Self-Inflicted Economic Injuries
Number go down
The recent collapse of US markets represents a completely justified loss of confidence in the US economy. Trump’s tariffs and the political instability he creates make a recession likely and a substantial economic slowdown almost certain.
Like many Americans, I’ve lost a significant portion of my life savings since Donald Trump took office. The major US stock indexes have all fallen dramatically, wiping out trillions of dollars from American portfolios. The Dow Jones is down 12%, the S&P 500 is down 14%, and the NASDAQ Composite is down 19%. The stock market decline has wiped out trillions of dollars from American portfolios. Bitcoin is down 14% in spite of the Trump administration’s support for crypto as an asset class. The value of the US dollar also fell 10% against other major currencies. The US may be experiencing some degree of capital flight as traders dump US assets almost across the board. Investing in America is starting to seem risky.
Senator Elizabeth Warren is probably right to call this “the dumbest financial crisis in US history.” The US economy for all its problems was until recently the envy of a world still struggling to recover from the COVID pandemic and the Russian invasion of Ukraine. There was certainly no economic emergency that justified imposing punitive and historically high tariffs on almost every country in the world. The only emergency is the one Trump himself created by reneging on agreements the US made—including some he negotiated—and in the process upending the international economic order that has mostly benefited the US. Trump’s tariffs are predicated on the idea—which is clearly wrong—that bilateral trade deficits are largely the products of unfair barriers to trade. While countries certainly do create unfair barriers to trade, these tariffs mostly won’t address them. Instead they have been applied in a dumb, formulaic way that produces absurdities like tariffs on uninhabited islands. The broad collapse of US markets is a resounding vote of no confidence that the tariffs will benefit the US economy.
What happens now depends on Trump, since Congress is unlikely to act. If he rolls back some of the tariffs and holds off on imposing new ones, US markets are likely to recover at least partially, although other countries will still try to reduce their dependence on US trade. If Trump instead decides to reimpose the tariffs he paused or to impose significant new sectoral tariffs the economic impact could be enormous. The markets, which are still banking on the possibility he won’t impose severe new tariffs, will fall even further. GDP growth will slow significantly as international trade shrinks. Prices will increase on goods and components that are subject to tariffs. Unemployment is likely to increase too, at least initially, because businesses that rely on trade will be forced to lay workers off. Moving businesses back to the US to avoid paying tariffs will take time—and businesses will be reluctant to make new investments while trade policy is in flux—so it’s unlikely there will be much new hiring to offset layoffs any time soon.
My guess is that Trump will back off the most extreme tariffs, since he has already backed down in the face of rising bond yields. But because he genuinely believes that other countries are taking advantage of him—and because he has a high need for chaos and continually creates crises—he’s unlikely to back down entirely. He will continue to use the threat of tariffs to cajole other countries. He is already making matters worse by threatening to fire Fed Chair Jerome Powell unless he lowers interest rates. The Philadelphia Fed Manufacturing Index fell 39 points, the largest one month drop since the beginning of the COVID pandemic. US Consumer sentiment fell to its second lowest level in the survey’s history. Goldman-Sachs now estimates there’s a 45% chance of a recession this year; J.P. Morgan estimates there’s 60% chance; Polymarket bettors estimate there’s a 57% chance; and Metaculus forecasters estimate there’s a 75% chance. The loss of confidence in the US economy is justified; even if we manage to avoid an actual recession this year, the economy isn’t likely to be strong for a while.
My Forecast
50% chance of a recession in the US starting in 2025
You can see my predictions and add your own on Fatebook here.
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