Back over at the Philadelphia Inquirer, Zandi notes that global investor confidence has also plummeted, even as interest rates have dropped, with short-term interest rates now exceeding long-term rates. This is a classic indicator of impending economic recession. If the trade war escalates, consumer confidence also drops: Consumers spend less, creating a downward spiral of decreasing investment, the previously-mentioned increasing nervousness of companies to invest, and an increase in unemployment. As Zandi states, that is the “vicious cycle” of all recessions.
And the Fed can’t ride to the rescue because Trump’s unpredictable behavior makes that impossible. How can the Fed safely predict whether a rate cut will be beneficial in a volatile trade war whose parameters change on a daily basis? It can’t, which is why you see them exercising such caution now, a caution that, as seen Friday, only adds to Trump’s wild irrationality.
Josh Barro, writing for New York Magazine, sees Friday’s events, between Trump’s attacking Fed Chair Jerome Powell as an “enemy” and his declaration that he will escalate even further his tariffs against China, as a watershed moment.
[T]oday feels different. For the last couple of years, there had been a pattern: The president escalates, the markets hate it, then the president finds a way to back off, and stocks go back up. For a long time it looked like the president’s China policy was a negative factor for economy, but its effects were manageable, in significant part because Trump faced political incentives to limit the damage.
Now, as the economy shows signs of weakening (in part for reasons unrelated to the president’s actions) he seems panicked. He wants the Fed to clean up his mess but — despite public perception — his public jawboning of the Fed appears to be having little effect on monetary policy. The main way the president has been affecting monetary policy has been by taking concrete policy actions that hurt the economic outlook, which changes the parameters the Fed considers as it decides how to set interest rates. The bigger a mess Trump makes, the more rate cuts he can get, but not enough rate cuts to actually offset the mess. And this is making him angry.
The last time things appeared to be spinning out of control, Trump announced a delay in his proposed tariffs, postponing them until December (and presumably consigning them to be forever forgotten). But, as Barro points out, the Chinese (who are infinitely more patient, as well as infinitely more intelligent than Donald Trump) took that as a sign of weakness, and announced new tariffs of their own.
As Trump’s “strategy” of taking this country to the brink, then backing off, didn’t work. Instead he decided, on Friday, to escalate. The Dow Jones promptly dropped nearly 700 points. After the market had closed, Trump threatened further increases in tariffs, increasing the likelihood of a sustained stock market collapse next week.
And this is exactly how Barro sees this all playing out, with Trump’s tariffs becoming an unavoidable, self-reinforcing wrecking ball to the U.S. (and global economy), tanking Trump’s presidency—while taking all of us down with it. HBarro echoes several of the same points made by Zandi.
[Trump’s] trade policy no longer appears to be self-limiting. In fact, it could be self-reinforcing, where tariffs cause damage and the president tries to “fix” the damage with more tariffs.
It’s also worth considering the possibility that we have gotten too far down the trade-war road for the president to unwind the problems he’s caused. To the extent there are signs of weakness in the domestic economy, they are largely on the producer side. The consumer sector still looks decent. But tariffs and uncertainty over future tariffs have already discouraged businesses from producing and investing. And China has less reason to participate in a de-escalation than they did a year ago, since they can just ride out the next year and hope to be facing a new, less-hostile president. As Jonathan Chait notes, Xi Jinping doesn’t have to worry about reelection like Trump does.
As China has clearly showed the U.S. that it has no intention of “backing down,” what does our experience with Trump thus far tell us about how he will react? Has he ever, ever, acknowledged his policies for the grotesque mistakes they are? No. He habitually, reflexively doubles down on them. Because, just like any sociopathic personality, Barro notes that he is utterly incapable of admitting that he is wrong.
What the president showed us today is he’s prepared to hit the gas as he approaches the cliff. That should make us all worried about the economic outlook — and it should make Republicans very worried about the political outlook.
It’s arguable whether the human and social costs of a severe, global recession are worth getting rid of a cancer like Donald Trump. But events are occurring now at a pace that that may render that argument purely academic.