Market wisdom has averted trade war

The president of the United States commands one of the most formidable nuclear arsenals on earth, capable of destroying humanity several times over, yet even he must quail before the awesome might of the yield curve of government bonds. It was when 30-year US Treasury yields touched 5 per cent on Wednesday, the highest level since the pandemic, that Donald Trump’s decision to wage economic war on the world became untenable.

And a good thing too. Mr Trump, Sir John Major, Liz Truss and Harold Wilson are, for some reason, seldom compared but all were dashed upon the rocks of the financial markets. Each committed the same error of trying to persuade the unforgiving market that black was white and two plus two need not equal four.

Messrs Major and Wilson claimed that the pound was worth more than it really was. Ms Truss asserted that unfunded tax cuts were affordable even in a sea of debt. And Mr Trump, boldest of them all, maintained that America would thrive by launching a global trade war so cosmically destructive that it might have sprung from the imagination of H G Wells.

In every case, the markets were having none of it. Countless buyers and sellers motivated by rational self-interest brought those leaders down to earth with a reminder that no government in the free world can force people to lend it money, buy shares, or hold the national currency.

The traders, bankers and hedge funds – the most visible participants in the markets – have often been roundly abused for their insistence that two and two must equal four. Harold Wilson denounced the Swiss bankers who sold sterling as the “gnomes of Zurich”. Ms Truss claimed to be the innocent victim of a “powerful economic establishment”. As the US markets delivered their emphatic verdict on his trade policy on Wednesday, Mr Trump said they were “getting a little bit yippy”.

But, just occasionally, the rest of us should give thanks for the collective wisdom of open markets. They provide the ultimate safeguard against folly, administering their own inescapable form of rough justice. Mr Trump has been compelled to announce a 90-day truce in his trade war, though unless he blinks again he will punish China with an even higher tariff of 125 per cent. But for now, the world may have been rescued from possible recession by the majestic power of the US Treasury yield curve.