The potential consequences of the EU’s actions are dire. A massive sell-off of US Treasury bonds would lead to a sharp spike in US Treasury yields, causing mortgage and credit rates to soar. This, in turn, would increase federal interest payments, placing a significant strain on the US economy. The impact would be felt far beyond the United States, as global markets freeze and a shockwave ripples through the global economy.

The situation is further complicated by Japan’s unwinding of its yen carry trade, which is already leading to significant sales of US debt. This perfect storm of financial turmoil has raised concerns about the stability of the global financial system and the potential for a catastrophic crisis.

The tensions between the US and the EU are not just about geopolitics; they represent a fundamental shift in the transatlantic financial compact established in the aftermath of World War II. The EU’s threat to dump US Treasury bonds is as much about financial leverage as it is about politics. Europe’s reliance on US Treasuries as collateral in dollar borrowing means that such a move would also harm the EU, making the situation a lose-lose proposition.