The Argentine markets took a beating last week, but US Treasury Secretary Scott Bessent has rushed to the rescue with a remarkable promise: America will provide what amounts to unlimited support to prop up Argentina. His declaration that “all options for stabilization are on the table” – including swap lines, direct currency purchases, and buying Argentine government debt – represents an extraordinary blank check.

But here’s the real kicker: Bessent claims Argentina is “systemically important” to the United States. This is financial fiction at its finest.

The Systemic Importance Fairy Tale

Let’s be brutally honest: Argentina poses zero systemic risk to the US financial system. US banks have minimal exposure to Argentine debt. Trade between the two countries is negligible in the context of the US economy. If Argentina defaulted tomorrow, would Bank of America collapse? Would JPMorgan need a bailout? Of course not.

The “systemically important” label is being stretched beyond recognition. If Argentina qualifies, then virtually every country in Latin America – including those the Trump administration just hit with massive tariffs – should qualify too.

This isn’t about systemic risk; it’s about political preferences dressed up as financial necessity.

The Moral Hazard Machine

By offering essentially unlimited support to Argentina, the US is creating a massive moral hazard problem.

The message to Milei’s government is clear: Don’t worry about the hard work of building political coalitions or passing sustainable reforms through parliament. Uncle Sam will catch you if you fall.

This is precisely the wrong incentive structure. Argentina has defaulted on its sovereign debt nine times since independence. Nine times!

The country’s political economy is fundamentally broken, cycling through periods of populist spending followed by crisis and austerity. US financial support doesn’t fix this cycle – it enables it.

The Real Threat to US Financial Stability

Here’s the irony: While Argentina poses no systemic risk to the US, this bailout policy might. Not directly through financial contagion, but through the precedent it sets.

If the US Treasury is willing to provide unlimited support to a serial defaulter like Argentina simply because its president is friendly with Trump and speaks the MAGA language, what’s to stop other countries from playing the same game? Elect a Trump-friendly president, make the right noises about being an ally, and wait for the bailout when things go south.

This transforms the US Treasury into a global lender of last resort – not for genuine systemic crises, but for politically favored regimes. That’s a commitment the US cannot afford, especially when federal debt is already approaching dangerous levels.

The Buenos Aires Reality Check

The timing of Bessent’s announcement is telling. It comes right after Milei’s party got hammered in regional elections in Buenos Aires. The political message from Argentine voters was clear (rightly or wrongly): Milei’s policies aren’t working, and he lacks popular support for his reforms.

Rather than forcing Milei to build political consensus and pursue genuine institutional reforms, the US bailout allows him to double down on rule by decree. This is not sustainable governance. It’s political theater subsidized by American taxpayers.

Where’s the “America First”?

This is where the contradictions become absurd. The Trump administration came to power promising “America First” – putting American workers and taxpayers first, being tough on countries that don’t pay their fair share, and ending the era of the US playing global policeman.

Yet here we are, with a Trump-appointed Treasury Secretary promising unlimited support to a country that has stiffed international creditors nine times. How exactly does bailing out Argentine bondholders put American workers first? How does propping up a foreign government that can’t even win local elections serve US interests?

The Unlimited Commitment Problem

Perhaps most troubling is the open-ended nature of Bessent’s commitment. “All options are on the table” with no conditions, no limits, no requirements for structural reform. This isn’t a rescue package – it’s a blank check.

What happens when Argentina needs another injection in six months? Another one in a year? At what point does the US Treasury say “enough”? And when that moment comes as it inevitably will won’t the withdrawal of support trigger an even bigger crisis?

The Alternative Nobody Wants to Discuss

Here’s what should happen: Argentina should be allowed to face the consequences of its political and economic choices.

Yes, this means potential default. Yes, this means economic hardship. But it also means the country would finally be forced to confront its fundamental problems rather than papering them over with foreign money.

The IMF learned this lesson the hard way after multiple failed bailouts. Now the US seems determined to repeat the same mistakes, but with even less conditionality and oversight.

Conclusion

This isn’t about whether one likes or dislikes Milei. It’s about the dangerous precedent of the United States providing unlimited financial support to a country that poses no genuine systemic risk to the US financial system (or to the global financial system).

The moral hazard is obvious: Why should any country pursue painful but necessary reforms when they can simply wait for a bailout? Why should Argentina fix its institutional problems when the US Treasury stands ready to finance its dysfunction?

Ultimately, this policy doesn’t just threaten US financial stability through the direct cost of supporting Argentina.

It threatens the entire architecture of international financial responsibility. When “systemically important” becomes a political designation rather than an economic reality, and when bailouts come with no strings attached, we’re not promoting stability. The US taxpayers will be subsidizing instability.

The world is indeed upside down when an “America First” administration puts Argentine bondholders before American taxpayers.

PS Back in July I warned about Milei not being the miracle maker that some was making him up to be in my blog post Classical Liberals, Let’s Be Honest About Milei

The Federal Reserve cut rates by 25 basis points yesterday, bringing the fed funds rate to 4.00-4.25%, exactly as markets had expected. Stephen Miran – Trump’s recently appointed member to the FOMC- dissented, preferring 50bp.

Notably, the two other known “doves” on the committee, Christopher Waller and Michelle Bowman, voted with the majority rather than joining Miran’s call for more aggressive easing.

Markets barely moved, with for example the CME FedWatch tool continuing to price another 100-125bp of cuts by September 2026, unchanged from before the announcement. The immediate question isn’t whether the cut was justified. It’s a lot more fundamental: What exactly is the Fed’s nominal anchor?

Looking at the data, it appears the Fed has lost the nominal stability framework that served it well throughout the 2010s.

Without a clear nominal anchor, monetary policy risks becoming increasingly discretionary, politicised, and most dangerously subordinate to fiscal imperatives.

The Decade of Accidental Success

From 2010 to 2019, the United States enjoyed remarkable nominal stability. Few recognised it at the time (I how did – for example in this blog post in 2014) but the data tells a clear story.

Let me explain what we’re looking at. NGDP (Nominal Gross Domestic Product) is the total value of all goods and services produced in the economy, measured in current prices not adjusted for inflation. It’s the sum of real economic growth plus inflation, making it the best measure of total nominal spending in the economy.

PCE (Personal Consumption Expenditures) represents consumer spending, which accounts for roughly 70% of GDP. Since PCE data comes monthly while NGDP is only reported quarterly, I use PCE as a high-frequency proxy for NGDP trends.

The chart above shows an almost perfectly straight line at roughly 4% growth throughout the 2010s. The 3m/3m annualised growth rate fluctuated around its mean of 3.9% within a tight ±1 standard deviation band. This was, whether intentional or not, de facto NGDP level targeting.

The results were precisely what theory would predict. With trend real growth around 2%, that 4% nominal growth path delivered 2% inflation, confirming the basic identity: π ≈ g_NGDP – g_RGDP.

The Fed achieved its inflation target not through complex Phillips Curve calculations, but through stable nominal spending growth.

The Fed never acknowledged targeting NGDP.

They continued to emphasise their dual mandate and inflation target, conducting policy through the lens of unobservable variables like r* and u*. But regardless of the stated framework, the results were clear: stable nominal growth, on-target inflation, and no need for dramatic policy adjustments.

The Real Economy Normalised Quickly—As I Predicted

The COVID shock severely disrupted the real economy in 2020. But real shocks, by their nature, are temporary.

Back in May 2020, when most commentators were predicting a prolonged depression, I wrote on this blog that US unemployment would drop below 6% by November.

The reasoning was straightforward: this was a supply shock, not a demand shock, and market economies recover quickly from supply disruptions when monetary policy maintains nominal stability.

I was right. The labour market recovery was swift, just as economic theory predicted it would be.

By the end of 2021, the real economy had essentially normalised.

The unemployment rate had returned to NAIRU, and the output gap had closed. According to any standard framework (including the Fed’s own models) this is when monetary policy should return to neutral settings. The emergency had passed.

Yet policy remained highly accommodative well beyond this point.

From Deflation Fighter to Inflation Denier

My views on monetary policy rules have remained consistent. I’ve always advocated for rule-based policy targeting nominal stability.

What changed dramatically was my assessment of where the US economy stood relative to that rule.

From 2008 through 2020, I consistently argued that US monetary policy was less expansionary than widely believed – that we were below the optimal nominal path.

I welcomed the Fed’s initial response to the lockdown crisis, fearing a repeat of the 2008-9 deflationary shock.

However, by April 2021, the data forced me to completely reverse my assessment. In a blog post titled “Heading for double-digit US inflation,” I warned that we had swung from being below the optimal nominal path to being dramatically above it.

Using the P-star model and observing the massive growth in broad money supply, I predicted that inflation would surge far above the Fed’s target- potentially reaching double digits.

That forecast proved directionally correct, though inflation peaked at around 9% rather than breaking into double digits. The key insight was recognising that the Fed had allowed a massive ‘liquidity overhang’ to build up, and this would inevitably feed through to prices once the real economy normalised.

The Persistent Nominal Overshoot

Instead of returning to the pre-2020 trend after the real economy normalised, the nominal level shifted permanently upward. The PCE chart above shows this clearly.

Even if we generously re-anchor a new 4% trend from mid-2024, the level remains well above where it should be. This isn’t just about growth rates. It’s about the accumulated overshoot that hasn’t been corrected.

Only in 2025 has nominal growth finally begun to slow toward rates consistent with 2% inflation. But under proper level targeting, this isn’t sufficient.

When you overshoot the level target, you need a period of below-trend growth to return to the path. That’s the “make-up” principle that distinguishes level targeting from growth rate targeting. Instead, the Fed is cutting rates, effectively validating the higher nominal level.

Inflation: Still Closer to 3% Than 2%

The inflation picture confirms this diagnosis:

Since early 2021, core PCE has run persistently above the Fed’s 2% target. Even as it has moderated from its peaks, the trend remains closer to 3% than to 2%. With unemployment still relatively low, this pattern is consistent with excess nominal demand rather than supply disruptions. The supply shock excuse had validity in 2021-22, but not in 2025.

This persistent above-target inflation, combined with low unemployment, indicates that NGDP growth has been too high for too long. The Fed’s 2% target isn’t being achieved because nominal spending growth hasn’t been calibrated to deliver it.

The Elephant in the Room: Fiscal Dominance

What makes yesterday’s cut particularly troubling is the fiscal context. With US public debt-to-GDP above 100% and deficits running close to 6% of GDP, we’re approaching territory where the fiscal theory of the price level (FTPL) becomes relevant.

When markets doubt that future primary surpluses will back current debt levels, the price level must adjust upward regardless of central bank actions.

The Fed appears to have already surrendered to fiscal dominance. Rather than acting as a counterweight to fiscal excess, they’re accommodating it. This isn’t just poor monetary policy; it’s an abdication of institutional responsibility that risks far more than near-term inflation.

The Dollar’s Ticking Clock

Throughout 2025, I’ve warned that we’re witnessing the early stages of a potential challenge to the dollar’s reserve currency status (see here).

This “exorbitant privilege”—which allows the US to finance deficits cheaply and conduct monetary policy with unusual freedom depends entirely on foreign confidence.

As I noted in February when Trump announced his tariff plans, the combination of weaponising trade policy, political pressure on the Fed, and ballooning fiscal deficits creates precisely the conditions that historically have preceded reserve currency transitions.

We saw it with the Dutch guilder giving way to sterling, and sterling eventually ceding to the dollar.

Markets Expect Substantial Further Easing

The CME FedWatch tool shows the modal expectation for September 2026 remains centred around 3.00-3.25%, implying another 100-125bp of cuts from current levels—essentially unchanged from before yesterday’s announcement. Markets assign essentially zero probability to rates being higher than today.

This market pricing suggests the 25bp cut was so thoroughly anticipated that it contained no new information.

The real signal is what this persistent expectation of further easing implies: markets believe the Fed will continue accommodating the elevated nominal level regardless of inflation dynamics. If this occurs alongside continued fiscal deficits and no correction to the nominal overshoot, we could see:

• Long-term yields disconnecting from short rates as term premia explode
• Dollar weakness despite interest rate differentials
• Commodity price surges as investors seek real assets

The Case for NGDP Level Targeting

NGDP level targeting would address all these challenges simultaneously. With a 4% NGDP level target (consistent with 2% inflation given 2% trend real growth), policy would aim to run nominal growth at or slightly below 4% until the level gap closed. This is the systematic “make-up” strategy that level targeting requires – no bygones being bygones.

Moreover, NGDP level targeting elegantly handles supply shocks – a particularly relevant consideration given potential tariff changes ahead.

Under a nominal spending target, relative prices adjust to supply shocks while total spending remains stable. Temporary inflation from tariffs wouldn’t trigger monetary tightening that could cause an unnecessary recession. The central bank would focus on its proper role: providing nominal stability, not trying to offset relative price changes.

As I’ve argued since 2011, the implementation could be straightforward:

• Announce a public NGDP level path
• Use market expectations (potentially NGDP futures) to gauge whether policy is on track
• Adjust policy systematically when expectations deviate from the target path
• No need to estimate unobservable variables like r* or the output gap in real-time

This framework would also provide crucial resistance to fiscal dominance.

With an explicit nominal target, the Fed would have clear justification for tightening when fiscal policy threatens to push nominal spending above the target path. It transforms monetary-fiscal coordination from a political negotiation into a rule-based interaction.

The Risk of Policy Drift

Yesterday’s decision reflects a deeper problem: monetary policy lacks a systematic rule.

Miran’s isolated dissent for 50bp is particularly telling. Here’s Trump’s newest appointee to the FOMC – who co-authored a paper last year calling Fed independence an outdated “shibboleth” and advocating that Fed governors “serve at the will of the U.S. president” standing alone in pushing for even more aggressive easing.

That even the traditional doves Waller and Bowman didn’t join him suggests they recognise some limits to accommodation, but Miran apparently does not.

When each meeting becomes a negotiation rather than a rule-based decision, and when political appointees push for ever-easier policy regardless of economic conditions, the door opens wide to political influence and short-term thinking.

The Fed successfully delivered nominal stability from 2010 to 2019, even without explicitly targeting NGDP. That framework whatever we call it worked. It kept nominal growth stable, delivered on-target inflation, and avoided both deflation and overheating.

Since 2020, that implicit framework has been abandoned. We’ve moved from rule-like behaviour to increasingly discretionary decisions.

The result is persistent above-target inflation, an elevated price level, and markets expecting accommodation regardless of nominal conditions.

Learning from Past Mistakes

My evolving views on this crisis offer a lesson in the importance of nominal anchors. In 2020, I correctly identified this as a supply shock and predicted a rapid labour market recovery. By 2021, I warned about surging inflation when the Fed maintained emergency policies too long. Both predictions stemmed from the same insight: without a clear nominal anchor, policy errors compound.

The Fed had a framework that worked whether they admitted it or not from 2010 to 2019. They delivered stable 4% NGDP growth that translated into on-target inflation.

That framework didn’t require perfect foresight about r* or NAIRU. It’s just a commitment to stable nominal spending growth.

Conclusion: More Than a Missing Anchor

The Fed’s rate cut yesterday reveals multiple layers of institutional failure.

The de facto NGDP stability of the 2010s has given way to discretionary policy that validates whatever nominal path emerges from fiscal and political pressures.

The US is facing not just above-target inflation and an elevated price level, but potentially epochal challenges: fiscal dominance overtaking monetary independence, and the gradual erosion of dollar hegemony. These aren’t distant risks. They are unfolding now, hidden in plain sight behind market complacency.

The solution remains straightforward: commit to a nominal level target and stick to it. But yesterday’s cut suggests the Fed lacks either the understanding or the courage to do so. The anchor isn’t just drifting. It may already be lost. And with it, potentially, goes American monetary exceptionalism.

Looking back at my predictions from 2020 and 2021, the lesson is clear: get the nominal anchor right, and the real economy largely takes care of itself. Get it wrong, and you don’t just get inflation or recession. You risk the entire monetary architecture that has underpinned American prosperity for generations.

The coming months will be critical. If the Fed continues down the path markets expect another 100-125bp of cuts by this time next year – without addressing the nominal overshoot, we’ll know the answer: there is no anchor, only drift.

And a final warning: Once the markets realise that the nominal anchor is broken then US Treasury bond yields might explode.

Many economists and market observers have expressed surprise at the apparent absence of inflationary effects from President Trump’s economic policies.

I find this a bit puzzling, as I believe the inflationary impact is already clearly visible if one examines the data properly.

In this post, I will demonstrate why I’m convinced we’re seeing the beginning of a rather significant inflationary episode in the US economy.

After Donald Trump’s return to office, three major policy changes have occurred that I believe are significantly impacting US inflation dynamics. First, fiscal policy has been substantially eased through the “Big Beautiful Bill.” This is you might say be some unpleasant monetarist arithmetics.

Second, tariff rates have increased dramatically to nearly 20% on average for all American imports.

Third, the Trump administration has placed extraordinary pressure on the Federal Reserve to ease monetary policy. I have earlier warned to watch for a credibility (or lacks of) related spike in money-velocity.

The reason many observers haven’t noticed these inflationary effects in headline figures is primarily due to sticky prices, base effects and transitory effect of prices declines in some sectors of the economy. But as I’ll show, a more careful analysis reveals the troubling trend.

My Methodological Approach: Looking Beyond Surface-Level Data

To properly understand what’s happening with US inflation, I’ve examined three different price indices – the Consumer Price Index (CPI), the Personal Consumption Expenditures (PCE) deflator, and the Producer Price Index (PPI).

For each index, I’ve analyzed both the headline figures and the core measures that exclude food and energy prices, giving me six distinct metrics to work with.

I then calculated the median of these six indices and indexed this composite measure to 100 as of April 2025, represented by the blue line in my graph. I’ve also included a band representing ±1 standard deviation across the price series to capture statistical uncertainty.

I chose April 2025 as my indexation point because it coincides with President Trump’s announcement of substantial tariff increases on what he termed “Liberation Day.” Many of these tariff implementations were delayed until August, which means we have yet to see their full inflationary impact.

The Evidence: Inflation Is Already Accelerating

When I compare the actual inflation trajectory (blue line) with the pre-April trend (green line), which assumes continuation of the growth rate observed in the first four months of the year, I find that actual price increases have significantly exceeded projections.

Both these rates surpass the red line representing the Federal Reserve’s 2% inflation target.

What I find most concerning is the clear acceleration in monthly price increases. The monthly annualised growth rates since April tell the story:

• May 2025: 1.8% p.a.
• June 2025: 3.7% p.a.
• July 2025: 3.0% p.a.
• August 2025: 4.9% p.a.

These numbers reveal what headline year-on-year figures obscure – inflation is not only increasing but accelerating at a troubling pace. This is the key insight that many commentators are missing.

Recent Inflation Data Confirms My Analysis

The latest inflation data further validates my concerns. The Consumer Price Index for August 2025 increased 0.4% on a seasonally adjusted basis, after rising 0.2% in July. Over the last 12 months, the all items index increased 2.9%, up from 2.7% in July. The core CPI (excluding food and energy) rose 0.3% in August and stands at 3.1% over the last 12 months.

The PCE price index, which is the Federal Reserve’s preferred inflation gauge, shows a similar trend. The July PCE price index increased 0.2% month-over-month and 2.6% year-over-year. More concerning is the core PCE price index, which rose to 2.9% on an annual basis in July, up from 2.8% in June. This is the highest level since February 2025 and significantly above the Fed’s 2% target.

Producer prices present a more mixed picture, with the PPI for final demand edging down 0.1% in August after advancing 0.7% in July.

However, on an unadjusted basis, the index for final demand rose 2.6% for the 12 months ended in August.

More importantly, the PPI for final demand less foods, energy, and trade services rose 0.3% in August, the fourth consecutive increase, and moved up 2.8% over the year – the largest 12-month advance since March 2025.

Services and Shelter: Not Offsetting Goods Inflation

A notable aspect of the current inflation picture is that while goods prices are facing upward pressure from tariffs, services and shelter inflation aren’t declining enough to offset this increase. Services inflation, which should be largely insulated from direct tariff effects, is showing persistent strength. In August, core services excluding shelter rose 0.3%, with transportation services particularly robust – airline fares increased 5.9% in August after a 4.0% gain in July.

Meanwhile, the shelter component, which had been moderating and helping to contain overall inflation, is no longer providing as much of a disinflationary offset. The shelter index rose 0.4% in August, the largest increase since January. Given that shelter accounts for about a third of the CPI basket, this shift is significant. The lack of sufficient offsetting declines in these major components means that as goods inflation accelerates due to tariffs, overall inflation will likely continue to rise.

Reading Between the Lines: The Concerning Details

Looking at the details reveals even more concerning trends. Grocery prices recorded their largest jump since August 2022, rising 0.6% in August. Core goods prices climbed at their fastest rate in seven months, with notable increases in vehicle and apparel prices. Core services prices also continued to firm, supported by higher travel-related expenses and a pickup in shelter costs.

While some analysts focus on headline year-over-year figures that still appear relatively contained, the momentum in monthly data paints a very different picture. The trajectory of inflation is clearly upward, and the rate of change is accelerating. This becomes evident when you analyze monthly growth rates rather than annual comparisons that can mask recent trends.

The Fed’s Credibility at Risk

Despite this clear inflationary trend, the Federal Reserve is expected to reduce its policy rate by 25 basis points in September. In my view, this would be a clear signal that the Fed has yielded to political pressure, contribting to undermining its credibility and creating an additional, independent inflation risk.

It’s worth noting that the Producer Price Index data for August showed an unexpected decline of 0.1%, which may give the Fed cover to proceed with rate cuts. However, the underlying details show that this decline was largely due to a 1.7% drop in trade services margins, which could indicate that businesses are temporarily absorbing higher costs from tariffs rather than passing them on to consumers. This is likely unsustainable, and we should expect to see more pass-through of these costs in the coming months.

The Inflation Trend That Emerges When You Examine All Six Price Indices

While individual price indices can sometimes send mixed signals, my analysis of all six major price measures (headline and core versions of CPI, PCE, and PPI) shows a consistent pattern of acceleration since April 2025. This comprehensive approach reduces the noise in any single measure and reveals the underlying inflation momentum.

The pattern becomes especially clear when examining the data in sequence. Each month since April has shown an acceleration from the previous trend, with August showing the most dramatic deviation yet.

The fact that this pattern holds across multiple indices strengthens the conclusion that we’re witnessing a genuine inflation acceleration rather than statistical noise.

Beyond Tariffs: A Fundamental Shift in Expectations

I believe we’re seeing something more concerning than just the direct effects of tariffs. The data suggests we’re witnessing a fundamental shift in inflation expectations, which presents the risk of a more permanent inflationary regime beyond the one-time impact of tariff adjustments.

What’s particularly concerning is that much of the tariff impact has yet to be fully realized. Many businesses have managed to soften the impact of rising costs by relying on pre-tariff inventories and accepting slimmer profit margins, as evidenced by the decline in trade services margins in the August PPI. However, these buffers are likely to continue to fade.

The fact that we’re already seeing accelerating inflation before the full effects of the tariff increases have worked their way through the economy suggests that the problem could become much worse in the coming months.

Conclusion: US Inflation’s Upward Trajectory Is Clearer Than Many Admit

While many commentators continue to express surprise at the lack of visible inflation from Trump’s policies, I maintain that the evidence is clear for those willing to look beyond headline figures and examine the actual trajectory of monthly data. I believe my analysis indicates that US inflation is not only rising but accelerating at a concerning pace.

The coming months will likely validate this assessment as the full effects of tariff increases work their way through the economy.

More troubling is the potential for entrenched inflation expectations, which could make this inflationary episode much more persistent than many currently anticipate.

Federal Reserve policymakers should take note of these warning signs before proceeding with interest rate cuts that could further fuel inflationary pressures. The window to prevent a more serious inflation problem may be closing quickly.

Long-term British government bond yields are now at their highest level in almost 30 years.

What is even more concerning is that the UK economy is actually slowing down, which means that nominal GDP growth must now be considered significantly lower than long-term interest rates.

This is extremely critical, as it means that public debt as a percentage of GDP is now on an explosive rise, and if the UK government cannot convincingly demonstrate to financial markets that it will address the large budget deficit, currently around 5% of GDP, then expectations that the Bank of England will have to step in and run the printing press to finance the deficit will explode.

In that situation, the pound will collapse, and inflation will soar dramatically. And we are already on the way – despite the Bank of England lowering its monetary policy rate this year, long-term rates are rising – and yes, inflation is again rising sharply. We are currently at almost 4% – and there are indications that it may soon become much worse.

And the UK government is paralysed, and there is no indication that Prime Minister Keir Starmer has support within his Labour party to address the fiscal problems, while voter support for the populist Reform Party grows day by day, which is hardly encouraging if one believes there is a need for fiscal tightening and major macroeconomic reforms.

Public debt in the UK is already above 100% of GDP, and with interest rates as we see now, interest payments are consuming an increasing share of the state budget. This creates a vicious cycle where the government must borrow more to cover interest payments, which in turn increases debt and future interest payments.

And yes, it all looks very similar to the US, but unlike the dollar, the pound is not a global reserve currency.

So there is no mercy, and things could soon go very wrong in the United Kingdom.

The American economy stands at a critical juncture. President Trump’s assault on the Federal Reserve has reached an intensity that threatens the very foundations of independent economic institutions.

Lisa Cook, a Federal Reserve Board member, has become the primary target of Trump’s political pressure. Despite repeated claims of dismissal, Trump has encountered formidable legal barriers.

The Federal Reserve Act’s protective provisions are crystal clear: Board members can only be removed “with cause” – a legal standard requiring documented inefficiency, neglect of duties, or malfeasance in office.

Trump’s rhetoric has been unrelenting. He has repeatedly branded Federal Reserve Chair Jerome Powell a “stubborn MORON” and demanded the Fed Board “ASSUME CONTROL”. These are not mere political utterances, but a calculated strategy to undermine the institution’s credibility and independence.

The nomination of Stephen Miran to the Board represents a strategic manoeuvre. Miran, a key architect of Trump’s protectionist tariff policies and an overt critic of Fed independence, epitomises the administration’s approach to institutional capture.

Equally troubling is the nomination of E.J. Antoni to lead the Bureau of Labour Statistics, revealing a broader pattern of institutional pressure. Antoni’s background is particularly concerning. Present in Washington during the 6 January 2021 events and lacking formal statistical training, he has described BLS methodological changes as “Orwellian tricks”. His predecessor, Erika McEntarfer, was summarily dismissed following a jobs report revealing weak growth and significant downward revisions.

These are not isolated incidents, but a systematic strategy to erode the boundaries between political leadership and independent economic institutions.

The parallels with Turkey’s macroeconomic experience over the past two decades are stark and deeply troubling.

When politicians systematically attempt to control statistical narratives and pressure monetary authorities, the consequences are predictable and potentially catastrophic.

To understand the potential trajectory of these institutional pressures, I turn to an in-depth analysis of Turkey’s economic and financial data.

By examining the structural breaks in Turkey’s exchange rate and consumer price index, we can map the precise mechanisms through which political interference destabilises economic institutions and forecast the potential risks facing the United States.

The Method: Identifying Structural Breaks

To examine how institutional credibility manifests in economic data, I employ piecewise-linear regression on the logarithm of Turkey’s exchange rate (TRY/USD) and consumer prices (CPI):

Breakpoints are identified through a recursive residual minimization algorithm with minimum segment length constraints to prevent overfitting. The fitted model highlights trend accelerations indicative of collapsing policy credibility.

Structural Breaks in the Data

Based on CPI (all-items, 2015=100) and OECD TRY/USD data from 2000 to mid-2025, the model detects the following breakpoints:

ln(CPI, All-Items)

• April 2004
• January 2009
• July 2012
• December 2021

ln(TRY per USD)

• August 2001
• May 2008
• June 2016
• January 2021

The 2021 break is common to both series and corresponds to an inflection point in Turkey’s macroeconomic credibility.

Institutional Context

2001-2004: Turkey enters an IMF-supported stabilization program. Initial credibility gains follow structural reforms.

2008-2009: The global financial crisis provides cover for credit expansion via state banks. The exchange rate trend weakens.

2012-2016: President Erdoğan intensifies public attacks on the central bank, calling interest rates “the mother and father of all evil.”

2016: Following the July coup attempt, massive institutional purges and emergency rule accelerate TRY depreciation.

2021: Multiple central bank governors are fired in rapid succession. Interest rates are cut amid soaring inflation. The head of the statistical agency is replaced following public scrutiny. Both inflation and the exchange rate experience their sharpest accelerations.

The Cumulative Cost

Turkey’s all-items CPI rose from 9.5 in January 2000 to 74.36 in June 2025. The chart below shows the dramatic shift in inflation dynamics after 2021:

Similarly, the Turkish lira depreciated steadily until 2016 and then began to collapse after 2021:

The timing aligns precisely with political interference in core institutions.

Parallels to the United States

The U.S. now faces its own institutional tests:

• Trump has called Powell a “stubborn MORON” and demanded the Fed Board “ASSUME CONTROL.”
• He has threatened lawsuits over Fed building renovation costs.
• Trump claims to have sacked Lisa Cook.
• Stephen Miran, a prominent critic of Fed independence, has been nominated to the Board.
• E.J. Antoni, who lacks formal statistical training, has been tapped to lead the BLS.
• The federal deficit will reach $1.9 trillion in FY2025 (6.2% of GDP), while unemployment is at 4.2%.
• Federal debt held by the public is projected to rise from 100% of GDP in 2025 to 118% by 2035.

These dynamics echo the institutional erosion seen in Turkey during its slide into macroeconomic instability.

The eerie resemblances between Turkey and the US

The structural parallels between Turkey’s economic trajectory and the current United States landscape are far more than academic coincidence. They represent a precise roadmap of institutional decay.

In Turkey, political interference transformed a functioning economic system into a case study of monetary mismanagement. Our data analysis reveals how repeated attacks on central bank independence created predictable, catastrophic outcomes: hyperinflation, currency collapse, and total loss of economic credibility.

The United States is traversing an eerily similar path. Political pressure on the Federal Reserve, repeated attempts to undermine institutional independence, and strategic appointments designed to capture economic institutions mirror the early stages of Turkey’s economic unravelling.

The risk is not hypothetical. Each politically motivated intervention increases the probability of a return to double-digit inflation and challenges the dollar’s global reserve currency status.

The mechanisms of institutional erosion are identically structured: politically controlled statistical agencies, central bank leadership under constant threat, and monetary policy increasingly subordinated to short-term political calculations.

Market signals already indicate growing vulnerability. Dollar weakness, shifting international trading patterns, and increasing institutional uncertainty suggest we are not merely at risk, but already in the initial phases of potential systemic transformation.

The Turkish case study is not a warning, but a blueprint. Without immediate, robust defence of institutional integrity, the United States risks replicating a path from economic stability to monetary chaos with remarkable precision.

Suppose I came to you and said: “I would like to borrow a very large sum of money in order to buy massively overpriced shares. By the way, I am already drowning in debt.” What interest rate would you charge me?

The answer would be either prohibitively high or a flat refusal.

Yet this is precisely the course the United States government has embarked upon.

The Intel Purchase: A Costly First Step

Only days ago Washington acquired around ten per cent of Intel, spending close to nine billion dollars by converting subsidies from the CHIPS and Science Act into equity. The US Treasury now holds more than four hundred million non voting shares at roughly twenty dollars each.

Markets offered a modest applause, with Intel’s share price ticking higher. But the company remains far below its past peaks and management has already warned that government ownership could complicate global sales.

Officials present this move as the foundation of a new American sovereign wealth fund. The difference from Norway is obvious. Norway’s fund is backed by oil revenues. The United States has no such cushion of accumulated wealth, only mounting debt.

Next Target: Defence Contractors

US Commerce Secretary Howard Lutnick has confirmed that the administration is considering taking direct equity stakes in Lockheed Martin, Boeing and Palantir. His rationale is that defence contracting has become a giveaway and that taxpayers deserve equity in return for financing the industrial base.

It sounds like logic. In practice it risks transforming the United States government into both regulator and shareholder of strategic industries. To many observers that is not market capitalism but a slide into state capitalism or what I have called ‘Red hat socialism‘

Palantir’s Extraordinary Valuation

The inclusion of Palantir Technologies makes this strategy especially alarming. Palantir’s price to earnings ratio currently sits somewhere between five hundred and seven hundred times trailing earnings. Even forward estimates remain stratospheric, around two hundred to three hundred times earnings.

To put that in context, the S&P 500 trades at about twenty two times earnings. Palantir is thus one of the most richly valued large cap stocks in the world. For any rational investor it represents significant downside risk. For a government already weighed down by record deficits it borders on financial recklessness.

The Risk Cascade

If the US government continues down this path, the sequence of risks is straightforward. Overvalued markets always correct. When that correction comes, Washington will book enormous losses directly onto the public balance sheet.

A political leader faced with such an outcome may not accept failure. Instead President Trump could choose to double down by buying even more equity, perhaps in weaker or more speculative firms. It would be the gambler’s fallacy applied to fiscal policy.

As this desperation becomes visible, confidence in US Treasuries may fracture. Investors would start to wonder whether the American government is a sovereign borrower or a speculative hedge fund. The response would be simple. Yields would climb as bondholders demanded higher compensation for risk.

Higher borrowing costs would arrive just as debt levels are exploding. Mortgages, corporate credit and municipal borrowing would all become more expensive. Financial conditions would tighten dramatically and growth would stall. Rising interest costs would in turn swell the deficit, fuelling perceptions of fiscal irresponsibility and intensifying the pressure on both equities and bonds.

This is how a misguided equity gamble could spill over into a sovereign debt crisis made in America.

Argentina, Not Norway

A genuine sovereign wealth fund requires wealth. Norway built its fund on decades of oil revenues. The US by contrast is building what amounts to a sovereign kamikaze fund, financed not by surpluses but by debt and managed not with prudence but with political bravado.

In this sense the US increasingly resembles Argentina under Juan Perón, where populism, intervention and debt blended into a destructive mix.

The real danger is not only that Washington loses taxpayer money on overpriced equities. The greater risk is that such policies undermine trust in US Treasuries, the bedrock of the global financial system. If desperation drives the administration into doubling down on failed bets, America could face spiralling bond yields, collapsing market confidence and a fiscal crisis of its own making.

Donald Trump calls it a win for American industry. Trump’s economic advisor (or what ever it is he is doing) Kevin Hassett calls it the first step towards a sovereign wealth fund. I call it Red Hat Socialism.

The United States government has just taken a near ten per cent stake in Intel. Officially it is about safeguarding domestic chip production. In reality it is subsidies converted into equity in a company that continues to lose ground to TSMC and Nvidia. The deal gives Washington no real control but leaves American taxpayers exposed when the share price falls.

And it does not stop there. Only a month ago the Pentagon bought into MP Materials, the United States’ only rare earths miner. The state is now the largest shareholder and has promised a minimum price for output at nearly double the Chinese market rate. In Washington this is described as national security. From abroad it looks like state-sponsored market distortion.

The US stock market is, by most measures, massively overvalued. At the same time, the US federal government is running a massive deficit. These two things cannot coexist for long: buying overvalued US companies financed by government debt issuance.

A sovereign wealth fund works when you invest fiscal surpluses into undervalued assets. Norway is the textbook example. What the United States is building is the polar opposite. Overvalued assets financed by record deficits.

The arithmetic is brutal. When the market reprices lower and it will be taxpayers who will take the hit. At the same time bond investors will wake up to the reality of ever-expanding debt and rising issuance.

I suggest you sell your US Treasury bonds before the double-whammy hits – a massive sell-off in the US stock market combined with skyrocketing US bond yields.

If you’re a heavy user of language models, as I am, you’ll have undoubtedly noticed that the various AI models, such as ChatGPT and Claude, aren’t behaving quite as they used to.

This has particularly come into focus since OpenAI launched ChatGPT 5.0 a fortnight ago.

One must say that the reception has been anything but favourable. It’s been difficult to spot the improvements (unless one uses ChatGPT for coding…), and criticism has indeed rained down upon OpenAI for failing to live up to the hype surrounding 5.0, which OpenAI’s CEO Sam Altman had particularly attempted to create.

The Symptoms of Strain

Some of the problems surrounding ChatGPT have been shorter responses and poorer answers. A feeling that communication is different and, in some cases, longer response times as well.

And it’s not only ChatGPT that has had problems. Similarly, Claude has increasingly shown signs of “sycophantic” behaviour – that is, the model telling users what they want to hear. And sometimes this contradicts the facts.

It’s even the case that I have anecdotal stories that Google Maps and iPhone navigation have begun behaving strangely. But that’s my observation and to a lesser extent something others have written about.

The Root Cause: Capacity Pressure

But what’s happening?

In my view, it’s about massive capacity pressure. Demand for computing power has exploded, and this is particularly in step with the use of language models for IT development and coding driving this development – so-called “vibe coding”.

And this is where code tools like Lovable and especially Cursor come into play – these are the tools that have truly created the possibilities for effectively using AI in coding.

The first chart below shows an index for the number of Google searches for precisely “vibe coding”. If we compare this with the price of computing power in the USA, we see there’s a rather close correlation – more on that below.

The Economics of Computing Power

As the graph below shows we took the first jump in computing prices in December-January, after which it flattened somewhat, but the last couple of months it has risen further.

From December last year to the end of July, the price of “data processing, hosting and IT infrastructure” rose by over 11%.

And it has accelerated dramatically recently. In July alone, the price of computing power in the USA rose by over 5%.

And this is, in my opinion, the reason why users of AI models are now experiencing a poor product.

Thus, companies like OpenAI (ChatGPT) and Anthropic (Claude) are FORCED to do something to ensure their profitability, now they see their costs rising sharply. And therefore they’re attempting through the back door to reduce the performance delivered to customers.

The End of Free AI and possibly the end of the tech stock market boom

But I think it’s obvious – one way or another, this bill must be paid – and therefore we must also expect that the time when AI models were free or nearly free is over.

Finally, we must see whether the rapidly rising prices of computing power will affect earnings expectations in the large American tech giants, which have largely driven the massive share price increases we’ve seen in recent years on the American stock market.
In recent days we have seen a bit of weakness in the US tech stocks and I think we might be heading for more bad news going forward as tech companies struggle to maintain profitability as computing power prices continue to rise and capacity problems in the sector become a lot more obvious to investors.

Inflationary Pressures Mounting

This computing power crisis brings another inflationary pressure “out in the open” that comes on top of the negative supply shock arising from Trump’s immigration crackdown and his massive tariff increases.

Trump’s immigration policies have created a significant labour supply shock. Net immigration has fallen by over 90% compared to previous years, equivalent to a slowdown in labour force growth of more than 2 million people and this in fact in my view might be a far more sustained negative supply shock for the economy than Trump’s tariffs.

Simultaneously, Trump’s tariff regime has imposed duties averaging close to 20% – the highest level since 1933.

The combination creates a perfect storm: reduced labour supply pushing up wages, higher import costs from tariffs, and now spiralling computing infrastructure costs all feeding into broader price pressures.

So overall it is clear that US inflation already is in the process of heading higher.

The New Economic Reality

And that’s why I now say that the price of computing power is probably the most important price in the global economy right now.

The implications extend far beyond AI companies. As computing power becomes more expensive, it affects everything from financial services to manufacturing, from entertainment to logistics. Every industry now depends on computational capacity, and this bottleneck threatens to constrain economic growth whilst simultaneously driving up costs.

For investors and policymakers, monitoring computing power prices may prove more crucial than traditional indicators. We’re witnessing the emergence of a new economic paradigm where computational capacity, rather than traditional factors of production, becomes the binding constraint on growth and prosperity.

The most important lesson is that computing is getting rapidly more expensive and that will very soon show up in prices across the wider economy.

In my three decades as an economist—including 15 years as Chief Analyst for Emerging Markets at Danske Bank—I’ve seen some truly bizarre economic episodes.

I’ve watched Argentina default on its debt. I’ve analysed Turkey’s monetary policy madness under Erdoğan. I’ve observed Venezuela’s descent into hyperinflation. But what happened today in the United States might top them all.

This morning (US time), President Donald Trump fired the Commissioner of the Bureau of Labor Statistics, Erika McEntarfer, because he didn’t like the jobs numbers. Let that sink in. The leader of the world’s largest economy, the issuer of the global reserve currency, just sacked his top statistician for doing her job.

This is one of the most insane thing I’ve witnessed in my entire career.

The Numbers That Should Have Set Off Alarm Bells

The U.S. employment report for July 2025 should indeed be setting off alarm bells in the White House—but for entirely different reasons than Trump imagines.

The BLS delivered numbers that not only show weak job creation but revealed that for months we’ve been living under an illusion about the labour market’s strength.

July brought only 73,000 new non-farm jobs, with the private sector contributing a meagre 52,000. Unemployment rose to 4.2 percent. But what’s truly striking are the massive revisions: May was slashed from +144,000 to +19,000 jobs. June from +147,000 to +14,000 jobs.

These are NOT minor adjustments. We’re talking about 258,000 fewer jobs than initially reported. The BLS itself calls the revisions “larger than normal”—a rare admission from an agency that typically uses understated language.

Within hours of this sobering report, Trump took to Truth Social with a deranged rant, accusing McEntarfer of having “faked the Jobs Numbers before the Election to try and boost Kamala’s chances of Victory.” He ordered her immediate termination, declaring she would be “replaced with someone much more competent and qualified.”

America’s Authoritarian Turn

This isn’t just about economic statistics. It’s about the systematic dismantling of American democracy’s checks and balances. One by one, the institutions that have safeguarded American democracy are being shot down.

We’ve watched Trump attack the judiciary when rulings go against him. We’ve seen him undermine the intelligence community when their assessments contradict his worldview. He’s waged war on the media as “enemies of the people.” And now he’s destroying the credibility of federal statistics because they don’t support his narrative.

This is how democracies die – not in dramatic coups, but through the gradual erosion of institutional independence.

Each fired official, each attacked institution, each norm violated moves America further down an authoritarian path. Today’s firing isn’t an isolated incident; it’s part of a pattern that should terrify anyone who values democratic governance.

The Real Story: A Labour Market in Clear Deceleration

Looking at the actual data that triggered Trump’s rage, the pattern is undeniable: The U.S. labour market has slowed substantially. We now have enough data points to conclude this isn’t a statistical fluke.

Most concerning is the trend in private employment. Job growth in the sector that actually drives the economy has practically stalled throughout 2025. Government jobs don’t create American prosperity. When the private sector stops creating jobs, it’s a clear warning sign.

The numbers don’t necessarily indicate recession. But they tell of an economy that has lost its breath. Most worrying is the timing—the slowdown is occurring before the full effects of Trump’s tariff increases have hit. When businesses truly feel those effects, we should expect further weakening.

But instead of addressing these legitimate economic concerns, Trump shoots the messenger.

Why This Is Worse Than Any Emerging Market Crisis

During my years at Danske Bank analysing emerging markets, I became intimately familiar with data manipulation and authoritarian interference. I remember when Christina Kirchner’s government in Argentina essentially hijacked INDEC, the national statistics institute, because they didn’t like the inflation numbers.

But here’s the crucial difference: everyone expected this from Argentina. It was a country with weak institutions and a history of authoritarian interruptions to democracy. The United States is—or was—different. The US’s checks and balances were supposed to prevent exactly this kind of abuse.

That’s what makes today’s events so shocking. We’re watching the world’s oldest continuous democracy adopt the playbook of tin-pot dictatorships. The guardrails that were supposed to protect American institutions from political interference have failed.

The Banana Republic Playbook

What’s most disturbing is how familiar this feels. In my years covering emerging markets, I’ve seen this movie before. Economic data turns negative, populist leader blames the messenger, independent officials get fired.

During my time analysing Turkey, I watched Erdoğan systematically dismantle every institution that challenged his authority. Central bank governors, statisticians, judges—anyone who wouldn’t bend to his will was purged. Each firing moved Turkey further from democracy and deeper into authoritarianism.

Now we’re watching the same drama in Washington. Trump’s simultaneous attack on Fed Chair Jerome Powell—saying he should be “put out to pasture”—shows this isn’t about one bad jobs report. It’s about crushing any institution that maintains independence from presidential control.

The Death of Checks and Balances

The American founders understood that concentrating power in one person’s hands leads to tyranny. That’s why they created a system of checks and balances – independent institutions that could constrain executive power.

But what happens when those institutions are systematically attacked and undermined? When inspectors general are fired for investigating corruption? When the Justice Department becomes a tool of presidential vengeance? When federal statistics become subject to political approval?

You get authoritarianism with American characteristics. Not the crude military dictatorship of a banana republic, but a sophisticated dismantling of democratic norms while maintaining the facade of constitutional government.

The Mechanics of Statistical Credibility

The accusation that McEntarfer “faked” the numbers is preposterous to anyone who understands how the BLS operates. This is a career civil servant with over 20 years in government, confirmed by the Senate 86-8 just last year.

The Bureau employs hundreds of economists and statisticians who follow rigorous methodologies developed over decades. This isn’t some black box where numbers can be manipulated at will. It’s a professional statistical agency operating according to international best practices.

But in Trump’s authoritarian worldview, expertise is subordinate to loyalty. Professional integrity is less important than political convenience. Truth itself becomes negotiable when it conflicts with the leader’s narrative.

A Personal Reflection

I’ve spent my career analysing the economic consequences of institutional failure. I’ve seen how quickly things can unravel when democratic norms erode and authoritarian tendencies take hold. But I never imagined I’d see it happen in the United States.

In 30 years of watching economies and institutions evolve, nothing has been more surreal than witnessing American democracy’s checks and balances fail in real time. Each norm violated, each institution corrupted, each official fired for doing their job – it all adds up to a fundamental transformation of American governance.

The foundation of both democracy and capitalism is trust. Trust in institutions. Trust in data. Trust in the rule of law. Today, another pillar of that trust was demolished.

We’re watching the United States transform from the world’s leading democracy into something darker, more authoritarian, more arbitrary. And the most insane part? It’s all happening in plain sight, one fired official at a time.

I must say that the commentary surrounding Sunday’s so-called trade agreement between the US and EU has been almost universally “Trumpian” in its analysis.

Nearly every commentator emphasises that Trump has “won” whilst the EU has capitulated. From Frankfurt to Paris, from Dublin to Copenhagen, the narrative is one of European defeat in the face of American economic bullying.

So let’s examine the facts instead of the rhetoric.

The Pre-Trump Baseline

Before Trump’s return to the White House, there was widespread free trade between the EU and USA, save for a handful of selected goods. The average US tariff on EU imports stood at a mere 1.2%—a testament to decades of trade liberalisation.

This was an excellent situation. Economists have known since Adam Smith’s Wealth of Nations in 1776 that free trade trumps protectionism. David Ricardo subsequently taught us that the value of trade lies in each country producing what it is RELATIVELY best at—the principle of comparative advantage that has underpinned global prosperity for two centuries.

Prior to Smith, mercantilism dominated economic thinking. According to mercantilist doctrine, the purpose of trade policy was to maximise the trade surplus—or exports. This is precisely how Trump thinks about trade.

But the lesson from Smith and Ricardo is that we should focus on the division of labour and the consumer, not on crude trade balance arithmetic.

The New Reality: A 15% Baseline

When Trump threatened to impose tariffs, the EU had limited options. The deal, which imposes a 15 percent tariff on most European goods, came after a private meeting on Sunday between US President Donald Trump and European Commission President Ursula von der Leyen in Scotland. Yes, this disrupts the division of labour. But this was also the situation BEFORE Sunday’s “agreement” (we still don’t know the full details—as always with Trump, there’s more bluster than substance).

What would the perfect agreement look like? If we’re to heed Ricardo and Smith, it would be zero tariffs—both ways.

We haven’t achieved that, but here’s what’s remarkable: Announcing the agreement, Trump said the E.U. will not impose a tariff on U.S. imports. In other words, the EU has moved towards MORE free trade, not less. The bloc has committed to maintaining zero tariffs on American goods whilst accepting a 15% levy on its own exports.

This is, all else being equal, GOOD for European consumers and producers.

The Asymmetry That Matters

What isn’t good, naturally, is Trump’s 15% tariff on European exports to the USA. This certainly affects European exporters. But let’s be clear about who bears the greatest burden here: American consumers and producers will pay the lion’s share of these costs through higher prices and reduced competitiveness.

It’s worth remembering that trade is a positive-sum game, not a zero-sum contest. When I hear commentators proclaim that Europe has “lost,” it sounds eerily like Trump himself, who persistently misunderstands trade as a win-lose proposition.

The EU could have escalated the trade war. Brussels had prepared a long list of retaliatory tariffs targeting everything from beef and beer to Boeing aircraft and car parts. That would have been a replay of the 1930s trade catastrophes when global commerce collapsed.

We’re not getting that. Instead, we’re getting LOWER EU tariff rates—indeed, zero tariffs on US goods. Yes, we face tariffs on our exports. That’s not ideal, but it’s primarily American consumers who will foot the bill.

The Numbers Tell a Different Story

Consider what Trump initially threatened versus what materialised:

• Initial threat: 30% tariffs on all EU goods
• April position: 20% “reciprocal” tariffs
• Final agreement: 15% baseline with significant carve-outs

A “zero-for-zero” scheme will apply to aircraft and related components, semiconductor equipment, critical raw materials and some chemical and agricultural products. Moreover, For the auto industry, for which the current tariffs of 27.5% were almost halved to 15%.

I’m genuinely pleased that the EU has let reason prevail and avoided escalating a trade war. It would have been economically senseless and would have led to inflation and stagnation across Europe. Now we get to maintain ZERO import tariffs—likely contributing to lower inflation in the coming period.

The Broader Economic Context

We must also remember that the USA today consumes excessively—both publicly and privately. A correction is inevitable. Americans must pay higher taxes to close the massive federal budget deficit.

Tariffs are an absurdly inefficient way to raise revenue, but the alternative would have been lower public spending combined with the introduction of a federal VAT (which would have been my recommendation). Regardless, Americans must consume less. And they will. Yes, this means reduced European exports to the USA.

The Investment “Promises”

What about the EU’s “pledges” to “invest” in the USA? Trump, the deal also includes that all European Union countries will be “opened up for U.S. goods” at 0% and the bloc will invest $600 billion in the U.S. Frankly, I doubt this will amount to much. This is vintage Trump theatre. We saw the same performance with the Japan trade agreement—Trump announced massive Japanese “investments” that Tokyo couldn’t recognise in the actual agreement.

The Bottom Line

So what should we conclude? We’ve secured an agreement that leaves European consumers BETTER off than before. We’ve avoided or postponed a trade war. American consumers will bear the cost of Trump’s tariff folly.

All told, whilst everyone claims the EU has “lost,” European consumers have actually WON. Credit to the EU’s negotiators for this outcome. They may not even realise it, and they’ll be savaged in the press, but this is actually a good day for Europe.

We must lament that Trump behaves like an economic illiterate, attacking international trading systems and attempting to dismantle the liberal world order. But escalating the trade war would have been monumentally stupid.

The Path Forward

The EU should continue down this path—we need ZERO tariffs on even more goods and with even more countries. “We have a deal. We have a trade deal between the two largest economies in the world, and it’s a big deal, it’s a huge deal,” she said. “It will bring stability. It will bring predictability.” The EU must urgently begin negotiating with major trading partners—Japan, South Korea, and the UK—for zero-tariff agreements.

And again, let’s stop thinking about trade like Trump does. It’s not about maximising exports. It’s about the division of labour and lower prices for consumers. The mercantilist obsession with trade surpluses died with Adam Smith in 1776. Let’s not resurrect it now.

A Final Thought on Economic Literacy

What’s most disturbing about this entire episode isn’t the tariffs themselves—it’s the economic illiteracy they reveal. When supposedly sophisticated European commentators adopt Trump’s zero-sum view of trade, we’ve truly lost the plot.

The gains from trade don’t come from running surpluses. They come from specialisation, from competition, from the creative destruction that forces firms to innovate. When we impose tariffs, we don’t protect jobs—we protect inefficiency.

The EU’s negotiators may have just pulled off one of the cleverest moves in recent trade diplomacy: maintaining completely open access for American goods whilst accepting temporary tariffs that American consumers will largely pay. It is not perfect (that would be complete free trade), but it is much, much better than European consumers would pay massive higher prices than today.