Yesterday’s lunchtime walk might have been punctuated by anxiety over your 401(k). President Trump’s record-high tariffs had sent shockwaves through the markets, leaving many wondering about the meaning of ‘stagflation’ – a terrifying combination of high unemployment and inflation. Then, midday brought a surprising twist: headlines announced Trump had ‘paused’ or ‘reversed’ the tariffs, except for those impacting China, which remained at a staggering 125%. This left many with more questions than answers. Was the economy suddenly stable? Was our financial security safe? Had predictability vanished entirely?
To navigate this economic volatility, we turn to Justin Wolfers, a University of Michigan economist, whose insights shed light on the events of that tumultuous week. In a recent Radio Atlantic episode, Wolfers and host Hanna Rosin dissected the situation, providing a crucial perspective on the situation.
The conversation began with a shared bewilderment: the sheer unreal nature of the week’s events. Wolfers humorously likened the president’s actions to the confused ramblings of someone who hadn’t quite mastered their college economics course. Rosin highlighted the double whammy of Wednesday: the initial panic over investors rapidly selling off U.S. bonds (the supposed ‘safe haven’), followed by Trump’s tariff announcement and the subsequent stock market surge.
Wolfers explained that Trump’s actions were reminiscent of his first-term handling of NAFTA. He initially tore up the agreement, claiming the need for a ‘better deal,’ only to eventually reinstate virtually the same terms, declaring a victory. This pattern repeated itself with the tariffs: Trump initiated a trade war, then claimed everyone wanted to negotiate, ultimately restoring the situation to where it was before the chaos began. He made it clear that, despite the headlines, the situation was far from resolved. The American average tariff rate remained ten times higher than in January, comparable to the disastrous Smoot-Hawley tariffs of the Great Depression.
The stock market’s reaction, Wolfers suggested, was not solely due to the tariff adjustments, but also to a shift in perception. The initial fear of a deeply incompetent administration willing to risk a recession had been partially alleviated. The president’s actions, though still reckless, indicated a level of responsiveness to market pressures.
Wolfers then delved into the significance of the bond market, explaining that rising bond yields (interest rates) reflected a loss of confidence in the U.S. economy, both domestically and internationally. This increase in interest rates has real-world consequences, affecting government spending on vital services. The volatility created by Trump’s actions had made America a less predictable and therefore, less attractive investment.
Despite the somewhat improved situation, the overall outlook remained precarious. While the ‘hard data’ (employment figures, spending) showed a fundamentally strong economy, the ‘soft data’ (consumer confidence, investment plans) indicated a looming recession. The risk of stagflation – a dreaded combination of high unemployment and high inflation – loomed large.
Wolfers cautioned against trying to ‘time the market,’ emphasizing that the current level of risk is already factored into market prices. He advised those lacking a high-risk tolerance to consider safer, lower-return investments. He concluded by reiterating the severity of the situation, highlighting that the downward trend in the stock market reflects a lack of confidence in the future of the American economy – a sentiment with far-reaching consequences for everyone.
Ultimately, while things might seem slightly better than the previous day, the crisis was far from over. The economic uncertainty and the President’s unpredictable actions continue to pose a significant threat to the US economy.
