The big news of the last week was the Trump Administration’s backtrack of his not-so implicit threat to take over Greenland by force. It’s of course not surprising that he backed off, as there is not American support to even buy Greenland, much less take it over by force. Further, his proposed tariff increases were going to be a market killer, as longer term treasuries spiked sharply. Now I believe Mr. Trump’s Greenland gambit is the most harmful thing he’s done in his second term, even more so than his tariffs, because sometimes you don’t actually hold all the cards, and everybody knows it.

Imagine you have a neighbor that is pretty braggadocious (let’s call him Bob), and last month he went down the street and soundly beat up another neighbor (call him Bill) who was known to allow drug users free traffic to his place, and was suspected of actually having a meth lab in the attic. The police had ignored neighbor complaints for years, and Bob finally just got fed up and gave Bill a whipping that wouldn’t quit. And after the beating Bill took, he cleared out of the house and it’s now up for sale. You may not like Bob, but you have to agree that it’s a great thing that he took care of the problem. Of course you wished the police had handled the problem (especially since Bob is boasting now all the more), but at least Bill is gone and the neighborhood is much safer. But last week Bob came over and knocked on your door, saying he wanted to buy the empty lot you own next door to your house, but you wanted it for a reason–as you didn’t want somebody to be able to build right beside your house and spoil your view of the woods beyond. You tell him you’re sorry, but it’s not for sale. But then Bob says you can do this the easy way or the hard way, but you are going to do the deal. Now Bob is not only much bigger than you, but he also has a pretty large gun collection that he fires off in his backyard. You, however, have never had an attraction to guns and don’t own any. So what do you do? Maybe you call the police, and they actually talk to him, but he denies he ever threatened you, so they go away. The next week, Bob is back at your door, reminding you of how much you and the rest of the neighbors owe him, because only he can keep the drug people out of the neighborhood. You tell Bob you’re grateful for that, but the lot is still not for sale. But Bob simply retorts, “you’re going to sell this to me one way or another. You can’t protect your lot from the drug lords that were down the street, and I hear they’re coming back. Let’s do this the easy way, because we are going to do the deal.” Your next door neighbor Sam gets wind of the blowup and offers to go talk to Bob. Bob wanted to use the lot to be able to access the woods during deer season, so Sam is able to get him to agree to lease the hunting rights and not fight you over it. You don’t really like the idea of hunters shooting into the woods as deer go by, but Bob also reminds you that bears sometimes come out of the woods and scavenge the garbage cans, and potentially even can attack people. Part of you wonders why he couldn’t have just sat down and discussed this? Why did he have to physically threaten me? On the other side of this deal, you now have a different opinion of your neighbor, and you start wondering what he’s going to want next. What should you do? Well Bob has the biggest car dealership in town, and for one thing, you might not buy your next car from Bob. You have to remain civil to Bob, but you can minimize your dependency on him. One thing is for sure, your opinion of Bob is never going to be the same.

Proverbs 18:21 reminds us that “Death and life are in the power of the tongue, and those who love it will eat its fruits.” Some words we say can never be taken back. Forgiven yes, but certainly not forgotten. A man’s words flow out of the character of his heart, as Jesus reminds us on Luke 6:45: “The good person out of the good treasure of his heart produces good, and the evil person out of his evil treasure produces evil, for out of the abundance of the heart his mouth speaks.” But not only Donald Trump’s character is revealed by his words, but America itself is judged by others. Which Republican publicly condemned him? No, rather they excused him, correctly saying he would never do this–it’s just art of the deal. Now that is correct, but isn’t it also irrelevant? Could Europe be completely sure? One of the wonderful things about economics is the idea that every trade creates value, as both sides have differing values of whatever is traded, and by free exchange, both sides win. Yet Donald Trump has a distorted view of trade, that often trade is severely imbalanced, such that when one side wins, the other side loses. And as he’s reminded us, he’s going to make sure America always wins. Yet the key to long term success in any relationship is reaching agreements with others to ensure the classic win-win. Some things cannot be part of your negotiating strategy. You can’t, for example, negotiate to buy your neighbor’s house and threaten to burn his house down if he doesn’t sell to you. It doesn’t matter if you don’t do it and you mutually agree on price outside the threat–the threat has a cost of its own. Similarly you don’t get into an argument with your spouse and threaten to physically abuse them, even if you don’t end up doing it. And you never actually intended to do that. You simply cannot make those threats without long term negative consequences.

And that gets us to todays discussion about markets. To be sure, markets are reflecting a whole host of things (not simply Greenland), but all of last year we saw the emergence of the so-called debasement trade, which was basically out of the dollar. Consider this chart of gold for the last year as of yesterday’s prices:

Gold has appreciated by ~80% in the last year, with silver even higher:

Now normally a parabolic rise like we see in silver should come down sharply, even if silver stays in a bull market, simply to rebalance sentiment and bleed off excessive bullishness. Yet it keeps powering higher. The debasement trade is not simply out of dollars, although that is part of it. It is more broadly a sell off of the existing order, as most of the major countries are on the verge of debt spiraling out of control. The sell off of the Japanese yen on Tuesday is a warning shot for all the larger profligate countries. Robin Brooks of the Brooking’s Institute has been consistently chronicling this (you can wonk out by reading his work here). But just to summarize, Japan is fighting a two progronged problem, with the new prime minister wanting to have an expansive fiscal policy (ending “extreme austerity”) even while the Bank of Japan is trying to preserve the value of the Yen, which has fallen to decades low lows. With a debt to GDP that dwarfs ours, the government can’t expand fiscally without the BOJ buying more of the debt, which will cause the yen to fall further into oblivion. At some point Adam Smith will win.

But the U.S. is not immune to these pressures, as Mr. Trump has refused to tackle the real pressing spending problems (entitlements) to which the Democrats have created as a key part of their identity, while implementing some very stimulative tax and regulation policies. Meanwhile, his browbeating of the Fed now has the Fed opening up smaller levels of quantitative easing (~$25B/month). The Trump Administration’s threat of criminal prosecution of Jay Powell is of the same nature as the threat to attack Greenland. Of course Mr. Powell is not above the law, but criminal prosecution needs to clear a very high bar. And the Trump administration is saying a cost overrun in Washington DC fits the bill? If that’s the case, pretty much every government official should go to jail. So we have extremely loose fiscal policy, and very loose monetary policy, and the rest of the world moving away from the US in reaction to Mr. Trump’s belligerence, when those countries finance a large part of our debt. Treasury Secretary Bessent sneered at Denmarks “threat” to sell the pittance of US treasuries they have ($100M), and he is correct that this is meaningless: “Denmark’s investment in U.S. Treasury bonds, like Denmark itself, is irrelevant,” U.S. Treasury Secretary Scott Bessent told reporters Wednesday at the World Economic Forum in Davos, Switzerland.” Yet calling a sovereign nation that is an ally of the US “irrelevant” comes with its own costs. Europeans as a whole are watching and getting angry, and collectively they have over $8T in bonds and equities in the US. Selling on the margins is continuing to drive the U.S. dollar lower, and it has begun to resume the downward direction*. Hence the inexorable rise in gold and silver. Our fiscal profligacy is in part what made Mr. Trump have to reverse course. They should be wary of thinking that Trump Always Chickens Out, but nevertheless we should stem our hubris with the realization that we truly don’t have “all the cards,” and certainly not while we don’t have our fiscal house in order.

Gold and silver could collapse from here. The dollar could rise. Yet the fundamentals that have driven these changes don’t seem to be going in our direction. Even after the rapid rise, I wouldn’t be betting against the debasement trade.

* After being down about 9% in the first half of last year, the USD index more or less leveled off. But much of that was due to extreme weakness in the Japanese yen, which is imploding. Relative to stronger currencies, such as Sweden, Switzerland the U.S. dollar has really fallen. Again, search out Robin Brooks and his substack to know more.

EDIT Update: Monday morning. Canaries still singing.