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Economic indicators are telling Trump that if he persists with irrational policies, the outcomes will be gory
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Allies are shocked. Adversaries are amused. The world is confused. The economic disruption through what is seen to be the wrath of US President Donald Trump through tariff vengeance is wreaking havoc across economies. Of course, the word ‘tariff’ is merely an armour behind which lies a whimsical and reckless disorder.
Cheerleaders will capitulate. Victims will panic. Deals will be signed. And Trump will revisit, but not end, the unpredictability of his now-here-now-gone policies, in which he thrives (the recent withdrawal from being a peacemaker in the Russia-Ukraine war after making grandiose announcements of ending the war in 24 hours of coming to office earlier is only the latest). What had been lying hidden is now out in the open: a huge disruption in the 1945-anchored rules-based international order through the United Nations, and the 1995-platformed globalisation, through the World Trade Organization (WTO). Both have seen a creeping hijack by Beijing over decades that gained hyper-velocity in Xi Jinping’s China.
The economic disruption through what is seen to be the wrath of US President Donald Trump through tariff vengeance is wreaking havoc across economies.
Sitting 12,075 km away from Washington D.C., New Delhi sees this drama as a three-act play. It carries within it all emotions of entertainment—shock and awe, amusement, panic, tension, respite; a forlorn lover, a contemptuous adversary, unrelenting two-side, two-geography wars. The climax is awaited, perhaps still being authored. Act 1 laid the foundations and the expectations through Trump’s pre-election agenda. Act 2 is underway, partly successful domestically, but mostly not externally. Act 3 is some distance ahead.
In the horizon of that distance, three powerful entities will provide the counter checks and balances on a power that had a reasonable fundamental philosophy—you may disagree with it, but it stood on logic. It began well. However, it is now in a state of intoxication and irrational exuberance. This essay reflects on three counter-balancing forces that can tame Trump.
Perish the political narrative that ignores stock markets because they are a medium of the wealthy, by the wealthy, for the wealthy. In the US, 56 percent of households or 127 million investors, owned mutual funds. In India, there are 220 million direct equity portfolios and 235 million portfolios of mutual funds. Markets are no longer platforms for the rich. They have become tools for wealth creation for the middle class. A leader would be out of synch with the political economy to ignore markets. The days of “Sensex bhaad mein jaye” (Sensex be damned),” as late Communist Party of India General Secretary leader A.B. Bardhan had stated in May 2004, are history. Today, when stock markets crash, they hurt the wealth of voters and impact political decisions. There may or may not be a casualty, but you can’t ignore the correlation of a 12 percent fall in the S&P 500 in four trading days and Trump’s 90-day ‘tariff’ respite that followed.
The other markets that impact politics are bonds and currencies. The underlying assets behind bonds and their values are companies or sovereigns, their credit risks, and their interest rates. Bond markets anticipate these changes. Sudden changes in bond prices are a powerful indicator of confidence in an economy in the absence of any interest rate change. The bond market expresses its displeasure or discomfort with an event or a policy by selling bonds. When bond prices fall, yields rise. The 10-year bond yields rose from 4.01 percent to 4.48 percent on 11 April 2025. Effectively, Trump also shaved off the idea that US bonds are a haven for global finance. Although Trump has paused his ‘tariff’ war as a result, the uncertainty has not ended.
Sudden changes in bond prices are a powerful indicator of confidence in an economy in the absence of any interest rate change.
Currencies impact international trade, price competitiveness, investments and finance on the firm’s side and migration, education and travel on the household side. The 2.5 percent fall in the value of the dollar between February and April reduced confidence in the world’s reserve currency and may have added weight to the fall in bond markets and compounded Trump’s U-turn on ‘tariffs’. But it could fall even further, almost by another 10 percent. This could impact money flowing into the US, as a new currency risk has emerged from a market that, thus far, had been stable. With this, other US assets, such as equities and bonds, seem riskier. This also creates a new conflict between the two currency goals. Trump’s economic desire for the US to become export competitive, which means a weaker dollar, and his strategic thrust to retain the status of the dollar as the world’s reserve currency, which means a steady or strong dollar. An uncertain policy regime to the status of the dollar puts a question mark on how strong the world’s reserve currency is.
Put equities, bonds and currencies together into a combined finance basket, and what we see is a steady fall in confidence in their nexus. This could tame not only Trump’s specific policies, such as on ‘tariffs,’ but even their direction.
As profit-seeking, value-building, tax-paying, job-generating and wealth-creating entities, private companies sit at the heart of America’s political economy. They source their raw materials from across the world. Reasons could range from availability (rare earths) to core competencies (electronic components). These help US companies save costs on their final products. They enable diversification of risk. And they can import innovation. When irrational tariffs make the import of these goods pricier, large corporations will be able to absorb losses for some time. But for smaller firms, tariffs will be a pass-through mechanism; they will embed the increased costs to final consumers. Whether the consumer will buy or not will be their risk.
Whatever the extent of this pass-through (estimates range from all imports being inputs to granular industry-specific differentials to between 53 percent and up to 95 percent), the outcome, as pointed out earlier, will be inflation. How the US central bank, the Federal Reserve, manages this will be tricky, and its Chair, Jerome H. Powell, sits in an unenviable hot seat. On the one hand, he is being pressured by Trump to cut rates under the threat of sacking him. On the other hand, potentially rising inflationary expectations of more than 2 percent is pressuring him to either raise rates or keep them steady between 4.25 percent and 4.5 percent.
If Trump is waging a bet on job creation through manufacturing in the US, he will have to traverse the treacherous waters of politics before he gets there.
Either way, across countries, inflation is a vote-killer. And the US will be no different. Apart from economic hardship and reduced standards of living, inflation creates economic discontentment that overflows into voting behaviour. The hard stance of Trump on ‘tariffs’ will pressure his administration to act. Long-term is for investors. For voters, short-term hardships matter the most in determining political outcomes. If Trump is waging a bet on job creation through manufacturing in the US, he will have to traverse the treacherous waters of politics before he gets there.
So if not the three markets (equities, bonds and currency), it will be inflation that will tame Trump. Of course, both are conjoined at the base. As inflation rises, so do interest rates. For companies, higher interest rates make capital more expensive and push interest costs higher. But it will be the politics of inflation that will hurt—US household debt to GDP stands at 75 percent, and exposes voters to the vagaries of interest rates. At some point, if input costs due to ‘tariffs’ and interest costs because of rates get too high, businesses will hold back expansions, face losses, or even shut down, and households will be under financial stress. Markets and inflation could deliver a double-whammy to tame Trump’s tariff vengeance.
Finally, if things go too far, the US faces a precarious state of recession by the third quarter of 2025. A recession happens when there are two consecutive quarters of negative GDP growth. It results in reduced consumer spending, which becomes a tool for a vicious cycle of business instability and profitability. The political result is job losses. Combined with high prices in the economy, a slowdown can even turn into stagflation—high inflation running alongside flat or negative growth. This has the danger of turning into economic despair. Or worse, depression, which is a sustained period of economic decline during which GDP contracts, unemployment rises, and consumer confidence suffers. Trump is smart enough to prevent that.
It will be worse for the US this time because it would have shut its doors to trade, raised costs for companies, and imposed high prices on consumers, amidst a loss of trust.
A depression in the US is a low-probability event, but a recession could be looming (60 percent probability) or is already here. It is not easy for economies to get out of a recession. It will be worse for the US this time because it would have shut its doors to trade, raised costs for companies, and imposed high prices on consumers, amidst a loss of trust. He would have turned hope into gloom for citizens. But given the pragmatism that underlines Trump’s policy behaviour, he might just turn back from this ill-fated vengeance misadventure and seek out new ways to make America great again.
To do that, Trump will have to swallow his pride, cajole allies, particularly the $20 trillion EU, to work with him. The EU just might. So might the other 50 countries that Trump claims have lined up to negotiate trade deals with him. But all will do so knowing that the US under Trump is no longer the trusted partner it had been for the previous eight decades. India and the US have already signed a terms of reference for the first phase of a trade deal. So a recession, which would have dealt a big blow to the US, is most likely not to occur.
The fault lines of major power plays that Trump sought to fix by pressuring allies and adversaries alike lie amid the ruins of hasty policies, poor execution and unintended outcomes. China, for instance, is refusing to toe the negotiation line, making Trump appear to be fencing in air. The biggest strategic weapon that the US had—a five-letter word called trust—lies decomposing in the arrogance of another five-letter word: power. And new impossibilities will come up in this impossible world.
The biggest strategic weapon that the US had—a five-letter word called trust—lies decomposing in the arrogance of another five-letter word: power.
Nothing new here. In different ways, Xi Jinping’s China is doing pretty much the same thing—not following the rules-based international order, preventing market access, stealing technologies, weaponising trade and the economy, and harassing smaller nations with the threat of military might.
Now, the global trust deficit has expanded to Washington D.C. If Trump’s legacy 45 months from today is to hyphenate the US with China and himself with Xi, the world, while dancing with wolves, will need to look beyond this geopolitical circus and create its own centres of serious, mature and strong strategic and economic power.
Gautam Chikermane is Vice President at the Observer Research Foundation.
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Gautam Chikermane is Vice President at Observer Research Foundation, New Delhi. His areas of research are grand strategy, economics, and foreign policy. He speaks to ...
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