Comment by lxgr
7 days ago
> The flaw is that the USD is massively dropping because of the tarifs.
That's all but certain. Currently it's dropping, but long-term it might as well rise, as the demand for foreign currencies from US importers (and by extension consumers) will go down.
> This will push up interest rates on US bonds, because bond holders want compensation for the value loss of their bond.
How do existing bondholders get to demand anything? They may want compensation for a reduced market value, but nobody owes them that. Fluctuating market values are part of the deal of buying bonds.
Existing bondholders can't demand anything of course. But the bond price is determined by buyers and sellers. With dropping USD, buyers will pay a lower price for the bonds, i.e. the yield will go up.
Your model is missing the Fed, which can buy an almost infinite number of bonds to bring the effective interest rate down to whatever it wants.
You mean, by printing money. Well, if they would do that, the USD would sink even more and thus also the US bonds.