Trump’s tariffs, migration and fiscal policies are endangering the American economy, and risk destroying American claims to global leadership.

Following World War II, US leadership gave the world the global rules-based order. All economies benefited, and living standards rose as never before everywhere.

But today Trump is challenging that rules-based order. Trump and his MAGA movement blame foreigners for the decline in the real wage of a typical US white male so that it is now less than it was 40 years ago. As Trump and his supporters see it, it is only by restoring American hegemony that the living standards of working-class Americans can recover.

Instead, the real reason for the decline in working-class wages in America was first technological change, principally new automation and communications technology, that hollowed out middle-level jobs. Second, there was a failure to reskill affected workers.

But apart from this past failure by previous administrations to understand the importance of skills training, what Trump and his supporters don’t understand today is how much the US has relied on other countries for its economic success, and therefore the grave risks that Trump’s policies present to the American economy itself.

In short, Trump’s dangerous policies include his tariffs, migration policies and fiscal policies. As will be shown, these policies are having a negative impact on American inflation, financial stability and productivity.

The outlook for inflation in the US

Although Trump has frequently varied his tariff announcements, the OECD in the September update of its Economic Outlook concluded that “The overall effective US tariff rate rose to an estimated 19.5% at the end of August, the highest rate since 1933."

In addition, the value of the US dollar against other currencies dropped by 11% in the first half of this year, the biggest decline in more than 50 years. And, as will be argued in more detail below, the dollar is at risk of depreciating further, with Morgan Stanley Research estimating that the US currency could lose another 10% by the end of 2026.

Both the higher tariffs and the lower dollar will increase inflation in the US.

Although the effects are only starting to come through, already the prices of imported items such as clothes, electronics and household appliances have surged. The market expects that consumer price inflation will soon be running at 3.5% – much above the Federal Reserve Bank’s inflation target of 2%.

After resisting Trump ever since he returned to the presidency, the FRB did agree to reduce its cash rate by a quarter of a percentage point to 4.25% at its September meeting. However, that is still a high rate compared to the Australian cash rate of 3.6%, for example and, with rising inflation, the likelihood is that the FRB will want to increase interest rates in the near future.

No doubt Trump will resist any such increase and may well seek to change the board of the FRB, starting with the present chairman whose term will end next January. But in any case, the FRB only sets short-term interest rates, and Trump’s interference may well provoke the market into increasing the longer-term interest rates. And it is these longer-term interest rates that matter for the cost of government debt and private investment.

Further, the prospective budget deficits under Trump are likely to add to these market pressures on interest rates and the exchange rate. So the outlook for US inflation and the need for a restrictive monetary policy is not good.

The outlook for financial stability in the US

Somewhat surprisingly, the US stock market has been experiencing what The Economist has described as “an astonishing boom”. Since a trough in April, the US share price index, the S&P 500, has risen by 40%, which according to The Economist has been “fuelled by optimism about artificial intelligence”.

However, the problem is that stock prices now exceed 40 times earnings, and that is approaching the records set just before the dotcom bust in 2000.

It is no surprise therefore that a couple of weeks ago, the Bank of England warned that the soaring valuations of leading AI tech companies was increasing the risk of a “sudden correction” in financial markets. Even Sam Altman, the boss of OpenAI, one of America’s leading tech companies, thinks that yes, “we are now in a phase where investors as a whole are overexcited about AI”.

In addition, last Wednesday the governor of the Bank of England, warned that recent events in US private credit markets have worrying echoes of the sub-prime mortgage crisis that kicked off the global financial crisis in 2007. As the deputy governor put it, the Bank of England has concerns about the high leverage, opacity, complexity and weak underwriting standards in US financial markets.

Equally dangerous, the US has been running excessive budget deficits for years, now around 7% of GDP – far more than any other country. But that doesn’t worry Trump.

Trump has now succeeded in getting Congress to pass his great big budget bill, which the authoritative Congressional Budget Office estimates could add another US$3.3 trillion to federal deficits over the next 10 years. The main reason for this additional budget blowout is that the cost of Trump’s very large income tax cuts in favour of the rich massively outweighed the savings from the cuts made to Medicaid, green energy and assistance to the poor.

General government financial liabilities in the US were already running at 122.9% of GDP in 2024. The CBO has now projected that the US debt-to-GDP ratio will reach 172% by 2054, and an even higher 190% if Trump’s tax cuts become permanent.

These government debt ratios are well above the average government debt rate in the OECD and further puts the US at risk of a loss of confidence by international investors. With less foreign purchases of US government bonds, long-term interest rates in the US are bound to rise.

The future of the US dollar

Since World War II, under the US rules-based order most foreign transactions were paid for in US dollars. That meant that most countries kept their foreign exchange in the form of US dollars, by investing in US government bonds, which offered both security and liquidity.

This willingness by other countries to hold US bonds helped the US to finance its continuing and excessive budget deficits. But it also led to the US exchange rate being excessively high, so that the exchange rate for the US dollar against most other currencies is much above the purchasing power of the US dollar.

Now, in response to US trade restrictions, many other countries are seeking to develop alternative trading partnerships and increasingly this also involves using each other’s currency to pay for imports rather than the US dollar. The consequence is that other countries are becoming less willing to hold US bonds.

This decline in demand for US bonds will put downward pressure on the US exchange rate. But it will also make it more difficult to fund US Government debt and will lead to upward pressure on interest rates – something that Trump definitely will not want.

On the other hand, the only alternative would be an even lower exchange rate, and thus a further increase in inflation and the cost of living.

Future productivity growth

Almost all the improvement in living standards depends upon productivity growth and productivity growth is almost entirely driven by technological progress and innovation.

But Trump’s policies to get rid of migrants and cut university and research funding risk a major reduction in future US productivity growth.

We know that the private returns to innovation are less than the social returns. Consequently, there is a major role for government in financing R&D. But Trump has cut this public funding and university funding, which is bound to reduce future innovation and thus productivity.

In addition, Trump’s clampdown on migration, both legal and illegal, will not only reduce the supply of unskilled labour on which industries like hospitality and agriculture depend. Trump has also imposed a fee of US$100,000 on new H-1B visas by which skilled labour enters America.

This new fee represents an increase of up to 50-fold and will have a devastating effect on firms that depend upon highly skilled labour. For example, Amazon employed more than 14,000 H-1B visa holders as recently as June this year, and 65% of these visa holders in the US today are estimated to work in computer-related occupations.

More generally, a recent study found that skilled migrants account for 5% of the American labour force but 10% of labour earnings. Migrants are innovators, with Elon Musk being a well-known example. More generally, migrants who make up only about 14% of the US population, constitute 38% of the country’s resident Nobel Prize winners in chemistry, medicine, and physics. But will these outstanding scientists want to come to America in the future that Trump is creating in US universities?

Conclusion

Rather than making America Great Again, there is every chance that Trump’s economic policies will so damage the American economy that the US will lose its leadership status and most Americans will feel they are going backwards.

Thus, following the mid-term congressional elections in another 12 months, the Republicans may well lose their majority. But that will also require the Democrats to unite behind a spokesperson who is able to outline a credible alternative economic strategy to restore productivity growth and lock in low inflation and financial stability.

The views expressed in this article may or may not reflect those of Pearls and Irritations.