Nicely done. I remain skeptical that anything resembling a grand plan will come out of this. Negotiating credibility is mostly gone, political will for a protracted period of economic pain is not there, and this is the second-term project of a lame duck with a thin congressional majority and no strategic allies.
"Consider this a bonus article, a very rare instance where I am not talking about which stocks I want to buy or sell, or making directional calls on FX, equities or rates."
This isn’t about tariff history. It’s about post-WTO China—the moment the U.S. handed Most Favored Nation status to a state-run economy that doesn’t play by any rule the global system was built on.
Since 2001, China’s economic model has been predicated on one thing: suppressing domestic consumption while overproducing for export. It pegged the yuan, sterilized capital inflows, bought trillions in Treasuries, and used that dollar flow to stockpile commodities, subsidize SOEs, and build ghost cities. That wasn’t free trade. That was vendor financing on a global scale, and we were the counterparty.
Meanwhile, U.S. industry hollowed out under the illusion of “comparative advantage.” But you can’t compete on unit labor cost when your competitor can legally suppress wages, ignore IP rights, and absorb cost through monetary policy. China exported deflation. We imported dependency.
This isn’t about Smoot-Hawley. That’s ancient history. The real rupture was when we let a mercantilist autocracy into a liberal trading regime and assumed equilibrium would hold. Now we’re living in the aftermath: a structurally overvalued dollar, a fractured supply chain, and a U.S. electorate no longer willing to subsidize the global commons.
You want a framework? It’s not the “Fourth R.” It’s rebalancing—through tariffs, reshoring, and decoupling. Call it crude, call it disruptive—but it’s inevitable. The system was unsustainable. Now it’s repricing.
And let’s be clear: pricing in the cost of U.S. production to bring back strategic manufacturing isn’t what sends markets into turmoil. That’s not the volatility trigger. The klepto-globalists already took care of that, because they outsourced sovereignty for profit and let Beijing write the global script. The turmoil you’re seeing isn’t from tariffs—it’s from decades of asset managers, multinational CEOs, and policymakers getting paid to look the other way while China rewired the system.
U.S. production cost pricing shouldn’t spark a multi-trillion-dollar market drawdown. If tariffs were the sole driver, we’d see sectoral rotation, not broad liquidation. Instead, we’re witnessing a coordinated foreign exit—led by European institutions—that demands deeper scrutiny than “tariffs cause volatility.”
This isn’t just protectionism vs. globalization. It’s a structural decoupling of capital flows that propped up U.S. asset valuations for decades. Post-WTO, trade surpluses abroad fueled U.S. Treasuries and equities via the eurodollar system. Rehypothecated eurodollars, collateralized by Treasuries, amplified this liquidity loop, as reused collateral in shadow banking turbocharged global credit. That pipeline is now fracturing.
The real question isn’t tariffs’ bluntness. It’s:
Why is Europe—often politically fragmented—suddenly aligned in this capital unwind?
Why the synchronized moves from EU institutions, sovereign wealth funds, and reserve managers?
Is this a quiet rejection of U.S. fiscal dominance? A response to dollar weaponization? A hedge against geopolitical risks? Or the start of a de-dollarization shift masked as a correction?
Tariffs don’t explain this scale of capital flight. The market isn’t reacting to trade policy—it’s grappling with the unraveling of a mispriced liquidity loop.
This shift isn’t reactive. It’s deliberate.
To understand the drawdown, forget tariff headlines. Ask:
Who’s selling?
Why now?
Where’s the capital flowing?
Can tariffs alone explain the drawdown? No. So what’s the real catalyst behind Europe’s exit? Unwinding a rehypothecated liquidity trap? Or hiding a more fundamentally flawed financial system propped up by Treasuries?
Harder questions remain. Is Europe unwinding bad collateral chains to stabilize their banks, or masking deeper flaws in a financial system overexposed to U.S. Treasuries? That’s the real debate.
Citrini, with all due respect, this is a fundamentally different market regime. As my trading disclaimer says: past performance is not indicative of future results—and that applies here more than ever. The frameworks of the past simply don’t map cleanly onto what we’re seeing now.
I stand by my position: pricing in the cost of U.S. production shouldn’t trigger a multi-trillion-dollar drawdown. The volatility isn’t about tariffs—it’s about a coordinated foreign exit from U.S. markets, particularly from European institutions. That’s the real story.
So the question isn’t whether tariffs are a blunt tool—it’s: why is the EU moving in lockstep with this unwind? What’s driving that capital flight? That’s where the focus should be—not just on historical parallels, but on structural shifts happening in real time.
Look—I don’t say things lightly. You don’t have to agree with me, but you should at least consider the possibility that I know exactly what I’m talking about.
There's no need to overcomplicate it or look for some kind of conspiracy.
I, as an indivual investor, am trimming down my US equity holdings as fast as I possibly can. These are the reasons:
- Very deep distrust of the Trump Administration. It's anti-Europe and pro-Russia.
- Zero confidence in Trump himself, his cadre of yes-men and his policies.
- US stock market is subject to Trump's erratic policies and may be further harmed going forward - likely also subject to a recession.
- Under Trump, the USD has been a huge drag on my portfolio and I see no end to this.
- I no longer trust the US rule of law. I don't feel confident that Trump won't come after my US holdings with taxes, capital controls, etc.
- Europe is left to fend off Russia alone - despite NATO. So there are many reasons to invest locally, rather than in the US. Rearmament being only one.
I want out of the US market and so do other individuals, asset managers, pension funds, etc. It's just natural behavior, given the circumstances.
Citrini’s post was detailed and well-researched—I respect it. But it doesn’t preclude a serious discussion about whether re-coupling tariffs to the actual cost of U.S. production might, in fact, be the most measured adjustment in a global system already showing structural cracks.
Let’s be clear on the core of my argument:
This isn’t about replaying Smoot-Hawley. It’s not 1930. The real inflection point was post-WTO China—when the U.S. extended Most Favored Nation status to a command economy that systematically violated every assumption embedded in liberal trade theory.
Since 2001, China has run a model built on suppressed consumption, overcapacity in export sectors, capital controls, a pegged currency, and the weaponization of its trade surplus via recycling into U.S. Treasuries. That wasn’t “free trade.” It was vendor financing at scale—and we were the client.
Europe didn’t stand aside. EU central banks joined the trade-finance loop via overnight repo, using rehypothecated offshore contracts—like bulk iPhone purchase orders—as synthetic collateral to juice liquidity and generate USD-denominated exposure. That helped spin up a quadrillion-dollar eurodollar shadow banking system backed by increasingly tenuous real-world inputs.
That’s the actual source of fragility. Not tariffs.
Frankly, I’d rather see foreign-held Treasuries unwound and replaced with USDC-backed instruments, ideally tethered to a blockchain ledger with traceable payment trails. Call it radical—but that’s more transparent than continuing to underwrite a system that relies on phantom leverage and opaque dollar recycling masquerading as international reserves.
While that machine ran, U.S. industrial capacity collapsed, hollowed out under the illusion of comparative advantage. But there’s no price discovery when your counterparty controls labor costs by fiat, ignores property rights, manipulates currency, and subsidizes losses through sovereign balance sheets. China exported deflation. We imported dependence.
This is the actual rupture point. The unwind is overdue. And markets aren’t reacting to tariffs—they’re reacting to the recognition that the vendor-financed Treasury demand loop is breaking down. Tariffs are just the visible part of a much deeper structural reset.
You basically just reworded your original post without adding anything new. Hopefully, you realize that. And also, let’s be real — there’s no way the U.S. builds an industrial base anywhere close to China’s within the next 30 years.
If it tries, the tax will be devasting - possibly losing all adavntage in all other areas.
When taking about Smoot-Hawley everyone conveniently leaves out the 32% contraction in money supply over three years starting in 1929. Tariffs may have been a straw but the camels back was broken well before the order was signed
All else being equal, corporate bankruptcies have little to no effect on the monetary base. Certainly no direct effect on M1/M2, small indirect effect due to the money multiplier
To a degree but Smoot-Hawley was not the reason for that during the period.
Between 1928-1929 the Fed hiked from 3.5% to 6%. As the stock market crashed the waters receded and it was clearly revealed that many banks were over leveraged/undercapitalized. A legit and total bank run ensued. With no FDIC to guarantee deposits, cash was pulled and hoarded.
To make matters even worse (far worse), the Fed was still tied to the gold standard, having to maintain 40% gold for every unit of currency. This wouldn't have been as big of a deal except... Great Britain dropped their gold standard in 1931. All central banks who held Sterling as a proxy for gold converted their sterling to USD, presented the USD to the fed for gold, forcing the fed to send gold out of their vaults, which legally forced them to contract the monetary base to maintain the 40% ratio.
Smoot-Hawley had virtually nothing to do with what happened in the 30s. But people love to point to it because it involved tariffs at a time when bad economic things happened.
I have respect for Citrini, but I'm surprised he chose this angle. It is very, very easy to debunk as a good proxy for what's happening today.
Great Fourth Turning content, surprisingly without a single reference to the book. Recommended reading on the off chance you haven’t done that yet Cit.
"Is there an outcome to this that’s not devastating to the global economy? Yes, but there’s no outcome where global trust in the U.S. is restored with haste."
How do you see that non-devastating outcome, and what are probabilities of that?
Citrini’s piece brilliantly traces the historical arc — but here’s the uncomfortable truth: this isn’t Smoot-Hawley, and it’s not 1971. We’re watching the system architect voluntarily dismantle the operating system of global trade. The Fourth ‘R’ isn’t just Rent — it’s Repricing: of capital, of trust, of American exceptionalism. And no model priced that in.
The cost of unpredictability won’t be a number. It’ll be a regime change."
Having studied fairly intensely international economics and currency regimes including under a former minister of finance - this is an excellent article. The trade /bop/tariff linkage to the (US) monetary system is intricate and not easily explained to the non- finance or economist background. I’m concerned the Mom and pops saving in 401ks and 529s have no idea what is brewing under the surface.
> Additionally, today’s administration, like Hoover's in 1930, faces the contradiction of being both debtor and trade restrictor
The US was a creditor nation in 1930, as the article rightly points out in the beginning. This is where I think the comparison between hawley-smoot and trump tariff falls short. The US had a sizable trade surplus back then, and tariff's impact depends greatly on a country's trade balance.
Good catch & point. As you can see from the rest of the article this was a typo, I meant that section to be demonstrative of the differences, not claim similarity. I’ve fixed it.
Outstanding piece - although you don’t say it explicitly, the inevitable conclusion is that the second and third order effects of this economic vandalism will be a destruction of international trade, FDI and with it propserity for a decade at least. I couldn’t help but see manufacturing as the agriculture of our age with all the attending consequences.
Excellent piece. I think this is more than ‘rent’ though. The administration seeking increase in exports and investments in manufacturing point towards the fact that it is no longer in Americas interest to be a debtor nation.
There is no scenario in which the long term prospects of pawning off industries to fund short term lifestyle will end well.
Nicely done. I remain skeptical that anything resembling a grand plan will come out of this. Negotiating credibility is mostly gone, political will for a protracted period of economic pain is not there, and this is the second-term project of a lame duck with a thin congressional majority and no strategic allies.
Great piece. But it begs the question - how do we position for this? It seems everything is "bad" under this scenario?
"Consider this a bonus article, a very rare instance where I am not talking about which stocks I want to buy or sell, or making directional calls on FX, equities or rates."
Like he said, gold.
You’re completely divorced from reality.
This isn’t about tariff history. It’s about post-WTO China—the moment the U.S. handed Most Favored Nation status to a state-run economy that doesn’t play by any rule the global system was built on.
Since 2001, China’s economic model has been predicated on one thing: suppressing domestic consumption while overproducing for export. It pegged the yuan, sterilized capital inflows, bought trillions in Treasuries, and used that dollar flow to stockpile commodities, subsidize SOEs, and build ghost cities. That wasn’t free trade. That was vendor financing on a global scale, and we were the counterparty.
Meanwhile, U.S. industry hollowed out under the illusion of “comparative advantage.” But you can’t compete on unit labor cost when your competitor can legally suppress wages, ignore IP rights, and absorb cost through monetary policy. China exported deflation. We imported dependency.
This isn’t about Smoot-Hawley. That’s ancient history. The real rupture was when we let a mercantilist autocracy into a liberal trading regime and assumed equilibrium would hold. Now we’re living in the aftermath: a structurally overvalued dollar, a fractured supply chain, and a U.S. electorate no longer willing to subsidize the global commons.
You want a framework? It’s not the “Fourth R.” It’s rebalancing—through tariffs, reshoring, and decoupling. Call it crude, call it disruptive—but it’s inevitable. The system was unsustainable. Now it’s repricing.
And let’s be clear: pricing in the cost of U.S. production to bring back strategic manufacturing isn’t what sends markets into turmoil. That’s not the volatility trigger. The klepto-globalists already took care of that, because they outsourced sovereignty for profit and let Beijing write the global script. The turmoil you’re seeing isn’t from tariffs—it’s from decades of asset managers, multinational CEOs, and policymakers getting paid to look the other way while China rewired the system.
If you’d like to make the claim that I am divorced from reality please do so without AI generated text to back it up.
U.S. production cost pricing shouldn’t spark a multi-trillion-dollar market drawdown. If tariffs were the sole driver, we’d see sectoral rotation, not broad liquidation. Instead, we’re witnessing a coordinated foreign exit—led by European institutions—that demands deeper scrutiny than “tariffs cause volatility.”
This isn’t just protectionism vs. globalization. It’s a structural decoupling of capital flows that propped up U.S. asset valuations for decades. Post-WTO, trade surpluses abroad fueled U.S. Treasuries and equities via the eurodollar system. Rehypothecated eurodollars, collateralized by Treasuries, amplified this liquidity loop, as reused collateral in shadow banking turbocharged global credit. That pipeline is now fracturing.
The real question isn’t tariffs’ bluntness. It’s:
Why is Europe—often politically fragmented—suddenly aligned in this capital unwind?
Why the synchronized moves from EU institutions, sovereign wealth funds, and reserve managers?
Is this a quiet rejection of U.S. fiscal dominance? A response to dollar weaponization? A hedge against geopolitical risks? Or the start of a de-dollarization shift masked as a correction?
Tariffs don’t explain this scale of capital flight. The market isn’t reacting to trade policy—it’s grappling with the unraveling of a mispriced liquidity loop.
This shift isn’t reactive. It’s deliberate.
To understand the drawdown, forget tariff headlines. Ask:
Who’s selling?
Why now?
Where’s the capital flowing?
Can tariffs alone explain the drawdown? No. So what’s the real catalyst behind Europe’s exit? Unwinding a rehypothecated liquidity trap? Or hiding a more fundamentally flawed financial system propped up by Treasuries?
Harder questions remain. Is Europe unwinding bad collateral chains to stabilize their banks, or masking deeper flaws in a financial system overexposed to U.S. Treasuries? That’s the real debate.
Citrini, with all due respect, this is a fundamentally different market regime. As my trading disclaimer says: past performance is not indicative of future results—and that applies here more than ever. The frameworks of the past simply don’t map cleanly onto what we’re seeing now.
I stand by my position: pricing in the cost of U.S. production shouldn’t trigger a multi-trillion-dollar drawdown. The volatility isn’t about tariffs—it’s about a coordinated foreign exit from U.S. markets, particularly from European institutions. That’s the real story.
So the question isn’t whether tariffs are a blunt tool—it’s: why is the EU moving in lockstep with this unwind? What’s driving that capital flight? That’s where the focus should be—not just on historical parallels, but on structural shifts happening in real time.
Look—I don’t say things lightly. You don’t have to agree with me, but you should at least consider the possibility that I know exactly what I’m talking about.
There's no need to overcomplicate it or look for some kind of conspiracy.
I, as an indivual investor, am trimming down my US equity holdings as fast as I possibly can. These are the reasons:
- Very deep distrust of the Trump Administration. It's anti-Europe and pro-Russia.
- Zero confidence in Trump himself, his cadre of yes-men and his policies.
- US stock market is subject to Trump's erratic policies and may be further harmed going forward - likely also subject to a recession.
- Under Trump, the USD has been a huge drag on my portfolio and I see no end to this.
- I no longer trust the US rule of law. I don't feel confident that Trump won't come after my US holdings with taxes, capital controls, etc.
- Europe is left to fend off Russia alone - despite NATO. So there are many reasons to invest locally, rather than in the US. Rearmament being only one.
I want out of the US market and so do other individuals, asset managers, pension funds, etc. It's just natural behavior, given the circumstances.
This is AI slop. I hope citrini bans you
It’s not AI, it’s not slop. And hoping she gets banned smacks of a dutiful minion
It may be too aggressive for your taste, citrini can take it, but not hateful and demeaning as what you just said.
It’s 100% AI you moron
you're a misogynist, I get it now. A woman with a brain is a threat to you.
Citrini’s post was detailed and well-researched—I respect it. But it doesn’t preclude a serious discussion about whether re-coupling tariffs to the actual cost of U.S. production might, in fact, be the most measured adjustment in a global system already showing structural cracks.
Let’s be clear on the core of my argument:
This isn’t about replaying Smoot-Hawley. It’s not 1930. The real inflection point was post-WTO China—when the U.S. extended Most Favored Nation status to a command economy that systematically violated every assumption embedded in liberal trade theory.
Since 2001, China has run a model built on suppressed consumption, overcapacity in export sectors, capital controls, a pegged currency, and the weaponization of its trade surplus via recycling into U.S. Treasuries. That wasn’t “free trade.” It was vendor financing at scale—and we were the client.
Europe didn’t stand aside. EU central banks joined the trade-finance loop via overnight repo, using rehypothecated offshore contracts—like bulk iPhone purchase orders—as synthetic collateral to juice liquidity and generate USD-denominated exposure. That helped spin up a quadrillion-dollar eurodollar shadow banking system backed by increasingly tenuous real-world inputs.
That’s the actual source of fragility. Not tariffs.
Frankly, I’d rather see foreign-held Treasuries unwound and replaced with USDC-backed instruments, ideally tethered to a blockchain ledger with traceable payment trails. Call it radical—but that’s more transparent than continuing to underwrite a system that relies on phantom leverage and opaque dollar recycling masquerading as international reserves.
While that machine ran, U.S. industrial capacity collapsed, hollowed out under the illusion of comparative advantage. But there’s no price discovery when your counterparty controls labor costs by fiat, ignores property rights, manipulates currency, and subsidizes losses through sovereign balance sheets. China exported deflation. We imported dependence.
This is the actual rupture point. The unwind is overdue. And markets aren’t reacting to tariffs—they’re reacting to the recognition that the vendor-financed Treasury demand loop is breaking down. Tariffs are just the visible part of a much deeper structural reset.
You're out of your cottonpicking mind.
You basically just reworded your original post without adding anything new. Hopefully, you realize that. And also, let’s be real — there’s no way the U.S. builds an industrial base anywhere close to China’s within the next 30 years.
If it tries, the tax will be devasting - possibly losing all adavntage in all other areas.
What part of recoup cost of production don't you understand? It costs more having our supply chains all the way around the world. A lot more.
When taking about Smoot-Hawley everyone conveniently leaves out the 32% contraction in money supply over three years starting in 1929. Tariffs may have been a straw but the camels back was broken well before the order was signed
I'd guess collapsing businesses from Smoot-Hawley tariffs played a direct role in the monetary base contraction.
All else being equal, corporate bankruptcies have little to no effect on the monetary base. Certainly no direct effect on M1/M2, small indirect effect due to the money multiplier
Mass credit destruction should hit M2, no?
To a degree but Smoot-Hawley was not the reason for that during the period.
Between 1928-1929 the Fed hiked from 3.5% to 6%. As the stock market crashed the waters receded and it was clearly revealed that many banks were over leveraged/undercapitalized. A legit and total bank run ensued. With no FDIC to guarantee deposits, cash was pulled and hoarded.
To make matters even worse (far worse), the Fed was still tied to the gold standard, having to maintain 40% gold for every unit of currency. This wouldn't have been as big of a deal except... Great Britain dropped their gold standard in 1931. All central banks who held Sterling as a proxy for gold converted their sterling to USD, presented the USD to the fed for gold, forcing the fed to send gold out of their vaults, which legally forced them to contract the monetary base to maintain the 40% ratio.
Smoot-Hawley had virtually nothing to do with what happened in the 30s. But people love to point to it because it involved tariffs at a time when bad economic things happened.
I have respect for Citrini, but I'm surprised he chose this angle. It is very, very easy to debunk as a good proxy for what's happening today.
Great Fourth Turning content, surprisingly without a single reference to the book. Recommended reading on the off chance you haven’t done that yet Cit.
Great piece, makes you wonder whether TLT is a hedge any longer
"Is there an outcome to this that’s not devastating to the global economy? Yes, but there’s no outcome where global trust in the U.S. is restored with haste."
How do you see that non-devastating outcome, and what are probabilities of that?
Citrini’s piece brilliantly traces the historical arc — but here’s the uncomfortable truth: this isn’t Smoot-Hawley, and it’s not 1971. We’re watching the system architect voluntarily dismantle the operating system of global trade. The Fourth ‘R’ isn’t just Rent — it’s Repricing: of capital, of trust, of American exceptionalism. And no model priced that in.
The cost of unpredictability won’t be a number. It’ll be a regime change."
I write more about this here: https://substack.com/@chaserierson
Having studied fairly intensely international economics and currency regimes including under a former minister of finance - this is an excellent article. The trade /bop/tariff linkage to the (US) monetary system is intricate and not easily explained to the non- finance or economist background. I’m concerned the Mom and pops saving in 401ks and 529s have no idea what is brewing under the surface.
Wow. That’s the best explanation I’ve read.
I’ve read a few, and would have read more, but like this article says (and the others don’t), “we don’t know a lot of what we’d like to.”
A long read well worth the effort.
The history and where we are now, *unanswered questions and all.
Thank you very much.
*because we don’t know the answers
> Additionally, today’s administration, like Hoover's in 1930, faces the contradiction of being both debtor and trade restrictor
The US was a creditor nation in 1930, as the article rightly points out in the beginning. This is where I think the comparison between hawley-smoot and trump tariff falls short. The US had a sizable trade surplus back then, and tariff's impact depends greatly on a country's trade balance.
Hey,
Good catch & point. As you can see from the rest of the article this was a typo, I meant that section to be demonstrative of the differences, not claim similarity. I’ve fixed it.
Outstanding piece - although you don’t say it explicitly, the inevitable conclusion is that the second and third order effects of this economic vandalism will be a destruction of international trade, FDI and with it propserity for a decade at least. I couldn’t help but see manufacturing as the agriculture of our age with all the attending consequences.
You look at only tarrifs but the problem started in European banks early. It is not tarrifs that cause the depression.
Exceptional!
Excellent article - great work !
Excellent piece. I think this is more than ‘rent’ though. The administration seeking increase in exports and investments in manufacturing point towards the fact that it is no longer in Americas interest to be a debtor nation.
There is no scenario in which the long term prospects of pawning off industries to fund short term lifestyle will end well.