To get the full picture, it takes the full weekend Deeper Dive to lay it all out. Become a paid subscriber and read all about it because it will be earth-shaking if it goes critical.)

AI bring in additional critical factors

In spite of how potentially bad it looks like it could be based solely on the factors and likely reactions mentioned in that Deeper Dive, there is a lot more depth and intricacy to how tariffs can cause the national debt to go critical. So, I want to add more analysis that one of my readers got by putting my main thesis into an AI computer and asking the computer if tariffs could crash the national debt. This will be an alerting supplemental read for everyone:

The reader gave the following scenario to Perplexity Pro AI:

Consider whether the high tariffs being promised by newly elected president, Donald Trump, could create a chain reaction [my thesis] that will cause severe financial problems because of the huge US national debt.

And here are the additional layers of complexity to this problem that the AI came up with outside of the one I laid out for a chain reaction:

The high tariffs promised by newly elected President Donald Trump could indeed create a chain reaction leading to severe financial problems, exacerbating the already concerning situation with the US national debt. This potential economic crisis stems from several interconnected factors:

Economic Impact of Proposed Tariffs:

President-elect Trump has proposed significant tariffs on imports, including:

– A 10-20% tariff on all imports
– At least a 60% tariff on Chinese imports
– A 25-100% tariff on Mexican imports
– A 100% tariff on all imported vehicles

These tariffs are expected to have substantial negative effects on the US economy:

1. GDP Reduction: Studies estimate that Trump’s proposed tariffs could lead to a 0.64% reduction in US GDP[1][3].

2. Global Economic Slowdown: The tariffs would also impact other major economies, with China potentially facing a 0.68% GDP reduction and the European Union a 0.11% decrease[1].

3. Reduced Consumer Spending: Higher prices on imported goods would leave consumers with less disposable income, potentially leading to decreased spending in other sectors of the economy[2].

4. Supply Chain Disruptions: Multinational companies might need to restructure their supply chains, potentially increasing costs and reducing efficiency[2].

Exacerbation of National Debt Issues:

The US national debt is already at a critical level, [one of my premises is that it is on the edge of going critical already with credit downgraded] approaching its post-World War II high[4]. The implementation of high tariffs could worsen this situation through several mechanisms:

1. Decreased Tax Revenue: Economic slowdown and reduced consumer spending could lead to lower tax revenues, further widening the budget deficit[4].

2. Increased Government Spending: Economic disruptions might necessitate increased government spending on social safety net programs and economic stimulus measures.

3. Rising Interest Costs: As the national debt grows, interest costs are projected to increase rapidly. These costs are already the fastest-growing “program” in the federal budget, expected to total $12.9 trillion in the next 10 years[5]. [This mechanism could also be hugely impacted by the factors I laid out in my Deeper Dive, but the AI did not even identify those risks, pushing interest even higher than the expansion of debt pushes it by directly impacting bond rates.]

4. Potential Credit Rating Impact: If the US fiscal situation deteriorates further, it could lead to a downgrade in the country’s credit rating, increasing borrowing costs and exacerbating the debt problem. [True from the fiscal standpoint on top also from the Treasury impact to interest that I laid out in the Deeper Dive.]

Potential Chain Reaction:

The combination of high tariffs and mounting national debt could trigger a chain reaction:

1. Trade War Escalation: Retaliatory tariffs from affected countries could further damage US exports and economic growth[3].

2. Reduced Foreign Investment: Economic uncertainty and trade tensions might discourage foreign investment in the US, potentially impacting the dollar’s strength and the government’s ability to finance its debt. [Not just in the US, but especially in US Treasuries, my main point.]

3. Inflation Pressure: Higher import prices could lead to increased inflation, potentially forcing the Federal Reserve to raise interest rates, which would increase the cost of servicing the national debt. [That’s one way they can raise interest. But their direct connection to Treasury demand may be an even bigger way.]

4. Crowding Out Effect: As more of the federal budget is allocated to debt servicing, less funding will be available for crucial areas such as infrastructure, education, and research, potentially hampering long-term economic growth[5].

5. Reduced Fiscal Flexibility: The combination of high debt and economic slowdown would limit the government’s ability to respond to future economic crises or unforeseen events[5].

In conclusion, while the full extent of the impact remains uncertain, the implementation of high tariffs as promised by President-elect Trump could indeed set off a chain reaction that exacerbates the already precarious situation with the US national debt, potentially leading to severe financial problems for the country.

Add all of that to what I wrote in my Deeper Dive, and you have the potential (not certainty) of a major chain reaction that blows the national debt up like a nuclear bomb and destroys the dollar as a global trade currency. Think of it this way—tariffs strike directly. Depending on how high and broadly they are applied, they can strike lethally. Bottom line is that TRADE is the only reason the US dollar IS the global currency at the most fundamental level. Kill trade with the US, and you kill the most foundational reason to use the dollar as a global currency, and if that happens, the debt goest thermonuclear.

With all of that, AI still missed the foreign-exchange factor. So I pointed that out to my reader, and he, then, asked that specific question of Perplexity Pro AI:

You did not mention that tariffs would have an impact on purchases of US Treasuries when fewer nations need them for foreign exchange. Please discuss whether this would add to US financial problems.

Having now been cued in by my thesis regarding what it had left out about other critical problems in this broad chain reaction, the AI responded as follows:

You’re correct to point out that the impact of tariffs on foreign purchases of US Treasuries is an important consideration when assessing potential US financial problems. This aspect could indeed exacerbate economic challenges for the United States. Let’s explore this connection in more detail:

Impact on Foreign Demand for US Treasuries:

The implementation of high tariffs could reduce foreign demand for US Treasuries through several mechanisms:

1. Reduced Trade Surplus: Countries with trade surpluses against the US often use their excess dollars to purchase US Treasuries. If tariffs reduce these surpluses, there may be fewer dollars available for Treasury purchases[1].

2. Currency Effects: Tariffs can lead to currency appreciation, potentially making US Treasuries less attractive to foreign investors[2].

3. Retaliatory Measures: If other countries impose retaliatory tariffs, it could further reduce their ability or willingness to purchase US Treasuries[2].

Consequences for US Financial Stability:

The reduction in foreign demand for US Treasuries could indeed contribute to US financial problems:

1. Higher Borrowing Costs: With decreased foreign demand, the US government might need to offer higher yields to attract investors, increasing the cost of servicing the national debt[1].

2. Pressure on Domestic Investors: A shift away from foreign buyers could put more pressure on domestic investors to purchase Treasuries, potentially crowding out other investments[1].

3. Increased Volatility: Lower foreign participation in the Treasury market could lead to increased volatility, as the investor base becomes less diverse[1].

4. Impact on Dollar Strength: Reduced foreign demand for Treasuries could potentially weaken the dollar’s status as the world’s reserve currency, with far-reaching economic implications[1].

Mitigating Factors:

However, it’s important to note some potential mitigating factors:

1. Domestic Demand: There has been an increase in pension demand for U.S. Treasuries since 2020, with potential for future increases in pension ownership[1].

2. Safe Haven Status: Despite tariffs, US Treasuries may still be viewed as a safe haven during global economic uncertainty[1].

3. Regulatory Factors: Changes in banking regulations could potentially increase bank demand for US Treasuries in the future[1].

In conclusion, while the impact of tariffs on foreign purchases of US Treasuries is a valid concern that could contribute to US financial problems, the overall effect would depend on a complex interplay of factors, including domestic demand, global economic conditions, and policy responses. The potential reduction in foreign demand for Treasuries adds another layer of risk to the already complex economic implications of high tariffs.

So, there you have it. The outcome is far from certain due to the complexity, but each factor by itself can be powerfully damaging, and there is a possibility the come together in a catastrophic chain reaction between many contributing parts (and it doesn’t take all of them to reach critical mass). This could build up all within Trump’s term to a level that would explode the national debt like a nuke and end the dollar’s dominance. And you have likely read about that first … here in The Daily Doom.

Everyone just got a free extra-edition Deeper Dive to follow up on the last, usually available only to paying subscribers. So, now might be a good time for those who are free subscribers (or not subscribers at all) to remember that the sale price for a full subscription to everything on The Daily Doom, including all weekend Deeper Dives, ends Tuesday. Now is the time to get the best sale price on top of the newly reduced regular price of The Daily Doom:

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