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Investors and businesses are grappling with the uncertainty surrounding the US’s tariffs on its top three trading partners. Despite proposed tariff relief, US stocks continue to decline.
In a recent note, TS Lombard’s Steven Blitz draws parallels between the US and a distressed debtor, highlighting challenges raised by Council of Economic Advisors nominee Stephen Miran. Miran’s discussion on tariffs as a negotiation tool and revenue source suggests a potential Mar-a-Lago Accord and a “graduated” approach inspired by the Federal Reserve.
The ongoing tariff discussions align with the idea of fiscal forward guidance in the era of reality TV. TS Lombard’s Blitz emphasizes the revenue-driving aspect of tariffs for the Trump Administration, pointing out the complexities of reshoring activities and reducing the budget deficit.
A proposed solution involves issuing “special century bonds” to forex reserve managers to refinance outstanding debt. Blitz suggests that the US aims to extend the maturity of its debt through alternative means like the global security umbrella.
Blitz also discusses the concept of a “classic cram down” where debt holders are forced to swap their holdings for debt with new terms or equity. However, he questions the feasibility of this strategy and its impact on US debt holders and global trade dynamics.
An alternative proposal involves the Fed trading its portfolio for non-marketable zero-coupon bonds, potentially reducing debt servicing costs. This approach could shift the management of the economy to the fiscal side in the long run.