Trump's Self-Fulfilling Crisis
Project Syndicate: February 28, 2025 (slighly edited version)
“I alone can fix it,” Donald Trump proclaimed in 2016, when accepting the Republican nomination for president. Fix what, exactly? Among other problems, “the economy, stupid,” to borrow the famous mantra from Bill Clinton’s 1992 presidential run. Last year, Trump once again campaigned on the premise that the US economy was “in crisis” and a “disaster.” He began his second term with a solemn promise to restore “the golden age of America.”
Donald Trump’s bleak diagnosis of the US economy is not grounded in reality — at least not yet. As illustrated below, America’s “misery index” – the sum of the unemployment and inflation rates – hardly suggests an economy in dire straits: it was 7.0% in January 2025, down dramatically from its post-pandemic peak of 12.7% in mid-2022, and more than two percentage points below its postwar average of 9.2%. In fact, the latest reading is virtually identical to the 6.9% average recorded during Trump’s first administration (2017-20), which he fondly recalls as “the greatest economy in the history of the world.”
Campaign rhetoric is one thing; acting on it is quite another — especially if its core premise is false. The risk is that the initial policy frenzy of Trump 2.0 — some 73 executive orders in his first month back — could well spark the very crisis he imagines is now at hand.
The inflationary impact of tariffs is a case in point. Here, I find Trump’s new “reciprocal” tariff plan actually more worrying than targeted bilateral tariff hikes (which are still a serious blunder, as I have argued ad nauseam). This new plan reflects Trump’s belief that the rest of the world must conform to the American “model,” and his willingness to use tariffs as a cudgel to make that happen. This applies not just to cross-border trade, but also to industrial policies, value-added and digital-services taxes, currency manipulation, and any other so-called structural impediment to foreign-market access.
Trump’s reciprocal tariff plan flies in the face not only of well-established supply-chain efficiencies, but also of the eight rounds of reciprocal tariff reductions after the US enacted the Reciprocal Trade Agreements Act of 1934. Is the Trump administration, with its grandiose insistence on reciprocity, actually unaware of this?
Nor does Team Trump grasp the inflationary potential of these actions, pointing to the lack of inflationary fallout from the tariffs of 2018-19. This is a false comparison: reciprocal tariffs are aimed at all of America’s major trading partners, not just China, as was the case back then. Moreover, they are being proposed during a period when core inflation (the Consumer Price Index excluding food and energy prices) is 3.3% —well above the Federal Reserve’s 2% target. By contrast, average core CPI inflation was close to the Fed’s target during Trump’s first administration.
Much to Trump’s displeasure, an inflation-targeting Fed will likely be wary of cutting policy rates in the face of price increases from tariff hikes. And it's not just eggs —Americans now seem to be bracing for a sustained period of higher prices. The latest University of Michigan survey showed that consumers expect inflation to be 3.5% over the next five to ten years – the highest reading since 1995.
Another concern is that Trump’s disruptive policies will pierce the optimism and denial embedded in financial markets. The US stock market has been on a tear, largely owing to a speculative binge on artificial intelligence. According to Bloomberg, the “Magnificent Seven” – the tech giants Alphabet, Amazon, Apple, Meta, Microsoft, Nvidia, and Tesla, all of which have poured billions into AI development and infrastructure – are up fully 3.2-fold (on an equal-weighted, total-return basis) from the end of 2022. Bloomberg calculates this group has a price-earnings ratio of 33 – over 40% higher than the average PE ratio of other large-capitalization stocks.
Moreover, by December 2024, the Magnificent Seven accounted for 34% of the S&P 500’s total market capitalization – nearly six times the internet sector’s market-capitalization share prior to the end of the dotcom bubble in March 2000. A DeepSeek selloff in late January, caused by the stunning revelation that a Chinese startup had created a large language model on par with those of American AI firms at a fraction of the cost, underscores this concentration risk. While AI may represent a revolutionary technological breakthrough, it may be only a matter of time before this speculative bubble bursts. Could the chaos of Trump 2.0 be the pin that pricks this bubble?
I also worry about a sharp dollar correction. To be sure, I wrongly predicted a dollar crash in mid-2020. But with the broad dollar index – the real effective exchange rate as calculated by the Bank for International Settlements – surging to a record high, my concerns have multiplied. America’s gaping current-account deficit and domestic-savings shortfall are far worse today than in mid-2020; there is limited upside to interest rates after their recent normalization; and the eventual collapse of the AI-fueled equity bubble could lead to cross-asset contagion. American exceptionalism, a pillar of the greenback’s dominance, may also be at risk; key soft-power attributes long associated with global leadership of the United States — morality, character, adherence to the rule of law, and unflinching commitment to alliances — are fraying as the MAGA grip tightens. Yet just like the AI-led equity bubble, the US dollar is also priced for perfection.
Alas, the United States remains far from perfect. A polarized American society personifies a key imperfection, endlessly debating whether Donald Trump is as crazy as a loon or as sly as a fox. The MAGA hope is that the savvy dealmaker will ultimately prevail, winning major concessions by taking tough positions and bullying foreign adversaries. Look no further than Volodymyr Zelensky’s February 28 mugging in the Oval Office of the White House.
In these days of froth, doubling down on MAGA spin may not be the wisest bet to make. In the end, America may well get the economic and financial crisis that Donald Trump falsely claims to be confronting. The Misery Index will then finally live up to its name.
Dear Mr. Roach, your timely insights, accompanied by excellent writing, I believe offers your readers a reliable perspective or opinion packed with valuable analyzes. I look forward to reading your book “Accidental Conflict..” and following your work on Substack. Thank you!!
I think its unfair to deny Trump's result on driving investment to the US and creating conditions for a stronger middle class. He often use things that people value as stakes. A good checks and balance is needed.
Globally, a zero-tariff World can only be achieved when no sizable countries try to use state intervention to gain strategic advantage over others. The EU doesn't have much levers to bring that outcome. Many still claim that imports subsidized by partner are good for consumers. In fact it is only good to an extend when the outcome doesn't change strategic competitiveness. i.e. Mario Draghi's plan to regain competitiveness make sense for Europe but an anti-tariff stance don't. China hold the key to resolve tariff not the EU.
It also makes more sense to have an European coalition of the willing to become NATO Europe's nucleus and the foundation of European security. The war happens in Europe, and there are also gas pipe sabotage, cable severing, North Korea, etc. A messy mix of NATO and EU don't seems able to actually protect European from further aggression.