Dear Reader,

The trade war with Canada is heating up again.

Negotiations broke down last week.

Canada is preparing retaliatory tariffs on American goods.

And President Trump is threatening to raise tariffs on Canadian cars, trucks and auto parts to 50%.

At almost the exact same time, Trump has promised to unleash an “economic D-Day” against Iran – using sanctions and the power of the U.S. financial system to pressure countries around the world to cut ties with Tehran.

But I’m not going to spend today talking about tariffs or trade wars.

If you’ve followed me for any length of time, you already know how I feel about those.

Instead, I want to point out a huge irony underneath all of this.

Because the Trump administration clearly wants to wield America’s enormous economic might as a weapon.

And there’s no question America has a lot of it.

We have one of the largest consumer markets on Earth.

We control the world’s most important currency.

And access to the American financial system is so valuable that threatening to take it away can change the behavior of governments and companies around the world.

America’s economic power gives Washington enormous leverage over the rest of the world.

But at the same time…

America’s Debt is Giving the Rest of the World Leverage Over Washington

And with the national debt just crossing $40 trillion – while the government is still adding roughly another $2 trillion a year to the pile – we’re starting to see exactly what that looks like.

Recently, the 30-year Treasury hit 5.31% – its highest level since 2007.

Treasury yields help determine borrowing costs throughout the economy, from mortgages and business loans to corporate bonds.

And, of course, the interest Washington itself pays on its enormous debt pile.

So when long-term yields surged…

Treasury Secretary Scott Bessent stepped in.

On August 19, the Treasury announced it would double the size of certain buybacks of long-term government bonds from $2 billion to at least $4 billion per operation.

Yields immediately dropped.

But within days, they climbed right back up.

I broke down exactly what happened – and why I believe the Treasury has effectively shown the market where its pain threshold sits – in my recent video.

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But for today, let’s look at the bigger picture.

The important point isn’t the mechanics of these buybacks.

It’s what they reveal.

Washington has now shown that there is a level at which rising Treasury yields become painful enough that it feels compelled to act.

And when the government depends on borrowing trillions of dollars every year…

It means…

America Needs the Bond Market to Cooperate

And we’ve already seen glimpses of what happens when America’s foreign policy collides with that reality.

Back in January, President Trump threatened eight European countries with tariffs over Greenland.

Markets responded by reviving the so-called “Sell America” trade.

A Danish pension fund even announced that it was dumping its entire Treasury position, while Bessent was soon being asked publicly whether he was worried about wider European selling.

Trump ultimately dropped the tariff threat after announcing a framework with NATO.

Now, I’m not saying the bond market forced Trump to back down.

There were plenty of other negotiations happening behind the scenes.

But the episode showed how quickly America’s own financial markets can become part of the pressure Washington has to consider.

Then there’s Japan.

Japan is America’s largest foreign Treasury holder, with roughly $1.1 trillion of U.S. government debt.

Recently, when the yen came under severe pressure, Japan needed dollars to support its currency.

One obvious way to raise those dollars would be to sell some Treasuries.

Washington very clearly prefers that it doesn’t…

Because dumping Treasuries would cause their price to fall – and yields to rise.

Instead, the U.S. has backed mechanisms that allow Japan to raise dollars against its Treasury holdings without unloading those bonds into the open market.

Think about what that tells you.

Now, I’m not saying Japan – or China, or Europe – can simply dump all their Treasuries tomorrow and bring America to its knees.

That argument is much too simplistic.

They’d hurt themselves too.

But the bigger point isn’t whether they ever actually do it.

It’s that America has borrowed so much money that Washington now has to worry about the possibility at all.

That’s what $40 trillion of debt does.

It gives the people financing you a pressure point they didn’t have before.

That’s What Makes the Current Strategy So Ironic

The administration wants to wield America’s economic power more aggressively…

At the same time that Washington’s fiscal policy is slowly weakening its ability to do so.

Now, before anyone turns this into a partisan point, this did not start with Trump.

The debt ballooned under Biden too.

In fact, back then there was an entirely different argument for why we shouldn’t worry so much about deficits.

Modern Monetary Theory – or MMT – was having its moment.

In simple terms, MMT argued that a government like the United States, which borrows in a currency it controls, doesn’t face the same financial constraints as a household.

The real limit isn’t running out of dollars – it’s inflation.

And while never made explicit, so-called “Bidenomics” was basically an expression of MMT.

Today the justification is different.

Trump and Bessent argue that faster economic growth can help America grow its way out of the debt burden.

I sincerely hope they’re right.

But notice the recurring pattern, the one that says:

We Don’t Need To Deal With the Debt Today

The administration changes.

The justification changes.

But dealing with the debt always gets pushed off until tomorrow.

And for decades, America has been rich and powerful enough to get away with it.

Maybe it still can for a while longer.

But what we’re seeing in the Treasury market should be a warning that there are limits.