159. Trump Turmoil: It’s The Hope That Kills You

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1:12Hello and welcome to another Rest Is Money, Trump's turmoil special with me, Robert Peston. And yes, I am flying solo again today. My partner in crime, Steph McGovern, will be back very shortly. It is never a dull moment with the Trump administration. There's always something new that, it's a metaphor I've used before, hits you about the face like a very large wet fish. and today's blow to my cranium from the Trump wet fish was an interview by J.D. Vance, the Deputy President with the UnHerd website. It's a European UK website. It's the first big interview he's given, as I understand it, to any European news organisation.

2:05There's quite a lot in it. The bit of it that I was just going to reflect on briefly and before we get into the meat of this podcast, is that he said something that to people of my generation is genuinely extraordinary, which is he said that the British and French governments were right in 1956 to launch their military investigations to stop the Egyptian government nationalising taking control of the Suez Canal. Ah, for reason, you may think this is all ancient history. Why on earth am I banging on about this? For people of my generation, we were taught in schools, we were told by our parents that the big symbol of how the UK and Europe were no longer the powers that we thought we were in the world was the so-called Suez Crisis.

3:00because what happened was that France, as I just said, France and the UK did send this military force to take control of the Suez Canal. But Eisenhower, the American president and the Russian government at the time basically bullied us into ceasing and desisting. And we left with our tails between our legs. And this is the moment where it became crystallized in everybody's minds that Russia and particular America were the world's great superpowers. Vance says this morning that the UK and France were right to try and take control of the Sirius Canal. You can sort of see where that fits into their philosophy, given that they've been banging on, Trump has been banging on about how terrible it is that Chinese interests have commercial ownership along the Panama Canal.

3:52And, you know, you can also see it in the way that they've been militarily intervening in the Middle East for commercial reasons, bombing the Hooties to keep shipping lanes open. But even so, as revisionism goes, this is pretty extraordinary. I mean, the reason he says this is because he is talking about why Trump has been putting pressure on the whole of Europe to massively rearm. And of course, the UK has taken its first important steps along that road and Germany has taken really ambitious steps along that road. And what he says, which is very, very striking, is that he has an enormous amount of respect for Britain and France.

4:45And because we were right about Suez, even though Eisenhower, the president at the time, ignored France and Britain. I mean, Anthony Eden, the prime minister's, the British prime minister of the time, his reputation was permanently ruined, sullied. Anyway, because he says we were right at the time, you know, he wants us to be militarily more powerful to influence America, because believe it or not, he is making this dramatic concession today that Washington and Trump may not always be right. Really? Can you believe that? They're conceding that they may not always be right and they want Britain and France to tell them when they're wrong?

5:23I mean, I have to say, if you look at their performance recently, chances are that even if we were to say to them in a way that Keir Starmer has so far been reluctant to do, he hasn't used the phrase to Donald Trump once, you're wrong, so we understand. But, you know, if he were to suddenly decide that Donald Trump is open to direct criticism, what do we think? Do we think Donald Trump will listen to Keir Starmer and President Macron? Well, to be discussed. but you have to say it's great that Vance is not totally denigrating us as he did do not that long ago with that Munich Security conference speech or seemingly denigrating all Europeans then but he's now saying how much he respects and admires us and will take our advice in the future So let's hope that that is now the settled position.

6:21Now, however, I do want to talk about what the economic business markets outlook is. We've had a sort of temporary lull in the mayhem this week, particularly since Trump announced that he would temporarily remove those really big tariffs on consumer electronics, Apple iPhones and the rest. The stock market is still, of course, net lower as a result of his introduction of very substantial tariffs. And very substantial tariffs are still in place. The average tariff rate imposed by America is, I think, still somewhere of the order of 25%. This is a massive tax on the exporters of the rest of the world, still in place.

7:13obviously we've got the negotiations going on with individual countries on country-specific trade deals. There's one other thing actually, of course, that Vance did say today in that interview, which is that he thinks there is a high probability, a high likelihood that there will be a trade deal with the UK, which he puts down to quite how much Donald Trump loves the UK and the King, as well as the fact that our trading relationship with the US is more balanced in his view than the trading relationship of a country like Germany. What we're living through is not only high tariffs, but this extraordinary uncertainty, because one of the things that the 90 days has introduced is just tremendous uncertainty about essentially the tax on overseas businesses as they apply to their sales into the world's single biggest national economy.

8:12And if you'll forgive me, there's a rather brilliant economist who I want to quote. He's a bloke called Olivier Blanchard, now a distinguished academic working in America. He was chief economist of the IMF for many years. And he sort of, I thought, captured the nature of the uncertainty that all businesses and investors have to face when trading with the US in a rather brilliant tweet, which I'm going to read to you. And he described the uncertainty imposed on the world as fractal uncertainty. Those of you who are students of geometry will understand the metaphor he's using is this is the most extraordinarily complex, multifaceted uncertainty.

9:12The snowflakes are always cited with their geometrical complexity as examples of fractals. Now, so this is his description of fractal uncertainty. Uncertainty about what each Trump team member wants. I mean, we've seen that again today with the much more reasonable statements being made by the Treasury Secretary, Scott Besant, about the new tariff world than we habitually get from, for example, Donald Trump. Uncertainty about how each Trump team member thinks this can be achieved. Uncertainty about which team members actually influence determine the outcome. Uncertainty about how long each decision will remain in place.

9:54We've certainly seen that. Uncertainty about how long each of the members of the team will actually remain in place. As you remember from the, it is sort of amazing to any of us that there haven't been any high profile resignations so far. There was a lot of talk before Trump's reverse ferret, before his postponement of the really extreme tariffs that Besant was going to resign. He hasn't. He is still the Treasury Secretary. Uncertainty about how long the team as a whole will remain in place. Not sure how much uncertainty there is about that. But then, you know, find a killer line. and this is certainly true, uncertainty about what the next team will be and will do.

10:40So you're an investor, a trader, a hedge funder, a firm, an importer, an exporter. He says good luck to all of them. And I think we've all got to wish good luck to anybody who's trying to make major investment decisions at the moment, because the uncertainty of the sort that Trump has introduced is pernicious and cancerous. how, you know, if you're making any kind of you're committing any substantial sum of money, of course, substantial means relative to your own resources. It's incredibly difficult to judge, you know, what the right thing to do is at the moment, because you just don't know what the prevailing both market conditions and tax conditions, tariff conditions will be.

11:24And so while we're taking stock, I do think we just have to, in a clear-eyed way, that what Trump has done has made America and the world poorer. It was only a few weeks ago that all forecasts pretty much for America's economic growth this year, whether it would grow by about two and a half percent. The consensus now is that is close to nought. the probability, look at the forecast of a very powerful influential investment bank like Goldman Sachs, they say there's a 45 % risk of recession. It seems to me the evidence shows the risk of recession rather higher than that. I mean, it may not be an incredibly deep recession because consumers and businesses' balance sheets are in reasonably good shape.

12:15Consumers have savings, businesses are in more robust shape than they certainly were at the time of the global financial crisis in 2008. So if there is a recession, or I think I would argue when there's a recession, it'll probably be a relatively shallow recession. But just think about though that swing from robust two and a half percent growth to 0 or minus 0.5 minus one. That's a remarkable thing for a single individual, the US President Donald Trump, to have caused. And if you sort of doubt me about this, I mean, look at things like the pretty well respected survey that's carried out by Michigan, I think it's called Michigan State University, the swing there in terms of consumer optimism to pessimism, a drop of 30, 40 percentage points in just a matter of weeks is really striking.

13:15It is true that the data right now for what, or the latest data, this is never real time, but the latest data for what people have been actually spending has not fallen off a cliff. but that shows some degree of consumer rationality because if you think tariffs are coming in which they are and have done on important items like motor cars and electronics what do you do you buy those items before they become prohibitively expensive those accelerated purchases yes they give a bit of a boost in the short term but as soon as tariffs are in they fall off a cliff. And then there's the finance aspects of all of this.

14:05I have talked at length, because I do think this is perhaps the most damaging thing that Donald Trump has done, is to undermine confidence in the safety of putting your money in dollars and the safety of putting your money into US government debt treasuries. And so we have seen, and I'm sorry to go over this again, but it is hugely significant, something that we don't normally see when you have the kind of markets turmoil that we've experienced of late. Normally when there's markets turmoil, the flight to safety makes the dollar stronger and people buy US government debt, they buy treasuries, the price goes up, The yield on those treasuries goes down.

14:55The effective interest rate that the US government pays goes down. That is what Trump hoped would happen. The reverse has happened. The dollar, along with falling stock markets, the dollar has weakened and the price of US government debt has also fallen. Therefore, the yield on that debt has risen. The interest rate paid by the US government has risen. And that sort of undermines what I think is often referred to as America's extravagant privilege. What does that mean, that phrase? It means that America has had the advantage that no other country on the planet has of being able to borrow as much as it has wanted to do at relatively cheap rates, despite running deficits on its public sector accounts that would not be seen by other countries like the UK as totally unsustainable.

16:03and it is pretty I think straightforward to make the case that at least for a number of years America will be paying more to borrow than it would have had to do if it hadn't been for these policies and even however if you think that as markets settle down as they seem to be and if If we see some more U-turns on some of the more extreme tariff policies, you may even get a bit of a rise in the price of equities and a bit of a rise in the price of U.S. government debt. There will still be lasting damage to the American economy. They will still be paying more to borrow than they would otherwise have done for two very, very straightforward reasons.

16:58that are almost mechanically engineered by what Trump has done. First, when investors can see quite how much damage can be done by a single individual, the American president, and you just have no idea, he's so unpredictable what he's going to do next. At that point, and I've been talking to investors about this, the big mantra at the moment of investors is diversify geographically. Don't put so much of your money into America. And that is now, I think, a trend that is baked in. There will be, for months and years, less of a flow of overseas money into America. And it's not just because international investors' risk evaluation has changed, which is one aspect.

17:54America is riskier, so put your money in Europe. Euro is rising very strongly, for example. The yen has benefited. It's not just that. It is also that if Trump's policy succeeds in the way that he wants it to succeed, and that is moot, and we're going to come back to, even if it does succeed, the costs to American incomes, even if the policy succeeds in the way that he wants it to, we'll come back to the costs after the break. pretty much by definition, if he succeeds in reducing the deficit with China, with Japan, with Germany, if their surpluses fall, they then have less money to invest in American financial assets like US Treasury bonds.

18:50When there's less of their money going into US Treasury bonds, the interest rate that the American government has to pay to borrow just automatically it's a flow of funds issue automatically rises America becomes much more dependent on the savings the smaller pool of savings of Americans to fund its deficit and if there is less money chasing an ever-growing which is also potentially but even if it's static if there's less money chasing a static pool of debt, the price of that debt, relatively speaking, falls. And the interest rate paid by the government rises. So, you know, across the board, right, these are policies that are going to cause for years, massive headaches for the American government.

19:51it's already spending more on interest than it spends on defense than it spends on medicare right it's already spending you know more on paying interest rates than it is spending to keep its country safe or to provide a you know health care right that is already the case and that is set to get on all reasonable forecasts the interest bill for america is set to get even higher. And this is apparently, because this is the direct result of Trump's policies, this is apparently what he wants. Or at least if he doesn't want it, nobody's told him the basic truths about these things. So, you know, even if his policies work in his terms, and we'll talk about what these policies might mean in his terms in a minute, okay, after the break.

20:47There are these massive costs for America. So, all right, this is a good time to go for a quick break. I'll be back in a minute.

21:17Welcome back to a Rest is Money, Trump's turmoil special with me, Robert Peston, slightly annoyingly flying solo again today. Steph will be back very, very soon. Now, I also wanted to look at some of the basic economics of what Trump is engineering. I want to share just a couple of forecasts with you on this. So there's a forecasting model called the Penn-Warton budget model, and they have factored in what's been happening to the cost of capital. they've been factoring in the impact of of the tariffs and they estimate over the next 30 years the trump induced changes protectionism increasing the cost of capital will combine to shrink america's economy its gdp by about eight percent and its wages by seven percent compared to the course they were on before Trump's massive economic reforms.

22:33And they also argue that the stock of capital, stock of capital is absolutely fundamental to the growth prospects of any country. The stock of capital will end up being a tenth smaller than it would otherwise have been, and put that into concepts that we all understand. It just means, I mean, You know, American infrastructure for an incredibly wealthy economy is frankly not remotely as good as it should be anyway. They don't invest enough in roads and rail, but they're saying that there will be shabbier roads, older airports. And in the end, the factories themselves will also be, you know, less gleaming and less sparkling and less and less new.

23:17And so even if these policies succeed, you know, it's a bit like it's a sort of Trump's version of what happened in Soviet Russia. You can have a sort of economic theory about what you think is somehow fairer, but it ends up making everybody poorer. And it's incredibly difficult to come up with a scenario that makes America relatively richer, even if he gets his way, which is he gets on shoring. and then I think you know there's so much more I could talk to you about I mean one of the things that is sort of terrifying at the moment which is sort of basically gone unnoticed is the extent to which normakers in America are pressing ahead with massive tax cuts that would mean that the debt of the United States the federal reserves stock of debt and its deficits would just explode in a completely unsustainable way.

24:14So if you look at what the Senate has currently sort of penciled in, in terms of budget changes, it's talking about measures that would add a net$5.8 trillion to the deficits, the primary deficit run by the government. That's the gap between what it raises in tax and what it spends. but that explodes to 7 trillion or almost 7 trillion when you include the increased interest cost the interest bill on its own which is currently running at about 3.2 percent of national income as a share of the economy 3.2 percent that would rise to a staggering 4.6 6 % by 2034. So these are potentially really unsustainable rises in the borrowing needs of America and reinforces the point I made in the first part of this podcast, which is that America is, if it's not careful, on course to get into an absolute deep financial mess.

25:32We talked on the podcast about what happens to an economy when the interest rate it pays significantly exceeds the growth rate of the economy. And on these projections of what's going to happen to the size of the national debt and the deficit, America could be literally just years away from that kind of debt spiral where the debt rises unsustainably simply because of the amount that the government has to shell out in interest payments. Now, at that point, America becomes uninvestable, and we get back to that absolutely scary outcome that we talked about the other day, which is America struggling to borrow, and then you've got the kind of global financial crisis that would make the global financial crisis of 2007-8 feel like a vicarage tea party.

26:25I'm just going to make two final points before we wind up. I've talked a lot about the damage that Trump is doing to America. But actually, if I think about it, I think Europe and China should say a big thank you to Trump. because I think there is a very, very good prospect that China and the European Union will massively benefit from what Trump has done. The rise and rise of China has been the big economic and some would argue political story of the last 30, 40 years. I've been absolutely steeped in it, certainly in the last 20 years. Been to China many, many times, made films for the BBC about it, documentaries.

27:12is one of the things that I constantly said was the problem for China was it was too reliant on its exports and it was damaging itself by suppressing the demand of its consumers and to an extent therefore suppressing also the living standards and lifestyles of its enormous population. China now has, in the face of these tariffs, obviously it's, as we've talked about before, It's going to shunt some of its tariffs to other parts of the world, like Europe. There is this risk of dumping. But the other thing that China has to do now, and I think there are some signs it's doing this, is it has to stimulate consumer demand.

27:50If it stimulates consumer demand, it will become a more sustainable, self-sustaining economy. That would be good for China, right? This would make the foundations of the Chinese economy more robust. So, you know, I would argue Trump is doing China a favor. It is undoubtedly the case that Europe, including the UK, has not been entrepreneurial enough. You know, we have allowed America, when it comes to tech, even when it comes to areas where we're relatively strong, like pharmaceuticals, we have allowed America to gain too much of a competitive lead in these enormously important industries. and it has become clear to European leaders that Europe has to recharge, reboot, reinvent itself, get back its economic mojo.

28:50In the UK and I think none more widely in Europe, there is a fundamental review of the kind of regulations that are in place that stifle entrepreneurialism. There is much more of an appetite for the state to make riskier investments, invest in infrastructure, invest in the fabric of what generates productivity. I've still got massive concerns about the provision of, you know, what I call scale-up finance to our brilliant small and medium-sized businesses. But as I've also said, this thing I talked about earlier in the podcast, the way in which America is deliberately saying to Europe's leaders, you have to take more responsibility for your defence, you have to spend more.

29:32So we are rearming, we are investing in our defence businesses, probably not enough, but it's growing. That defence industrial strategy is the kernel of a much more ambitious set of industrial policies in the round. And it won't just benefit arms manufacturing because there are always civil spinoffs, particularly in this high tech world, from investing in defence. There will be benefits across the wider economy. Now, you may think, given the history of the stagnation of European income since the global financial crisis, I'm being overly optimistic. I'm a great believer in the UK and Europe. I actually think that Trump has given us the shock that we need to take control of our destiny and at long last put in place the kind of reforms that would allow us to translate our brilliant know-how from our university systems into really high growth, productive businesses that will ultimately benefit.

30:43So that's the optimistic case. I am sticking to it. And I've got one other very brief message for Donald Trump. Your diagnosis, Mr. Trump, of what's gone wrong in terms of the incomes of many American people had nothing to do with the fundamental economic model either of the world or of America. It mostly was to do with wholly inadequate industrial policy and welfare policy within America. So maybe you could spend a little bit of time thinking about that. I doubt you're going to change course. None of us should actually make any of our personal bets, either in our business lives or our personal lives, on the expectation that you're going to change course.

31:31because as one of the world's most influential investors, said to me an hour ago, it's the hope that kills you. So that's it for today's West is Money podcast. I will see you again soon. Goodbye.