The Most Important Economic Question Right Now

Will he back down?

I’m late to the burgeoning literature reacting to Trump’s bigger-than-Smoot-Hawley tariffs, their misguided rationale and even worse mechanics—the reciprocal tariffs are proportional to countries’ goods surpluses with us, which as Paul K points out, is bananas (Dean B analogized it to your MD diagnosing you by dividing your height by your birthday). So far this AM, the plan is having a devastating impact on markets. The Dow is down over 1,500 points as I write this, which is almost twice its selloff when the housing market imploded, Lehman crashed, and Congress passed the TARP.

I’ve got a piece with my take on this very scary development—the Lib Day tariffs came in well above expectations—going up shortly at The Contrarian. I make many points that others have made—the sharp rise in costs to households and businesses, the large tax increase (by one measure, largest in over 50 years), the forecasts of income losses and recession. But I also stress one other point that goes against some of what I’ve read as I see this less as the beginning of the end of globalization as we know it and more as the U.S. partially pulling itself out of the global trading system.

Liberation Day, in other words, will liberate the United States from global supply chains while pushing everyone else closer together. As with a bully on the playground, the rest of the kids will recognize that the only way for them to have fun is to ignore him.

But what I want to discuss here and now is the highly impactful question of whether Trump will back off. I firmly believe that if he tweeted out some version of “Never mind!”—which would read more like, “My Liberation Day tariffs have accomplished their goals in one day! Victory! I can now revoke my exec order! On to the tax cuts! Everybody go buy $Trump coins to celebrate!”—the markets would do a 180 and business confidence would quickly recover.

That was absolutely the way of Trump 1. But it is not the way of Trump 2.

I was there when the Dow fell 800 points back when the housing bubble imploded and Lehman crashed in 2008. Congress quickly quickly reacted, and while we can debate what they came up with—the TARP program—my point is the political system quickly responded to this exogenous (outside forces) shock.

But this shock is not at all exogenous. The call is coming from inside the house. This is an own-goal kick the magnitude of which most of us have never seen. And Congress is virtually comatose, happy to completely cede control to the president.

Remember, in a point that risks getting lost in all of the uproar, the economy that Trump inherited was fine, characterized by solid GDP growth, robust jobs, low unemployment, rising real wages and improving consumer confidence.

This is all just a huge, deeply misguided vanity play based not on numbers or underlying economic conditions. In fact, it’s based on false numbers, like their incessant claim of a $200 billion dollar trade deficit with Canada (it was about $60 billion in ‘24, and mostly oil).

Which is why I fear the answer to the question I’ve posed is…no. To back down at this point would be to admit that he and his team have been operating from a place that is many miles away from reality. And such an admission is very likely a bridge too far for them.

So, stay tuned and fasten your seat belts low and tight around your waist. The turbulence is about to get a lot worse.