Donald Trump’s policies as US president, set against China’s manufacturing competitiveness, could trigger a liquidity crisis for many countries squeezed in between.
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This is the risk of rising US interest rates due to the president-elect’s threatened tariffs, his promise to deport undocumented immigrants and a rising US fiscal deficit as a result of his proposed tax cuts.
The euro is at greatest risk but the Japanese yen and Indian rupee are also in the firing line. A US debt crisis is further down the road when there are no significant economies left to bleed.
The bond market is already adjusting to the Trump effect. Inflation never really went away, despite the US Federal Reserve’s positive outlook just before the presidential election, which in any case failed to help the Democrats. If anything, US inflation is becoming entrenched.
Two years after the Covid-19 pandemic, US companies and government agencies are still having a hard time getting staff to return to work in the office. There is very little chance of productivity bringing down inflation.
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Two of Trump’s three major policy thrusts – more import tariffs and mass deportations – are clearly inflationary. Even if the tariffs end up boosting domestic production, it would take a long time. Further, there is no evidence from Trump’s first trade war to support the possibility of a supply response within the United States.