155. Trump Turmoil: The Tariffs Kick In

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1:13Hello and welcome to another Trump's Tariff turmoil, rest is money daily special. Joel, I'm Robert Peston. And I'm Steph McGovern. So before we get into the analysis, let me just give you a quick update on where we're at at the moment. So it is Wednesday. The tariffs have now kicked in. From today, pretty much all goods imported into the US will face at least a 10 % surcharge, which is money that will be paid to the US government. Now, you know, we've talked about the percentages. They vary widely. we've got the UK at 10%, EU 20 % tariff they're now facing. You've got several African and Asian countries in the 30 % and 40 % range, including Indonesia at 32%, Vietnam we've talked about at 46%, and Madagascar at 47%.

2:05Then, of course, there's China, the one that everyone's talking about, their tariff now at 104%. 54%. And that's, of course, because Trump added that extra 50 % this week, didn't he? And retaliation, for their retaliation, to the first lot of tariffs. It's an interesting one with China, because they are not letting go here. They're saying they're going to fight to the end. So as well as imposing their own tariffs on America, they're also making moves to try and weaken their currency and offset the tariffs a bit for US buyers. EU as well. We're waiting to see how they're going to retaliate on all of this because they are the two largest exporters to the US.

2:43And then those, some of those who aren't retaliating and are now looking at maybe doing deals. Trump's saying he's been contacted, but who knows whether this is true, by 60 different countries wanting to make deals. We know that Japan and South Korea are possibly going to be in talks now. The Italian PM has come out saying she wants to go over and do a deal. So that's a little bit of a roundup. Robert, go on then, give us what you're seeing and hearing. For what it's worth, you can tell already the extent to which Washington in general is getting deeply nervous about all of this. You said they were claiming they were talking to 60 countries.

3:18I think Trump yesterday said it was up to 70 and they just don't have the capacity, he claimed, to talk to everybody who wants to do a deal with America. So far, and we're talking at the European markets opening, so far, let's be clear, investors are not seeing light at the end of the tunnel. What they are reacting to are tariffs that have today gone to historic levels, tariff levels around the world that we haven't seen since Smoot-Hawley in the 1930s, which was a big contributor to the Great Depression of the 1930s. And it is recession fear that is driving markets today. Now, the biggest, you know, for me, market shock that we are seeing, have been seeing overnight, is something I talked about at the end of our conversation yesterday, which is what is happening to government bond prices and in particular to the price of US treasuries.

4:29those are the bombs issued by the US government that is the debt of the US government and the point I made is that normally when there is a global financial crisis there is what's called a flight to safety in traditional circumstances that would mean that investors would buy US treasuries and their price would rise the genuinely frightening phenomenon that we have been seeing we started to see it earlier this week and we've seen it with a vengeance overnight, is investors massively selling US government treasuries. And that means that the price that the US government pays to borrow, particularly at the long end, right?

5:19So when it's borrowing for 30 years, 10 years plus, okay, that has been rising very sharply. So they are now paying at the longer end more than 5 percent. That's the US government to borrow. Now, there are a number of remarks one wants to make about this. One is this is totally counter to what Trump expected to happen and wanted to happen. As he introduced tariffs over the recent weeks, one of the things that he pointed to as signs of success was that bond prices were rising and the amount that the government paid to borrow was falling. And he said that would translate into lower interest costs for the American people.

6:10Precisely the opposite has been happening over the last 24 hours. And then there's a second point. You know, I have made the analogy between Trump's reckless economic policies and the reckless economic policies of Liz Truss and Kwasi Kwarteng that drove her out of office in the UK. And this fall in American government prices is chillingly similar to that 2022 crash in the UK government bond market, the fall in the price of UK government bonds, the spike in the interest rate that the UK government had to pay. And the really important moment that is still to come is what will happen, which will happen later this week, when the US government tries to issue new bonds, tries to raise new money.

7:08Because if it looks as though there's a bit of a buyer's strike, if it looks as though investors are reluctant to lend, that is then a fully fledged fiscal crisis for Donald Trump. And you would assume at that point he would have to make a U-turn on the more extreme of these tariffs. Obviously, with Donald Trump, you can just never be sure how far he is going to continue to drive the American motor car towards the cliff edge. And, you know, there have been plenty of moments in the last few weeks where you would have thought that he would have put on the brakes. And he hasn't. It's full steam ahead.

7:54So this feels to me, I mean, you know, this crisis started last Wednesday when he announced these tariffs. The 10 % ones came in immediately. Today, we've got these bigger ones being introduced on the countries that he regards as the biggest culprits, the ones that he claims are ripping off America most. As you know, I regard that claim as absurd. Third, the world has reacted by saying you are creating a recession in America and potentially a global recession. But as I say, unlike any other financial crisis that I've been in, the most powerful man in the world, the American president, isn't trying to end the crisis.

8:40He's making it worse. And just on that, about that comparison with other crises, obviously you and I worked together on the credit crunch in 2007, 2008. And that was, you know, that felt like a really scary time. It felt very uncertain. You know, every single day I remember you were getting calls from various people involved in this asking you what was going on. There was runs on banks. There was massive companies that went bust. Does this feel like that, do you think, Robert? Because, you know, that ended with bank bailouts and obviously really cheap money after that. How is this going to end?

9:19And does it feel, because that felt really scary to me. I remember being sat in an edit suite with you, which is where you make these TV packages for the BBC News. And I remember sat in one and we were, you know, editing this piece together, showing all these people, these desperate people getting money out of Northern, you know, trying to get money out of Northern Rock. Then there were these awful scenes of the companies going bust and people carrying cardboard boxes of their stuff out of the offices. It was really tangible that real people were being hit hard. Do you think that's what we're going to see here?

9:55Does it feel as scary as that to you, Robert? So I think the first thing to say is that our banks are stronger than they were in 2007, 2008. The fundamental cause of that crisis was that it was the banks themselves that had taken these reckless risks, made absurdly risky loans to the US housing market, and then had bought these ludicrously complicated financial products that they believed had somehow eliminated normal credit risk. and they simultaneously, these banks didn't hold enough cash and their capital, which is their buffer against shocks, was too small. It was too low. The banks have been recapitalized.

10:42They have much more capital. They have much more cash. And so I think it's very important to say we go into where we are in this crisis with a more robust financial system. But one of the things, again, we're seeing this morning is that the junk bond market, that's essentially the borrowing of riskier companies, the junk bond market is seeing quite sharp falls in prices, which means that the price of lending to riskier companies has gone up. And that means that investors are taking the view that the recession that looks as though it may well be on its way now will cause problems for a whole range of companies.

11:26And therefore, we are also seeing the share prices of banks fall. Now, when the share prices of banks fall in that way and when they expect to face losses, particularly on, let's say, corporate lending, then they do become more cautious about extending new credit. and then you get into a vicious downward cycle because when banks scale back the lending to companies, the economy then slows down really quite rapidly and you get to something that, you know, the phrase was invented in 2007, 2008, credit crunch. Quite a lot of people thought that I invented the phrase. I'm not sure I did, but I certainly used it.

12:11Just on it. I certainly used it a lot. I mean, we're not at a stage where I would call this a credit crunch. But, you know, central banks, Bank of England, European Central Bank, the US Federal Reserve, will be concerned at any evidence at a slowdown in the provision of lending, a provision of credit. it. And that will be one of the factors that they will be thinking about right now, about whether they have to join forces to provide liquidity to markets, which would mean special measures, as I say, to provide additional funding to banks, but also cutting interest rates. So, you know, those are the things that central banks are thinking about right now.

12:52Genuinely, this is a crisis that is as serious as that because it has been going on for so long. I just want to make one, I think we should probably go to a quick break in a minute, but I just want to make one more, because you raised the really interesting question about, you know, how this relates, how this feels compared to other crises. The bit of the global financial crisis, which I am reminded of in terms of where we are today, is the Lehman weekend, all right? So on a Friday in the autumn of 2008, I'm picking up reports that Lehman is going bust. And my initial instinct is, okay, this is a major, this is what's called a bulge bracket investment bank.

13:47It's one of the most important investment banks in the world. And your normal assumption, when a financial institution as significant as that is in trouble, an institution that mostly people would classify as too big to fail your instinct is that the US government will bail it out the treasury secretary at the time Hank Paulson and you're thinking right there'll be a deal by the US Federal Reserve and the US Treasury and they'll bail out Lehman yeah someone will save them yeah well the US government will save them right they will effectively nationalize and put enormous amounts of money in all through the weekend I'm getting reports that yeah they're trying to sell bits off Barker's was involved in trying to buy a big chunk of Lehman at that point.

14:29But I'm also hearing, which I can hardly believe, that Paulson is taking the view that if he can't do a commercial deal, he's going to let it go bust. And I'm thinking this can't be right, because if he lets Lehman go bust, stock markets, when they open, will absolutely tank. And they will tank in a way that means we cannot avoid a global recession. That was my instinct. So I thought he's bound to bail them out. And they didn't bail them out. Lehman went bust. We had the mother of all market reactions and we were into global recession and then all the bailouts of the UK banks followed in. This was the most costly bailout in global financial history.

15:05And all of us hit very hard. You know, GDP collapses and everybody's poorer. Arguably, that's set in train 15 years of economic stagnation, particularly in the UK. Okay. Now, you know, right now, okay, the future, therefore, you would argue, of the global economy is in the hands of Donald Trump, right? This feels like that Lehman weekend to an extent. But we just don't know whether he is going to do the right thing and put in place some kind of a U-turn that reassures investors. Yeah, and there's loads more to say on that, but let's go to a quick break.

15:53Welcome back to Arrested Money Special on the global financial turmoil with me, Robert Peston. And me, Steph McGovern. Now, the other thing I want to talk about in this, Robert, is, you know, you've just eloquently explained what happened in the credit crunch, the global financial crisis and the kind of what was going on to try and get us out of it. and then you you know you kind of ended on talking about it's Trump who's doing this now and what freaks me out in this is Trump in his role as president is doing it feels like he is doing the job of the regulators of the banks of the you know like he's making all the decisions in himself so I was reading that he is not even doing these meetings and things his plan is to negotiate the deals, the trade deals himself.

16:45You know, he's not going to involve the Treasury or the Commerce Department or US trade representatives. He's going to do these deals himself. So unlike in a financial crisis where all the clever heads try and get together to solve these things, you've just got this lone ranger who is going to try and do it himself. And that's where it freaks me out about how it's going to end because he's, as we've been saying for years, he's gone totally rogue. But it feels like given he's not even, I know he's got this trade advisor, Peter Navarro, and everyone, you know, everyone seems to be slagging him off at the moment.

17:20But it sounds like this is just him and without any kind of expertise in trade, who's going to go into these deals with these desperate countries who don't want to face these tariffs. And just probably base it on who's brought a letter from a member of the royal family from that country. You know, who's been nice to him, who's wearing a suit. like really ridiculous things and not proper trade expertise. Does that worry you, Robert? Yeah, it all worries me. You mentioned Peter Navarro, his main trade advisor, the individual most influential in shaping these terrifying tariffs. And as you implied, but you didn't name names, Elon Musk, not the world's you might argue favorite billionaire at the moment has called pete navarro a moron um and you know there will be quite a lot of governments around the world who won't say that publicly they probably agree they don't agree with elon musk on much but they will probably agree with elon musk on the classification of the designer of these tariffs as a moron um i mean i think there are two things to break down here though in terms of the fundamental points that you make.

18:35Look, it's not the case that Donald Trump does the nitty gritty of negotiating these trade deals. So, for example, I've been talking to those ministers and officials involved in negotiating with Washington on the trade deal that they want. And I've been talking to Washington people about that same deal. And what they all say and have been saying is those talks have been going well, but they cannot be confident, you know, in previous administrations, you know, with conventional presidents, if your commerce and trade secretaries essentially negotiated something with a foreign country that they thought was robust and sensible, you would expect the American president to sign it off.

19:20What all of those negotiators say is, you know, they can put together a deal that they think works for both countries. But then there's just this enormous element of uncertainty about whether Donald Trump himself will buy into it and sign it off. So he has personal power. And that's my point. It's scary. He introduces extraordinary uncertainty into all aspects of government and indeed into the global economy, because so much of what is going on is about his personal decisions, his personal preferences. There is a second point, though, that is sort of implicit in what you say, which is genuinely very disturbing at the moment.

19:58Trump has, for months, attacked the US Federal Reserve, led by Jerome Powell, right? He has constantly said, doesn't cut interest rates fast enough, doesn't set monetary policy in a way that helps America. During his election campaign, there were suggestions that he might undermine, formally undermine the independence of the US Federal Reserve to set interest rates, set monetary policy. And then there were all this talk about Trump setting up a shadow Federal Reserve to second guess the Federal Reserve, and in a sense, undermine its authority. This, in the current crisis, this hostility between Washington, Trump, and the US Federal Reserve, you know, the incredibly important independent organization that sets interest rates, this hostility between the two is really troubling.

20:58Because in a crisis like this, you need all the important financial, economic bits of government to work together, to coordinate policy. And without undermining the independence of the US Federal Reserve, you need the US Treasury and the Federal Reserve to work closely together. So it's massively suboptimal that there is tension between the two of them. And then there is a second really big risk. Okay, I talked earlier about the frightening spectacle of seeing US government debt fall in conditions of uncertainty where you would expect the price of US government debt and the dollar to rise. if, in response to this crisis, Trump does what he's completely capable of, which is start to move to formally undermine the independence of the US Federal Reserve.

21:57At that point, I think US Treasuries tank, right? Because at that point, and they literally fall through the floor, because at that point, investors say, there is no anchor on inflation in the US system. At the moment that Trump were to say he's now in charge of setting interest rates, global investors would absolutely panic, dump the dollar, dump US treasuries. And you're not only into an American financial crisis, you are into a global financial crisis because the world holds dollars and US treasuries. And if we saw falls on that level, we would at that point, I'm afraid to say, see whole governments in trouble and very significant investment institutions across the world in trouble.

22:44It is incredible that one person has the ability to do all this, this, you know, Lone Ranger idea. Because I always naively assumed, even if you're leading a country, you're still bound by rules and regulation and, you know, by morals and good ethics and everything. I know in lots of cases where there's dictatorships, that doesn't happen. But in democratic countries, you would think that no one person could cause this much damage and be allowed to just crack on and keep doing that until, you know, there's only, it's like last one standing, isn't it? Particularly between China and America. And you really wonder how it's all going to end.

23:28You know, whether this escalates into more than a financial drama. This is now obviously not just about markets. This is about the living standards of individuals. I mean, we haven't talked very much about the more direct impact on millions of ordinary people. We should talk a little bit about that maybe now, but also come back to it tomorrow and the day after. But of course, there will be millions of people, you know, particularly those close to having to draw a pension, terrified that the value of their pensions is falling before their eyes. And we need to sort of talk a little bit about what do you do?

24:10Do you try and switch your assets into cash to try and ride this out? These judgments are incredibly difficult to make when you've got so much uncertainty and uncertainty in the human form of what Donald Trump does. The other thing which I also want to explore with you in the next day or so is we saw a tremendous supply shock during the COVID crisis. This is something that is similar to that crisis. We did see markets fall there. But the other thing we saw was because of the virus, tankers couldn't get to certain destinations. Big companies couldn't get parts. And there were genuine. We ran out of really quite important stuff.

24:58And then we saw the supply shock translate into a big spike in inflation. Now, when you dismantle global free trade in the way that Donald Trump is doing, and multinational companies have to think about where they source their parts from to keep costs down, it will be inevitable that we will have a very significant shock to the ability of manufacturers to get all the stuff they need in the right time to supply us. So I do think that one of the stories we've got to look out for is important stuff just running out, you know, just running out that we may well run out of important stuff in very important markets.

25:39And then what, you know, not only what does that mean for, you know, the reaction of voters and consumers, but it also mean, you know, prices of stuff going up. And there's one final thing that, again, I want to come to. This is just essentially I'm selling this as a sort of, you know, as an exciting soap opera that you just go, you've got to tune in tomorrow. The other thing we haven't talked about, which is on everybody's minds at the moment, is that the really important pharmaceutical industry has so far been exempted from tariffs. But Trump has signaled that he wants to bring them into the tariff net.

26:15And there are also other things that he wants to do to bring down prices in America of pharmaceuticals, but potentially put up prices for pharmaceuticals for, for example, the NHS. Jess, I want to talk about all of that in coming days because this is massive stuff as well. Yeah, and as you say, there is so much, isn't there, to cover on this, which is why we want to talk to you every day about what's going on because things can change in an hour at the moment with Trump and all this turmoil. So we will be back tomorrow at the same time with the latest. But that's it from us for now. Bye-bye. See you tomorrow.

26:50Bye-bye.

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