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News — Comments from Paolo Pasquariello, a Professor of Finance and Area Chair of Finance from the University of Michigan:

The week of April 2 was meant to be the week of "Liberation Day" (in the words of the current administration). Instead, it marked the end for the U.S. of the decades-long era of being "special" in the eyes of investors. Instead, it was when the U.S. became Italy, or better the U.K., a more similar country victim of multiple self-inflicted economic wounds --- from Brexit to pandemic mismanagement to Liz Truss' economic heterodoxy. Being special has always come with a lot of privileges for the U.S., first and foremost, the one of being deemed a safe haven during times of turmoil. During such times, money flowed away from any other "risky" financial asset, market, or country for the perceived absolute safety of U.S. Treasury securities. This perception allowed the U.S. government to borrow at low interest rates for decades. No more. The week of April 2 is the week that the U.S. learned that, from now on, its borrowing needs will depend on the whims of the bond vigilantes, like every other country in the world. Perceptions of "specialness" are very fragile; it takes decades to build them up and a few weeks to bring them down. The U.K. learned this lesson the hard way when its short-lived Prime Minister Liz Truss decided to ignore a century of economics to undertake policies that had the magical effect of displeasing virtually everybody, but especially the bond vigilantes. Again,  who are the bond vigilantes? They are no one in particular. Rather, it is a metaphor for the collective actions of countless bond investors, small and large, sophisticated and uninformed, who assess a country's creditworthiness and make their investment decisions accordingly. Those bond vigilantes assessed that the U.K. -- a relatively small open economy that had just abandoned the largest trading zone in the world and its main trading partner in an act of economic self-harm with little precedent (until April 2, that is) --- had become more likely to default on its debt in light of Ms. Truss' fiscal recklessness. And so they sold U.K. government bonds, tens of billions of pounds of it, which raised sharply its interest rates and made the country's likelihood of default greater, which then led to more bonds being sold and to its interest rates to go up even further, and on and on...until it was high time for Ms. Truss to reverse herself and for her party to show her the door unceremoniously only a few months after anointing her. Those were the days when U.K. citizens learned that from now on their country will have to pay higher interest rates going forward to borrow from the rest of the world because of the possibility that such madness may happen again --- since, after all, it did happen before. Those greater borrowing costs are known as the "moron premium." Back to Liberation Day, which liberated bond vigilantes from the outdated belief that one could always count on the U.S. to make ultimately sound financial decisions, and more generally to keep its financial promises. The routine Russian roulette of budgets, debt ceilings, and government shutdowns already imperiled this belief. And yet, the bond vigilantes continued to hesitate since, after all, they (we) need to believe that there is something, somewhere, where it is always safe to park their (our) money away in times of turmoil. Liberation Day unleashed such a storm of self-inflicted economic harm that all that residual reluctance was washed away in a blink. The bond vigilantes sold massive amounts of U.S. government bonds. U.S. interest rates jumped, fear and distress spread like wildfires, and President Trump duly blinked, kind of. Kind of, since crazy talk of taxing/expropriating foreign holders of U.S. Treasuries (crazy because that would mechanically translate into greater borrowing costs for the U.S. to convince them to hold or buy its bonds) or of firing Fed Chairman Powell (crazy because he is the only one preventing a stampede) continued. Kind of, because the tariff reprieve is only temporary, fueling further uncertainty and fear. And so the bond vigilantes continue to sell U.S. Treasuries, and U.S. interest rates continue their upward trajectory. Some say that this is just temporary, since after al,l those investors need to park the money somewhere and will therefore return to the U.S. once things blow over. No, they won't. They have already found palatable alternatives in German government bonds and gold. Some say that this is just temporary, since after all, in two or four years' time, Mr. Trump and the GOP will pay a heavy electoral price for such madness, and order and reason will be restored by the next administration. No, it won't. The "moron premium" is permanent, as it reflects what is possible and what is possible is driven by what has just happened. Two decades ago, nobody could have predicted such madness in U.S. economic and financial affairs, but it has now happened. And from now on, for decades to come, the bond vigilantes will remember and factor that in when lending money to an increasingly needy and perceivedly less trustworthy U.S. government. It isn't easy not to be thought of as special any longer, especially in financial matters. It requires humility, patience, perseverance, and tolerance for pain -- sometimes bond vigilantes overreact or hit the wrong target, but there are so many of them that even their mistakes can become self-fullfilling. This is already the current reality for most countries. This is the future for the U.S. for decades to come. Perhaps Mr. Trump should have invited Ms. Truss to the White House for a chat on April 1.