And A Full-Fledged Trump Depression? Not That Far-Fetched
Yesterday we ran a post bout the coming Trump recession and the next morning I brought name exposure to equities down by 5% and asked my financial advisor to prepare a plan for another 5%. I don’t think the financial industry sees this second Trump administration as catastrophic as some of us do. Still, yesterday Denitsa Tsekova, reporting for Bloomberg, wrote that the <> Wall Street banks say markets are flashing rising recession risk<>. They all read that. Even Trump’s people do, which might have something to do with why he put the brakes on his economy-killing tariffs yesterday. “Financial markets,” wrote Tsekova, “are signaling that the risk of a recession is growing as tariff-related uncertainty and indicators of economic weakness spread fear across Wall Street. A model from JPMorgan Chase & Co. shows that the market-implied probability of an economic downturn has climbed to 31% on Tuesday, from 17% at the end of November. Key indicators like five-year Treasuries and base metals are showing an even higher— toss-up— chance of a contraction. While it’s far from the base case, a similar model from Goldman Sachs Group Inc. also suggests recession risk is edging up, at 23% from 14% in January… [Economic sentiment is darkening as money managers and corporate executives struggle to cope with the volatility created by Trump’s threatened tariffs. Trump defended his plan to remake the global trading order in his address to Congress Tuesday night, acknowledging the prospect of discomfort ahead.
“With softer economic activity data in the US and already weaker business and consumer confidence in recent weeks, the tariffs that came into effect on March 4th on Canada, Mexico and China are raising the risk of an even bigger hit to business and consumer confidence going forward,” said JPMorgan strategist Nikolaos Panigirtzoglou. “In turn this raises the specter of a US recession and markets have naturally priced in higher probability.”
…Data this week showed US factory activity last month edging closer to stagnation as orders and employment contracted. This came after reports showing consumer confidence hitting the lowest levels since 2021, personal spending unexpectedly decreasing, and disappointing prints about the American housing market.
Mohamed A. El-Erian, the president of Queens’ College, Cambridge and a Bloomberg Opinion columnist, now sees a 25% to 30% chance of a recession, up from 10% at the beginning of the year. El-Erian is among a small but growing group of Wall Street worrywarts, focused on stubborn inflation pressures and the recent decline in consumer and business confidence.
Robert Kuttner’s report skipped right over recession and went right for a Trump Depression. On economics, Kuttner judges Trump worse than Hoover— and out to purposely “create a collapse. There are several distinct elements of the coming Trump depression, all cutting in the same direction, all interacting with each other, all needless.. [starting with] Trump’s entirely gratuitous tariff war. Economists are divided on just how much the tariffs on Canada, Mexico and China will increase inflation, but there is no doubt they will raise consumer and producer prices somewhat… Exacerbating the impact of tariffs on Canada and Mexico is the integrated nature of North American production since NAFTA.”
“The tariffs,” wrote Kuttner, “will have several other knock-on effects. They will produce retaliation by Canada and Mexico, which in turn will depress GDP growth. Even a modest uptick in prices will spook the bond market and the Federal Reserve, raising interest rates. That in turn will spook the stock market. The Dow is down almost 1,400 points in the last two days. A falling stock market feeds on itself, and more is likely to come. All of this will be bad for consumer confidence, which had already been plummeting. The Conference Board’s Consumer Confidence Index for February, released last week, fell for a third straight month, marking the largest monthly decline since August 2021. And when consumers are in a pessimistic mood about the economy, they reduce their spending. Consumer spending in the U.S. dropped 0.2 percent in January— the first monthly decline since March 2023. Spending probably fell even more in February.”
What has gotten less attention is the risk of a general implosion in demand, as the result of several other Trump-Musk policies. Trump is about to get a bitter lesson in Keynesian economics, in reverse.
The cuts in government spending and the layoffs of government employees not only have a direct impact on total demand. Across the economy, institutions from universities to research labs to government contractors have prudently reduced planned outlays because they have no idea whether anticipated government support will materialize.
This is Keynes’s famed multiplier, but in the wrong direction. It artificially recreates what occurred after the stock market collapse of October 1929, as layoffs led to more layoffs and the economy went into free fall.
Which raises the question: What in the hell does Trump think he is accomplishing?
I’m guessing that the tariff part of Trump’s wreckage is a pure case of Trump’s impulsivity and irrational fondness for tariffs. I’m also guessing that there have been frantic back-channel conversations between White House aides and Treasury Secretary Scott Bessent and Commerce Secretary Howard Lutnick, who understand the risks even if Trump doesn’t.
Yesterday afternoon, all too predictably, Lutnick told Fox Business: “Both the Mexicans and the Canadians were on the phone with me all day today trying to show that they’ll do better, and the president’s listening, because you know he’s very, very fair and very reasonable. So I think he’s going to work something out with them.” Good luck with that.
The problem is that it’s easier to engineer a crisis of consumer and investor confidence and aggregate demand than it is to undo it. Even if Trump were to come up with some face-saving pretext for once again suspending the tariffs, investors and consumers know that Trump is capable of reversing today’s policies on a whim yet again.
Pathetically, Lutnick has talked about revising government indicators of GDP. Sorry, but you can tinker with how you measure GDP, but that doesn’t change reality. Even harder to reverse will be the Keynesian multiplier effects of all of the Musk-ordered layoffs and cuts in public spending.
A related key question is whether Trump has any master plan for the economy here, or whether he is just batshit crazy. The evidence is that Trump’s effort to destroy the government reflects a certain malign consistency, but that his effort to destroy the economy is based on sheer ignorance and impulsivity.
His economic policy is internally inconsistent, and totally at odds with his political need to tame inflation. He is on track to have the kind of stagflation that did in Jimmy Carter, only far worse— and self-inflicted.
Live by bullshit, perish by bullshit.
Trump has the power to issue commands in the domains that he controls, but he can’t command the stock market to levitate, or prices to moderate, or consumers to feel confident, or people who have just been laid off to go out and shop.
In a couple of weeks, the budget talks will reach the point of an increasingly likely government shutdown. Closing the government will be even more of a hit to total demand and consumer and investor confidence.
In agreeing to reopen the government, Democrats are in a good position to demand that Trump reopen the whole government, starting with the parts that Musk has illegally shut down. In the meantime, this engineered crisis is entirely Trump’s.
This afternoon, Noah Smith noted that “Despite steady GDP growth, low inflation, low unemployment, and record high stock prices, Americans told pollsters in 2024 that they were deeply unhappy with how Joe Biden had handled the U.S. economy. So they elected Donald Trump, who promised to lower costs for average Americans, create a new era of U.S. manufacturing and domestic investment, and so on. How is that working out? Well, the Atlanta Fed now projects that the U.S. economy will shrink at an annualized rate of 2.8% in the first quarter of Trump’s presidency... US factory activity last month edged closer to stagnation as orders and employment contracted, while a gauge of prices paid for materials surged to the highest since June 2022 as tariff concerns mounted. The Institute for Supply Management’s manufacturing index slipped by 0.6 point in February to 50.3, according to data released Monday. Readings above 50 indicate growth. The group’s price measure increased 7.5 points to 62.4... Tariffs are taxes. They create deadweight loses. Tariffs make a country’s exchange rate less competitive. Targeted tariffs against a few strategic products are usually not very harmful, but broad tariffs just clobber a modern economy. Never say economists didn’t warn you… Unless Trump is being paid by America’s enemies to destroy the country’s economy— something I think is pretty unlikely— what we’re looking at here is an ideological project. Like Mao did in China in the 1960s, Trump is taking a baseball bat to the U.S. economy in order to follow his deeply held ideological beliefs… America voted for a guy they thought would deregulate the economy and fix inflation— a modern-day Reagan. Instead they got a dime-store Mao, who would be happy to impoverish his nation just to see it be less reliant on the rest of the world. I think a little buyer’s remorse is in order.”
And where are the so-called fiscal conservatives in Congress? The same pack of grifters who once claimed to stand for economic stability, now cowering like whipped dogs, too afraid to challenge the erratic madman running their party into the ground. The same people who howled about deficits when it meant blocking food assistance or infrastructure spending are now watching in silence— or even applauding like trained seals— as Trump torches the economy with reckless tariffs, crony-driven spending cuts and a government-by-temper-tantrum approach to policymaking.
They see the data. They know the recession warnings are flashing red. They hear from the same Wall Street executives who are suddenly realizing that maybe, just maybe, putting a sociopathic con artist in charge of the world’s largest economy wasn’t the smartest long-term investment. But congressional Republicans don’t care. Because their job isn’t to govern— it’s to cling to power in their gerrymandered little districts by whatever means necessary, even if that means watching the country burn while they pour another glass of donor-funded champagne.
These are the same Republicans who shut down the government under Obama for sport, who held the economy hostage over debt ceilings, who pounded their chests about responsibility while tanking pandemic relief efforts. And now? They sit like nodding bobbleheads, rubber-stamping Trump’s insanity, too spineless to stand up to him, too corrupt to care about the wreckage left in his wake.
And when the crash comes— and it will come— watch them scramble like rats from a sinking ship. Watch them blame immigrants, blame the media, blame Democrats, blame anyone but themselves. But history will not forget that it was Republicans who handed the keys to a grifter, Republicans who enabled his destruction, and Republicans who made damn sure that when the bill came due, it was working Americans— not their billionaire donors— who were left to pick up the pieces... again. They built this disaster. Now they own it. Live by the con, perish by the collapse.