Is This America's Liz Truss Moment?
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Bloomberg Audio Studios. Podcasts, radio, news. The U.S. financial system in terms of currency, bonds, and equity are potentially at risk of unraveling in a very precipitous way if you get to that point of no return. And we just don't know where that is. ♪

I'm Stephanie Flanders, Head of Government and Economics at Bloomberg, and welcome to Trumponomics, the podcast that looks at the economic world of Donald Trump, how he's already shaped the global economy, and what on earth is going to happen next. So, some stuff has happened since we recorded our last episode with Martin Wolf, as we knew it would.

When we recorded that episode, we stepped back to consider the root cause of America's big trade deficits with the rest of the world, just as President Trump was getting ready to bring out that big poster board of tariff rates in the Rose Garden that was supposed to get rid of all of its deficits with everyone. Well, we're not going to go into the fine print of that plan today or the infamous formula, if you can call it that, which produced the numbers. You would have heard that from plenty of other people.

Plus, the numbers might well have changed by the time this goes out. But I did want to think about what that big announcement has taught us about the Trump White House and what will it mean for the US economy. Put it another way, are we now looking at a US recession coming down the track? And if so, how much does Donald Trump actually care?

Such small questions, but we have big brains to answer them here in the form of two friends of the show. Bloomberg Senior National Political Correspondent Nancy Cook, welcome back. Thanks so much for having me. And we're in the same room for once in the DC Bureau. And Ed Harrison, Senior Editor and author of Bloomberg's Everything Risk newsletter. Ed, great to see you. Hello. And you haven't been busy in the last few days at all, Ed, Everything Risk. Right, right.

No, not at all. There are no risks whatsoever.

Well, let me start with you. Give us a sense of where we've been in the last few days as investors were trying to absorb what had happened last week, the announcements coming out of the administration and the president's steadfastness around this plan, which has really taken a lot of people by surprise. Yeah, I think that last week you could characterize as a panic.

that was centered around the equity market. Basically, the tariffs were a lot more robust than people had anticipated. And as a result of that, equity sold off on the day after that.

Then there was talk about retaliation against China, which, as of this recording, is about to go into effect. And that precipitated another sell-off on Friday, in particular because people did not want to go into the weekend heavy on stocks with potentially bad news coming.

And so then we reversed some of that on Monday. Things have been very choppy. But really, I think most of the first salvo is done. And now we're at a point where people, they don't know what to think, but they're waiting for the economic effects to start to occur because these tariffs are going to go into effect almost immediately. Well,

What has been interesting, and I guess this is a particularly kind of a Trumponomics topic, is what's happened in the treasury markets. I think our first ever episode was about how important the US bond market was going to be to this administration. I think we were quite prescient on some of that. But you have a bunch of tariffs come out, which other things equal you'd expect to increase inflation and actually increase

The head of the U.S. Central Bank of the Fed gave a speech on Friday that suggested he was still quite focused on inflation, even with everything else going on. And yet, Ed, we didn't see necessarily the people buying U.S. debt necessarily expecting more inflation and sort of steady interest rates. We saw a bit more confusion. Yeah, and I think the reason for that is because of the panic in equities, that really it was just a knee-jerk reaction from

to grab other assets you could at that particular juncture, flight to quality, and Treasury's benefited from that. But now that we have a chance to sit back and watch the effects play out, I think we're going to see a quite different story coming into play. The one that you mentioned with regard to the Fed, the Fed's in a very difficult position here, in particular because the inflationary

inflationary impact of the tariffs are probably going to precede the negative impacts on the labor market, just because the labor market is really relatively solid right now. And it's going to take a little while for that to dissipate. And so the Fed is going to therefore be challenged through

3%, 4%, who knows? It could be as high as 5% inflation at some point. And that is going to limit their ability to ride to the rescue.

Nancy, going back a few steps, the market seemed to have been very surprised by what he announced last week, even though in many ways he'd said even on the campaign trail that this is exactly what he was going to do. What was your thought when you saw those very high numbers, much higher than expected for the tariff rates on every country, not just the countries with particularly large deficits? What did you conclude in terms of what's been driving this administration? Who's been close to the president?

Yeah, the markets were very surprised by how high the tariffs were and the fact that there was tariffs on countries, but also these universal baseline tariffs. And what happened was that Peter Navarro, who has been a huge advocate of these baseline tariffs and really doing high tariffs on countries, has so much power in this White House at this particular moment. Just tell us a bit about him. What's his job now? And maybe a bit more about some of the other stuff he's done.

So he's a senior advisor to the president. He is supposed to be working on trade. You have to remember that he also worked on trade in the first Trump White House. But there were epic battles in the first Trump White House between different people in the administration. Gary Cohen, who was the national economic director at the time, Treasury Secretary Steven Mnuchin, and they were more of a voice inside the West Wing than

who were advocates of free trade. And so it was like these constant battles between Peter Navarro and Robert Lighthizer, who was the U.S. trade representative, and Mnuchin and Cohen, and going back and forth. And the trade policy sort of swung back and forth based on who had the most influence.

This time, there is not that same sort of checks and balances from the free trade perspective. And everybody is basically on board with tariffs, including people who you wouldn't necessarily think of like Treasury Secretary Scott Besson or the National Economic Council director Kevin Hassett. But Navarro has so much influence because he went to jail for Trump.

He defied a subpoena to appear before the January 6th committee and served four months in prison. What Trump values most in the second term is loyalty. And what expresses loyalty more to him than someone who went served behind bars? And so Peter's influence just can't be overstated now. My sources were telling me the Tuesday before election.

The big tariffs came out that Wednesday that Navarro had gotten with Trump and had convinced him of this idea of the universal baseline tariffs and that the two of them had doubled down. I've covered Trump since 2016. What has surprised me this time is how undeterred they are by the market volatility, the calls from Wall Street and CEOs, businesses freaking out, just calling anyone they can find in the administration. The Trump people feel like,

He talked about this in the campaign. You should have known this was coming. He's not up for a reelection. You know, he really believes in these tariffs and thinks they're going to change the economy. And he and Peter Navarro are really doubling down. I don't think I had fully absorbed that Peter Navarro was running the trade ship inside the White House.

Were we aware of quite how influential he'd been? So I would say a few months ago, there was reporting coming out. I was talking to people and it took a while for the Treasury Secretary and the Commerce Secretary to get confirmed. And so what was happening in that vacuum was that Peter Navarro and Stephen Miller, who is a deputy chief of staff, you'll remember him from all of the most controversial immigration issues from the first term. The two of them were basically the lone voices on trade for the first term.

several weeks of the administration, and they were the ones driving the agenda. And to me, it's very clear that the White House is much more comfortable with Peter Navarro this time around than they were last time. Last time, they didn't really let him go on TV that much. They sort of hid him away. Sure, he was close to Trump, but he wasn't like the front man. This time, he is going on TV almost every day representing the administration's trade policy.

And I just think that that's a sign of how much influence he has and how much they are doubling down on this. At least one person who was also hanging out at the White House a lot in the first few weeks of the administration was Elon Musk. And then he and Navarro seem to now be getting at it in a

entertaining, but not very mature fashion, shall we say? Well, I think Elon Musk's stock is dropping in the White House and him picking a fight with Peter Navarro is part of this. He was not in the final meetings on trade. That was really sort of the economic aides, the chief of staff, Susie Wiles.

Stephen Miller was in that. Elon has not been part of sort of the final decisions on trade. And although he likes to be the president's first best friend and is on Air Force One and is at Mar-a-Lago and is in Washington a lot and has real walk-in privileges in the West Wing, trade is not his lane. And I think that they are not taking his advice seriously on it. Ed, it sounds like the White House that Nancy is describing is not one that's going to

back down, at least to any serious extent. We'll wait to see. So given that, how are you looking at the risks of recession and that challenge for the Fed of whether it can actually do anything to prevent one?

Yeah, the recession call is a big one, because I think that people now realize how serious Trump was, and that it's not just 10% tariffs, these across-the-board baseline tariffs, which the likes of Bill Ackman said they can get behind, but rather something more severe, doubling down on... 106% or 104, whatever it is on China, that's definitely a bit more severe. Going into effect literally as we are taping this. And so I think that if...

Recession is not your base case. It's a very high probability case. And that's what the markets are saying. The equity markets are down and treasury yields are down as well. What I find interesting in terms of the recession trade and how this is all playing out is currencies.

The Japanese yen and the Swiss franc are really appreciating in value versus the U.S. dollar, not just as this has played out, but in the last day or so, as the 104% Chinese tariffs have come into play, the Swiss franc has really gone ballistic, as if suddenly the United States is not the safe haven currency anymore.

in these kinds of times of difficulty. This is a huge transition that the market's going to have to deal with and understand what the implications are, especially if we have a recession that's not just in the United States, but global. Is there an actual difference of view between the Fed and the markets? I say that because

If the Fed is thinking, hmm, we've still got an inflation problem, so we're going to have to wait a bit before we provide support for the economy, even as the market's falling. Yeah.

And if the market's expecting the Fed to be late, then I guess there's no disagreement, but we are looking at a recession. Well, I think that the markets are front running so many cuts that it's going to be very difficult for the Fed to deliver them in the time frame that the markets are talking about, unless it's a very onerous recession. It's more likely that they will be late, as you're saying, and that they'll be more aggressive than

If things fall apart, because their hands are going to be tied in the near term by the inflation that is likely to happen almost immediately. It was interesting what Powell was saying. He didn't say it directly, but he was essentially saying, we're going to wait.

We're not going to make any moves whatsoever until we find out what the actual full ramifications of the policies are and what the policies themselves are. They don't know what the policies are. And so what that means is an extended hold period at a minimum. And that's not what the market has priced in.

Yeah, it's interesting. I mean, our own Anna Wong, who we've heard several times on this podcast, who's a former Fed economist, is our chief US economist. She put out a great piece, actually, just as markets were going through their gyrations on Monday and treasury yields had gone down quite far, apparently, on the anticipation of

of lower rates saying, you know, markets are hoping for a Fed put, and this is why that's unlikely. And she went through all of the things. I think the fact that the Fed is focused on hard data, the fact that the Fed's own inflation forecasts and inflation risks are things that the Fed's very concerned about. And certainly, Jay Powell, the

chair doesn't want to be seen to be making the same mistake that was made in 2022 when they were quite slow to raise rates in the face of inflation. I mean, I found that pretty convincing. Nancy, how do you think the administration's thinking about the Fed? I mean, could they potentially rescue the economy, provide some kind of floor, even with this tariff plan? And I guess the other side of that, if they don't, is it going to be a useful kind of whipping boy for putting all the blame on?

I mean, the Fed is already a whipping boy for President Trump. I mean, he has come out already last week and said Powell should do something. He's posting messages on Truth Social. He is willing to use his bully pulpit from the White House to try to act like this is the Fed's problem, even though these tariffs are 100 percent a policy of the administration. It's not Congress. It is a self-inflicted wound or whatever you want to call it on the part of the administration. They did this.

He has long had Jay Powell in his sights. And when I interviewed Trump during the campaign or different people did, there was constantly questions like, are you going to fire Jay Powell? And do you believe in the independence of the Fed? And he sort of went back and forth, honestly, month to month on the importance of the independence of the Fed and whether or not he would let Powell serve out his term. What did he say to us? He said, oh, yeah, as long as I think he's doing a good job. Exactly. Yeah, his job is safe, as long as I think so. So I think that

that will just continue to be a point of tension. And even Treasury Secretary Scott Besson, who I think before what happened with the tariffs was seen as like a grown up who could speak to the markets. I don't know exactly how he's viewed by Wall Street now. I think that's been muddied a bit. But even he sort of

had a plan for replacing Powell and did not think that Powell needed to serve out his term. So I think even Besson is not fully on board with the idea that the Fed should be as independent as it should be. And it just really, I think, marks a huge shift. There are so many shifts in the Republican Party on how Trump approaches economic issues, and the Fed is just one of them.

We've talked a few times on this podcast about the kind of ordering of things in this administration and how you could make the argument that in the first term, Trump kind of did the positive things for the economy first, and then the negative stuff, the bigger tariffs, other things came later and actually caused the economy to weaken even before COVID. When arguably, from a political standpoint, you'd want to get your costly things at the beginning and then have the more positive things.

We've certainly got some pain coming down the track. We've had the Doge cuts, but also most fundamentally, these big tariff increases. Tax cuts, making the Trump tax cuts permanent, maybe some other tax cuts on top of that. I mean, that does seem to be something the administration is now turning its mind to and wanting Congress to act on as fast as possible. Nancy, do you think that can be a source of support for the economy and the administration?

I have written a lot of tax stories lately, and Republicans now have moved up the time frame of when they want to get tax reform done, given what is happening with the tariffs. Before they thought, oh, they could do it at the end of 2025 when the tax cuts actually expire. Now they want to do it as soon as possible, hopefully by even July 4th. I think that's a little optimistic, but people on Capitol Hill think, OK, maybe by midsummer or towards the end of summer, so August. There was a bit of movement on this even this weekend on the Hill.

Yeah, there was. The Senate passed a budget resolution which will give them a vehicle to do tax reform and some parameters about how much money they can spend. And I think that the Trump people, including Peter Navarro, are going on TV and saying, well, look, these tariffs are just one part of the economic package. We also have, you know, less restrictions on energy, deregulation, the tax cuts. I think the question about the tax cuts is,

Yes, they want to do a big tax bill, but a lot of those tax cuts are just going to be extending existing ones. And I don't know if that is going to be, you know, extending people's existing tax cuts is going to be enough. Not giving them a tax increase. Right, not giving them a tax increase. I'm going to go buy a car because I didn't have a tax increase. Right, that's not how people think.

think about it. And so I just don't know if that is going to be enough to actually juice the economy the way that they think it will compared to the stark policies that they did on tariffs, which were really surprising and quite large.

And Ed, I guess this gets us back to how the financial markets would view this. I mean, I have to mention that that Senate resolution contained a really not very responsible approach to scoring the cost of making those tax cuts permanent. I think we're talking an extra $5 trillion in debt.

but it was scored as almost zero on rules that no one thinks make any sense. But even if this gets passed, this tax cut bill or the making permanent of the previous tax cuts, if it sends a message that there is no fiscal restraint of any kind of serious degree in this White House or this country and an ocean of red ink flows

way more than is even in the existing numbers. We look at our numbers, our forecast for the US debt, they're about 100% of GDP now, it's going to maybe 150% of GDP over the next 20, 30 years. And that's assuming that the tax cuts are not made permanent. So surely that's not going to put a floor under the sort of confidence in the US.

As you were saying that, I'm thinking about Liz Truss and what happened there. When suddenly you're looking at oceans of red ink, over the longer term, it's going to lead to a depreciation of the currency, greater inflation, and ultimately it could create a crisis of confidence about the United States' ability to govern itself and its finances.

The numbers that we're talking about really are mind-boggling because we're already at 6% debt to GDP in a booming situation where...

Growth was at 3%. What if you add tax cuts on top of that, the baseline being 3% or being 6% and you add tax cuts that are going to make that even greater? Then you're looking at permanent deficits of 8%, 9%. It's just...

mind-boggling. I think the markets would throw a tizzy and it could be very destabilizing. It's interesting you mentioned Liz Truss. We had a great column that was by our columnists in Europe, Lionel Laurent and Marcus Ashworth. Imagine the UK Liz Truss moment only global.

They're saying the U.S. is the closest thing to a global superpower we have, and that means when its leaders are in the grip of excessive overconfidence, similar to that seen in the U.K.'s Liz Trust meltdown, everyone, not just America, pays the price. I guess I'll give a final word to you, Ed. You mentioned something about the safe haven status for the U.S. That's what I was thinking as you were reading that. Well...

Donald Trump has said he doesn't like this dollar being so strong, so be careful what you wish for. But I guess the risk is the combination of question marks around central bank independence, question marks about runaway borrowing and debt, not to mention stepping out of the global trading system in the way that he has now done or at least appears set on doing.

That's quite a trifecta that could really be very damaging for the U.S. standing in global financial markets as well. Yeah, I think that George Soros would talk about reflexivity, that you get to sort of a point where things start to feed on themselves. And we don't know where that point is on various levels, both in terms of equities, in terms of

people pulling their money out of U.S. dollar assets. We don't know what that means in terms of the U.S. dollars falling. And we also don't know what that means in terms of foreigners owning bonds and what that means for interest rates. So all three of those things, the U.S. financial system in terms of currency, bonds, and equity are potentially at risk

of unraveling in a very precipitous way if you get to that reflexive point, to that point of no return. And we just don't know where that is. And on that bombshell, Ed Harrison, thank you very much. Nancy Cook, thank you. Thank you.

Thank you for listening. We focused a lot on America in this episode and particularly on Wall Street and the White House. I'm thinking, even as I sit here, that we should think about how the rest of the world should respond next week. Note to self.

Trumponomics is produced by Moses Andam and Samar Saadi, with help from Chris Martlew, Amy Keene, Cale Brooks, Rachel Lewis-Kriske, and Jared Rudderman. Sound design by Blake Maples. And Brendan Francis Newnham is our executive producer. There are presentations. There are presentations.

And then there are Canva presentations. With Canva, you can use AI to take your presentation to the next level. You can generate dynamic slides and text with a simple prompt. You can drag and drop graphics and charts from Canva's media library and add interactive elements to plus up your deck.

And with collaboration tools built in, the whole team can work together better. You'll love the presentations you can easily design with Canva. Your clients and coworkers will too. Love your work with Canva presentations at Canva.com. ThriveVent can help you plan your finances for the people, causes, and community you love.

What makes Thrivent different? Financial services and generosity programs are combined to help you build a financial roadmap for the future while also creating opportunities to give back along the way. Visit Thrivent.com to learn more. Thrivent, where money means more.