146. Does Trump Risk Sparking A Global Financial Crisis?

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1:13Hello and welcome to The Rest Is Money. Slightly frustratingly, Steph can't be with us this week, but I am thrilled to be joined by very much a friend of the podcast, Andy Haldane. Actually, soon to step down running the Royal Society of Arts, the RSA, but spent most of his career at the Bank of England as its chief economist, one of the most interesting and influential British economists of our age. I hope I'm not overstating your role, Andy. There's so much to talk about. Thanks. Is thanks the right word to Donald Trump? I think what we should sort of concentrate on today are a number of things.

1:53Reaction in markets recently, we had markets soaring at the moment that Trump was elected. Stock markets falling very sharply the last few days. Bond markets also in some turmoil last few days. Lots of talk that we're heading for recession. And I suppose the issues are around, is there anything rational behind his mix of policies? How concerned should we be that recession is close and indeed even some kind of global markets catastrophe is more of a possibility? And obviously, what does it mean for us here in the UK and Europe? But let's just sort of kick off with, you know, the absolute basic question.

2:48I mean, I don't know a single person who's sort of economically literate who ever thought that his tariffs were going to make us better off. I suppose two questions really, actually, rather than one. Are there any economists who make a credible case that you can get richer by imposing tariffs? And secondly, why do you think investors have gone from being cheerleaders for Trump just a few weeks ago to being, in many cases, terrified? Morning, Robert. Lovely to be on, albeit as a poor substitute for Steph. And you very definitely overstated my contribution at the start of the show. Big questions there.

3:29So maybe picking off one or two of them to begin with. I think the vast majority of mainstream opinion would be that any tariff or tariff war overall, in terms of the average well-being of the average citizen, is set to make us worse off rather than better off. So given that he rode to power in America promising the American people he would make them better off, what the hell do you think is going on? I think there's a degree of brinksmanship and poker playing going on that pure power politics led him to believe that even if the US was experiencing some pain, if it was less pain than someone else, that they would capitulate and a better deal could be done off the back of that.

4:13But I'm sorry, I'm just going to point out something to you, which still makes my jaw sort of drop when I think about it. I was in the White House, you know, only a couple of weeks ago in a press conference. I mean, I asked a question about, you know, why he was sucking up to Putin, which actually, according to some people in the US media, means I'm never going to be invited back. But anyway, somebody else asked a question of Donald Trump along the lines of whether he understood that imposing tariffs would make US businesses, US citizens worse off. It would push up prices for them. And Donald Trump just said, no, they don't.

4:52I mean, honestly, it was just weird. He basically has this view, which he actually expressed, that somehow the producing country pays, not the citizens and businesses of the country where the tariffs are imposed. Yeah, I think there is a deep degree of misunderstanding. We saw a bit last week, actually, with Hokey Kokey on the tariffs with Canva in Mexico, where even anyone with the most cursory understanding of, you know, integrated supply chains either side of the US border would have known that a 25 % tariff would have been punitive for domestic producers of US cars. You know, if the parts are crossing the border, as I think they are for a car, average car, six, seven times on each leg, 25 percent being levied.

5:43All of a sudden, a U.S. manufactured car for a U.S. citizen is going to be much, much, much more expensive. And that they had to back off for car makers within 24 hours. That suggests someone hadn't thought that through. Maybe the president, maybe his team. And of course, they backed off some of the other measures soon thereafter. I mean, for me, that was always the reason why I felt this was a degree of poker playing rather than a desire to think it would get rich off the back of tariffs. And that remains my view, actually. Except that we've heard Donald Trump say in terms, yeah, it's going to be painful before we get to the sunny uploads.

6:22And so, you know, one of the reasons markets panicked, frankly, is because they heard him saying something which they did not experience in the first Trump presidency. They heard him saying, we'll take the hit in order to get the putative benefits of tariffs down the track. You know, in the first Trump presidency, the story was markets react badly. Trump backs off and does other stuff. And I think one of the reasons why investors were so bullish early on is they just did not believe that any of these tariffs would actually be imposed. Now, obviously, as you say, there's been this hokey-cokey of some tariffs being imposed and then delayed.

7:07But nonetheless, there are some tariffs across the world. We've got some big ones, for example, on steel and aluminium. Across the world, they exist now. They are there, right? There are tariffs on China. They are there. There are some tariffs on Canada and Mexico. Actually, I should point out, because we'll come back to this. There are now tariffs imposed on America's, you know, allegedly great friend and Trump's great buddy Keir Starmer. We've got tariffs now from America on steel and aluminium, you know, imposed on the UK. I don't know. I mean, I imagine our aluminium industry isn't enormous, but...

7:43Not our steel industry anymore. Perhaps explains our response. But to those points, I mean, yes, I think markets have been surprised and hence the response on the degree of follow through on this. And he has expressed a greater tolerance for pain than was true last time around. But listen, there's degrees of this so far. Although there's a fearfulness about recession, we do not yet know that the US is entering one. The odds have gone up. Well, if you look at the Atlanta Fed nowcast, you know, a few weeks ago, it was showing 3 % annualized growth for the first quarter of this year. It's now showing, and this is actually before the latest market downturn.

8:21So before they factor in what they might think of as a wealth effect and, you know, negative impact on spending from shares collapsing, it's gone from 3 % plus to minus 2.4, right? Now, no one is saying that, you know, that means, you know, recession is baked in. And I am told that there is some slightly eccentric thing they do with the nowcast, which is when they look at the negative impact of trade. Quite a lot of American businesses have been shipping in vast amounts of stock from the rest of the world to get ahead of the tariffs. you would assume, therefore, the balance of trade will swing in a slightly more positive direction for America, you know, once the tariffs are, in a sense, in because, you know, that's a sort of one-off, temporary, let's beat the tariffs impact.

9:12And in fact, one of the things I was told, which is quite interesting, it's apparently a big chunk of that massive increase in the American trade deficit is gold. That there are big, big shipments of gold to America because of fears that that's an area where there will be tariffs. We don't actually know yet, actually, on gold. Anyway, so it may well be that the Atlanta Fed thing is overstated. But if you look at almost all credible forecasters, you know, they were talking about 2 % to 3 % growth this year, and they're now talking about 1 % growth this year. So there's definitely a slowdown. A slowdown seems really likely, given the slew of indicators.

9:52I mean, I would point out by way of framing that economists, the great body of them, have been predicting a slowdown, indeed recession in the US, for at least the last three years, Robert. I'm consistently getting that wrong. The resilience and robustness of the US economy has been a striking feature over the past several years. That's not to underplay the extra headwind that's plainly been put in place. And most of those forward indicators, including about uncertainty and deferral of spending, do point in that direction. I think unless and until that becomes more concrete evidence of a big tilt in the U.S.

10:30economy, and unless and until we see a somewhat larger, it's true that U.S. stock market has underperformed the rest of the world. hasn't been in freefall yet. I think when, if and when either of those two things would have come to pass, that's the point in which we test the pain threshold of the new president. And I think in that situation, thinking twice or three times is likely to kick in. I mean, first and foremost, Trump's in the game of self-preservation. And a tumbling stock market and a tumbling economy is not good for the popularity approval ratings of Donald Trump. So I do think that may yet be a moment of reckoning, even though the bumps in the road he could ride out.

11:13If there was something cliff-edge-like, I think any president would think twice and be advised so to do. It's not just tariffs, though, that are spooking investors and markets. There was this, I always thought, slightly naive view that you put Elon Musk into the machinery of government, you set up Doge, the Department of Government Efficiency, you give him his metaphorical chainsaw, and you generate absolutely dramatic cost savings that then allow you to fund very significant tax cuts. That's what investors were hoping. What they've seen instead is unbelievable controversy, huge amount of pain from public servants.

12:10But actually, now a degree of skepticism, the savings will be that significant. The concern is, nonetheless, that he still goes full steam ahead with rolling over, extending those very big cuts in business and personal taxes that are due to expire, that he introduced in his first term, plus do things that he promised on the campaign trail, you know, no tax on tips, no tax on overtime. These are all very expensive commitments. The underlying American deficit, probably about 6 % at the moment. You get a slowing economy, you get tax cuts. It's pretty easy to come up with a deficit of 10 % or more, you know, at that point, right?

13:05Even if he's doing something that he appears to be doing, or rather Scott Besson, his treasury secretary, seems to be doing something that he's inherited from the last lot of funding more at the short term. Nonetheless, you know, there's quite a big risk that the price of US treasuries fall, that interest rates across the spectrum rise. That's not just a shock for America. That's a shock for the world. If that were to come to pass, it absolutely would be. I think the numbers that were quoted at the very beginning of how much fat Musk could cut from the federal government, the$2 trillion number, was always pie in the sky and was probably written off as much as such by markets.

13:54But I think they were somehow persuaded that it might be nearer a trillion, right? Right. It's still a big number, right? It's still a big number. And we've already seen a degree of wing clipping of Musk last week by Trump himself. It's also true that, you know, some of what we're seeing, some of those cuts that we are seeing are plainly not into fat. They're into muscle. So, for example, the scaling back of R &D expenditure, which we know to be the kind of wellspring of innovation and growth and all things bright and beautiful. You know, that is not that's not fat. That's that's the that's the engine of the U.S.

14:30economy. And it's also sort of paradoxical and weird that Musk would be remotely associated with any of that, given that his businesses have benefited to an enormous degree from those sorts of R &D credits. Already has been some backing off of that. And it wouldn't surprise me if there's further backing off that happens. And therefore, the dividend, the Doge dividend, isn't going to be remotely on the scale that was spoken about and probably even well south of that one trillion dollars that you mentioned. One of the questions that's on many people's mind is that unfunded tax cuts, those put in place by Quasi Quoting and Liz Trust were a catastrophe here.

15:12We've always thought America can get away with more when it comes to deficits. But, you know, the world doesn't give them a totally blank check. What is the limit on which they can go for unfunded tax cuts? I mean, you're right. The dollar of longstanding now has benefited from that, what's sometimes called exorbitant privilege of being the world's reserve currency, the go-to place if you're parking your money and your assets. I don't see that change anytime soon, Robert. It takes a long time for people to fundamentally change their view of what is the world's safe haven. But is that haven becoming less safe if a combo of smaller cuts in spending and larger tax cuts to come?

15:59The Treasury market's already been more fragile over the past six months or so. Could this be a leg up? I think that's possible. Would we all pay the price of that internationally? Yes, we would, to a degree. Although interestingly, we have seen what looked like some safe haveny flows back into Europe over the last week or so. Maybe off the back of a stronger perception of Europe eventually perhaps starting to get its act together when it comes to structural reform and digging deeper into its pockets to haul it out of the anemic growth rates it's been suffering for the last several decades. So I think, you know, I wouldn't say this is a catastrophe for global government bond markets, but equally we'd all be caught up in the backlash.

16:45Well, it's only that, look, I mean, you used to immerse yourself totally in the whole question of the interconnectedness of different markets and different institutions. And, you know, there is, I don't think, I'm trying to work out whether, you know, North Korea is in the fortunate position of not having any exposure to US assets. But, you know, truthfully, whether you're any kind of bank, whether you're any kind of central bank, if you're any kind of investor, you know, you are exposed to U.S. shares, U.S. government bonds, the dollar. In the short term, one of the things we highlight on this programme repeatedly is the sort of, I actually think it's a scandal, but certainly the tragedy that British investment institutions have massively reduced their exposure, their commitment in a financial sense to the UK economy.

17:50And if you are a typical British person saving for a pension, almost certainly the biggest chunk of your savings will be held in the US stock market. And so what we've just seen in terms of very significant falls in New York Stock Exchange, NASDAQ, huge stocks like NVIDIA and Tesla, that's going to be making British people poorer. And so I suppose that there are two slightly separate issues. They're related, of course, is is Trump so reckless that he, you know, this is going to be the presidency that undermines the extraordinary privilege America has of its currency being the currency that everybody has to hold as the world's reserve currency.

18:39You know, is it remotely plausible that this is the moment where something we thought could never happen happens? But even if that doesn't happen, when dollar assets fall, the whole world has a problem, don't they? It does. Look, the U.S. has for a number of years been the engine of world growth. If that engine goes down a year or two, we'll suffer the consequences of that. And it's also been a repository of a disproportionate chunk of the world's wealth. I think foreign holdings of US equities have never been higher than they are at the moment. And the same be true of US government securities as well.

19:14I must admit, it's for among those reasons that I think, you know, once that pain barrier, whether for stocks or for the economy, is felt, that some second thoughts will need to be had. Well, when they need to be had, the question is, will they be had? Everybody said, oh, my God, it's amazing. Trump's never going to do anything bonkers because they've got Scott Besant there, who is a, you know, longstanding, successful fund manager. Started off with Soros. He understands markets in, you know, sort of the view of sort of Wall Street and the city. He's in inverted commas, sensible. He'll never let Trump, you know, do balmy things.

19:49Well, Trump has been doing balmy things. Yeah, this is a much more pliant cabinet than last time around. Whether like if Gary Cohn, former government of Sachs, was a stabilizing force and set his hat against tariffs and that end up winning the day. This is a different cabinet. I still think, though, that when push comes to shove, when the pain threshold really is reached, we've already seen a willingness. We've sort of a tell already from, in poker speak, from the president already, a willingness to back off when things reach a pain threshold, whether for car makers or anyone else. That would still be my strongly held view, that self-preservation will kick in and therefore the worst case scenario painted will be avoided if need be.

20:36Will it be bumpy en route to that? Yes, it already has been and doubtless there'll be many more bumps in the road. He's a guy who wants to do deals. I'm guessing deals will be struck off the back of this that will avoid mutually assured destruction for them and for their trading partners. Now in a minute, we're going to go for a break and after that break, what I'd really like to do is just focus on what all of this mayhem means for the UK and Europe and actually whether there's an opportunity economically for the UK and Europe. There's just one other thing that I want to talk about with you before the break.

21:09This is a very dangerous thing to ask because actually it's only just popped into my head and I haven't given it any thought myself. But I have been thinking an enormous amount about when it comes to global security, what it means that Trump has, the word is not philosophy, because it's quite hard to impute a philosophy to Donald Trump, but a sort of different view of how you sort of govern the world, right, from, you know, frankly, any American president of modern time. It's very clear that he believes in so-called great men, right, strong men, right? And so it's sort of intriguing that he seems somewhat friendlier towards President Xi of China than President Biden was.

22:04We've all been, I would say, shocked by the extent to which he's praised Putin and is keen to do not only some kind of deal over Ukraine with Putin, but has talked about commercial deals with Russia. So I suppose I'm quite interested in whether or not there is anything at this stage sort of interesting and intelligent to say about what that means, apart from tariffs, which is very much within the context of, you know, I'm a great strong man. I can do what I like in terms of, you know, battering other economies by putting up the price of the things they sell to us. But do you have a sort of view about what this means for global financial governance in general?

22:54I mean, even before this, we'd seen over a couple of decades, a degree of financial balkanization, European bloc, a North American bloc, an Asian bloc. And doubtless, what we've seen over the past few months will be further impetus to that balkanization of flows of money as well as flows of goods. There are some big questions about, you know, let's take an example. In my previous life, I was quite heavily involved in the international banking rules. Is there even such a concept now? So on that, say, for example, one of the things that is sort of, again, gone by the wayside. But as I understand it, Trump has made clear that the latest capital iteration of Basel will not be applied in America.

23:46which gives American banks an enormous competitive advantage, certainly in the short term, because they can lend more relative to their capital base. I don't think the British, I mean, I don't think the Bank of England has yet said what it's going to do on any of that. But, you know, should we be worried, for example, that America is simply saying we had these Basel rules, we thought, particularly after the financial crisis, that we all had to pull together much more in terms of having a collective set of global rules to keep our banks safe. If Trump is simply saying we're going to do what we like with our banks, should we be worried about that?

24:27Well, I think we should longer term. I mean, that would append what has been a consensus now over half a century, that there is virtue and value in imposing some kind of minimum floor for how much protection banks hold. And, of course, that floor was amped up, was raised after the global financial crisis. As soon as any one country chooses to ignore that floor, it becomes more of a free-for-all again. And you get a race to the bottom. All banks have less money to protect their customers. And the risk of a financial crisis goes up. Quite so. So I think on a medium-term horizon, that risk has got to be there.

25:03At the moment, rapacious risk-taking is not what's happening. So it's a lesser risk, but it's one that would be so the seeds of perhaps the next crisis. If we did see that splintering of, in this case, you know, the international rules of the road, which overall not perfect, have kept us free from harm's way most of the time, if not all the time. So, look, I think that is a good moment to go to the break, particularly since you've talked actually about a word or you've used a word which we haven't used enough on this program, balkanisation. And that brings us very nicely on to what all of this means, both in a financial and real sense for the economy of Europe and the UK.

25:48So we'll be back in a minute.

25:54Welcome back to The Rest is Money. Andy Haldane, delightfully, is still here. Now, this probably shows how nuts I am, but I've actually been feeling more optimistic about the outlook for the UK and Europe in the last few weeks. And as a direct result of what Trump has been up to, then I have been feeling for, I mean, almost years, as it were. And the reason I say that is because I just have felt that UK governments and European governments have somehow been obviously not at ease with our respective mediocre economic performances, the mediocrity of productivity improvements, the mediocrity of living standards rises.

26:51but somehow they just didn't have the urgency to try and sort this stuff out. Even when, you know, they could see the far right on the march and the far right on the march precisely because all our economies have been performing so badly. But now what we've seen is, in a sense, you might argue, Trump not only directly trying to damage Europe, but also doing something that no European leaders like is sort of directly insulting Europe. And you just, for the first time, and obviously we've seen this particularly in Germany with Mertz recently chosen to be the new chancellor, though not yet in office, you just see European leaders, and I think it's also to an extent true of our own Prime Minister, Keir Starmer, slightly waking up to the idea that we cannot any longer be comfortable in our mediocrity and maybe we'll stop doing some of the really big radical things that we need to do to rescue our way of life.

28:03So I agree with you on the EU. And I think we've long known, haven't we, that it sometimes takes a fully-fledged crisis or the threat of one to galvanise political will. And what Europe's been lacking is political will among the core countries. Now, interestingly, in parts of Europe, southern Europe, they already had summoned the political will by dint of having had the euro crisis. So there's a reason why Portugal and Spain and Italy and even Greece are doing well. They got their crisis in early, reformed off the back of it structurally, are now the engine of growth in Europe. But France and Germany are the bigger economies.

28:45The core and the engines, though, had not, because they'd not suffered that similar fate. And with the shredding of the Western alliance, or whatever you want to call what's happened over the last month or so, that has fortified and galvanised them, helped by the change in government in Germany. And that gives me hope as well, that the moment has come for them to step up and to break free of their fiscal shackles as Mertz already said he will do. And where Germany leads, you would hope that France will then find it much easier to follow, as would others off the back of that. We should remind people that Germany has really an extraordinary history post-war of booming, then appearing to get massively behind the curve in terms of economic performance.