On Friday at noon, when Wall Street was once again in the red, on the verge of destroying six trillion dollars in value due to the most inexplicable trade war in contemporary history, the President of the United States shared an extraordinarily bizarre video on his social media. In it, an unconditional supporter of his presidency claimed that Trump was deliberately crashing the markets as part of a "master plan," "applauded by Warren Buffett" as the most brilliant move in decades to force the Federal Reserve to lower interest rates and refinance the country's debt cheaper and reduce mortgage costs. The video was delirious, the mention of Buffett false and crude (his company had to come out to deny it despite everything), but for Trump to share it with his millions of followers while publicly pressuring the Fed's chairman, Jerome Powell, sums up the state of affairs well. Not the reasons, but the chaos and confusion.
Trump has always been capable of going far beyond what any of his friends or enemies think, but if there is one thing he has been consistent about since at least the 1980s, it is his disdain for the international order, his protectionist worldview, and the theory that the entire planet abuses the United States, an economic and security "doormat" that has been "plundered, violated, and looted by nations near and far, friends and foes." Now, in his second term, with full powers, experience, a very detailed plan, and a team of loyal followers, he is ready to turn the tables. And to risk whatever it takes, from trillions of dollars in the stock markets to the role of the dollar as the reserve currency and center of the global financial system.
The President operates on instincts more than facts and craves constant glory and recognition. And his tells him that the leading economic, military, and nuclear power, the most powerful country in history, can do whatever it wants. It can impose tariffs and demand that the rest of the planet accept them without protest, as if they were feudal tributes. He believes he can replicate the late 19th-century model when the US, without income taxes, funded its (small) state with tariffs ("so much money was coming in that we didn't know what to do with it"). As one of his closest, loyal, and radical advisors, Stephen Miller, defended this week, he aspires to a kind of autarky, where the goal of tariffs is to reverse and "end all interdependence with the rest of the world," especially in terms of manufacturing and goods, to ensure that the United States produces everything it needs.
"Today's announcement is the most significant measure in global trade policy that we have seen in our lives, it is not even a close call. It is the most important event that has occurred in global trade since the unfortunate decision that we are now reversing to eliminate all commercial tariffs and income policies of the United States that led to the relocation and outsourcing of the entire industry," Miller said in a promotional video on the same Wednesday.
Trump and his inner circle cynically, ignorantly, or irresponsibly believe that the 20th century has been detrimental, harmful to the US. That globalization has been harmful to the interests of the country that created the current framework and that it has become what it is thanks to everything it now repudiates. The past week has been a display of astonishing revisionism. Long and short term, claiming that the tariff laws of 1930, which academic and economic consensus deem disastrous during the Great Depression, came too late to save the country. But also, spreading the propaganda that Biden's "inherited legacy" was a "free-falling economy, not creating jobs, a depression, not a recession," while data shows that by 2024, unemployment was at very low levels, with much higher growth than the major economies of the world and decreasing inflation.
The new Administration has well-defined objectives by its main figures, sometimes contradictory or without a clear order. The first is to tax all products entering the US to fill public coffers and thereby lower taxes. The second, drastically reduce the size of the State and public spending, through massive layoffs, closure of agencies and departments, sale of buildings or lands.
Third, force the Federal Reserve to lower interest rates, even if it means chaos and destruction in the markets or if a contraction or recession needs to be forced. It's better at the beginning when popularity ratings are high, the Government thinks, speaking through its affiliated media of adjustments, corrections, temporary pain, or temporary turbulence. Fourth, build on these foundations to transform the US from a consumer country into one of producers and industry, forcing companies to bring back production and jobs that it believes the poorest countries in the world have "stolen."
Fifth, and to facilitate the above, devalue the dollar slightly, but without losing its role as the world reserve currency and center of the system. They do not aim to convince their allies, as Ronald Reagan did in the Plaza Accords of 1985 to help him find a balance by appreciating their own currencies, but to extort them. With tariffs, threats to withdraw from NATO or forced annexations. Or other punishments to the BRICS if they try to seek alternatives to the US dollar. If that is not enough, the head of the President's Council of Economic Advisers, Stephen Miran, who has tried to intellectualize this square of the circle, proposes a default through a forced conversion of US bonds into 100-year bonds, for example.
Sixth, and related: these days, as the stock markets fall, money has taken refuge precisely in Treasury bonds. And the Administration celebrates by saying that this demand is pushing yields down, already below 4%, which will lead to significant savings, as the country's refinancing needs are enormous. Masterful move.
The bet is extraordinarily risky but in line with Trump's worldview, born into wealth, his team, largely made up of millionaires, and above all the ultra-rich of Silicon Valley, led by Elon Musk or Peter Thiel, who believe that the world belongs to the bold and that risk management is what sets wolves apart from sheep, the River from the Village, in their terminology. "Only the weak will fail," Trump wrote on Friday. "Much better than expected, it's already working. Hold on tight, we can't lose!!!" he said in another message.
The rest of the planet, meanwhile, has absorbed the blow as best as it could while studying the best response. Russia has celebrated it in a big way. China has announced retaliatory tariffs for the same amount as theirs, but it obviously imports much less than it exports. The EU has promised firmness, and leaders like Emmanuel Macron want to go after technology companies and the service sector, so that the pressure from their leaders, the Zuckerbergs, Bezos, Altmans, Pichais, Cooks, who surrounded Trump on his inauguration on January 20, makes him rethink his strategy.
Europe must respond, and it will, but it mainly relies on the destruction of the markets to awaken American society. The European Commission, "outraged and concerned," as Teresa Ribera said on Friday in Washington, seems to hope that Trump will stew in his own juice, overwhelmed or crushed by reality.
Trump's announced tariffs have not only been higher than almost everyone expected, disorienting any economic operator who does not know whether to buy or invest because they do not know what will happen tomorrow. But, according to Paul Krugman, "it is a much greater shock to the economy than the infamous Smoot-Hawley tariff of 1930, especially when we consider that international trade is approximately three times more important now than it was then." In the 1930s, trade accounted for 22% of the US GDP, now it is around 30%. "These tariffs are going to hurt. A lot. According to my calculations, this round of tariffs could be 50 times worse than those Donald Trump instituted in his first term. That means they will transform our lives in much more fundamental ways," wrote Justin Wolfers, a professor at the University of Michigan.
It's not just the brutal destruction of stock market wealth in the last month and a half, or the fact that tariffs could raise the price of an iPhone by up to 55%, the phone that every American in a big city has. It's not just the threat of inflation, which was one of the three main electoral assets and perhaps the decisive factor for the people to punish the Biden-Harris administration. Or that investment banks already believe that the chances of a recession exceeding 60% this year or next. The Baker, Bloom, and Davis Economic Policy Uncertainty Index, compiled by three respected academics, is currently hovering around 600 points, above the peak of the Covid pandemic in 2020. The percentage of adults with a negative perception of the economy, according to the University of Michigan survey, is at its highest level since it began in 1985, well above the last three major recessions.
"A single, uniform global tariff, which would increase or decrease based on the US trade deficit with the world as a whole, would have been easier to implement and harder to manipulate," argues economist Oren Cass, a supporter of these Trump actions. But he warns: "establishing tariffs country by country and reassessing each one regularly will generate a bonanza of lobbying and inevitable failures and distortions," something that critics in Washington are starting to call "Argentinization," full of holes, shortcuts, and room for corruption with friends. If you contribute to the campaign, the memecoin, or Trump's presidential library, you might get exemptions.
Furthermore, experience shows that hegemonic power does not work symmetrically. If an economic bully, as the US is now, has a high share of a sector or market, they usually have total control. But if their share drops a bit, strangely enough, their dominance crumbles more quickly, as the weak start to see alternatives. Until now, no one conceived substitutes for Washington or the dollar, but Trump has broken all taboos and opened all doors.