Trump 2.0

Since Donald Trump moved back into the White House, hardly a day has gone by without at least one or two more countries being hit by (higher) tariffs or, at the very least, by the threat of imposing tariffs as a consequence of their unfair trading tactics or other unjust behaviour (Trump’s words, not mine).

And every time a new tariff has been declared, a chorus of Wall Street economists have delivered a song and dance about how destructive this would be to the U.S. economy; how much more damage those tariffs would do at home when compared to all those unfair countries that ‘took advantage’ of the Americans.

I have read dozens of research papers on tariffs in recent weeks, and not one – not one – has made even the vaguest attempt to portray tariffs as a positive for anybody. In the chart above (Exhibit 1), the research team at Goldman Sachs present their latest estimate as to the expected impact from tariffs on US GDP growth. As you can see, they expect 1Q26 to be the low point growth-wise with an estimated impact on GDP growth of -0.8 percentage points.

I would never argue that Trump knows more about the economy than most (he is happy to promote that view himself) but, likewise, I refuse to believe that his mind is so impregnatable that he cannot see the downside of higher tariffs.

Hence the question: Is it possible that Trump is deliberately seeking an early economic slowdown, possibly even a recession (which he will then blame Biden for), only to set up the conditions for the Federal Reserve to make several cuts? Such a sequence of events would allow Trump to argue, when going into the midterm elections in late 2026, that he has brought living costs down as promised. That will, in the eyes of the MAGA cult, make him look like a hero.

When this line of thinking was first presented to me, I dismissed it. “No, it is too far out”, I said; however, as Trump continued his vendetta in spite of all the arguments against it, the idea started to grow in the back of my head and, today, the answer to the question is no longer an emphatic “NO”. Having said that, realistically, we’ll probably never get to the bottom of this, as it is not in Trump’s interest for it ever to be revealed.

One last point before moving on. The following is a theory, not a fact. By arguing that Trump is possibly engineering an economic slowdown, I will most likely upset some readers, but there is no reason to be upset. I don’t really know whether it is true or not, but the evidence in favour is getting stronger by the day. And it is a very valid question to ask whether it is pointed at Donald Trump or any other political leader.

The only other example

Younger readers may think that something like this has never happened before, but that is not the case. In August 1979, Paul Volcker took over the chairmanship of the Federal Reserve Bank. At the time, inflation was out of control everywhere. In the U.S., it peaked at 14.8% in March 1980, and Volcker responded by engineering a deep recession to kill the monster. By June 1981, the Fed funds rate reached 20%, and Volcker was widely ridiculed. Two years later, when the rate of inflation in the U.S. had settled down to less than 3%, nobody laughed at him anymore.

To this day, Volcker is a true hero to most economists. I lived in Copenhagen at the time and had just bought my first flat when he took charge. The mortgage rate in Denmark in the spring of 1979 was no less than 18.5%, and Volcker is the reason I survived the first experience as a property owner.

You may argue that one cannot compare Trump’s attempt to engineer a slowdown (if true) with Volcker’s. Whilst correct that the underlying motives are/were vastly different, both approached it with a declared desire to improve living conditions for Americans. To that extent, the two examples are very comparable.

What motivates Trump?

It sounds almost crazy to suggest that a sitting president, who relies on popularity to come safely through the midterm elections, would deliberately engineer a slowdown in 2025. Having said that, I have identified (at least) four reasons why this may actually make sense:

1. A meaningful slowdown would virtually assure a number of rate cuts from the Federal Reserve Bank later this year and/or early next. How many would obviously depend on the magnitude of the slowdown, but it is no coincidence that (one of) Trump’s nickname(s) is the King of Debt. He has built his entire career on debt and is desperate for interest rates to return to zero.

2. A slowdown now followed by several rate cuts would set the U.S. economy up nicely for a recovery in 2H26, which would be perfect timing in the context of the midterm elections.

3. Trump continues to blame Biden for anything that doesn’t go to plan. A recession in the next few months would be easy to blame on Biden and would make the Democrats look rather foolish (again).

4. Trump is an attention-seeker. He loves being in the headlines almost irrespective of the price (a classic narcissistic behaviour according to a certified phycologist friend-of-mine). When Trump saw how much attention his tariff talks attracted, it was like pouring petrol on the bonfire.

The simple fact is that Trump remains convinced higher tariffs will Make America Great Again. I, and most other economists, do not share that view, but none of the arguments against tariffs have had any effect so far. A very simple example: Trump thinks (he has said that more than once) that import tariffs are paid by the exporter and is therefore a tax on all those ‘cheating’ countries but that is not true. The import tariff is paid by the importer, and data from 2017-20 (Trump’s first reign) has shown that, in almost all cases, the importer will pass the cost to consumers, i.e. American consumers pick up the cost. Make America Great Again?

One could argue that, up to this point, the tariff talks have been mostly a negotiation tactic, and that we’ll end up with something far less severe. However, if you compare Trump 2.0 to Trump 1.0, that argument doesn’t stack up. He loves tariffs.

The end story

How is it all going to end? Until recently, the probability of a recession in the U.S. this year was considered remote. Most Wall Street economists estimated the risk to be no more than 10-15%. Over the last couple of weeks, that number has risen dramatically. Take for example this revised estimate from J.P. Morgan. As you can see, it is now 40%, and many other Wall Street firms have done something similar.

J.P. Morgan’s recession estimate was admittedly higher than most, as we entered 2025 (it came from 30%), but the trend across Wall Street is very clear. The recession risk is rising, and one way that increased risk has been expressed is through the performance of Russell 2000, an equity index deemed far more sensitive to economic downdrafts than S&P 500 (Exhibit 2).

As you can see, Russell 2000 has lost about -16% of its value since it peaked in late November. At -20%, the correction turns into a bear market. By comparison, S&P 500 is only down -6.7% over the same time frame, which tells me that investors have begun to prepare for a recession in the U.S. later this year.

Final few words

If it does indeed end with recession, Trump will most likely get what he really wants, i.e., lower interest rates, but he will also find it a lot harder to persuade an increasingly sceptical electorate to vote for the Republicans, come November 2026.

And, if you think I am being overly concerned, that the US economy is doing just fine, I suggest you take a long look at Exhibit 3 below. Why do you think the yield on 10-year US Treasures has dropped from 4.8% to 4.2% since mid-January?

Niels

1 April 2025‍