The chain of contradictions in Trump’s economic policy

What on earth will happen to US economic policy if Donald Trump becomes president? This question is already causing widespread concern. And even the supposedly smart money doesn’t seem sure of the answer.

This week, for example, hedge fund Bridgewater told clients that Trump’s “nominations and rhetoric so far appear to indicate that he will seek to go big and radically reshape U.S. institutions, global trade, and U.S. foreign policy.” Gulp. However, it was subsequently stressed that this was only “a guess” as there was “currently low confidence in the likely programs”. In plain language: protect yourself.

This uncertainty partly reflects Trump’s unpredictable style and penchant for risky trading. But it also makes something else clear: his recent political promises are full of contradictions. Investors can only watch to see how these play out or not.

What are these contradictions? The first is about inflation. During his presidential campaign, Trump attacked the Biden administration over Covid-era price increases and promised to end inflation. But he also promises to impose tariffs of 60 percent against China and 25 percent against Mexico and Canada, which could “derail” the inflation fight, as US Treasury Secretary Janet Yellen warned this week.

Stephen Moore, a Trump adviser, rejects such talk. “Trump raised tariffs in his first term, but where was the inflation? “There were none,” he wrote in his recent newsletter. Fair point. But this week we learned that inflation is already 2.7 percent, above the Federal Reserve’s target and far higher than in 2016. Goldman Sachs expects tariffs to increase that rate by a percentage point – even before deportations increase labor costs.

Secondly, there is the question of interest rates. This week, Trump promised to keep Jay Powell as Fed chair. However, he had previously tried to pressure the “idiot” Powell to cut interest rates. And he has an incentive to try again as the cost of servicing the debt has skyrocketed. How this can be reconciled with Powell’s defiant declarations of Fed independence remains unclear.

Then there is the dollar. Trump’s team thinks it is very overrated. Scott Bessent, candidate for treasury secretary, told the Manhattan Institute this summer: “In the next few years…” . . We will need some kind of major global economic reorganization, something like a new Bretton Woods.” Indeed, Takatoshi Ito, Japan’s former finance minister, notes that “some observers, including myself, are speculating about it. . . Bessent could even call for a “special meeting of the G20” to reproduce “the 1985 Plaza Agreement.”

However, Bessent also said at the same Manhattan Institute meeting that two-thirds of any impact from tariffs is typically expressed through currency gains – meaning the tariffs will strengthen the dollar. Most economists agree. Imagine that.

This leads to a fourth uncertainty regarding the trade deficit. Trump’s team told me that it explicitly rejects the economic orthodoxy inspired by 19th-century economist David Ricardo – particularly the idea that countries export goods to make money to pay for imports, and when each country focuses on areas with comparative Specialized in advantages, everyone is better off.

Instead, Trump’s advisers want to reduce the deficit by leveraging America’s political and commercial dominance (via tariffs) while maintaining capital inflows. It can be difficult to do both. And any dollar strength could attract more imports, not fewer, especially if growth accelerates.

All of this could actually increase the deficit, says Ken Heydon, a former Australian trade official. In fact, during Trump’s first presidency, “the U.S. trade deficit rose to its highest level since 2008, from $481 billion to $679 billion,” he notes.

A sixth topic is the Brics states, i.e. Brazil, Russia, India, China and South Africa. Last month, Trump threatened sanctions if these countries challenged the dollar by launching their own common currency. But they have shown no serious plan to do so. Such threats could backfire. A blog from the free-market American Enterprise Institute says: “As unlikely as a move away from the dollar would be, the capricious, indiscriminate and unilateral exercise of U.S. power…” . . could actually make that possible.”

Last but not least is the budget deficit. Trump promised to cut it from 6.5 percent to 3 percent of GDP. But he also wants huge tax cuts. His team says the gap will be filled by higher growth, cuts in government spending and revenue from tariffs. However, “it will be difficult, if not impossible, to achieve these goals simultaneously,” even if there are modest fiscal improvements, said Tiffany Wilding, an economist at Pimco.

Perhaps Trump will defy the skeptics and prove the economic orthodoxy wrong. In fact, markets are already acting as if this is the case – that Trumponomics will deliver the holy grail of high growth, low inflation and some fiscal control. If that succeeds, I will be thrilled. But now these seven contradictions are still big. So if you’re confused about Trump, don’t worry: uncertainty is the most rational response right now.

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