Could Trump Really Break America?

Lasting damage has been done. But this is far from over.

It was my privilege yesterday to host Justin Wolfers on my weekly Let’s Do Lunch econ Q&A over at the Contrarian (which is the place to be on Tues at noon ET, btw). The majority of the questions, at least the ones not about Aussie politics, were some variation on the title of this post. Can Trump fire Powell? What happens if creditors just stop lending to the US? Will the dollar cease its reign as the globe’s top reserve currency?

These are all discrete questions, but they fall under the rubric of “can one deeply misguided, self-dealing, reckless person lastingly wound America?” I’ll tackle that over-arching question here. I’ll stay in my econ lane though I of course realize it is a bigger question than that, evoking important, existential questions regarding violating the rule of law and ignoring the courts.

First, the answer to the question as I framed it is flat out “no.” But before you breath a sigh of relief, my point is the one person can’t do this alone. He needs the support of fully compliant political supporters who refuse, out of their own self-interest and in full and clear violation of their pledges to “protect the Constitution,” to let him break the country. And, of course, both the country-breaker and his political lackies need an electorate to raise them to power (insert a raging rant about the imbalances and distortions generated by the electoral college).

At this level, the question becomes one of checks and balances, of disciplinary forces. If the Congressional majority won’t stop Trump, who can? Two candidates are the markets and the courts.

The latter part of the question has been cast in terms of “Constitutional crisis:” wherein the administration ignores court orders. This crisis appears to be unfolding in real time. Did you hear Stephan Miller claim that the SCOTUS supported, 9-0, the administration’s position on Kilmar Abrego Garcia? Chilling.

The markets, however, have already made Trump blink and there’s some evidence—far too soon to tell—that Trump 2 may be closer to Trump 1 on this point then initially appeared to be the case, meaning he pulls back, blinks, and folds in the face of big market selloffs. He grouses about Powell, the Dow tanks 1,000 points; the next day he reverses and the Dow makes up its losses. Dow futures are up over 700 points this morning on rumors of a pull-back in the China trade war.

Because the administration creates its own reality, they can cast their folding as victory. Should Trump keep blinking, I fully expect to hear “We won the trade war!” which, in English, means “the self-inflicted damage from the trade war passed my pain point.”

This is also chilling, in two ways. First, it shifts the question above from “can Trump break America,”—the answer to that is not by himself, but with the support he has from his party: yes, he could—to “would Trump break America?” Second, to conclude the answer is “no” to that question requires one to focus on today, when they’re sending conciliatory signals, and not on Friday, or possibly tomorrow, when they’re back in breaking-mode.

And this is the punchline. Yes, it’s possible that, at least on the economy, Trump will fold and markets will at least partially recover (“partial” is important, as I’ll explain). He’ll back off on firing Powell—as I wrote the other day, he may well just be setting the Fed chair up to be the fall guy should Trump’s economy-wrecking project reach fruition—we’ll settle into some considerably worse equilibrium on trade with an effective tariff rate that’s 2x or 3x times the pre-Trump 2 rate (of 2-3%) instead of one that’s 10x higher.

But, and Justin leaned into this in a way I found resonant, I fear that real, lasting economic damage has already been done. Trading partners know they can’t trust our government to keep any deal we make. Such dynamics raise the risk premium on U.S. interest rates, worsening our financial outlook, and given a fiscal path that’s about to get a lot worse, this causes long-term fiscal damage. If even just the 10% base tariff sticks, it will raise prices on a consumer base that’s already stressed by price levels, and it’s likely that China will face a tariff rate multiples of that base. You can’t generate a serious discussion about firing the Fed chair without lastingly damaging central bank independence.

Trump can say “just kidding!” all day; Bessent and Lutnick can backfill with reams of nonsense about how it was all a grand strategy. And there’s a decent chance, based on the fact that it’s hard to generate a shock of the magnitude to throw this $30 trillion economy, one that was in good shape when they inherited it, into recession, that if they soon back down, forecasts will improve and recession probabilities will fall.

But real, lasting damage has already been down, and it will take years, if not generations, to repair it.

How will we know if this analysis is correct? Go back to the questions from yesterday’s lunch session. Folks were asking about interest rates, the value of the dollar, our save-haven status, the depth of the “sell America trade” (I hate the term, but it’s what market folks are calling it). Even if stock values partially recover, these metrics will reflect the depth of the damage, even in the event that they stop with the self-inflicting wounds. (And, again, to be very clear, they may well not do so; my point is that there are signs they might.)

Here’s how one guy put it in the WSJ yesterday, talking about Monday’s market swoon:

“It’s the hallmark of the ‘no confidence’ trade,” said Scott Ladner, chief investment officer at Horizon Investments. The Charlotte-based firm trimmed its U.S. equity position several weeks ago to favor more international stocks. “It’s impossible to commit capital to an economy that is unstable and unknowable because of policy structure.”

So, watch the trend—not the daily bips/bops—in the dollar, in interest rates on longer term Treasuries. As in the above quote, see if firms begin to feel more comfortable investing capital in new projects (this is the “non-residential fixed investment” line in the GDP reports). Watch the trade flows. See if China moves their soy bean purchases from the U.S. to Brazil, as I believe they will. Similarly, watch to see if new trading blocks that leave us out begin to emerge, as I again suspect they will. Very importantly, watch inflationary expectations to see if, as has been the historical case, diminished Fed independence shows up as a de-anchoring and increase in this critical variable.

Finally, when I say Trump can’t break America by himself, I’m not just talking about the unfathomably irresponsible Republican party. I’m also thinking about the rest of us. If you’re not doing whatever you can to fight back, then stop whatever it is you are doing and step up. My wife has become a part-time protester; our basement is full of clever, colorful signs. I’m dialing back the “semi” in my semi-retirement (age 69) to make whatever noise I can.

If there ever was a “if-you’re-not-part-of-the-solution-you’re-part-of-the-problem” moment, this is it.