Trump is a friend to the markets—for now

Trump’s economic policies could prove disaster (Picture: Gage Skindmore)

Donald Trump’s election victory has sent stock markets—especially in the United States itself—shooting up. Maybe the removal of pre-election uncertainty was a factor. But undoubtedly the main reason is Trump’s promise to give big business more of what he provided in his first term—tax cuts and deregulation.

His picks for jobs in his administration have been full of assorted far right figures. One exception has been the key economic post of treasury secretary. There was a bitter internal struggle within the Trump court over who to choose as billionaires wrestled for the job.

“Trump knew that he could not afford a mis-step,” explained the Financial Times newspaper.

“He had to find a person wedded to the populist economic policies he championed on the campaign trail, including sweeping tariffs. But he also needed someone he could trust to protect the metric he cared about most—the US stock market.”

So, in the end, and just as in his first term, Trump opted for a Wall Street insider, the hedge-fund boss Scott Bessent. 

In an interview in October, Bessent said Trump’s plan to impose higher tariffs on imports was a “maximalist” bargaining tool in trade negotiations. “My general view is that at the end of the day, he’s a free trader,” he said. “It’s escalate to de-escalate.”

Trump immediately showed this was wishful thinking. After all, “escalate to de-escalate” is the Israel military’s slogan as it devastates Gaza and Lebanon. On Monday he announced he would slap tariffs on imports from China, Canada, and Mexico on his first day in office.

Undoubtedly the threat to raise tariffs is what worries big business most about Trump. Higher tariffs wouldn’t just disrupt global trade. They might push up inflation. This is why traders, bankers and bosses are worrying that interest rates may not fall as fast as had been expected. Central banks might keep rates high to counter the inflationary impact of tariffs.

But broader concerns have motivated Financial Times columnist Rana Foroohar to write, “I am already dreading the downturn that must surely come at some point during Trump’s presidency.” She points out the shallow basis of the relatively robust economic growth the US economy has been experiencing compared to the rest of Western capitalism.

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According to the research firm TS Lombard, “This business cycle has always seemed ‘artificial’, and it has been powered by a series of temporary or one-off forces, such as pandemic reopening, fiscal stimulus, excess savings, revenge spending and more recently (higher) immigration and labour force participation.”

Foroohar also quotes an even more pessimistic assessment from Dennis Kelleher of Better Markets, a foundation critical of Wall Street. “I think we’ll get a two-year sugar high under Trump but down the road, we’re looking at a potentially catastrophic correction—something much worse than the global financial crisis of 2008. That’s because we have a financial system that is essentially extractive,” Kelleher writes. The counter-argument to this kind of critique is that financial markets are being driven upwards by a technological revolution, the advances in Artificial Intelligence (AI).

How much AI does raise productivity and profitability remains to be seen. Even if it does so significantly, this doesn’t mean it isn’t inflating a financial bubble.

As Aiden Reiter of another Financial Times column, Unhedged, points out, “Railroads and the internet changed everything, too, but their first manifestation was in bubbles that burst. The combination of the fact that AI is obviously an amazing, important thing, and the fact that we don’t really understand how it will work as an industry, makes it absolutely perfect bubble fuel.”

Indeed, while working on his masterpiece Capital, Karl Marx closely studied the 1866 financial crash. This represented the bursting of a wild speculative bubble in the shares of railway companies. Railways were a technical innovation that transformed but also destabilised the British and, indeed, global economy.

Then, capitalism was in the ascendant. Now it is much more fragile. Like a bull in a china shop, Trump in his second administration will destabilise it even further.