The City rarely pays attention to the theatrics of Washington unless they move markets. But this week, the headlines from Capitol Hill have caught the attention of even the most jaded bond traders. Donald Trump, in his characteristic style, has branded a House vote on Iran policy as ‘unpatriotic’. The vote, which saw a handful of Republicans siding with Democrats to limit his ability to strike Iran without congressional approval, has exposed a deep fissure in the American political landscape. For those of us watching from London, the question is not about patriotism. It is about the cost of unpredictability.
Let us start with the basics. The US economy is the bedrock of global finance. Its deficits, its military adventures and its monetary policy dictate the terms for the rest of us. When the commander-in-chief begins a Twitter war with his own party over Iran, the immediate reaction is a spike in the geopolitical risk premium. Oil prices twitch. Safe havens like gold and the Swiss franc see a bid. But the real story is subtler. It is about the erosion of what economists call ‘policy credibility’.
Markets despise uncertainty. They crave clarity on fiscal and foreign policy. When a president accuses his own legislature of being unpatriotic for asserting its constitutional role in declaring war, it sends a signal that the institutional checks and balances are fraying. This is not a partisan point. It is a matter of risk assessment. A government that cannot agree on the rules of engagement is a government that will struggle to manage its debt, its currency and its interest rates.
Look at the bond market. US Treasury yields have been on a rollercoaster this week. The ten-year note initially sold off on the news, pushing yields higher as traders priced in the possibility of a reckless escalation. Then the flight-to-quality trade kicked in, driving yields lower again. This back and forth is a symptom of a market that has lost its anchor. For the first time in years, the US dollar is not the undisputed safe haven. The euro, the yen and even gold are competing for that mantle.
What does this mean for the UK? It means we are caught in the crossfire. A weaker dollar is good for British exporters. But a spike in oil prices, which often follows Middle Eastern tensions, is bad. It feeds directly into inflation, squeezing consumers and forcing the Bank of England to keep rates higher for longer. That is a double blow. Businesses face higher borrowing costs. Households face higher fuel bills. And the Chancellor’s fiscal headroom evaporates.
There is a deeper issue here. The American political system is designed to be slow and deliberate. It forces consensus before committing blood and treasure. When the president bypasses that consensus, he creates a credibility gap. Investors start to wonder: if the US cannot commit to a consistent Iran policy, can it commit to a consistent fiscal policy? The answer, sadly, is increasingly in doubt.
The US deficit is already running at a peacetime record. Trump’s tax cuts, which I have criticised before, were enacted without corresponding spending cuts. Now the military remains overstretched, the national debt is above 100 per cent of GDP, and the Congressional Budget Office projects a deficit of $1 trillion for the foreseeable future. The Iran showdown is not just a foreign policy crisis. It is a fiscal stress test. If the US decides to wage a prolonged campaign in the Middle East, the costs will be enormous. The bond market will demand higher compensation for holding US debt. That means higher yields. That means a higher cost of capital for everyone.
Of course, the optimists will say that this is all noise. The US has survived political chaos before. The economy is strong. Corporate profits are healthy. But I am not so sanguine. The structural imbalances in the US economy have been ignored for too long. The Iran vote is a symptom of a deeper dysfunction. The ability of the US to project power, both military and economic, relies on its financial credibility. Every tweet that undermines that credibility is a step towards a more volatile, more expensive world.
For the British investor, the lesson is clear. Diversify out of US assets. Consider the Swiss franc, gold and perhaps even a dash of Japanese government bonds as hedges. The days of the American exceptionalism trade are numbered. The City, ever pragmatic, is already making its moves. The only question is how fast the rest of the market will follow.
In conclusion, Trump’s ‘unpatriotic’ vote is not just a political drama. It is a market event with real economic consequences. The bottom line: fiscal irresponsibility always has a price. And America, for all its might, is not immune to the arithmetic of compounding debt and fading credibility. Watch the bond market. It is telling the truth.
