Afternoon all. Sending along the recording of my Hopium Live discussion with our good friend and economist Rob Shapiro from earlier this afternoon. Rob joined us to walk us through his new, compelling essay in the Washington Monthly, Trump’s Perfect Storm That Could Sink The American Economy. Rob’s presentation and essay will be useful to anyone wanting to get smarter about our current, perilous economic moment.
As I said to Rob after listening him describe what could happen in the coming months it all sounds far more like sabotage from Trump than a strategy to make America great again.
Here are two excerpts from Rob’s essay:
The bond and equity markets’ thumbs-down responses to Trump’s tariffs and threats signal an even more serious problem: Investors are losing confidence in Trump, his presidency, and perhaps the United States. It’s especially true for foreign investors who reinforced the message by moving away from the dollar, because they’re investing less in our stocks and bonds.
If their response to our president’s ineptitude and capriciousness persists, it could be ruinous. The stability of our financial system depends on trillions of dollars in foreign capital. In 2024, foreign investors and governments held $18.4 trillion in U.S. stocks and $8.5 trillion in U.S. Treasury securities, about 30 percent of all our stock and 30 percent of all our bonds. While most American investors will likely wait out the coming storm, foreign investors with $27 trillion in American financial assets have plenty of alternatives. In a word, the United States could face destabilizing capital flight.
To stave off this grim prospect, the Treasury Department and American corporations will have to offer foreign and domestic investors higher returns. (Yields on U.S. treasuries soared after Trump revealed his chaotic tariff regime and have decreased only slightly since then.) So, regardless of what the Fed does, market interest rates may rise even as the economy declines.
And……
Our gathering economic storm includes another feature that could drive the economy onto the rocks. Apart from the tariffs, Trump’s aggrieved attacks on the rule of law also threaten the willingness of foreign investors to continue holding and buying American bonds and stocks. Along with the rest of us, they see Trump and his administration unilaterally abrogating contracts, withholding appropriated funds, dismissing court decisions, attacking judges for enforcing their rulings, deporting people without charges or hearings, providing special treatment for large contributors and favored companies, and threatening law firms and universities without any legal basis.
The erosion of the rule of law under Trump can have enormous economic significance for a foreign government, investor, or company with stakes in our economy. They now know that the U.S. government may ignore its contracts with them or decide not to enforce their agreements with others when it serves the political or personal interests of the president. That’s the way the world works in the kleptocratic dictatorships in Russia and Venezuela, and virtually no one invests in their stocks and bonds.
By following their lead, Trump and his apprentices risk devastating capital flight that could leave many of our leading financial institutions insolvent. In addition to his deeply destructive tariffs, Trump’s sweeping campaign against the rule of law in the United States has raised the economic stakes from a rocky business cycle to a potential financial and economic meltdown with terrible consequences.
And be sure to catch yesterday’s depth discussion and post with special guest, Rep. Tom Suozzi on why we must keep working to roll back Trump’s destructive tariffs and defeat his dangerous reconciliation bill.
Keep working hard all. We are making progress, true progress, but have a lot of work ahead of us - Simon
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