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Donald Trump Is Crushing |
This THIRD WAVE from Texas |
Policy and Process
Disarray, at least, shows signs of life. Trump’s legislative agenda risks being DOA.
Almost none of the president’s agenda is going through Congress, including stuff such as tariffs that the Constitution assigns to the legislature (Article I, Section 8, look it up). With slim majorities in both chambers, Republicans are betting on “one big beautiful [tax] bill” that will extend Trump’s 2017 tax cuts; add some new tax cuts; increase the debt limit; boost spending on border security and defense—while also cutting some discretionary spending. Good luck to Senate Majority Leader John Thune and Speaker Mike Johnson. If they can pass such a catchall bill this year, it will be the first miracle in history to occur on Capitol Hill.
While the House and Senate are roughly aligned on tax cuts, they are far apart on spending cuts, with the fiscal hawks in the lower chamber shooting for $1.5 trillion in reduced outlays, compared with the paltry $4 billion envisioned by GOP senators. Fights are looming over Medicaid cuts, the tax breaks in Biden’s Inflation Reduction Act, the state and local tax deduction, and the top marginal tax rate.
The bottom line: It is very unlikely that the Trump administration will achieve much in the way of deficit reduction this year. During the campaign, Trump vowed that DOGE would find savings of up to $2 trillion. That target had been halved by January 30. Now we are looking at just $150 billion of savings, of which just $63 billion are itemized. Turns out, the main driver of the federal deficit is not a wasteful bureaucracy but the ever-rising cost of Social Security and Medicare, two entitlement programs Trump has pledged to leave untouched. (Who knew?) Monthly federal outlays for February and March are higher than they were in the same period last year and in 2023.
On fiscal policy, to put it bluntly, the first hundred days have been a fail.
I have a similar ambivalence about the Trump administration’s foreign policy. Its predecessor was guilty of an infuriating succession of failures of deterrence. But how much of an improvement are we seeing?
The president now claims that he was only jesting with his campaign pledge to end the war in Ukraine within 24 hours. That’s good, because no one took it seriously. The key question remains how far he and his administration are willing to lean on the Russian government the way they have leaned on the Ukrainians. We saw the first signs of presidential impatience with Putin last week. But I remain to be convinced that a lasting ceasefire, much less a lasting peace, can be achieved without sustained economic and military pressure on Moscow. Trump should want Ukraine to be South Korea; he risks leaving it as South Vietnam.
Yet the biggest foreign-policy puzzle is whether Trump can succeed in reducing America’s reliance on China for critical imports, while simultaneously waging trade wars with America’s principal allies—and everyone else, too.
And that brings us to the most worrisome part of the first hundred days: The economic consequences of Trump’s tariffs.
The Worst Thing So Far—By Far
Trump told us that the most beautiful word in the English language was tariff. And he made no secret of his intention to use tariffs as a negotiating lever, as a kind of economic sanction, and as a source of revenue. What was impossible to foresee was how soon in his second term he would deploy tariffs, how aggressively, and how chaotically.
The result was one of the great fiascos in the history of modern economic policy. Combined with the tariffs Trump imposed on China—which were so punitive as to amount to a trade embargo—Liberation Day triggered panic in financial markets.
For several days, the world teetered on the brink of a financial crisis as bonds and the dollar both sold off—a combination rarely seen, save in times of extreme market distress. At lunchtime on April 9, a 2008-level crisis was averted when Trump postponed the reciprocal tariffs for 90 days. Two days later, he exempted electronics from his tariffs, including those on China.
Even after these concessions, however, the United States remains a radically more protectionist country than it was prior to Trump’s second inauguration. The Yale Budget Lab estimates that the overall average effective U.S. tariff rate is now 28 percent, the highest since 1901, and more than 10 times the 2024 rate. Consumer prices could rise by around 3 percent in the short run. Shoe prices could rise by 87 percent; clothes by 65 percent. These are just two of the many sectors where the United States still relies heavily on imports from China, even if these often come via third countries to avoid the tariffs imposed in Trump’s first term.
This remains an extraordinary shock for an administration to inflict on its own citizens, to say nothing of the rest of the world. And, while we may have pulled back from a financial crisis, the probability of a recession has risen substantially.
Think of what is unfolding as a chain reaction. The first place it shows up, after financial markets, is in business confidence.
True, U.S. consumers and households have not yet changed their behavior. But that is simply because the chain reaction has not got there yet. Give it a month or two—then you’ll see it clearly in the data.
The Federal Reserve knows this. But Fed Chair Jerome Powell—having been threatened with summary dismissal by Trump just a week ago—is in no hurry to cut interest rates. With consumer prices almost certain to rise because of the tariffs, he can argue that his obligation to achieve price stability precludes immediate rate cuts.
The end point of such an economic chain reaction tends to be political revulsion. But this may already have begun. According to polling from YouGov/The Economist, Trump’s approval rating has fallen by 14 points since he entered office in January. A New York Times/Siena College poll found that 55 percent of voters, including 63 percent of independents, oppose his tariffs. His approval rating among independents is down to 29 percent. Now imagine how these numbers will look if the economy does enter a recession later in the year. And then picture what that will mean for next year’s midterm elections.
What does Trump do now? He may have only another hundred days to salvage his second term and avoid premature political interment. In his business career, when things went wrong, there was an easy way out: bankruptcy, something Trump ventures entered six times between 1991 and 2009. But there is no equivalent of Chapter 11 in the realm of politics.
The nearest thing would be for Trump to execute a radical U-turn on tariffs, accompanied by a Night of the Long Knives designed to clear out the various figures in the administration best qualified to be fall guys. Yet my hunch is that tariffs are too central to Trump’s worldview for him to swallow such a declaration of policy bankruptcy. A more likely outcome is that the Wall Street Wise Guys, led by Secretary Bessent, hastily stitch together a bunch of back-of-envelope trade deals, continue to soothe the bond market, and rely on a weakening dollar to keep the U.S. economy out of recession. If they are lucky, by this time next year they will look like geniuses. If not—if inflation picks up, the deficit widens, the bond market takes fright, and Cold War II with China escalates, with a Taiwan Semiconductor Crisis playing the part of the 1973-74 Oil Price Shock—then Trump runs the risk of sharing Nixon’s ignominious fate. For, if Republicans lose the House, a third impeachment becomes a near inevitability.
That would be a tragic outcome for a man who made no secret of his radical intentions last year, and who—if only he had under- rather than over-delivered on tariffs—would be in a far stronger position than he finds himself on Day 101 of his second White House term.
The next hundred days will reveal if Trump’s epic to-do list was too much, too soon.
Regards,
Niall Ferguson
The Free Press
P.S. from Addison: President Trump’s first 100 days have been, well, historic.
“Hugh Hendry's ‘acid’ test of the status quo,” writes attorney at law, Grey Swan member, John H. “and the inflection point where we now lie is the best that I have seen.
“I would hesitate to call his outlook Trumpian; his explanation is that of a surgeon who sees the effects of a disease upon the entire body. Too many other explanations of where we are, 50 years after the creation of the petro dollar, are both pedestrian or unduly linear.
“The analysis actually fits in nicely with your earlier observations about the not so subtle re-monetization of gold.”
Please add your own perspective to the mix here: addison@greyswanfraternity.com
P.P.S. We’ll be discussing the implications for the dollar as reserve currency of the world, gold and Bitcoin in the monetary system and their impact on our investment strategy on Grey Swan Live! this Thursday at 11am EST. If you’re a paid member, please be sure to join the call.
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How did we get here? Find out in these riveting reads: Demise of the Dollar, Financial Reckoning Day, and Empire of Debt — all three books are now available in their third post-pandemic editions. You might enjoy one or all three.
(Or… simply pre-order Empire of Debt: We Came, We Saw, We Borrowed, now available at Amazon and Barnes & Noble or if you prefer one of these sites: Bookshop.org, Books-A-Million or Target.)
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