The Biden Administration He changed his economic strategy as soon as he entered the White House and gave up neoliberalism, because he believed that instead of fighting unemployment, he was focusing on inflation, which had ceased to be a problem. If after a decade of low interest rates (2008-2018), inflation was so low, events showed that more could be spent without worrying about the evolution of prices, they concluded.
With these premises, Biden He got to work: he enacted the Rescue Plan, a stimulus package of almost two trillion dollars, which was added to another two trillion that the Trump administration had spent on the pandemic, regardless of the spending. Three years later, the CPI had risen 20%. The president’s political advisors had underestimated the consequences of the stimuli on inflation
Obamahis predecessor, slowly recovered from the Great Recession and handily won re-election. But Kamala Harris He was not so lucky, because inflation hit everyone, unlike unemployment, especially the middle and lower classes, and pushed them to the side of trump. Economic growth thus had a harmful effect on the Biden Administration.
On Wall Street they were relieved when they learned that Trump was choosing one of their own for the main financial position, the Treasury secretary. Scott Bessent He is a legendary stockbroker and a student of financial history, which may prevent the political mistakes that ruined his ancestors’ careers.
Most of the 2017 tax reform expires at the end of next year, and Bessent is leaning toward extending it more or less as it is now, even as he is besieged by demands for change, especially from the Oval Office. Trump wants new tax breaks for tip income, overtime pay and Social Security benefits.
Likewise, the vice president-elect J.D. Vance seeks to expand the child tax credit and pay for it by increasing the Corporate Tax to 21%, which would lead to a loss of income and growth. Finally, Trump wants to impose new tariffs. Bessent has a complicated job ahead of it to reconcile interests and balance the accounts during the next legislature.
The president-elect posted a barrage of his thoughts on his Truth Social network on Monday, in which he promised 25% tariffs against all products from Mexico and Canada, and a new 10% tariff on imports from China. “This tariff will remain in effect until drugs, particularly fentanyl, and all illegal immigrants stop this invasion of our country,” he wrote.
The increase in tariffs will have harmful effects on inflation and American employment
Bessent himself during his campaign to access the Treasury defended the tariffs. Their theory is that only the threat of imposing them will make countries reduce their trade barriers. It is a risky bet to think that other countries will not dare to retaliate so as not to lose the American market. In addition, tariffs will raise the cost of American consumer goods and reduce employees dedicated to manufacturing products for export.
Trump campaigned as the Tariff Man and its objective is to apply them as soon as possible and on a massive scale. Their intention is to build a protectionist wall to force companies inside and outside to manufacture almost everything in the United States.
The problem is that this strategy is not free and can have side effects. Let’s start with the automobile industry, which depends on cross-border trade to remain competitive. A 25% border tariff would raise car prices and cost tens of thousands of jobs for American manufacturers. It’s no coincidence that shares of Ford Motor and General Motors fell sharply on Tuesday on the news. Trump may not care about stocks, but What about his promises about employment and the working class?
There is also the risk of retaliation. On Tuesday, the Mexican president, Claudia Sheinbaumoffered to talk to Trump about fentanyl and immigration and said she is prepared to respond with tariffs on American exports. “One tariff would be followed by another in response, and so on until common businesses were put at risk,” Sheinbaum said. The US is Mexico’s largest trading partner, from which it even imports gasoline for daily use.
Finally, there is the legal issue. The tariffs would destroy the Free Trade Agreement with Mexico and Canada that he negotiated and signed in his first term. The terms of the pact establish that it cannot be reviewed until 2026, and the parties have another decade to renegotiate or abandon it.
No matter how many times Trump denies it, tariffs are sales taxes, which, of course, will increase consumer prices. How much inflation can we expect from another round of tariffs? Imports represent around 14% of US GDP. Various experts consulted by The Wall Street Journal They consider that if the average tariff rate is 10% to 20%, that means that prices will increase between 1.4% and 2.8%. Most likely it is a one-time price increase, that is, they will not rise every year.
In addition, there is the problem of the threat of mass deportation of illegal immigrants. That would also be inflationary by restricting the supply of labor. So, if we add it all up, Trump’s new policies could add 2% to 3% to overall inflation in two or three years, a percentage point a year, at least.
The biggest risk for the market and the IPC is that Trump keeps his promise and fires Powell
That should boost interest rates unless Trump follows through on his often privately expressed desire to fire Jerome Powell before the Federal Reserve chair’s term expires in 2026. In his first term, Trump consistently criticized Powell after gently raising interest rates. He even asked if he could fire him and was told no. The case would probably reach the Supreme Court.
What could prevent his dismissal from occurring? Congress, which created the Federal Reserve in 1913, from refusing to enact changes to the law? Not likely, with their current majority on Capitol Hill. Neither the Federal Reserve nor its independence appear in the Constitution. And the judges who ruled that as long as Trump is president he has immunity for his official acts would once again support him.
Or do you think that Pam Bondithe new attorney general, will tell her boss that she can’t fire Powell? Don’t even dream about it. The matter is most likely to go to court. The Supreme Court, with a 6-3 conservative majority, would side with Trump. If so, the independence of the Federal Reserve will go down the drain.
The only line of defense is in the market. At the first sign of Trump going seriously against the Federal Reserve, stocks and bonds will plunge. Thousands of points lower on the Dow Jones is what could deter Trump from moving forward.
If the new president eliminates or reduces the independence of the Fed, that would open the spigot of inflation, since its new head, even if he is a person of recognized prestige, will not dare to touch the rates, at least to raise them .
Liberalism is a doctrine that promotes free markets, limited government power, maximum growth, and individual competition to improve social well-being. But recent events such as wage stagnation, wealth inequality and some negative effects of free trade as a result of the pandemic weakened its attractiveness and opened the doors wide to protectionist movements, which in the medium term will limit the growth of economies and They will make prices and financing more expensive. Despite the current optimism in the markets, Trump could backfire.
P.S..- In Spain, the new governor, José Luis Escriváalso has dreams of greatness. Behind their project to “modernize the statutes of the Bank of Spain” they assure that there is the extension of his mandate from six to eight years or the authorization so that he can be re-elected for two consecutive periods, of four years each.
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