Learning Resources, Inc. v. Trump (Tariffs; (I))

No. 24-1287
Title:	Learning Resources, Inc., et al., Petitioners v. Donald J. Trump, President of the United States, et al.
Docketed:	June 17, 2025
Linked with:	25A327
Lower Ct:	United States Court of Appeals for the District of Columbia Circuit
Case Numbers:	(25-5202)
Questions Presented

The Congressional Budget Office baseline assumes tariff revenue that the Supreme Court may be about to invalidate. The CBO integrated these tariffs into projections showing reduced primary deficits of approximately 2.5 trillion dollars over a decade. Refund liability estimates range from 108 to 133.5 billion dollars based on December 2025 CBP collection data, with some analyses suggesting total exposure approaching 200 billion dollars across all affected jurisdictions. The Court of International Trade ruled in December that it can order refunds even after liquidation. Over 600 complaints covering more than 1,000 companies are stayed pending the Supreme Court decision. If the ruling is adverse, Treasury faces a double shock: loss of projected future revenue and immediate outflow for past collections. The February refunding announcement must communicate borrowing needs into a market where dealer balance sheets are already strained and the marginal buyer has shifted from price-insensitive foreign central banks to price-sensitive leveraged hedge funds. If the Court rules broadly against tariff authority, fiscal projections must be revised upward at the precise moment Treasury needs market confidence in those projections.

Prediction markets assign 68 to 79 percent probability that the administration loses the IEEPA tariff cases. The Federal Circuit ruled 7-4 in August 2025 that IEEPA’s “regulate importation” language does not authorize sweeping tariffs. The statute permits regulation, the court found, but does not explicitly grant the power to impose duties, which is an Article I power strictly reserved for Congress. The major questions doctrine played prominently in the reasoning: Congress must speak clearly if it wishes to assign decisions of vast economic and political significance to the executive branch. Congress did not speak clearly.

Oral arguments in November 2025 revealed skepticism from justices across the ideological spectrum. Chief Justice Roberts emphasized that imposing tariffs and taxes has always been the core power of Congress. Justice Gorsuch expressed concern about the nondelegation doctrine, the principle that Congress cannot hand over its core taxation powers to the President without clear intelligible principle. Justice Kagan noted the statute lacks the specific word “tariffs,” contrasting it with other trade acts that use the term explicitly. Justice Barrett flagged the danger of allowing IEEPA to bypass established trade statutes, essentially rendering Congressional trade authority moot. The justices’ questions do not dictate the ruling, but they suggest the administration faces an uphill battle.

If the Court rules broadly, the transmission to Treasury markets operates through multiple channels. First, tariff revenue projections embedded in fiscal forecasts must be revised. The February 4 refunding announcement occurs 26 days after the ruling. Treasury officials must communicate borrowing needs into a market processing constitutional uncertainty about the revenue base funding that borrowing. The communication challenge is delicate: acknowledge the ruling’s fiscal implications without projecting panic, maintain market confidence while revising assumptions downward. Second, refund liabilities create immediate fiscal pressure. The amounts are substantial, with estimates ranging from 108 to 133.5 billion dollars based on December collection data, representing immediate cash requirements that affect Treasury’s general account management. Third, alternative tariff authorities exist but require time. Section 232 requires Commerce Department investigation. Section 301 requires USTR investigation. Section 122 is limited to balance of payments emergencies and capped at 150 days. The administration cannot seamlessly substitute authorities. There will be a gap between IEEPA invalidation and alternative implementation, and markets will price the uncertainty during that gap.

 Even if it invalidates IEEPA tariffs, the Court may limit remedy to prospective application, citing disruption from retroactive relief under the Hammons precedent. The constitutional confrontation is containable. The response is that remedy uncertainty is itself volatility-inducing. The lower courts framed the authority question sharply. Whether broad or narrow, the ruling creates a gap in executive trade authority that markets must price. The transmission to fiscal assumptions and auction demand operates even with narrow ruling, just with smaller magnitude.

How Treasury Market Plumbing Became the Single Point of Failure for the Post-1945 Order, and What Happens When Three Constraints Bind Simultaneously in February 2026

Shanaka Anslem Perera

"LA ARQUITECTURA DE LOS TRES SISTEMAS" (7-01-2026; SHANAKA ANSLEM PERERA)

 

The $4 trillion in duration extensions placed since October 2023 rests on a single assumption that broke during the pandemic and has not returned.

The assumption is that asset prices and consumer spending move together, that wealth effects transmit through the income distribution, that what is good for the S&P 500 is eventually good for the median household. The assumption is wrong. Not because asset prices will fall, though they might. But because the transmission mechanism that connected financial markets to the real economy has been severed at precisely the point where it matters most: the spending behavior of the bottom sixty percent of American households, who have exhausted their pandemic savings, maxed their credit cards, and are now defaulting on auto loans at the highest rate since the data series began in 1994.

The thesis in one sentence: The 2026-2027 period represents a phase transition risk window where the integration of K-shaped consumer bifurcation, European productivity collapse, demographic trust fund arithmetic, and three-systems geopolitical fragmentation creates nonlinear convergence that institutional silos structurally cannot model, making current positioning vulnerable to sudden regime change that the 70% soft-landing consensus systematically underprices.

What follows is the complete institutional playbook for the phase transition now unfolding.

 I. The Capture: Why Your Models Are Missing the Break

Here is what the consensus does not model: the top 10% of American households now account for 49.7% of all consumer spending. This is the highest concentration since data collection began in 1989, up from 43% in 2020. These households hold 67% of total wealth and over 87% of all corporate equities. Their spending is not constrained by wages but by asset prices. When equities rise, they spend more. When equities fall, they spend less. The transmission is direct, immediate, and uncushioned by the broader labor market.

Meanwhile, the bottom 60% have exhausted every buffer. The Federal Reserve Bank of San Francisco documented that aggregate excess savings, which peaked at $2.1 trillion in August 2021, were fully depleted by March 2024. The personal savings rate has fallen to 4.7%, well below the 8.4% long-term historical average since 1959. Thirty-seven percent of American households cannot cover a $400 emergency expense with cash. This statistic has not improved since 2022 and represents a structural vulnerability that no amount of Fed policy can address.

 The question for institutional allocators is not whether this bifurcation exists. The data is unambiguous. The question is what happens when the top decile’s asset-driven spending collides with the bottom sextile’s credit exhaustion. The answer requires understanding a transmission mechanism that standard models do not contain.

 

 II. The Mechanism: How K-Shaped Stress Transmits to Asset Prices

This model worked when consumption was more evenly distributed across the income spectrum. It fails when half of spending depends on asset prices and the other half depends on credit that is already extended.

Here is the mechanism the models miss.

Stage seven: The K-shape converges. The wealth effect that sustained top-decile spending reverses. The credit contraction that constrained bottom-sextile spending intensifies. The two economies that have been moving apart begin moving together, downward. This is the phase transition that models calibrated to historical correlations cannot anticipate.

This is not a liquidity crisis. Central banks cannot solve it with rate cuts. This is not a confidence crisis. Jawboning cannot restore transmission mechanisms that have structurally broken. This is a consumption structure crisis, and it has no modern precedent because the concentration of spending in the top decile has no modern precedent.

Systems approaching phase transitions exhibit characteristic signatures: rising sensitivity to small perturbations, lengthening recovery times from minor shocks, increasing cross-correlations. All three are observable in current markets. The VIX recovery time from spikes has lengthened. Cross-asset correlations have crept higher. Market reactions to news events have amplified. The system is telling you it is approaching criticality. The question is not if but which perturbation triggers the transition.

 III. The European Doom Loop: Why the Continent Cannot Provide Offset

This time is different. Europe is not experiencing a cyclical downturn. Europe is experiencing structural decline, and the decline is accelerating.

The productivity gap between the European Union and the United States has widened into a chasm that monetary policy cannot bridge. From the fourth quarter of 2019 to the second quarter of 2024, U.S. labor productivity grew by 6.7%. The euro area managed 0.9%. This is not a statistical artifact. This is the compound effect of underinvestment in digital technology, regulatory fragmentation that prevents scale, and energy costs that have made European industry globally uncompetitive.

 Industrial electricity prices in the European Union are approximately two to two-and-a-half times as high as in the United States. Gas prices remain four to six times Henry Hub benchmarks. For energy-intensive industries, chemicals, steel, aluminum, and heavy manufacturing, this arithmetic is fatal. No efficiency gains or green premiums can offset a cost disadvantage of this magnitude in feedstock and power. European manufacturers are not losing to American competitors on technology or quality. They are losing on the basic input costs that determine which facilities can operate profitably.

 The consequences are visible in the physical economy. Volkswagen closed its Dresden production facility on December 16, 2025, the first German plant closure in the company’s history. The symbolism matters: the social contract between German capital and labor, which guaranteed domestic employment in exchange for labor peace, has been broken. The Dresden closure follows a broader restructuring announced in late 2024, including plans to reduce German workforce by tens of thousands. This is not cyclical adjustment. This is structural retreat.

 BASF is shuttering adipic acid and other facilities at Ludwigshafen. Dow is closing plants in Böhlen and Schkopau. Ineos has permanently closed its Gladbeck site. The German Mittelstand, the small and medium enterprises that form the backbone of the economy, reported over 230,000 planned closures by end-2025 according to KfW data. Each closure represents supply chain disruption, expertise loss, and community devastation that cannot be rebuilt when conditions eventually improve.

This paralysis is not accidental. The European Union’s consensus-based governance structure cannot respond at the speed the crisis demands. Each recommendation requires negotiation across 27 member states with divergent interests. Germany needs energy security. France needs industrial sovereignty. Poland needs security guarantees. Spain needs cohesion funds. The intersection of these requirements produces lowest-common-denominator policy that addresses none of the structural challenges. The competitiveness gap widens while Brussels debates.

Capital has voted with its feet. Foreign direct investment into the European Union plunged 58% in 2024, according to UNCTAD’s World Investment Report. This is not volatility. This is capital reallocation on a structural basis. European residents purchased €226 billion of non-euro equity and €623 billion of non-euro debt securities in the twelve months to August 2025, according to ECB Balance of Payments data. The United States alone received €96.7 billion of new European FDI, representing 64% of all outflows. European capital is funding the American technology stack that widens the productivity gap further.

 For global portfolios, this creates a feedback loop that temporarily masks American vulnerabilities. European capital flight supports U.S. asset prices. U.S. asset prices sustain top-decile spending. Top-decile spending maintains GDP growth. GDP growth validates the soft-landing narrative. But the flow cannot continue indefinitely. European capital is finite. And when the K-shaped stress transmission mechanism engages, no amount of European flight-to-quality will prevent the correction, because the correction will originate in the domestic economy that European capital cannot reach.

 IV. The Demographic Collision: 2033 Is Closer Than Models Assume

The fiscal arithmetic that underpins U.S. Treasury valuations assumes policy continuity that political reality cannot deliver.

Here are the numbers that consensus models incorporate: Social Security’s Old-Age and Survivors Insurance Trust Fund will deplete in 2033. Medicare’s Hospital Insurance Trust Fund will deplete in 2033 as well. For the first time since Medicare’s creation in 1965, both funds exhaust in the same year. At depletion, Social Security beneficiaries face an automatic 23% benefit cut. Medicare Part A faces an 11% cut. These are not forecasts. They are calculations based on current law and demographic projections with well-defined confidence intervals.

 The worker-to-beneficiary ratio has fallen to 2.7-to-1, down from 5.1-to-1 in 1960. By 2034, it will reach 2.4-to-1. Fewer workers supporting more retirees while healthcare costs compound at elevated rates creates fiscal pressure that no plausible growth rate can offset. The arithmetic is merciless: even 3% real GDP growth sustained for a decade would not close the actuarial gap without revenue increases or benefit reductions that exceed what political processes can deliver before crisis forces action.

 What makes political resolution impossible is the electoral mathematics. Senior voters participate at rates exceeding 70%. Florida, Arizona, Pennsylvania, and Michigan, the states that determine presidential elections, contain millions of voters over 65. Any politician who votes for benefit cuts loses these states. Any politician who votes for sufficient tax increases loses different constituencies. The policy space that would address the structural deficit does not overlap with the political space that enables re-election.

 The $124 trillion wealth transfer from Baby Boomers over the coming decades, documented by Cerulli Associates, will not flow smoothly.

 The demographic pressure is not a risk to monitor. It is arithmetic. The uncertainty is only in timing, and the timing is front-loaded by the Peak 65 wave that crests in 2026-2027.

 V. The Three Systems: De-Dollarization Is Infrastructure, Not Rhetoric

The geopolitical consensus dismisses de-dollarization as aspiration without mechanism. 

This analysis is correct for transactional dominance. It is wrong for reserve diversification. And the distinction matters enormously for Treasury demand at the margin.

In mid-2025, foreign central banks’ gold reserves exceeded their U.S. Treasury holdings for the first time since 1996, according to World Gold Council and Treasury TIC data. Gold’s share of central bank reserves rose to approximately 27% while Treasuries fell to approximately 23%. Central banks purchased more than 1,000 tonnes of gold in each of 2022, 2023, and 2024, specifically 1,082, 1,037, and 1,045 tonnes respectively, double the 473-tonne annual average from 2010-2021. Poland, Brazil, India, Uzbekistan, and China have been persistent buyers. The buying is price-inelastic and strategic.

 Reserve managers do not need a transactional replacement to reduce dollar exposure. They need a store of value alternative. Gold is that alternative. Every ounce of gold purchased is effectively a dollar of potential Treasury demand removed from the market. The signal from central bank behavior is unambiguous: diversification away from dollar-denominated reserves is accelerating regardless of rhetoric about dollar dominance.

This is the Three Systems architecture crystallizing in real time. System One is the dollar-euro Atlantic bloc, anchored by SWIFT and U.S. military alliances, offering security guarantees and deep capital markets in exchange for political alignment. System Two is the BRICS-commodity bloc, constructing parallel financial infrastructure designed for sanctions immunity, linking energy directly to gold and local currencies. System Three is the digital-decentralized system, the neutral zone where capital that seeks to avoid both U.S. sanctions and Chinese capital controls finds exit valves.

The Treasury is refinancing $9.2 trillion in maturing debt by end-2025 and another $9 trillion in 2026, largely from pandemic-era short-term borrowing. Who buys this paper? China’s holdings have fallen to $688.7 billion as of October 2025 per TIC data, the lowest since 2008, down 47.7% from the 2013 peak of $1.317 trillion. Japan’s share has declined from 20% in 2009 to 12.9% today. The buying increasingly comes from “Indirect Bidders” in Treasury auctions, a category dominated by hedge funds using leveraged basis trades and Western custodial hubs. This is hot money, price-sensitive, liable to vanish in a liquidity shock.

The structural shift is slow but directional. Dollar reserve share declines approximately 0.7 percentage points annually. At this rate, the dollar falls below 50% by the mid-2030s. But rates of change can accelerate. A geopolitical shock, a sanctions overreach, a loss of confidence in U.S. fiscal trajectory could trigger the nonlinear acceleration that gradualist models cannot capture.

 VI. The Positioning Trap: Where Institutional Money Is Wrong

This positioning reflects the soft-landing consensus. It assumes the Fed will cut 100-150 basis points in 2026. It assumes inflation will converge to target without resurgence. It assumes corporate earnings will grow at the 14-17% rate that sell-side models project. It assumes that the correlations that held during the disinflation phase will hold during whatever comes next.

Every one of these assumptions is vulnerable.

 VII. The Evidence Cascade: Why This Analysis Is Undeniable

 The thesis rests on primary source data that can be verified, not on narrative or ideology. Here is the evidence cascade that makes the thesis undeniable.

 VIII. The Adversarial Gauntlet: Ten Objections Defeated

Objection Four: Dollar dominance is structural. No alternative exists.

Dollar transactional dominance is structural. Dollar reserve dominance is eroding at 0.7 percentage points annually. The gold-over-Treasuries crossover demonstrates that reserve managers have found an alternative store of value. They do not need a transactional replacement. They need insurance against weaponization. Gold provides insurance. The dollar’s FX share is irrelevant to the marginal buyer of duration.

Objection Five: Europe always muddles through. The pessimists are always wrong.

Europe has muddled through cyclical crises. This is a structural crisis. The productivity gap is widening, not narrowing. The FDI is exiting, not entering. The plant closures are permanent, not temporary. The reform paralysis is constitutional, not political. When even Mario Draghi’s emergency recommendations achieve 11.2% implementation after twelve months, the system has revealed its incapacity. This is not pessimism. This is observation.

Objection Six: Employment is full. Consumers pay debts when they have jobs.

This historical correlation has broken. Auto and credit card delinquencies are rising despite full employment. The default is a function of insolvency, not unemployment. Wages have not kept pace with the cost-of-living rebase. A job that pays $45,000 in 2019 dollars pays the equivalent of $38,000 in 2019 purchasing power today. The consumer has the job. The job no longer covers the bills.

Objection Seven: Treasury auctions show strong demand. Bid-to-cover ratios are healthy.

The “Indirect Bidder” category in Treasury auctions is increasingly opaque, dominated by hedge funds utilizing basis trades and Western custodians acting as pass-through vehicles. This is hot money, highly sensitive to volatility and rate differentials. The structural decline in Chinese and Japanese holdings means the U.S. is reliant on levered private capital that is liable to vanish in a liquidity shock. Strong auction technicals mask structural demand deterioration.

Objection Nine: BRICS is internally contradictory. India-China tensions doom coordination.

BRICS political unity is indeed fragile. India under Modi has no interest in subordination to Chinese hegemony. But financial infrastructure is being built regardless of political tensions. CIPS operates. Local currency settlements expand. Gold accumulates. The infrastructure creates optionality that becomes valuable precisely when geopolitical tensions escalate. Political rhetoric dismisses BRICS. Financial flows respect it.

Objection Ten: Phase transitions are unpredictable. You cannot time a crisis.

The timing objection is valid for trading. It is irrelevant for risk management. The question is not whether to predict the date of the phase transition but whether to hedge the tail risk that current positioning ignores. High-yield spreads at 2.81% versus a 4.5% twenty-year average price minimal recession probability. CAPE at 40.6 prices perfection. The cost of tail hedging is historically low. The payoff if the hedge is needed is historically high. You do not need to time the crisis. You need to not be positioned for perfection when perfection is not the modal outcome.

 IX. The Trade: What to Do Monday Morning

The analysis implies specific portfolio actions that can be implemented immediately.

Reduce equity concentration. The mega-cap technology names represent extreme crowding in institutional portfolios. These names are priced for perfection: perfect AI monetization, perfect multiple expansion, perfect macro stability. Any disappointment triggers outflows from passive vehicles that amplify the correction. The risk-reward is asymmetric to the downside.

Extend gold allocation. Central banks have provided the tell. Gold has rallied substantially through 2025, trading near $4,470 per ounce. J.P. Morgan forecasts prices reaching $5,055 by late 2026. Bank of America sees $5,000. The structural bid from reserve managers continues regardless of price. Gold has no counterparty risk, no sanctions exposure, no political vulnerability. The thesis supports gold to $5,000 minimum with potential for higher levels if fiscal concerns or geopolitical shocks intensify.

Favor short duration over long duration. The Fed’s cutting path is uncertain. Fiscal issuance is heavy. Foreign official demand is declining. The term premium has been suppressed by QE muscle memory. When muscle memory fades, the term premium returns. The ten-year yield at current levels does not compensate for duration risk in an environment where inflation reacceleration or fiscal premium repricing are plausible scenarios.

Position for Treasury curve steepening. The short end is anchored by Fed policy expectations. The long end is vulnerable to fiscal supply, foreign demand withdrawal, and term premium normalization. Bull steepeners if the Fed cuts into weakness. Bear steepeners if fiscal dominance reasserts. The curve steepens in both scenarios.

Consider European sovereign credit shorts. France trades at 78 basis points over Germany with a debt-to-GDP trajectory toward 121% by 2028. Italy faces a massive refinancing wall in 2026 as the ECB steps away from bond purchases. The ECB’s anti-fragmentation tools remain untested and deliberately vague. A spread widening trade in periphery-versus-core has asymmetric payoff if the doom loop re-engages.

Hedge volatility compression. Systematic volatility selling has suppressed VIX. The cost of protection is cheap relative to the risk of a liquidity event. Long volatility exposure, whether through options structures or VIX-linked instruments, provides convexity if any of the thesis catalysts materialize.

 X. The Synthesis: A Framework That Compounds

What remains is the framework.

The K-shaped economy is not a phase of the cycle. It is the structure of the cycle. 

The European decline is not reversible through policy within the current institutional architecture. The productivity gap is structural. The energy disadvantage is permanent while hydrocarbons remain expensive. The reform paralysis is constitutional. European capital will continue to fund American assets until European assets no longer exist to flee. Then the funding stops.

The demographic collision is arithmetic. Trust fund depletion in 2033 is not a forecast. It is a calculation based on known inflows and outflows. The only uncertainty is whether crisis-forcing occurs in 2029 or 2030 or 2031. Markets will price the collision before it arrives because long-duration assets must incorporate the fiscal trajectory.

The Three Systems architecture is crystallizing regardless of diplomatic rhetoric. The infrastructure for non-dollar settlement exists and expands. The gold accumulation continues regardless of price. The reserve diversification proceeds regardless of speeches about dollar dominance. The marginal Treasury buyer is not a central bank with fifty-year horizons but a hedge fund with fifty-day horizons. The structural demand base has shifted.

The integration of these four dynamics creates a system with narrow margin for error. The consensus is positioned for perfection. Perfection requires the Fed to thread the needle, Europe to muddle through, demographics to be a distant concern, and geopolitics to remain stable. Any single failure cascades because the system is coupled, correlated, and levered.

The fracture point approaches because multiple stress vectors are converging, each individually manageable but collectively overwhelming. The soft-landing consensus is not wrong to observe resilience. It is wrong to project that resilience forward without examining the transmission mechanisms that have changed. The consensus is using the map of 2019. The territory is 2026.

What comes next is not knowable with certainty. The probabilities favor stress, perhaps 60% versus 40% for extended soft landing. But the asymmetry of payoffs makes the position clear regardless of probability. The cost of hedging against fracture is low because consensus has compressed spreads and suppressed volatility. The cost of not hedging against fracture is potentially severe because positioning is crowded at consensus extremes.

The map is not the territory. And the territory has changed.

The Fracture Point: How America's K-Shaped Economy, Europe's Structural Decline, and the Three Systems Realignment Converge in 2026-2027

The $4 Trillion Duration Bet Rests on a Transmission Mechanism That Broke in 2021 and Never Returned

Shanaka Anslem Perera