Jan 27th, 2025: Andrew Hilton’s scavenging in the slagheap/midden of history
(at least, the history of the last week)
As any reader knows, I was never particularly anti-Trump. I believed that (perhaps inadvertently, or through Steve Bannon) he had tapped into a legitimate vein of grievance among those who had been ignored by both economic globalists and (to resuscitate Agnew’s phrase) ‘pointy-headed intellectuals’. That is not to say that I liked his style; indeed, it is loathsome. Trump is a grifter – and at no time was that more evident than last week, when he (and Melania) launched intrinsically worthless ‘meme-coins’ to celebrate his inauguration, with an initial price of $15 – which quickly rose to $75-plus, before falling back. There are (potentially) 200 million of these – which means Trump is soaking his far from affluent MAGA base for what would be a billion-dollar windfall. Never has an American President shown greed on anything like this scale. Even so, I think it makes sense to separate substance from style, though I accept that many people - including my son, whose FutureProof blog, is a liberal cri de coeur – would disagree.
The fundamental problem is that there is huge tension within Trumpism: is it ‘for the wealthy or for the working class’? Most liberal critics would opt for the former – pointing to the influence of plutocrats like Musk and Howard Lutnick, and the row over H1-B visas. But it is as well to remember that the first EOs that Trump has implemented focused on deportation of illegal aliens – something that was waaay down the list of priorities for his wealthy backers, but that is pretty much non-negotiable for the Bannonites. That, of course, is the fundamental unknown: Bannon or Musk? (After all, Musk had been planning to build a Tesla plant in Mexico.) Scott Bessent or Peter Navarro? Lutnick or Kennedy? Schmoozer or disrupter? New right or old right? We’ll see – but it may take a year or so for one side to emerge as the clear victor. And, in the meantime, who knows what will happen in the markets (or in the wider world) to throw a set of spanners into the works. (I even had a friend calling me today from NY at 4AM, his time, to warn me that US equities are poised for carnage as a result of the revelation that China’s DeepSeek start-up is going to do to OpenAI and Google what Toyota and Nissan did to Detroit in the 60s. That’s going to test Trump’s commitment to his tech-bro friends.)
OK; so what has Trump done? That is not so easy to say – largely because a lot of his hyper-activity (extraordinarily impressive in someone of his/my age) has been essentially either performative or an attempt to see just how far he can push executive authority without precipitating a Congressional backlash. And also because, as he well knows, the courts are going to try to block him on issues like his revocation of birthright citizenship and probably on removing employment protections from Federal workers (particularly close to MAGA hearts). But he has certainly changed the terms of the debate over illegal immigration – and his uncompromising line with Colombia’s Gustavo Petro will resonate more widely in the region. It would be crazy to think that 11 million illegals will be shipped out, but it is going to be a lot harder (and more expensive) to get lawns cut and pools maintained for quite a while. That’s a significant win for blue collar MAGAs – though Big Tech is more concerned about immigrants from Asia, and that is still to be resolved. Trump has also, quite genuinely, transformed the debate over DEI – and on ‘progressivism’ more widely. Social conservative are gingerly emerging into the daylight, and views that would have been anathema a year ago are now almost mainstream – eg a woman is a woman, a man is a man etc. I don’t for a moment think a Federal ban on abortion is on the cards (Trump is not that stupid), but more initiatives at a state and local level seem inevitable.
He has also legitimised a degree of environmental scepticism. I want to be careful about this, since Trump is not simply a climate change denier. What he appears to be is someone who doesn’t believe there is a cat’s chance in Hell of meeting climate commitments that the Biden Administration made (I agree) – and that, therefore, he is not going to cripple the US economy by trying to do something that is impossible at a time when China and India (its biggest present and future competitors, and the other two big polluters) are quite clearly manipulating the system to their economic advantage. There is, at least, a degree of honesty about pulling out of Paris that our politicians should recognize – though I acknowledge that, so far, Trump has not suggested any alternative technology-based approach to climate change. Perhaps he is waiting for Musk to come up with something.
Whatever, boosting domestic oil and gas production (‘drill baby, drill’ – especially on Federal land and offshore) is also just about the only step that he can take, as President, that will actually impact the cost of living (as opposed to the rate of inflation). And, remember, he pledged repeatedly to bring the cost of living down.
That brings up a couple of other issues.
The first is Trump’s relationship with the monetary authorities. We will find out this week whether the Fed is willing to risk the wrath of the White House by ‘pausing’ its cycle of interest rate cuts. The current consensus is that, following slightly stronger than expected economic releases over the last month or so, the FOMC will sit on its hands, at least this week – and the consensus is usually right. But if Powell et al are looking for an excuse to keep the White House happy by trimming rates another quarter-point (which might be a politically shrewd move), they only have to look at the latest Michigan sentiment index (which fell sharply this month, from 74 to 71), or the composite S&P PMI (which fell last month from 55.4 to 52.4), or the KC Fed’s manufacturing index, or the Conference Board’s index of leading economic indicators… There is plenty of evidence out there that the US economy, though clearly in a better place than the Eurozone or the UK (or even China), would respond positively to another rate cut. (And, of course, the ECB is bound to cut.) I think it is significant that the dollar is down almost 1% on a trade-weighted basis so far this year (and 1.7% last week) – which suggests, at least to me, that FX traders still expect more rate cuts ahead.
I am more sceptical about the likely success of Trump’s efforts to rein in government, to ‘drain the swamp’, even though there is broad support in Middle America for ‘doing something’. (The fact that the richest counties in the country are all around DC is, I think, the ultimate insult to blue-collar Americans.) It is partly the influence of the courts and the public sector unions which will defeat him. But it is also partly the fact that so many people (and their dependents) suck at the Federal teat; they don’t realise that they, too, are beneficiaries – but they will if those benefits are pulled. Plus, as I have said before, I don’t have high hopes for DoGE – except, possibly, in the area of government procurement (where, admittedly, there is much that could be done). Musk has already squeezed out Vivek Ramaswamy (who is off back to Ohio, apparently to run for Governor), and his own commitment is a tad suspect – not least because he lost his battle with Susie Wiles for an office in the White House proper (he is in the Old Executive Office Building, right next door). But also because he has been deliberately picking fights with other Trump advisers, notably OpenAI’s Sam Altman and Marc Andreesen. Irwin Stelzer (right on most things) predicts he won’t last a week; I am less pessimistic – but I still figure he’ll be out within six months.
The big unresolved economic issue continues to be tariffs. In particular, are they an end in themselves (as Trump has implied when he says he ‘loves’ them), or just a threat? So far, the evidence is mixed. Trump has formally announced plans for a shiny new External Revenue Service to collect tariffs (which currently average around 2% on US imports) and all other revenues from abroad – but that’s it. There are stories (which I imagine emanate from Peter Navarro) that he is going to hit Mexico and Canada with 25% across-the-board tariffs come February 1 - and he certainly scared Colombia with the threat of denying its exports tariff-free entry to the US. But he hasn’t actually done anything yet.
That said, I do think it very unlikely that we will dodge this particular bullet altogether; there will be tariffs – probably not on Canada, but almost certainly on a range of imports from China (and probably Mexico and Europe). They will be fairly selective, designed to encourage firms (US and foreign) to relocate production (and/or their tax domicile) to the US – where (as Trump told Davos participants, by video, last week) he will guarantee a low tax/low regulation business-friendly environment. I suppose the question for us in the UK is whether we can sufficiently distance ourselves from our Continental friends that we can get a better deal than he will offer the EU. Any thought of a ‘special relationship’ is clearly out the window (as it has been for many years, no matter whether or not Churchill’s bust sits on the Resolute desk), but our trade with the US is much closer to balance than is that of the Eurozone – and that could count (though whether Lord Peter is the person to put the message across is doubtful).
Which brings me to Trump’s foreign policy…
I am still (relatively) optimistic about a settlement in Ukraine – which Trump, quite rightly, called ‘a ridiculous war’ last week. It is extremely ridiculous, as well as bloody – and the broad outlines of a settlement, which could be seen as a win/win for both sides, are clear. Unfortunately, that’s been true for at least 18 months, and we have made no progress. Still, I do hope that Team Trump is less committed than Biden was to the fantasy that the US can bleed Russia to the last Ukrainian, while completely ignoring Moscow’s threats to use battlefield nukes if defeat is in any way imminent – which seems to have been the White House’s policy to date. Almost anything is better than that. As for the Middle East, however, I am deeply pessimistic.
As some of you might remember, my fear (months ago) was that Trump would see a settlement in Gaza primarily as a real estate deal – with his odious son-in-law openly drooling at the prospect of building luxury hotels along the Gaza corniche. His latest (allegedly, throw-away) comment that the best thing for Gaza would be if its 1.5 million surviving inhabitants were evacuated to Egypt and Jordan – and then spread throughout the Middle East – suggests that is what his team really thinks. That is no surprise to me, given that his chief Middle East envoy, Steve Witkoff, is another real estate developer with zero foreign policy experience. (What is super-scary is that he has just been given responsibility for the ‘Iran portfolio’ as well.) It is also bound to be supported by Netanyahu and by the far-right parties that still underpin him, all of whom believe Gaza and the West Bank are both integral parts of ‘Greater Israel’. And it will be backed by members of his own Administration – including his nominee for UN Ambassador, Elise Stefanik, who told a Senate Committee last week that she believes Israel has a ‘Biblical’ right to all the land between the Mediterranean and the Jordan, and Mike Huckabee, his Ambassador to Israel, who believes exactly the same.
So, stuff the Palestinians – and (since Trump doesn’t like picking up the tab) let’s try to sucker MbS into having Saudi Arabia pay to give them a new home (or a new tent) in whatever god-forsaken place we send them to.
Beyond Russia, Ukraine and Israel, we still know very little about Trump’s foreign policy. We know he pulled out of the WHO – which, I feel, was largely performative, and could be reversed with a change of leadership at the top. We also know that he has ‘paused’ US development assistance, which would be a very big deal for a lot of smaller countries if it turned into a longer term ban. But I surmise that this, too, is largely performative; after all, he has his man (Ajay Banga) at the World Bank. He just wants to make damn sure that countries that are currently weighing up the pros and cons of closer relations with either China or the US know what they risk if they opt for Beijing. As for China itself, I read (yet again) that it is building up its naval and air forces specifically for an invasion of Taiwan. I also read that the US (alone and as part of AUKUS) is reinforcing its submarine capability in the Taiwan Strait. Even to think about it makes me shiver. That would be ten times more dangerous than anything we have witnessed in Ukraine – and that has been bad enough.
A couple of other things…
First, Davos. No surprise that I remain deeply sceptical about the WEF – which, this year, seems to have been the last redoubt of the globalists. Even though Trump stole the show (albeit by videolink), I didn’t get a sense that those who trudged through the snow have yet got the message. That said, I was intrigued by the ‘Global Risks Report’, which the Forum released last week. Its ‘top 10’ short-term threats to the kind of institutional order it advocates were:
‘state-based’ conflict, ie war;
extreme weather events;
‘geo-economic confrontation’;
‘misinformation and disinformation’;
‘societal polarization’;
an economic downturn;
‘critical change to Earth systems’ (whatever that means;
unemployment;
‘erosion of human rights’; and, last but (perhaps) not least,
inequality.
No mention there of AI, even though that was supposed to be the main theme of this year’s event. My initial thought was to wonder how much Klaus Schwab and his CEO, Borge Brende, paid for this. But that might be unfair. My second thought was that most of the private sector participants would probably be far more interested in the prospect of an equity melt-down, a collapse of the dollar and/or a new Smoot-Hawley trade war. Still, I wasn’t there – but I’d love to hear from those who were.
Finally, this will be a huge week for us economists (even ‘soft’ ones like me). On top of a slew of central bank meetings (the FOMC, the ECB, the BoC and even the Brazilian CB), we will have key inflation data from the US (and Japan), EU confidence data, and China’s PMIs. I would hope that the economic outlook will be a bit clearer by this time next week – though if my NY trader friend is right, we’ll all be worrying about an equity sell-off (and what Trump will do about it).
Thanks for reading,
Andrew Hilton
Andrew@economic-evaluation.com