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The US financial system in terms of currency, bonds, and equity are potentially at risk of unraveling in a very precipitous way if you get to that point of no return, and we just don't know where that is.
I'm Stephanie Flanders, head of Government and Economics at Bloomberg, and welcome to Trump Economics, the podcast that looks at the economic world of Donald Trump, how he's already shaped the global economy and what on earth is going to happen next. So some stuff has happened since we recorded our last episode with Martin Wolf, as we knew it would when we recorded that episode. We step back to consider the root cause of America's big trade deficits with
the rest of the world. President Trump was getting ready to bring out that big poster board of tariff rates in the Rose Garden that was supposed to get rid of all of its deficits with everyone. Well, we're not going to go into the fine print of that plan today, or the infamous formula, if you can call it that, which produced the numbers. You would have heard that from plenty of other people. Plus the numbers might well have
changed by the time this goes out. But I did want to think about what that big announcement has taught us about the Trump White House and what will it mean for the US economy. Put it another way, are we now looking at a US recession coming down the track? And if so, how much does Donald Trump actually care? Such small questions, but we have big brains to answer them. Here in the form of two friends of the show, Bloomberg's senior national political correspondent, Nancy Cook, welcome.
Back, Thanks so much for having me, and we're in.
The same room for once in the DC bureau. And Ed Harrison, senior editor and author of Bloomberg's Everything Risk newsletter, Ed, great to see hello. And you haven't been busy in the last few days at all, led Everything Risk.
No, not at all. There are no risks whatsoever.
Well, let me start with you give us a sense of where we've been in the last few days, as investors were trying to absorb what had happened last week, the announcements coming out of the administration and the president's steadfastness around this plan which has really taken a lot of people by surprise.
Yeah, I think that last week you could characterize as a panic that was centered around the equity market. Basically, the tariffs were a lot more robust than people had anticipated, and as a result of that, equity sold off on
the day after that. Then there was talk about retaliation against China, which as of this recording is about to go into effect, and that precipitated another sell off on Friday, in particular because people did not want to go into the weekend heavy on stocks with potentially bad news coming, and so then we reverse some of that on Monday.
Things have been very choppy, but really I think most of the first salvo is done, and now we're at a point where people they don't know what to think, but they're waiting for the economic effects to start to occur because these tariffs are going to go into effect almost immediately.
What has been interesting, and I guess this is particularly a kind of a trumpnomics topic, is what's happened in the treasury market. I think our first ever episode was about how important the US bond market was going to be to this administration. I think we will quite precent
on some of that. But you have a bunch of tariffs come out, which other things equal, you'd expect to increase inflation, and actually the pet of the US Central Bank of the ED gave a speech on Friday that suggested he was still quite focused on inflation even with everything else going on. And yet ED, we didn't see necessarily the people buying US debt necessarily expecting more inflation and sort of steady interest rates. We saw a bit more confusion.
Yeah, And I think the reason for that is because of the panic inequities that really it was just a knee jerk reaction to grab other assets you could at that particular juncture, you know, flight to quality, and Treasury's benefited from that. But now that we have a chance to sit back and watch the effects play out, I think we're going to see a quite different story coming into play the one that you mentioned with regard to
the FED. The Fed's in a very difficult position here, in particular because the inflationary impact of the tariffs are probably going to proceed the negative impacts on the labor market, just because the labor market is really relatively solid right now and it's going to take a little while for that to dissipate, and so the FED is going to therefore be challenged with three percent, four percent, who knows it could be as high as five percent inflation at
some point, and that is going to limit their ability to ride to the rescue.
Nancy. Going back a few steps, the market seemed to have been very surprised by what he announced last week, even though in many ways he'd said even on the campaign trail that this is exactly what he was going to do. What was your thought when you saw those very high numbers, much higher than expected, for the tariff rates on every country, not just the countries with particularly large deficits. What did you conclude in terms of what's
been driving this administration? Who's been close to the president?
Yeah, the markets were very surprised by how high the tariffs were and the fact that there were tariffs on countries but also these universal baseline tariffs. And what happened was that Peter Navarro, who has been a huge advocate of of these baseline tariffs and really doing high tariffs on countries, has so much power in this White House at this particular moment.
Just tell us a bit about him, what's his job now, and maybe a bit more about some of the other stuff he said.
So he's a senior advisor to the President. He is supposed to be working on trade. You have to remember that he also worked on trade in the first Trump White House. But there were epic battles in the first Trump White House between different people in the administration, Gary Cohen, who was the National Economic Director at the time, Treasury Secretary Stephen Mnuchin, and they were more of a voice inside the West Wing who were advocates of free trade.
And so it was like these constant battles between Peter Navarro and Robert Leitthheuser, who is the US trade representative, and Minuchin and Cohen and going back and forth, and the trade policy sort of swung back and forth based
on who had the most influence. This time, there is not that same sort of checks and balances from the free trade perspective, and everybody is basically on board with tears, including people who you wouldn't necessarily think of, like Treasury Secretary of Scott Bessant or the National Economic Council Director Kevin Hassett. But Navarro has so much influence because he went to jail for Trump. He divided a subpoena to appear before the January sixth Committee and serve four months
in prison. What Trump values most in the second term is loyalty, and what expresses loyalty more to him than someone who went but served behind bars, And so Peter's influence just can't be overstated. Now. My sources were telling me the Tuesday before the big tariffs came out that Wednesday that Navarro had gotten with Trump and had convinced him of this idea of the universal baseline tariffs, and that the two of them had doubled down. I covered
Trump since twenty sixteen. What has surprised me this time is how undeterred they are by the market volatility, the calls from Wall Street and CEOs, businesses freaking out, just calling anyone they can find it the administration that Trump people feel like he talked about this in the campaign. You should have known this was coming. He's not up
for a re election. You know, he really believes in these tariffs and think they're going to change the economy, and he and Peter Navarro are really doubling down.
I don't think I had fully absorbed that Peter Navarro was running the trade ship inside the White House. Were we aware of quite how influentially.
Be So I would say a few months ago, there was reporting coming out. I was talking to people, and it took a while for the Treasury Secretary and the Commerce Secretary to get confirmed. So what was happening in that vacuum was that Peter Navarro and Stephen Miller, who is a deputy chief of Staff. You'll remember him from all of the most controversial immigration issues from the first term.
That two of them were basically the lone voices on trade for the first several weeks at the administration, and they were the ones driving the agenda. And to me, it's very clear that the White House is much more comfortable with Peter Navarro this time around than they were last time. Last time, they didn't really let him go on TV that much. They sort of hid him away. Sure, he was close to Trump, but he wasn't like the frontman.
This time, he is going on TV almost every day representing the administration's trade policy, and I just think that that's a sign of how much influence he has and how much they are doubling down on this.
At least one person who was also hanging out the White House a lot in the first few weeks of the administration was Elon Musk and then he and Navarro seem to now be getting at it in an entertaining but not very mature fashion. Shall we see?
Well, I think Elon must Stock is dropping in the White House and him picking a fight with Peter Navarro is part of this. He was not in the final meetings on trade that was really sort of the economic aids. The Chief of Staff Susie Wilds Stephen Miller was in that. Elon has not been part of sort of the final
decisions on trade. And although he likes to be the president's, you know, first best friend, and is on Air Force one and is a mar A Lago and it is in Marshington a lot and has real walk in privileges in the West Wing, trade is not his lane. And I think that they are not taking his advice seriously on it.
It sounds like the White House that Nancy is describing is not one that's going to back down, at least to any serious extent. We'll wait to see. So given that, how are you looking at the risks of recession and that challenge for the FED of whether it can actually do anything to prevent one.
Yeah, the recession car is a big one because I think that people now realize how serious Trump was and that it's not just ten percent tariffs, these across the board baseline tarffs, which the likes of Bill Ackman said they can get behind, but rather something more severe, doubling down.
On one hundred and six percent or one hundred and four whatever it is on top. That's definitely a bit more.
Severe going into effect literally as we are taping this. And so I think that if recession is not your base case, it's a very high probability case.
And that's what the markets are saying.
You know, the equity markets are down and treasury yields are down as well. What I find interesting in terms of the recession trade and how this is all playing out is currencies. The Japanese yen and the Swiss franc
are really appreciating in value versus the US dollar. Not just as this has played out, but in the last day or so, as the one hundred and four percent Chinese tariffs have come into play, the Swiss franc has really gone ballistic, as if suddenly the United States is not the safe haven currency in these kinds of times
of difficulty. This is a huge transition that the market's going to have to deal with and understand what the implications are, especially if we have a recession that's not just in the United States but global.
Is there a natural difference of view between the Fed and the markets. I say that because if the FED is thinking, Hm, we've still got an inflation problem, so we're going to have to wait a bit before we provide the support for the economy even as the market's falling, And if the market's expecting the FED to be late, then I guess there's no disagreement. But we are looking at a recession.
Well, I think that the markets are front running so many cuts that it's going to be very difficult for the FED to deliver them in the timeframe that the markets are talking about. Unless it's a very onerous recession. It's more likely that they will be late, as you're saying, and that they'll be more aggressive if things fall apart, because their hands are going to be tied in the near term by the inflation that is likely to happen almost immediately.
It was interesting what Power was saying.
He didn't say it directly, but he was essentially saying, we're going to wait. We're not going to make any moves whatsoever until we find out what the actual for ramifications of the policies are and what the policies themselves are. They don't know what the policies are, and so what that means is an extended hold period at a minimum, and that's not what the market has priced in.
Yeah, it's interesting. I mean, our own Anawong, who we've heard several times on this podcast, is a former FARED economist, is our chief US economist. She put out a great preace actually just as markets were going through their girations on Monday and treasury yields had gone down quite far, apparently on the anticipation of lower rates, saying, you know, markets are hoping for a FED put and this is why that's unlikely, and she went through all of the things.
I think the fact that the FED is focused on hard data, the fact that the Fed's own inflation forecasts and inflation risks are thinks that the Fed's very concerned about, and certainly J. Powell, the chair, doesn't want to be seen to be making the same mistake that was made in twenty twenty two when they were quite slow to raise rates in the face of inflation. I mean, I found that pretty convincing. Nancy, How do you think the
administration's thinking about the FED? I mean, could they potentially rescue the economy provide some kind of flaw even with this tariff plan? And I guess the other side of that if they don't. Is he going to be a useful kind of whipping boy for putting all the blame on I.
Mean, the FED is already a whipping boy for President Trump. I mean he has come out already last week and said Powell should do something. He's posting messages on truth social he is willing to use his bully pulpit from the White House to try to act like this is the Fed's problem, even though these tariffs are one hundred percent of policy of the administration. It's not Congress. It is a self inflicted wound or whatever you want to call it on the part of the administration.
They did this.
He has long had J. Powell in his sight. And when I interviewed Trump during the campaign, or different people did, there was constantly question like are you going to fire J?
Powell?
And do you believe in the independence of the FED? And he sort of went back and forth honestly months month on the importance of the independence of the FED and whether or not he would let Powell serve out his term.
Did he said to us, he said, oh, yeah, as long as I think he's doing a good joke exactly. Yeah, he's still the safe as long as I think so.
So I think that that will just continue to be a point of tension. And even Treasury Secretary of Scott Besson, who I think before what happened with the tariffs, was seen as like a grown up who could speak to the markets. I don't know exactly how he's viewed by Wall Street now. I think that's been muddied a bit. But even he sort of had a plan for replacing Powell and did not think that Powell needed to serve
out his term. So I think even Bessen is not fully on board with the idea that the FED should be as independent as it should be, and it just really, I think marks a huge shift. There's so many shifts in the Republican Party on how Trump approaches economic issues, and the FED is just one of them.
We've talked a few times on this podcast about kind of ordering of things in this administration and how you could make the argument that in the first term, Trump kind of did the positive things of the economy first, and then the negative stuff, the bigger tariffs other things came later and actually caused the economy to weaken even before COVID, when arguably, from a political standpoint, you'd want to get your costly things and at the beginning and
then have the more positive things. We've certainly got some pain coming down the track. We've had the Doge cuts, but also most fundamentally, these big tariff increases tax cuts, making the Trump tax cuts permanent, maybe some other tax cuts on top of that. I mean, that does seem to be something the administration is now turning its mind to and wanting Congress to act on as fast as possible. Nancy, do you think that can be a source of support for the economy and the administration.
I have written a lot of tax stories lately, and Republicans now have moved up the timeframe of when they want to get tax reformed done given what's happening with the tariffs. Where they thought, oh, they could do it at the end of twenty twenty five when the tax cuts actually expire, now they want to do it as soon as possible, hopefully by even July fourth. I think that's a little optimistic, but people on Capitol Hill think, okay, maybe by you know, Midsummer or towards the end of summer.
So August there was a bit of movement on this. Even this weekend on the Hill.
Yeah, there was the Senate passed a budget resolution which will give them a vehicle to do tax reform and some parameters about how much money they can spend. And I think that the Trump people, including Peter Navarro, are going on TV and saying, well, look, these tariffs are just one part of the economic package. We also have you know, less restrictions on energy deregulation, the tax cuts.
I think the question about the tax cuts is, yes, they want to do a big tax bill, but a lot of those tax cuts are just going to be extending existing ones. And I don't know if that is going to be you know, extending people's existing tax cuts is going to be a giving them a tax increase, right, not giving them a.
Taxing cust car because I didn't have a tax right.
That's not how.
People think about it. And so I just don't know if that is going to be enough to actually juice the economy the way that they think it will compared to the stark policies that they did on tariffs, which were really surprising and quite large and ed.
I guess this gets us back to how the financial markets would view this. I mean, I have to mention that that Senate resolution contained a really not very responsible approach to scoring the cost of making those tax cuts permanent. I think we're talking extra five trillion dollars in debt, but it was scored as almost zero on rules that
no one thinks make any sense. But even if this gets past this tax cut bill or the making permanent of the previous tax cuts, if it sends a message that there is no physical restraint of any kind of serious degree in this White House or the country, and an ocean of red ink way more than is even in the existing numbers. We look at our numbers, our forecast for the US debt, they're about one hundred percent
of GDP. Now it's going to maybe one hundred and fifty percent of GDP over the next twenty thirty years. And that's assuming that the text cuts are not made permanent. So surely that's not going to put a floor under the sort of confidence in the US.
As you were saying that, I'm thinking about Liz Trust and what happened there, when suddenly you're looking at oceans of red ink. Over the longer term, it's going to lead to a depreciation of the currency, greater inflation, and ultimately it could create a crisis of confidence about the United States ability to govern itself and its finances. The numbers that we're talking about really are are mind boggling. Because we're already at six percent debt to GDP in
a booming situation where growth was at three percent. What if you add tax cuts on top of that, the baseline being three percent are being six percent, and you add tax cuts that are going to make that even greater, then you're looking at permanent deficits of eight nine percent. It's just absolutely mind boggling. I think the markets would throw its dizzy and it could be very destabilizing.
It's interesting you mentioned this trust. We had a great column that was by our columnists in Europe, Lionel Laurent and Marcus Ashworth. Imagine the UK Liz Trust moment only global. They're saying, the US is the closest thing to a global superpower we have, and that means when it's leaders are in the grip of excessive over confidence, similar to that scene in the UK's Liz Trust meltdown, Everyone not just America, pays the price. I guess I'll give a
final word to you, Ed. You mentioned something about the safe haven status for the US.
That's what I was thinking as you were reading that. Well.
Donald Trump has said he doesn't like this dollar being so strong, so be careful what you wish for. But I guess that the risk is the combination of you know, question marks around central bank independence, question marks about runaway borrowing and debt, not to mention stepping out of the global trading system in the way that he has now done, or at least appears set on doing. That's quite a trifecta that could really be very damaging to the US standing in global financial markets as well.
Yeah, I think that George Soros would talk about reflexivity, that you get to sort of a point where things start to feed on themselves, and we don't know where that point is on various levels, both in terms of equities, in terms of people pulling their money out of US dollar assets. We don't know what that means in terms of the US dollars falling, and we also don't know what that means in terms of foreigners owning bond and
what that means for interest rates. So all three of those things the US financial system, in terms of currency, bond, and equity are potentially at risk of unraveling in a very precipitous way if you get to that reflexive point, to that point of no return, and we just don't know where that is.
And on that bombshell. Ed Harrison, thank you very much, Nancy Cook, thank you, thank you for listening. We focused a lot on America in this episode, and particularly on Wall Street and the White House. I'm thinking, even as I said here, that we should think about how the rest of the world should respond next week. Note to self. Trumpernomics is produced by Moses and Dam and Summer Sadi, with help from Chris martinlu Amy Kean Cale Brooks, Rachel
Lewis Chrisky and Jared Rudderman. Sound design owned by Blake Maples and Brendan Francis Newnham is our executive producer.