It’s easy to be alarmed about Donald Trump’s actions concerning the global economy.
Since taking office in January, he has rekindled the trade war with China, elevated US tariffs to levels not seen since the 1930s, upended the rules-based system regulating global commerce, and bullied America’s friends into onerous trade and investment measures as a price for retaining access to US markets.
At home he has threatened the independence of the Federal Reserve, the world’s most respected central bank. He has greatly increased the cost of immigrant work visas, making it harder for tech companies to attract the best talent. He has insulted Canada – arguably America’s best friend and ally – sought to rename the Gulf of Mexico, argued that Denmark should transfer Greenland to the US, and arbitrarily rebranded the US defence department.
In some of these cases he may have exceeded his authority. Historian Niall Ferguson believes Trump is expanding presidential power, as was done by presidents Nixon and Franklin Roosevelt.
Despite upset and turmoil, the US economy is still robust. Growth this year is projected to be above two percent. Stock prices keep touching record highs, jobs are being created–albeit at a slower pace, investment is coming in, and inflation is way down from its 9% 2022 peak. Federal Reserve chairman Jerome Powell was not alone when he observed at the beginning of the year, “The US economy is in very good shape.”
Now as we enter the fourth quarter of the year, the economy has weakened, but only slightly. There are few signs of recession or sustained slowdown. With share prices up 15% this year, is this a stock market bubble? No, because this isn’t a reprise of the 1999/2000 tech bubble when share prices soared despite companies having no earnings. Today’s magnificent seven (Alphabet, Amazon, Apple, Meta, Microsoft, Nvidia, and Tesla) are profitable and cash-rich.
Economic growth
Trump’s tariffs have not yet translated into sharply higher consumer prices. Will the tariffs boost inflation? Possibly, but so far it hasn’t happened. On monetary policy, the Fed is now in an easing cycle, and lower interest rates are likely to boost economic growth.
What about the weakening dollar and soaring gold price? After a decade of arguably excessive strength, the dollar has depreciated 10% this year, while gold has soared past $4,000, its biggest rise in 45 years.
Amazingly, gold is up 40% so far this year, and 58% in the past 12 months. That rise can’t simply be attributed to the metal being a safe haven and a hedge against inflation.
Gold specialist Pierre Lassonde says concern about exploding global debt is one factor. On 30 September Lassonde told Grant’s investment conference in New York that gold’s rise will continue. “Gold is going up against all other currencies.” That, he says, “is the definition of a gold bull market”.
Are gold’s rise and the dollar’s decline linked to the belief that Donald Trump has inexorably undone the post-World War Two order? Are we now in a multi-polar world in which dollar dominance is over?
“In transition”
Christine Lagarde, head of the European Central Bank, appears to think so. She told a European parliamentary committee on 6 October, “The world is in transition” and “geopolitical shifts and heightened policy uncertainty remind us that no currency’s global position is guaranteed.” Lagarde says now is the opportunity for the euro to strengthen its global role. Perhaps, but the dollar is still dominant, with only 19% of global trade being transacted in euros, while the Chinese RMB has risen to 6%.
What former Treasury Secretary Larry Summers said a while back still holds. “You have to put your money somewhere,” he told a conference, “and the dollar is a good place to put it…especially considering the alternatives. Europe is a museum, Japan is a nursing home, China is a jail, and bitcoin is an experiment.”
My message is: don’t write off the Trump administration and don’t conclude that US global economic leadership is coming to an end. It’s far too early to say. Trump supporters believe the president has a strong team and is off to a great start. Of course, there are critical uncertainties.
Will the Trump tariffs endure or be rolled back? Will Presidents Trump and Xi come to an understanding, ending the trade war and boosting US-China trade? One thing is sure, if there is an agreement, trade flows will increase and global growth will accelerate.
The views of the writer are not necessarily the views of the Daily Friend or the IRR.
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