133. Will Trump’s Chaos Strategy Work?

0:11Hello and welcome to The Rest is Money with me Robert Paxton and me Steph McGovern. Now, for those of you who are not watching the video, and I know many of you will be, Steph is sitting next to me in a wonderful luminous pink jumper. But it's what's underneath the jumper that is causing me a bit of concern. What I'm going to tell you is underneath the jumper is way more boring than what you might be picturing. Yeah, I've got my arm in a brace because this is quite, I mean, it's horrendously painful, but there is a funny side to this. in that so Robert and I are planning to do this series looking back at the credit crunch and this period when we you and I work together and financial crisis and just all of that so I obviously at the time had your book how to fix this mess and obviously I have no idea where it is I probably gave it away to a charity shop so I thought I better reread it again I'll order another one so said book came and I wasn't in so it got put by the bins so one cold Friday evening I had had a glass of red wine I'll be honest I went out of the house to get the book by the bin and literally slipped and fully hit the deck and sorry if if you're squeamish stop just close your ears for 30 seconds I snapped my arm in two at the top like full-on clean break so that was me in A &E on a Friday night by the time I got there because I'd got sent from various places half 11 at night um seeing you know I mean it's pretty grim in any on a Friday night anywhere um but I have to say I was treated so well by 2 a.m I'd had my x-rays I'd seen an orthopedic surgeon who was amazing and you know filled with drugs and sent on my merry not so merry way but in terms of you know we always talk about the NHS and how much trouble it's in honestly I cannot fault it.

2:07I've been back twice to the hospital since, to the fracture clinic. And it is incredibly depressing as you can imagine any hospital would be in terms of seeing people struggling and, you know, I did see people in corridors in A &E when I went to various departments. But the staff were really kind and I felt like it's been quite slick. I had to take my mum for a series of sort of tests and a consultation recently to a big London hospital And again, I was so impressed by the organisation. I mean, there was obviously a bit of waiting around, but way less than I expected. So maybe we're both quite lucky because obviously not everybody's experience is as positive as that.

2:53Don't get me wrong. I just think everyone's been slipping on the ice up north recently. When it is icy, guys, just really take care of it because I never thought at 42 I would slip on ice and break my arm like that. And actually, I know this is going through everybody's head, but of course, when Steph told me about the break and she accompanied it with a picture, I seem to remember, of the book, obviously the message was this was all my fault. Yes, it was. And I'd be walking around with this terrible sense of guilt. Yeah, I wanted the headline to be Peston broke Steph's arm. That's what I wanted the headline to be.

3:33But alas, it never happened. But the other funny thing about all this, I'll just quickly tell you, is do you remember I went AWOL last year? It's now come out what I was doing. So I was filming with Bear Grylls being chased around the Costa Rican jungle by Bear Grylls. But now all the publicity for that is coming out. And it looks like I, so as I'm walking around the street, people keep saying to me, is that what Bear Grylls did to you? Actually, I've got to tell you, I prefer that story to Robert Preston broke my arm. So let's just stick with the Bear Grylls conspiracy theory. Sorry, Bear. Yeah.

4:07Right. Anyway, should we talk about Trump? Yeah. So I think today it would be great to talk a little bit about the most extraordinary, both inauguration speech and then flurry of... Executive orders, man. Yeah, subsequently. And we should also just talk a little bit about the latest instalment of this government's attempt to get the growth rate up. Yes. So what stood out for you about Trump so far? All of the plastic surgery in the audience. No, I'm kidding. The inauguration. No, I'm kidding. No, I think for me, it's the kind of all the executive audience, it just felt like a bonfire of regulation and just taking us into the Wild West.

4:50It was like, right, wants to bring prices down, obviously. He wants to make it great for American people. And this whole idea that you can just throw all the rule book onto the bonfire and hope that that's going to do it. It's just really scary. I mean, it is sort of amazing, both the economic change that he's trying to drive through. And we'll talk, obviously, a bit about that in a minute, but also the sort of cultural changes. I mean, I was really struck to see, you know, the world's richest men. They are, you know, men in this case. Yeah. Literally within feet of him. Yeah. In prime positions.

5:35Yeah. At the inauguration. You know, we had Elon Musk almost literally behind him and then the founder, massive controller of Amazon, Jeff Bezos there. We had Mark Zuckerberg there. It was astonishing to see the more paying court at a time, of course, when he does things like say, right, no more diversity, equity and inclusion rules. Now, I don't know if you're like me, but over the last couple of years, these big international companies have all, you know, I've been invited along to their diversity, equity and inclusion events. Yes, I've spoken at a few of them as well, I think. And, you know, it was, you know, all the rage.

6:18I mean, and I think it's a good thing from, you know, trying to get a more diverse, balanced workforce wherever you are is a good thing. You know, Trump says, no, we're not having any of that in the US government, tearing it all up. And yet you've got these corporate leaders all sort of paying homage to him. And, you know, I presume that these big international companies will just follow suit. And that's, I mean, if I, you know, that's worrying, isn't it? I mean, in itself, that one person can, you know, essentially be at the forefront of just reverting to white men being in charge. Yes. From a business perspective, it doesn't make sense.

6:55Diversity and inclusion and all that is not just a tick box thing. It genuinely leads to better decision making. It means you understand you look like and sound like the people you're serving. You know, it's economics as well as, I hate the way it is framed as a kind of, it's a corporate social responsibility thing. It is also a business, a very simple business thing to look and sound like the people you are serving and working with. And also the one thing we know is that, you know, diverse ecosystems are healthier ecosystems. Yeah, yeah, of course. It's just, you know, it's a fact of nature and it's a fact of society.

7:34The other thing, though, that we need obviously to talk about is just the extraordinary economic changes he's trying to push through. So one of the things that the market sort of took as a positive side initially was that in the inauguration speech, yes, he talked about imposing tariffs, taxes on imports into the United States. But there was no timetable for that. There was no deadline. Markets immediately thought, oh, gosh, maybe that's been kicked into the long grass based on the idea that this wasn't happening. Then, literally within hours, he says, you know, by February the 1st, he's going to introduce 25 % tariffs on Mexican imports and Canadian imports.

8:19And at that point, you get these wild swings in the Canadian dollar, the Mexican peso. You know, the volatility we're seeing around all of this is extraordinary. He has not yet given us a timetable for the introduction of that global tariff, the one that we think will be set at something like 10 to 20 percent on all imports. He hasn't set a timetable for that tax or tariff on everything imported from China, which we think will be more like sort of 60 percent. I thought that would be the first thing he would say, to be honest. There is pretty much no world in which if he does these tariffs, prices don't go up for American consumers.

9:08And there's almost no world with or without retaliation. If there is retaliation from the European Union, if there's retaliation from China in terms of imposing tariffs on American exports, at that point, the impact on global growth is more significant. But even without that kind of retaliation, if tariffs are essentially a tax on U.S. consumers, businesses that import parts from the rest of the world or goods from the rest of the world will put up the cost of all sorts of goods, both for American business purchases and consumer purchases. and that will lead to both higher inflation in America and lower growth in America, which means lower growth for the world.

9:54And if there's retaliation, it means lower growth all round. So, you know, this is bonkers economics, even if he thinks it plays well to his core support because they somehow believe that it will bring more manufacturing onshore. Do you know the other thing that really stood out to me is how is this possibly going to work? how do you think it's going to work is this idea this executive order he's brought out to do with emergency price relief so all executive departments and agencies so we're talking about departments like commerce and health and human services and labour all of these departments have to bring in these emergency price reliefs and he's seeing this on the basis that some research has suggested that in Biden's administration, regulation has added something like$50 ,000 to the average American household.

10:52So he's like, let's get rid of all that. And then that will reduce the cost of living. That's totally nonsensical, isn't it? The idea that you can just, I mean, how does every department even do that? Like, right, we've all just got to not charge for all these different things we provide? How does it work? And also, if you look at what the cause of inflation was in Biden's time, it was, you know, Ben Bernanke, the former Federal Reserve boss, he did lots of research on this, loads of people have. It was things like supply chain, it was commodities, the same things that hit us here in the UK. It isn't to do with how much people were paying internally for housing costs and things.

11:33I'm sure there was a contribution of that, But really, inflation came from the external factors of which no president can control, really. Yeah, I mean, that is certainly right. He's also completely backed away from making a transition to a low carbon economy in the US. So he's eliminating hundreds, hundreds of billions of dollars of subsidies for the green transition. There was that amazing phrase that he used in the inauguration address, you know, drill, baby, drill. And, you know, he's basically wants to turn the tap on when it comes to more oil and gas production in the US. And, you know, you have to remember that, I mean, America, I think, is still currently the world's biggest oil and gas producer.

12:26It's certainly the scale of the oil and gas production in the US has driven quite a lot of America's growth over the last decade or so. And he thinks he can increase that production. There is quite a lot of actually uncertainty about the extent to which I saw some quite interesting research today, I think, from JP Morgan, which I think implied that there is more oil and gas they can actually get. Although I have to say other analysts believe that at the current prevailing market price of oil and gas, it's not actually, you know, the commercial decision if you're an oil and gas company to actually get it out of the ground is not as straightforward as you might think it is.

13:03So it's not quite clear really whether he can turn the taps on. And again, whether this is sort of performative, sort of a thing for show. But either way, you know, it's the world's biggest economy. And if they are backing away from taking any steps to reduce carbon emissions, whatever optimistic politicians in the rest of the world may say about we don't need them, that's just rubbish. Right. I mean, there's no way in the end that, you know, China and India, massive CO2 emitters are going to succumb to Western pressure to, you know, accelerate the reduction in their CO2 emissions if America is not doing a thing.

13:39Yeah, it's really scary, isn't it? I mean, obviously, he's also going to push for very significant tax cuts, which pretty much every, you know, respectable analysis will be funded essentially by an increase in the American deficit. and we are on all sensible projections looking at over the next 10 years on the sorts of numbers we're talking about for the US deficit, currently 6 % and rising on the basis of his proposals. We are looking at America's national debt rising to well over, well, sort of 130 % odd, right? I mean, that is significant. We should be under no illusion about the power of the American economy.

14:27Nominal GDP, that's GDP in current prices, is rising relatively fast. It's theoretically possible that they don't fall into the debt trap of not being able to service the interest on the national debt without borrowing even more just to pay the interest. But they are getting perilously close to being seen to be unable to be able to service their debts from the growth in national income. But for some reason or other, that's not worrying markets in the way that you would expect. It's fascinating the extent to which investors just look at the US and want to pour money in. I mean, I'm torn between two possible explanations of why they're pouring money in.

15:14One is because, for whatever reason, they believe the growth story. I'm surprised by that. The other, of course, which is the great paradox of sort of mad global, you know, sort of market psychology. Here you have Donald Trump, new US president, introducing all this incredible uncertainty into the outlook for the global economy. And as you know, when there's uncertainty, where do people put their assets? The dollar. They put it into the dollar. So this is the Alice in Wonderland aspect of the way markets work, that you get an American president, creates chaos, people get nervous, where do they put their assets?

15:59They give them basically to him. And that is mad, right? But it is what appears to be happening. And on top of all of this, of one of the many things he hasn't thought through is his absolute determination to stop people going into America, to stop immigration, and to get rid of loads of people who are absolutely key to the American economy. You know, this mass deportation we're going to see, it's people who work in jobs. like hospitality, like the food sector, if they all leave and, you know, the need for people to fill those roles, they want more money, you know, that's going to push up inflation.

16:39None of this has been thought through, has it? So, I mean, you never know with Elon Musk. I mean, you know, maybe in this sort of terrifying science fiction world we now inhabit, he has got a couple of warehouses filled with these robots ready to come out and, you know, pick the fruit and, you know, make the flat whites and the cappuccinos. I mean, I have to say, I'd be slightly doubtful. I think I did tell you about the time when I sort of was at this weird event at Lancaster House with the previous Prime Minister, Rishi Sunak. Was it when he was interviewing him? Yeah, this was when they were having this sort of interview as part of the government's great attempt to prove that it was worried about AI safety.

17:20And as part of this conversation, Elon Musk talked about his fear that it wouldn't be long till he was being chased by a robot up a tree, a robot who was out to kill him. And, you know, how he had to design the off button on the blooming robot. So, you know, if what we are talking about is, you know, essentially the replacement of undocumented migrants with these robots, I hope they have got the off button designed already. Do you know what? I need a break. Can we go to a break? Yes.

17:58So welcome back to The Rest Is Money with me, Robert Peston. And me, Steph McGovern. So Rachel Reeves is going to do a big showpiece on growth this week, isn't she? Where are you going? Where are you following her to this time? So these things are always kept secret. He knows everyone. He knows what he's not telling us. So this is the background that you have probably worked out anyway. But look, we've got a growth problem in the UK. God, that's the worst kept secret in the world. The economy is flatlining at the moment. Many businesses and economists would tell you that part of the reason why the economy is doing so poorly, frankly, is because the last budget did massively damage business confidence.

18:44partly the thing that you've talked a lot about, the reduction in the subsidy for business rates. But the biggest impact on all of that came from the£25 billion hit from increasing employers' national insurance. The Chancellor, Rachel Reeves, would say that even when, or literally days after doing the budget, she had already worked out that she needed to very publicly show what more she is doing to get the growth rate up. And her colleagues tell me that literally three days after the budget she's set in train work that will be unveiled this week on Wednesday. Just to add to that, because if businesses are going to take the hit they want to know that there's good times to come from it, that we are going to get growth and they're going to grow because of it.

19:38Yeah, that's right. And it wasn't that long ago when we were quite close. It didn't happen, but we were too close for comfort to a sort of fiscal crisis, a crisis where the interest rate being paid by the government was above what was affordable. with those government bond prices falling. So, of course, quite a lot of cynics will say that this growth event, because quite a lot of that spike in interest rates was because of the inflationary impact of the Trump government, something we've just been talking about, but a share of it was also just because investors have become pretty pessimistic about the growth outlook.

20:17So there will be cynics who say these growth announcements are her panicking and reacting to investors' negativism. She would say, no, this is just all planned. But, you know, you pay your money, takes your choice. There's no question in my mind that it's become much more urgent to show that she's getting the growth rate up. But the question is, given that business and investors are pretty cynical at the moment, pretty depressed about it, what she can do to turn it round? I mean, I am slightly amazed that the big sort of leak so far, they think will make a massive difference, which is they will try and help Heathrow now build this third runway.

21:01I mean, just the background for everybody about all of that. Heathrow has been wanting to build a third runway for about as long as any of us can remember. I mean, I don't think Queen Victoria was on the throne when they first started talking about it, but it slightly feels like it. In 2020, they basically put it on ice because the political backdrop was so negative. But they've already spent 600 million quid on buying the relevant land, on getting plans drawn up, on legal advice and all the rest of it. So they've already invested a ton of money in it. The original plan back in 2020 was, believe it or not, that it would cost 14 billion quid in 2014 prices.

21:58So if you just, and it would take about 10 years to build, right? All of this put on ice. if you just think about it, if it's 14 billion, then it's got to be at least 20, given the inflation we've seen, it's got to be, the project's got to be at least 25 billion quid. And again, it'll take 10 years to build. The argument for it is it's about capacity, isn't it? It's about increasing the capacity there, which should help all other airports too. Because I know when it was like HS2 being talked about, as someone who's from the North East, I kept going, what does it matter to me? And then I was explained to me that it's actually about taking capacity off the network to make it easier for all of us.

22:39Let's be clear, it's a mega hub. It's quite clear that international passengers quite like going to Heathrow compared to some of the other airports. I have no idea why, because actually, you know, it's not the world's most pleasurable experience, but that's partly because it does get too busy. And so it's only going to get busier, even if it's got a third runway. And also, if we think about who owns Heathrow, it's the Qataris, it's the Chinese. There's like a lot of foreign investing firms. All the owners, let's be absolutely clear about this, all the owners are foreign. So it's good news for them.

23:10Actually, let's be clear, because the sums of money are so big, one of the things that's interesting to me is whether or not, ultimately, they do give permission for this thing to go ahead, because they're going to have to find a colossal sum of money in order for them to give permission. This is what we need to hear from the Chancellor. They need to know that the government is going to rush through planning consents and remove all sorts of environmental obstacles because they won't do it unless they feel that there is a genuinely smooth, to use the right metaphor, I suppose, flight path to the thing actually shovels to go in the ground and development to start.

23:53And so it does require quite a lot of boldness from the government in terms of, in a sense, forcing it through. And the politics of it are, to put it mildly, difficult for this government because all climate scientists and including, you know, they will find quite quickly their own independent climate advisor will say, as and when they give permission for it, that it will mean that the government's targets to remove emissions will be even further. Yeah. Because we're already off target in terms of, you know, what needs to happen by 2035. We'll be even further off target if they do this. Within the cabinet, there's a real split between those who essentially think this is a good thing to do Rachel Reeves, you know, it's been saying, I mean, it's been really, again, the politics of this have been really nuts, really.

24:54So you've had Rachel Reeves in Davos, World Economic Forum, saying, got to just get on and do this good growth stuff in her language. Right. You've got something like Ed Miliband, the climate change secretary, just obviously completely strum, not said anything about it. But people close to him say he doesn't think this is the right thing to do at all. actually when it was voted on, I think it was in, I can't remember, I think it was 2018, the last parliamentary vote on this. Reeves voted for the runway. So she's been consistent. Keir Starmer voted against the runway, right? Because back then he was talking about the importance of making sure we hit our climate target.

25:35So, you know, it'd be very interesting to see how he, if he has changed position on this, Peyton has changed position on this because I happen to know this is, you know, even though it's fraught for the cabinet, this is what they are planning to announce. But how is he going to justify that? How is he going to justify changing his position, given that it will take us off course in terms of reducing CO2 emissions? It's also how this looks, because no matter how much you tell people of the UK this is good for the whole of the UK, it really doesn't look like that, does it? So if you're at home anywhere outside of the South East, you would think, how is this going to benefit me?

26:11And OK, there's things like there will be construction, there will be supply chain impact, and that could be from anywhere in the country. But really, this feels like it's just, this feels wrong. It's a boost to the South East, isn't it? Yeah. You know, I'm someone who looks at these things holistically and understands that it will impact lots of businesses in different ways. But really, how it looks to fork is happy days, the South East are just getting more again. So look, you've made an incredibly good point. I mean, it's really important in anything she announces that it isn't just seen to benefit the South East, even if in this particular instance, essentially all the money will be coming from international investors and not from taxpayers' pockets.

26:55I mean, one of the things that they have been looking at, I don't know whether or not she will say much more about it. On this podcast, I have actually on a number of occasions talked about the extraordinary growth benefits that could come from developing what's known as the Oxford-Cambridge corridor, or, you know, sort of powerhouses in the high-tech sector in both of those places, improving transport links between the two, allowing more houses to be built, more offices and commercial premises to be built between Oxford and Cambridge, essentially providing an overarching development plan. Again, the problem, though, is all the rewards will be going to a part of the country that is already very well off.

27:37And so the big issue for me is what will they be doing in the North East, in the North West, in the Midlands. It is slightly staggering to me that you can have a Labour government that, I mean, I may essentially see a series of announcements and think, wow, they kept all that under wraps. I mean, plainly, there's a ton more that they should be doing to improve transport links, particularly East-West transport links within your neck of the woods. Yes, there would be so much better productivity if people could get around the country more easily. But particularly, you know, within the North and Midlands.

28:14Yeah, yeah, yeah, completely. Yeah. So that's all important. And I think just finally, I just wanted to make one little point, which is that, you know, I'm getting feedback from the Chancellor's trip to the World Economic Forum, from bankers, from investors, and there's a sort of half good message and a half bad message, right? Right. There's a lot more work that the government needs to do to persuade investors in the private sector that they've got a genuine growth plan. I had one report of a dinner at which a very senior Downing Street official was told, something that I know you are concerned about by, you know, a lot of very big businesses that actually on top of employers, national insurance, their employment rights package was a huge short term cost for businesses and it was causing them a lot of concern.

29:16And this particular Downing Street person just said, I hear you, but, you know, the politics of this are such that none of that is going to change and there's going to be no delays. And we're just going full steam ahead. Now, we've had conversations many times about why it's important to tilt, I think, tilt power more towards employees from employers. But that said, it's also really important that we get the juices of investors and businesses running in a much more positive way about the UK. So that's the bad bit. So that's the sort of glass half empty kind of thing in terms of the messaging. So the only good thing, and this is, you know, sounds sort of, I suppose, counterintuitive to many people.

30:10But even if investors look at the UK and think it's not that great, right? When they look at France and when they look at Germany, they think, oh, my God, it's much worse. And they do, right? Because the political instability there is really extreme. in the case of Germany that actually the economy is in a worse state than the British economy and one of the things that is important for people to understand is that when people choose where to put their money it's not really a beauty contest it's an ugly contest and basically you're looking for the least ugly place to put your money because you've got to put your money if you control a ton of money you've got to put it somewhere and actually after a period of underperformance about the UK even if you're a bit disappointed with what the government's doing you sort of think well maybe there will be a bit of recovery in the UK We've got stability.