What Can Stop Trump plus other critical issues

Thoughts on how to stop a trade crisis turning into a financial crisis, Carney's bid for global leadership, the rise of American poligarchy, and why imperialism is making a return

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Next week I will be in Greece, firstly in Athens and then in Delphi for the wonderful Delphi Economic Forum, where I am looking forward to catching up with many old friends from across Europe for what is sure to be several days of insightful discussion. If any Wealth of Nations readers would like to meet up, please do get in touch!

In the meantime, I look forward to your feedback and comments.

In this newsletter:

• How to Avoid a Financial Crisis: What can stop Trump?

• Carney Shows the Way: The new leader of the free world?

• American Poligarchy: The economics of state capture

• Critical Resources: New and old imperialism

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1. What can stop Trump?

I wrote last week that America was approaching its Brexit moment. The question this weekend is whether it is experiencing its Liz Truss moment. At the time that the former British prime minister was blowing up the economy with her hare-brained assault on the country’s fiscal and institutional credibility, few could believe that such a thing could happen in a G7 country. Yet here we are again.

In my post on Thursday in the aftermath of Liberation Day, I noted that it was implausible that such a vast shock to the global economic order could be contained to the trading system and that it was bound to have ramifications for the financial system too. Since then, more than $6 trillion has been wiped off the value of US stocks, with the S&P having suffered its biggest single day falls since 2020 at the onset of the Covid pandemic.

Almost certainly the stock market would have fallen further if investors were not clinging to the hope that Trump’s tariffs are so ruinous to so many core American industries - automotives, apparel, retailers, tech - that they will not last long. But there was no hint of any retreat from Trump cabinet members today. Instead, Scott Bessent took to the airwaves to witter about how Americans should be reassured that the stock market infrastructure didn’t collapse with all the selling.

Before considering what might stop this turning into a wider financial crisis, it is worth thinking about some of the channels through which Trump’s trade shock and consequent economic shock could yet become a financial shock:

1. Margin calls: this is how financial crises usually begin. When the price of a financial asset falls rapidly, leveraged investors - those who have used borrowing money to fund their portfolios - face demands from their banks for more collateral. Those investors then have to sell other assets to raise the cash, thereby fuelling a downward spiral. There are already reports that following last week’s falls in the equity markets, hedge funds are facing steep margin calls. But there is no reason why this should remain limited to the stock market. The collapse in company valuations combined with the sudden risk of a US and global recession is a toxic combination for the debt markets. Trillions of dollars have flowed in recent years into opaque private credit markets, for example. The key point is that no one can be sure where the stress in the system will emerge. In the 2007/8 crisis, it was in obscure funds managed by European banks that invested in supposedly the most liquid assets. In the Liz Truss debacle, it was in the gilt market of all places. Does anyone really believe today’s regulators have a better sight of the risks?

2. Policy mistake: Patently, we have already had one policy mistake with the entire Liberation Day tariff imbroglio, which has predictably enough led to a trade war with China’s retaliatory imposition of 34 percent tax on US exports and further restrictions on exports of critical minerals. But what will be the next shoe to drop? Well-connected sources in Washington tell me that the administration, having already taxed trade, are preparing to tax capital flows too. The goal would be to charge the rest of the world for access to the US financial system, in line with ideas put forward in Stephen Miran’s notorious Mar-a-Lago Accord paper, as a way both to raise revenue but also to reduce the value of the dollar. The risk is that imposing taxes on foreign holdings of US financial assets lead to an exodus from US assets, accelerating sell-offs.

3. Dollar doubts: We already saw the dollar falling on the day after Liberation Day, the opposite of what one would have expected given that the tariffs are bound to be inflationary, at least in the short-term. The dollar stabilised on Friday and US Treasury yields fell, easing fears of a generalised loss of confidence in the dollar. But for how long? I have heard reports from credible sources that Peter Hegseth, Trump’s secretary of defence, when in Japan last week ostensibly to discuss America’s ongoing security guarantee, was pressurising the Japanese government to convert its short-term Treasury bonds into long-term bonds, again in line with the Miran Mar-a-Lago paper which proposed linking security to US financial interests. Meanwhile a remarkable story on Reuters a couple of weeks ago deserved wider attention. Extraordinarily, it reported that European Central Bank officials have been questioning whether they can still count on the US Federal Reserve to provide dollar funding in times of stress. These Fed swap lines are the financial equivalent of Nato’s Article 5: if you even have to question whether America will stand by its allies, then the world is already a more dangerous place. If these concerns become more widespread, the only rational response from the Japanese and Europeans would be to reduce their exposure to the US financial system and dollar as rapidly as possible.

4. Fed independence: what would surely send the markets into a tailspin would be any suggestion that the Federal Reserve was succumbing to political interference. Remember it was Liz Truss’s dismantling of the institutional guardrails around her mini-budget that initially triggered the market meltdown, rather than the increase in borrowing per se. Trump has never made any secret of his wish to replace Jay Powell, the current chairman who he appointed in 2018. He has also continued to pile pressure on the Fed to cut interest rates, including in a Truth Social post on Friday in response to the market sell-off. For the moment, Fed independence looks secure, with Powell insisting he will serve his full-term as chair which doesn’t end until early 2026. But with Trump assaulting other federal agencies that operate under Congressional authority, most notably the Federal Trade Commission, where he sacked two board members last month, investors are right to be anxious.

5. Capital Controls: The removal of capital controls across most of the world starting in the 1970s was one of the single most important catalysts for the era of hyper-globalisation. But now that Trump has blown up the global trading system and ushered in a new era of protectionism, could the era of free movement of capital be coming to an end too? The answer is almost certainly yes and Sir Paul Tucker, the former deputy governor of the Bank of England and author of Global Discord, which examines the roots of today’s geopolitical tensions, offers this excellent thought experiment to explain why. Imagine that Margaret Thatcher had decided not to take on the miners in 1984. In that case, British coal would have become steadily more expensive than Polish coal, leading British industry to import Polish coal instead. The government would then have had to impose tariffs on imported coal to protect British miners. But that would have led manufacturing to move to where coal is cheaper. So the government would have had to introduce capital controls to try to prevent the capital flight. Thus does protectionism tend to capital controls. Prepare to see this now play out globally.

So what can be done to prevent these worrying scenarios unfolding? Normally, the first line of defence to head off a crisis is the central bank. Yet given that the US economy is still grappling with sticky inflation, there is not much the Fed can do. It is currently forecast to make three more interest rate cuts this year, but given the inflationary impact of Trump’s tariffs, may be more inclined not to cut rates at all, to avoid undermining confidence in the dollar, despite Trump’s exhortations to boost the domestic economy through cheaper borrowing.

Then there is fiscal policy. The Trump administration could try to address US recession fears through a shift in fiscal strategy to try to counter the effects of the tariff tax hikes on households and businesses. But there is little sign of the administration moving in this direction, notes George Saravelos at Deutsche Bank: “The Republican leadership needs to convey a much greater sense of urgency in moving the fiscal package along and offsetting the fiscal tightening. Waiting till the summer - as they are communicating - might be too late.”

Of course, the only sure way to address a policy-induced crisis is to reverse the policy and remove the person responsible for it. That was how Britain exited the Liz Truss debacle. Unfortunately, in America’s presidential system, that is simply not an option. Not only is impeachment the only way to remove a president, but the constitutional order of succession currently consists entirely of MAGA loons. That does not instil one with much confidence that any of this will end well.

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2. Carney Shows the Way

Cometh the hour, cometh the man. It is not only Canadians who should count themselves fortunate that, through domestic political happenstance, Mark Carney became prime minister of Canada at exactly the moment that his skills and experience were needed to counter the extreme threat posed by Trump to global stability. The Rest of the West, and indeed the rest of the world, should be grateful for this fortuitous accident of timing.

It is not just that Carney, having served as Governor of two central banks, has a greater grasp of the issues at stake of any current global leader bar none. It is also that as Governor of the Bank of England during the Brexit years, he has direct experience of dealing with dangerously ignorant populists who have somehow managed to grab hold of the levers of power in a G7 country and accidentally trigger a monumental act of economic self-harm against itself.

Indeed, if Britain had not had someone of Carney’s global stature at the helm of the BOE at the time of Brexit and the years thereafter, then one can be quite certain that the damage to the UK economy would have been considerably worse. Carney’s presence sent a reassuring signal to global investors that Britain’s institutions were holding up. That is why the Tories twice had to beg Carney to extend his term despite his barely concealed contempt for the carousel of clowns that occupied high political office during that period.

Already Carney has delivered a masterclass in how to deal with Trump. As you would expect from a pugnacious former ice hockey player, it involves squaring up to the American bully. Carney’s robust response to Trump, including his historic warning to Canadians that their previously close relationship with America was over and his promise to retaliate against US tariffs, has already led the president to back down twice. First, when Trump dropped his disgraceful references to the Canadian prime minister as “Governor” and talk of making Canada the 51st state, and secondly, last week when Canada was exempted from “reciprocal tariffs”.

Now Carney in a new speech last week has offered to put himself at the head of a coalition of the willing among those other erstwhile US allies in the Rest of the West that have been hit by Trump’s deranged tariff policies. Other countries should take up his offer as a matter of urgency. We know that a coordinated response by Canadians, Europeans and like-minded countries in Asia is the right way to respond to Trump’s coercion because Trump himself has told us. In one of his middle of the night Truth Social emissions, he warned:

If the European Union works with Canada in order to do economic harm to the USA, large scale Tariffs, far larger than currently planned, will be placed on them both in order to protect the best friend that each of those two countries has ever had!

Of course Trump doesn’t want countries coordinating because that makes it much harder for him to bully them. He made similar threats of further extreme tariffs against China if it dared to retaliate, yet when Beijing imposed its own 34 percent reciprocal tariff on US imports last week, Trump limited himself to an all caps lock Truth Social complaint that “CHINA PLAYED IT WRONG, THEY PANICKED”. That was followed by another post the next day, reassuring Americans that China had been hit harder than the US and urging them to “HANG TOUGH”. It seems pretty clear that Trump blinked.

Besides, there is a more important reason why other countries should take up Carney’s offer to work together beyond simply coordinating retaliation. The over-riding objective must be to preserve as much as possible of the global rules-based trading system as possible to prevent it collapsing into chaos. It is not just that individual countries dealing with the Trump administration risk being saddled with ridiculously one-sided deals requiring concessions far beyond trade. It is that ludicrously distorted US trade barriers if they persist risk dangerous second and third round effects on trade flows that could damage everyone.

Hopefully other countries will recognise the danger and take up Carney’s offer. Yet one government seems determined to go its own way. Alarmingly, much of the British establishment appears to have succumbed to its customary Brexity, cod-Churchillian delusion about the special relationship and seems determined to prostrate itself before Trump in the expectation of a deal. Indeed, most abjectly, the government appears to have convinced itself that even the 10 percent tariff with which Britain has been hit is somehow tribute to its own negotiating prowess, even after Trump’s nonsensical tariff formula has been exposed to global ridicule and it became clear that Britain was treated no differently to anyone else.

The risk is that the British government, egged on by the the myopic advice of the right-wing media to whom it consistently shows baffling deference, becomes so fixated on securing a US trade deal that it loses sight of the wider picture. The overwhelming British national interest is not in seeking some minor mitigation from Trump’s tariffs on UK exports but on getting Trump to call off his entire ruinous trade war with the rest of the world. Although Britain is going to be tariffed at half the rate of the EU, most economists reckon that it faces twice the hit to growth - up to one percentage point of GDP.

What’s more, one can be sure that any deal the Trump administration does offer Britain will be designed to create maximum mischief by sowing division between Britain and the EU as it tries to reset its relationship. There are bound to be far greater economic advantages by reversing some of the Brexit damage through a much bolder renegotiation with the EU than is currently being contemplated given Sir Keir Starmer’s red lines than anything on offer from Trump. That should be the British government’s over-riding priority - as Carney would no doubt be pointing out robustly were he still in Britain.

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3. American Poligarchy

Of course, the economic consequences of Donald Trump are not just limited to his global agenda. There is also what he is doing to the domestic economy too. Thanks to a terrific essay for Foreign Affairs by Elizabeth David-Barrett, Professor of Governance and Integrity and Director of the Centre for the Study of Corruption at the University of Sussex, I now know that the correct term for the kind of system that Trump is seeking to establish in America is “poligarchy”:

In struggling democracies around the world, small cliques of politicians, business elites, and politicians with business interests—what political scientists call “poligarchs”—have warped the state to serve their interests. Together, these unholy alliances change rules, fire bureaucrats, silence critics, and then eat up the country’s resources. The politicians commandeer banks, rewrite regulations, and take control of procurement contracts. Their friends in the private sector, meanwhile, provide kickbacks, donations, and favorable media coverage.

There is a name for this process, says David-Barrett: state capture. It has occurred in Bangladesh, Hungary, South Africa, Sri Lanka, Turkey, and many other countries. To see how the Trump administration fits this description, consider what the president, with the help of Elon Musk at the Department for Government Efficiency have been up to since the inauguration:

In just over three months, Musk has purged agencies of staff, replaced fired workers with loyalists, and canceled existing public contracts—including for completed work. Trump, meanwhile, has fired inspectors general and removed the head of the Office of Government and Ethics. Together, the two men have taken resources that Congress had appropriated, abusing the power of the purse to redirect funds toward themselves and away from their perceived opponents. The Trump administration has ordered more Musk-made Starlink satellite dishes and put Musk’s companies, already some of the government’s biggest clients, in the running for billions more in contracts. At the same time, Trump has canceled government funding for universities and law firms that don’t support his agenda.

Trump’s own role model appears to be Hungary’s Viktor Orban - and the consequences of the Hungarian prime minister’s poligarchy for what was widely perceived to be the wealthiest country in Central Europe (“the happiest barrack in the socialist camp,” as it was known during the Cold War), and later the Central European country that foreign investors liked most, is grimly captured in this typically insightful piece for The Atlantic by Anne Applebaum:

Industrial production is falling year-over-year. Productivity is close to the lowest in the region. Unemployment is creeping upward. Despite the ruling party’s loud talk about traditional values, the population is shrinking. Perhaps that’s because young people don’t want to have children in a place where two-thirds of the citizens describe the national education system as “bad,” and where hospital departments are closing because so many doctors have moved abroad. Maybe talented people don’t want to stay in a country perceived as the most corrupt in the EU for three years in a row. Even the Index of Economic Freedom—which is published by the Heritage Foundation, the MAGA-affiliated think tank that produced Project 2025—puts Hungary at the bottom of the EU in its rankings of government integrity.

That this is where poligarchy leads should not come as a surprise. Economic decay is endemic to poligarchy, as David-Barrett explains:

In captured economies, the relationship between talent and success is severed. Skilled workers who lack the right political connections leave the country, and competent firms go under. Well-networked firms, meanwhile, grow fat without innovating or delivering quality products (or, sometimes, without delivering products at all). The country’s infrastructure deteriorates. Banks run out of money giving bad loans to favored businesses. The result is lower growth, fewer jobs, rising inequality, and high inflation.

Unfortunately, resisting and reversing state capture is an arduous process:

It requires that whistleblowers, journalists, and activists continuously speak up, with no immediate reward and at significant personal risk. Such persistence can pay off in the long run: civil society groups in Bangladesh, South Africa, and Sri Lanka eventually chased out corrupt politicians. But success often comes only after captors have crashed the economy by milking it for everything it’s worth. And by then, rebuilding is extremely difficult.

Like Applebaum, David-Barret’s analysis leads her to a bleak conclusion about where America could be heading if Trump and Musk succeed in their Orbanisation of the US economy:

They will not only distort U.S. markets. They will harm economies the world over. Since the United States is the planet’s largest economy and its main financial node, what happens there reverberates everywhere… The United States… is not just abandoning its historical role as the world’s clean-governance policeman. It is changing sides and becoming a mob boss. It is turning into a very different kind of role model.

Let’s hope that Musk’s imminent departure from the White House, along with the Republican Party’s poor showing in elections last week plus signs of anxiety in the Republican ranks in Congress amid escalating “Hands Off” anti-Trump and Musk demonstrations in every state are a sign that those guardrails in the American system are the start of a concerted fightback against poligarchy.

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4. Critical Minerals

I’ve written in a few posts recently about some of the likely implications of the new scramble for critical minerals, driven to new levels of intensity by Trump’s territorial ambitions and the demands he is imposing on Ukraine, for geopolitics and geoeconomics. Alongside Trump’s trade wars, this strikes me as one of the most consequential developments in the world at the moment since it has implications for global security and resilience, effectively opening the door to a return to de facto imperialism.

I’m hoping to write a more considered piece on this in due course, but in the meantime, I highly recommend these two podcast episodes. The first from the excellent Redefining Energy podcast is an interview with Richard Tite, Chief Investment Officer of TechMet, a critical minerals investment company that is partially owned by the U.S. Government and is very close to the Trump administration. Indeed, apart from giving an excellent overview of what is happening in critical mineral markets, it gives a fantastic insight into how the Trump administration is thinking about the sector in the context of its competition with China - so much so that a heated argument breaks out with one of the presenters, much of which was apparently cut from the recording!

The second is an episode of the Long Time in Finance podcast hosted by my old friend and colleague Jonathan Ford in which he interviews James Barr, who has written several excellent books on the Middle East. They discuss the competition for control of the Middle East’s resources by Britain, France and America at the turn of the last century, when resources for security deals were also very much on the agenda. It is a reminder that the scramble for resources has always been at the heart of geopolitical conflict. The question that bothers me as we enter this new era is where does Europe, lacking its own resources and barely able to defend itself, let alone provide security to anyone else, fit in?