Since January 2025, a reigning principle of global markets has been something called TACO. TACO stands for “Trump Always Chickens Out,” meaning whenever Trump does something stupid that creates financial instability, an adverse market reaction can be counted on to scare him into backing down. Until now TACO has kept the S&P 500 climbing to levels that make little economic sense. When 10-year Treasury bond yields spiked after President Donald Trump’s “Liberation Day” tariff announcement in early April 2025, Trump chickened out, at least a little. Bond markets were “getting a little bit yippy,” he observed at the time. But now they’ve spiked to a 19-year high and (unless you count some dithering over a 50 percent Canada tariff) Trump isn’t chickening out. Asked Wednesday whether Americans should worry about the bond market, Trump said, “No, I don’t think so.” TACO, RIP.
There are all sorts of reasons the bond markets are going bonkers, not all of them having to do with Trump. Big Tech has decided it can’t sustain its enormous investment in Artificial Intelligence without borrowing, so it’s floated bonds this year totaling about half a trillion dollars. France, Canada, China and the United Kingdom are all carrying government debt that’s almost as big a percentage of their Gross Domestic Product as in the United States, where it’s 123 percent of GDP; in Japan the percentage is much higher.
But a lot of the bond market trouble is caused by two problems that Trump isn’t going to fix anytime soon.
One of these problems is entirely his own invention: the Iran war, which shows no signs of ending and is driving up inflation, especially overseas. In the United States, the Consumer Price Index is 3.4 percent, and while that isn’t catastrophic it does exceed wage gains. Should the new Federal Reserve Chair, Kevin Warsh, move to check inflation with an interest-rate hike, there’s a good chance Trump will turn on him as he did with his previous Fed pick, Jerome Powell.
Trump could ease pressure on the bond market by announcing that he intends to let the Fed operate independently, but that isn’t going to happen in this lifetime. Meanwhile, growing evidence of cognitive failure in Trump’s endless, contradictory, and often deranged public statements about the war is creating serious doubt that, even if a plausible path to peace presents itself, Trump will be mentally competent to take it.
The other problem is the United States budget deficit, which is out of control in large part because of Trump’s 2025 tax cut, which is expected to expand the budget deficit by $4.5 trillion by 2035. Conceivably, Trump may announce some sort of spending cuts to show he’s lowering the deficit, but as with Trump’s earlier tax cuts, they will come out of the domestic discretionary budget, which is too small for any cuts to make much difference. Trump’s own Treasury department shows spending under Trump has gone up, not down, to the tune of $309 billion. The only thing Trump’s cuts to federal staffing managed to do is screw the government up; they’ve saved perhaps $53 billion, while incurring costs, according to the nonprofit Partnership for Public Service, of $71 billion. That nets out to a spending increase of $18 billion. That’s a high price to pay for a civil service less able to function.
Trump has taken cuts to Medicare and Social Security off the table, and he’s reduced somewhat the taxation of Social Security benefits. (He says he eliminated it, which is untrue.) The recent increase in Medicare and Social Security spending is driven pretty much entirely by demographic changes that can be undone only by lining elderly people up against a wall and shooting them dead. Politically, Trump has sworn off cuts to these programs, but even if he hadn’t, it’s hard to see how he could realize significant savings by cutting benefits A more practical approach would be to tax more of these benefits back by treating them the same as regular income, and also to eliminate the $184,000 income ceiling on Social Security tax. But that’s the opposite of Trump’s approach.
Both short-term and long-term, the only way to reduce the budget deficit is to tax our way out of it. Not even Democrats want to say that, but it’s true. The United States is an under-taxed country. Taxes on corporations, capital gains, and inheritance have fallen over time, and so has the top marginal income-tax rate. In 1980, the top marginal income-tax rate was 70 percent; today it’s 37 percent. As a percentage of GDP, federal tax revenues keep falling. At the start of the 21st century federal tax revenues were 20 percent of GDP. Today they’re 17 percent. When Barack Obama was president, the effective tax rate on the 400 wealthiest Americans was 30 percent. That was a scandal because it was no higher than the effective tax rate for all Americans. Today, though, the effective tax rate on the 400 wealthiest Americans has dropped to 24 percent. I’m on record opposing a wealth tax, but if we can’t find a way to tax, for instance, the income rich people live on by borrowing against their assets, a wealth tax will become unavoidable.
American insolvency is self-perpetuating. The more out of control the deficit gets, the higher 10-year Treasury bond yields rise. The higher 10-year Treasury bond yields rise, the more expensive it becomes for the federal government to borrow money. And the more expensive it gets for the feds to borrow money, the more the deficit grows even more out of control. Nobody wants to believe this, but deficits go down under Democrats because Democrats increase taxes. They go up under Republicans because Republicans cut taxes. It truly is no more complicated than that. Democrats are the party of solvency, and Republicans are the party of insolvency.
Treasury Secretary Scott Bessent has attempted a mini-TACO in recent months by shifting United States borrowing to shorter-term debt (a gimmick Bessent criticized his predecessor, Janet Yellen, for resorting to). On Wednesday he announced that the federal government will double the size of its repurchases of long-term debt, from about $2 billion to about $4 billion. That’s another gimmick: reduce the surplus of 10-year Treasury bonds and you bring down the yield rates at which Treasury must sell those bonds to get anybody to buy them. It briefly sent bond yields downward Wednesday, but within a few hours they were rising again.
Another false hope, discussed by Andrew Duehren in The New York Times, is that the AI boom will increase productivity so spectacularly that revenue will gush into federal coffers. But everybody agrees that it won’t be enough to address the deficit problem in any meaningful way—and besides, absent a substantial increase in taxation of capital, revenue collection will be impeded by the reduction in revenues from labor as workers get replaced by machines. Our best minds need to get working on how to get a Large Language Model to pay income tax.
The experts say bond yields haven’t yet reached the crisis point at which a meaningful government response would be the only way to coax them back down, as President Bill Clinton, for instance, did in 1993 by cancelling his economic stimulus plan and turning instead to deficit reduction. But if we reach that crisis point, don’t expect Trump to do anything, because TACO is dead.
