As a perfect storm in the US brews, Australia is not immune

The US President has moved fast and broken things, albeit some of which were fragile to begin with. Now the fortunes of many – countries, private investors, savers and retirees – are at risk of sinking.

US President Donald Trump arrives to speak at an AI summit in Washington. Picture: Julia Demaree Nikhinson / AP Photo

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It has been a fevered six months since Donald J. Trump took the oath of office at the Capitol in Washington. Like a true Meta bro, the US President (jersey numbers 45 and 47) has moved fast and broken things, albeit some of which were fragile to begin with. Trust in financial systems. Rules-based orders. Global agreements. Decorum. His policy frenzy eclipses whatever writer Philip Roth might have had in mind when he conceived the notion of the “indigenous American berserk”.

Shape-shifting tariffs may be an act of self-harm but they hurt global trade and growth. After being smacked with a 25 per cent tariff, Tokyo this week did a deal with the US. Japan opened up its economy to American rice and cars, and the impost on Japanese imports was cut to 15 per cent.

The Albanese government, too, is angling for relief and on Thursday announced the removal of a ban on imported US beef from cattle reared in Canada and Mexico. Washington claimed the win gleefully; Labor has other fish to fry.

Trump’s fiscal foolhardiness taunts creditors and will exact a huge debt-servicing burden on young Americans. The independent Congressional Budget Office this week reported the One Big Beautiful Bill Act’s tax cuts and spending would add $US3.4 trillion ($5.2 trillion) to the US deficit across 10 years.

The White House also is gunning for US Federal Reserve chairman Jerome Powell; the savagery, recklessness and seeming randomness is sending a chill through financial markets and the ranks of the world’s central bankers. What’s motivating it? “I can’t speak for what goes through Mr Trump’s mind,” Reserve Bank governor Michele Bullock says. “I’m not sure anyone can.”

RBA Governor Michele Bullock at the Anika Foundation lunch in Sydney. Picture: Gaye Gerard / NewsWire

Trump’s attention-seeking, narcissism and lust for dominance of the attention economy are a given. While many hope things will settle down at some point, it’s Trump’s ease of using power that has astonished DC’s political class.

According to the US Federal Register, Trump has signed 171 executive orders in his second term; he signed 220 of these presidential actions (which direct federal agencies on how to act) during the four years of his first administration. In total (391), that’s already more than two-term presidents Barack Obama (277), George W. Bush (291) and Bill Clinton (364) and Ronald Reagan (381).

Trump’s orders are all over the shop, from TikTok enforcement to nukes, but their titles pop with telltale MAGA branding: “restoring”, “unleashing”, “empowering”, “fighting” and “protecting”.

April’s Liberation Day tariffs rocked financial markets for a time, as well as central banks. Then Trump wobbled, extending timelines by 90 days for implementation. A British financial pundit alleged “Trump Always Chickens Out”. TACO stuck as a trading strategy for the money movers.

Westpac chief economist Luci Ellis wonders whether a better framing would be Trump Ambit Claims Often, “a description of a negotiating strategy rather than the suggestion of a character flaw”.

Westpac chief economist Luci Ellis. Picture: Jane Dempster / The Australian

In a note, Ellis says the tariffs are as much about showing the world who is boss – or, as the White House itself put it, “Keeping America in the Driver’s Seat” – as about economic policy goals.

“The tariffs are still an act of inflationary self-harm, so the default presumption should be that re-escalations are negotiating tactics, not the likely end state,” she says.

The former RBA assistant governor believes “we are more in the realm of psychology than economics and must proceed accordingly”. “A lot will depend on other governments striking the right balance between belligerence and obsequiousness,” she says.

This week the International Monetary Fund warned in its annual External Sector Report that tariffs were not the answer to fixing America’s external accounts. The problem was homegrown: Washington’s loose budgets, its billowing deficits and debt.

In the short term, the IMF report says, “escalation of the trade war would have significant macroeconomic effects”, with reduced global demand and further inflationary pressures through rising import prices. Further geopolitical tensions also could trigger shifts in the international monetary system, which in turn could undermine financial stability.

Investors also may lose confidence in the US dollar, which the. IMF says has been the backbone of the global system over the past 80 years, “despite momentous changes such as the collapse of the Bretton Woods system in 1973, the end of the Cold War in 1991 and the creation of the euro in 1999”.

That dominance means the US has been able to borrow more and at a lower cost and extract big returns (which the IMF calls “exorbitant privilege”); but it also has exposed the nation to risk, with the US offering insurance against shocks to the rest of the world (or an “exorbitant duty”). The privilege has softened and investors are reassessing their dollar exposure.

IMF chief economist Pierre-Olivier Gourinchas says tariffs will reduce savings and investment in the tariffing country, and neither reduces US excessive external deficits or China’s super-sized surpluses. “A major risk for the global economy is that countries will instead respond to rising imbalances by further raising trade barriers, leading to increased geoeconomic fragmentation,” Gourinchas says. “And while the impact on global imbalances will remain limited, the harm to the global economy will be long-lasting.”

When the RBA kept the cash rate steady in July, it noted the probability of “severe downside scenarios” for our growth and employment that staff had war-gamed looked to have declined. Bond and equity markets had settled, signalling “the most extreme outcomes for US tariffs were likely to be avoided”.

Still, the July board minutes noted “the future state of US trade and other policies was unpredictable and geopolitical tensions remained acute”, and three of nine board members voted for a rate cut because of subdued local growth and a likely slowing abroad.

More worrying for financial stability is the MAGA assault on Powell. Trump called the world’s most powerful central banker a “numbskull” and “Too Late”, for failing to cut the federal funds rate; it is now 4.25 to 4.5 per cent, where it has been since December.

Federal Reserve Board Chairman Jerome Powell. Picture: Mark Schiefelbein / AP Photo

After the Federal Open Market Committee held rates in June, Powell said near-term measures of inflation expectations had moved up in recent months and identified tariffs as the “driving factor”. He warned increases in tariffs were “likely to push up prices and weigh on economic activity”.

Trump insists the Fed’s policy rate should be “at least” three percentage points lower. Last week he canvassed congressional Republicans about whether to fire Powell.

The Wall Street Journal reported US Treasury Secretary Scott Bessent advised his boss not to sack Powell. Bessent now declares the entire monetary institution should be formally examined.

“There was fearmongering over tariffs and thus far we have seen very little if any inflation,” he told CNBC. “We have had great inflation numbers, so I think this idea of them not being able to break out of a certain mindset – you know, all these PhDs over there, I don’t know what they do.”

It was yet another attack on experts. Jason Furman, a former chief economic adviser to Obama, argues firing Powell “would unleash a massive amount of uncertainty, litigation and market turmoil”. The Harvard professor says when central banks are protected from political interference, they deliver lower and more stable inflation without job losses.

“Fears about the Fed’s independence would send markets into a tizzy with more risk and higher expected inflation almost certainly driving up longer-term interest rates,” Furman wrote last week in The New York Times.

On Thursday, Bullock voiced support for Powell. “You would have to say that the Fed is doing what it is supposed to be doing, which is focusing on the economy and employment,” the RBA chief told an Anika Foundation lunch. “They are not getting drawn into debate. Central bank independence is very important. Certainly, what’s going on in the United States is challenging that.”

The biggest long-term worry is the US budget’s trajectory after congress passed the OBBB Act. Even before this fiscal abomination is factored in, the CBO estimated federal public debt, now equal to the size of the US economy, would rise to 156 per cent of GDP over the next three decades.

Former Clinton administration Treasury chiefs Bob Rubin and Larry Summers argue fighting the Fed, busting the budget and a trade war will set the US on a road to ruin. Before Trump’s budget bill was passed, they warned the fiscal trajectory would lead to higher interest rates and capital costs, reduced business confidence, crowding out of private investment and derail America’s ability to cash in on the AI revolution.

Annual US deficits, which add to the stock of public debt, are rising from 5 per cent to 7 per cent of GDP in coming years. Washington is spending more on interest payments than defence. For perspective, Canberra’s expected $42bn underlying cash deficit this year is 1.5 per cent of GDP.

Harvard’s Greg Mankiw says there are only five ways to stop this upward trajectory in debt to income: extraordinary economic growth (he says, don’t bet on it); government default (Trump has expanded the range of policy possibilities); large-scale money creation (if Trump has his way with the Fed); substantial cuts in government spending (out of the question); and large tax increases (most likely in the long run).

“If one day the bond vigilantes wake up and start viewing the United States as a large version of Greece or Argentina, they will stop buying US debt at normal rates of interest. Congress will have no choice but to face the music, regardless of the political consequences,” the one-time council of economic advisers chief under Bush 43 said in a speech this month honouring Reagan-era deficit hawk Martin Feldstein.

According to Mankiw, the bond vigilantes may strike sooner rather than later.

Cracks are developing in the fiscal foundations, such as Moody’s downgrading of US government debt below AAA status. None of the major credit agencies gives US debt its top rating.

Australia may be one of the few countries with a gold star from credit watchers, but fiscal perils lurk for a nation with a federal deficit default setting. Then there’s the constant “friendly fire” from the White House and the likelihood of further trade and defence shakedowns, higher global borrowing rates and other shocks.

A perfect storm is brewing and it could sink the fortunes of many: countries, private investors, savers and retirees. Australians are not immune. As Richard Ford wrote in his story collection Rock Springs (1987), “Trouble comes cheap and leaves expensive.”