It took Yahoo! Finance all of a couple hours after the presidential election was called in Donald Trump’s favor to run with this incredible headline: “What could prevent Donald Trump’s recession?”

The man has not even taken office yet, and people are already looking to credit him with the next financial collapse.

It marks a startlingly fast transition in the prevailing economic narrative. Before the election, the economy was doing just fine and the Fed was getting ready to hike rates; then, immediately afterwards, recession is all but inevitable and is probably Trump’s fault.

The reason this idea carries any weight at all is that global stock markets, and stock market futures in the US, rapidly plummeted when it became clear that Donald Trump was going to win the election. This behavior made sense in some respects. Equity markets hate uncertainty, and Donald Trump’s victory represented a massive injection of uncertainty that few investors anticipated. The immediate reaction was a steep sell-off in stock markets. The article cited above was penned in the early hours of November 9th (updated later), when things were at their most grim.

But the decline didn’t last. Donald Trump offered a professional and conciliatory acceptance speech that seemed to quell some of the market’s fears. Then, attention turned to Trump’s proposed economic agenda. Aside from his protectionist trade policies, most of his proposed changes are favorable for business and the economy. Some of it is actually good policy, such as reducing corporate taxes, and gutting regulatory monstrosities like the Dodd-Frank Act. Other aspects, like his proposed increase in infrastructure spending and large budget deficits will offer some short-term stimulus, with adverse effects only in longer run. Since the stock market tends to emphasize the short-run, the reaction bordered on euphoric. The Dow reached all-time highs this past week, and continued the momentum for the beginning of this week.

With all that said, this honeymoon period will not last. Given the deep-seated acrimony that attended this past election, it would be very surprising if the various Democratic and Republican lawmakers that have been denouncing Trump for weeks, all suddenly supported his agenda. The Republicans may come back into the fold, but Trump will need Democrats to cross the aisle as well if he is to overcome filibusters in the Senate. Infrastructure spending could get through in these circumstances. The rest is unlikely.

Sooner or later, the markets will realize this, and come back down to reality. When that happens, the talk of “Trump’s recession” will surely return in earnest.

I agree that the next recession is likely to commence during Trump’s tenure. But while he may prove to be an unwitting catalyst of the next crisis, his policies will not be the primary cause.

This distinction is critically important because the next financial crisis is bound to be blamed on capitalism and the alleged free market. The presence of a billionaire businessman in the White House will encourage this association for everyday people, even though Trump himself does not believe in free market principles. Thus, it’s our job to disprove this narrative in advance. Because if the next crisis is misdiagnosed, the proposed solutions will once again make the underlying problems worse.

Popping the Risk-Free Debt Myth

The most likely way that Trump could catalyze the collapse is through the bond market. Following in the footsteps of Bush and Obama, Trump is going to rack up even more debt through major deficit spending, possibly at an even higher rate than the present. Ordinarily, this would just be business as usual. Trump didn’t run on a platform of lower spending or limited government, and Democrats have no ideological reason to oppose such spending. Meanwhile, some Republicans do have  a theoretical objection to increasing the debt, but they may be reluctant to sabotage their own party-mate–even if he was an outsider. This would suggest his path forward is reasonably clear. Democrats might use the next debt ceiling debate as a chance to exert leverage, but they aren’t likely to stonewall him completely.

These general circumstances are pretty standard. However, the thing that makes Trump’s presidency unique is that he has already openly talked about defaulting on the debt, in some way or other. He retracted the comments quickly, but still, he had publicly broached a sacred myth in the US–the certainty that the massive national debt will somehow, ultimately be paid off in the future. Now that he’s going to be president, this myth might get busted for investors as well.

In reality, of course, US government bonds have never really been risk-free, and they’ve grown considerably more risky in recent years as the debt rose dramatically under Bush and then Obama. It is all but inevitable that the US government will have to default on its obligations in some form eventually–just like any other debtor that has become overextended. The major entitlement programs, combined with an aging US population, ensure this outcome. In the years to come, the US will have to make a difficult choice. Renege on the promises made to seniors about Social Security and Medicare and/or default on government debt. If I had to guess, I’d assume the outcome will probably involve some of each.

But while the math underpinning the prediction of default is straightforward, the market has been treating US debt (and the debt of many other advanced countries) as if it carries no risk at all. This explains, in part, why bond prices rose and yields plummeted earlier in 2016 when the stock market went through a negative correction, and appeared poised to plunge even further. US bonds were still viewed as a relatively safe asset, and worth stocking up on when the US economy (and the stock market) seemed to be faltering. While it makes sense to divest from stocks when the economy is shaky, it does not really make sense that government bonds will be a safe haven, at least not from a country like the US that already has a significant debt burden. Why? Because if the US economy were to indeed stumble, this reduces the tax revenue (increasing deficits/debt) and/or would likely prompt a major public stimulus in reaction, which would further exaggerate the deficit. This doesn’t prove that bonds would be more risky than stocks in such a scenario, but it does mean that, all things equal, government bonds become a greater risk when the underlying economy weakens. Again, all else equal, if the market were pricing bonds strictly based on fundamental factors then, we should expect bond yields to rise when the economic outlook falters.

Note that this is essentially the same reason why less reliable borrowers get charged a higher interest rate. If a person has more debt and/or lower than average income, there’s a greater risk they won’t repay their debts. Thus, lenders get compensated for taking on an increased risk by charging a higher interest rate.

The same principle should apply to governments–and they actually do for many developing nations. But for the US, it is thrown entirely out the window. As noted above, when the economy faltered earlier this year, the yield on US bonds actually went down as more investors tried to get their hands on them. Using the individual example, this would be  similar to charging a lower interest rate for someone who’s unemployed versus someone with a job; it does not reflect the underlying economic risks.

There are two key reasons that this counter-intuitive phenomenon occurs anyway: a) investors believe, possibly correctly, that US bonds are still less risky in the short-run than most other asset classes (corporate bonds, equity securities, foreign bonds, etc.) and b) investors assume that the government that oversees the largest economy in the world won’t actually default on its debt. On this latter point, they just happen to be wrong.

All of which is a key reason why Donald Trump’s election, after publicly casting doubt on the “risk-free” status of US, is so significant for the markets. One week on, there are some signs that investors are finally recognizing the US debt is not risk-free after all.

The day after Trump’s election, one of the US’s largest creditors, China, appeared to accelerate its ongoing divestment of US bonds. Additionally, new auctions of US bonds post-election have not been greeted with the same eagerness as before. While these indications are somewhat anecdotal, they are indicative of the overall trend that is occurring. US government bonds are being rapidly sold off by major players, resulting in a sharp rise in bond yields. In other words, it appears that bond yields may finally be correcting back to reflect fundamentals.

And the fundamentals of US government debt under a Trump administration that promises to simultaneously cut taxes and increase spending while US debt is already at record highs, well, they look atrocious. In concert with the fact that Trump himself has contemplated default, this is why the risk-free myth might finally be dying.

Catalyst for the Crisis

In the long run, it’s great news that economic reality about US debt might finally be getting priced in. However, in the short run, it could be the spark that touches off the next crisis.

Recall that, in a previous article, I discussed the meteoric rise of negative-yielding government bonds. While US Treasury bond yields do not quite have negative yields, they have been near historic lows. In both cases, investors are not being adequately compensated for the risk they take on (and in the negative-yield case, they are actually paying for the privilege of taking on risk). The reason to buy negative or extremely low-yield bonds is because you think the yield will go even lower. That is, the price of the bond may already be unrealistic, and you’re betting that it will become more unrealistic so you can make a profit. It’s what we call the greater fool theory.

Needless to say, it creates a big problem if reality ever begins to take hold, as it’s beginning to in the US bonds. The snapback is often severe, and it means large losses can accumulate quickly for any entity that was holding US bonds.  Unfortunately, global government bonds have been moving with US bonds post-election, with their yields also rising. And since US bond yields are often used as a benchmark for other assets, there’s a chance the contagion will spread to other securities like mortgage-backed securities as well.

In turn, this means that the entities holding these securities could get crushed. That means pension funds, state and local governments, mutual funds, banks, and insurance companies–in other words, many pillars of the financial system. If the spike in US yields leads to similar increases in yields of foreign government bonds and mortgage-backed securities, the extent and scope of the losses will be exacerbated.

As of Monday, the bond market had suffered an estimated $1.2 trillion in losses. If the trend continues, the next financial crisis may well be upon us, as financial institutions suddenly find themselves undercapitalized and pensions go broke sooner than they expected. In that scenario, what happens next is anyone’s guess.

The Blame Game

Above, I have outlined a possible pathway that could set off the next crisis. Trump is a catalyst in this process; his remarks about the US debt–in addition to his profligate spending plans–are likely to help expedite the collapse.

But while he may be the match that sets off the next explosion, he and his policies did not create the bomb. He just acknowledged reality, fleetingly. The underlying economic problems were created primarily by the ultra-low interest rate policies of the Federal Reserve. In the name of economic stimulus, the Federal Reserve has been working to keep all interest rates, including US bond yields, artificially low. They have succeeded.

Now some more sophisticated authors will claim that, in fact, the Fed isn’t keeping interest rates “artificially” low at all. Rather, they will argue the natural rate of interest is just incredibly low right now, and the Fed is innocently trying to match it. Part of the problem here lies in definitions. Common sense would suggest a “natural” rate is one that emerges from the unimpeded buying and selling of market participants without intervention of government actors. However, the “natural” rate of interest that economists refers to is a rate that is not directly observable in the markets and must be estimated through a complex analysis by economists.

While this distinction is interesting, it is not altogether important. For the purposes of the potential bond market collapse that I contemplated above, only the common sense definitions of natural and artificial matter. In that regard, it is undeniable that the Fed has been keeping interest rates and US bond yields artificially low. As of June 2016, the Fed held $2.5 trillion of US debt, which was purchased with money created out of thin air. This accounted for more than 17% of the $13.9 trillion in US debt held by the public at that time. Thus, effectively 17% of the demand for US debt was supplied artificially by a de facto government entity. If the Fed ever sold off its current holdings, US bond prices would quickly correct downward, driving bond yields back up to more historically normal levels.

So we see that, in the only way that matters, the Fed has succeeded in keeping interest rates and bond yields artificially low. Now the long-run consequences for that policy are about to be realized, likely contributing to the next round of financial turmoil.

When that happens, it’s important that the blame lands in the right spot. Massive deficit spending is not a feature of the free market or capitalism, and neither is the Federal Reserve. The debt and the Fed are both creations of government. And if government is correctly understood as the root cause of the coming crisis, it will be obvious that it cannot also be the solution.