Donald Trump has steered the American economy into a perfect storm. This storm could break the U.S. economy. Trump’s tariffs are the most destructive force. Their first-order damages begin by arbitrarily driving up the prices of every product and input. This is followed by price hikes on most competing products and inputs made in the US. This will leave less money for everything else, depressing growth and jobs even as inflation accelerates—a textbook definition of stagflation. And these first-order costs are compounded by retaliatory tariffs by the primary targets of Trump’s levies, further slowing jobs, wages, and growth.
In 2024, the US economy grew at a healthy 2.8 percent rate. Inflation had eased. Now, Trump’s policies have brought in rising prices and the first stage of a recession
Source: https://en.wikipedia.org
The second-order costs follow from the unprecedentedly high tariffs on goods and inputs from the three largest trading partners. The 145 percent tariffs (on pause) on all Chinese imports and China’s 125 percent retaliatory tariffs have established for now a mutual embargo between the world’s two most important economies.
If these policies remain in place (after the pause), they will not only raise prices and slow the economy. By mid-summer, supply chains will be disrupted, and Americans should expect the shortages like in World War II. Trump and his apprentice dealmakers have only begun negotiations recently with China, Mexico, or Canada—in large part because the president’s personal economic delusions.
It gets worse. Most U.S. imports from its major trading partners are inputs for U.S. manufacturers, products made by their foreign subsidiaries, or energy US needs, and truncating access to those imports will damage a broad array of separate economic activities related to them.
Investors are losing confidence in Trump, his presidency, and perhaps the United States. It’s especially true for foreign investors who reinforced the message by moving away from the dollar. The stability of US financial system depends on trillions of dollars in foreign capital. In 2024, foreign investors and governments held $18.4 trillion in U.S. stocks and $8.5 trillion in U.S. Treasury securities, about 30 percent of all US stock and 30 percent of all US bonds. While most American investors will likely wait out the coming storm, foreign investors with $27 trillion in American financial assets have plenty of alternatives. In a word, the United States could face destabilizing capital flight. To stave off this grim prospect, the Treasury Department and American corporations will have to offer foreign and domestic investors higher returns. So, regardless of what the Fed does, market interest rates may rise even as the economy declines.
Trump and his economic clowns count on tax cuts and higher spending to ward off recession. In normal times, they might have been right. But their hopes are delusions under the new conditions.
The gathering economic storm includes another feature that could drive the economy onto the rocks. Trump and his administration could unilaterally abrogate contracts, withhold appropriated funds, dismiss court decisions, attack judges for enforcing their rulings, deport people without charges or hearings, provide special treatment for large contributors and favour companies, and threaten law firms and universities without any legal basis and these just prompt capital flight from the US.
Trump and his apprentices risk not only devastating capital flight but could leave many US financial institutions insolvent. In addition to his deeply destructive tariffs, Trump’s sweeping campaign against the rule of law in the United States has raised the economic stakes from a rocky business cycle to a potential financial and economic meltdown with terrible consequences. May God help us all!
Reference:
Trump’s Perfect
Storm that Could Sink the American Economy, by Robert J.
Shapiro, Washington Monthly,
5 May, 2025
No comments:
Post a Comment