Members of a U.S. Army honour guard team set American flags in place for a 'Celebration of America' event.Win McNamee/Getty Images
John Rapley is an author and academic who divides his time among London, Johannesburg and Ottawa. His books include Why Empires Fall (Yale University Press, 2023) and Twilight of the Money Gods (Simon and Schuster, 2017).
Hold onto your hats, the economy of a second Trump presidency could get wild – and not necessarily in a good way.
After winning the U.S. election this week, Mr. Trump will be impatient to make the tax cuts implemented during his first administration permanent, while lifting regulations in the financial, energy and technology sectors. That will boost corporate profits and provide a further injection of stimulus to the economy.
Meanwhile, tariffs will support domestic manufacturers, who will be in a position to meet the higher wage demands that will probably result from the reduced labour supply that tighter borders will bring. Higher wages will, in turn, support overall demand, prolonging the American economic expansion. Already, in anticipation of this, the stock market leapt to new record highs on Wednesday, as investors bought shares in companies they expect to thrive.
So the Trump presidency will probably begin with an economic bang. In the short term, this will probably be good for the Canadian economy, since it will stir demand for exports, not least because the strong U.S. dollar will make Canadian goods cheap south of the border. But look a bit further down the road, and the outlook starts to look less clear.
Canada may face a peculiar set of challenges when its trade deal with the U.S. and Mexico comes up for renewal in 2026, as Mr. Trump will no doubt push for a harder bargain. But by then, an even bigger challenge may have arisen in the cycle of the U.S. economy. That’s because all of the measures to boost growth will also provoke inflation, which is already running above the Federal Reserve’s target.
That rise in inflation was also anticipated in Wednesday’s market action: Although stocks and crypto surged – the latter because Mr. Trump went out of his way during the campaign to appeal to the sector – bond prices fell. That’s an indication that investors doubt the fiscal health of the government, and that has a big impact.
Falling bond prices translate into rising yields, which means the interest rate the U.S. government must pay on its debt is going up. When interest rates on the government’s debt rise, they go up across the board.
Potentially worsening matters is that if Mr. Trump’s tax cuts become permanent, the impact on the fiscal deficit will put the national debt on an even sharper upward path. The government will be forced to sell even more bonds to cover its expenses, flooding a market in which investors will demand ever-higher returns.
The eventual rise in interest rates will be proportionate to the scale of the preceding economic boom. The longer the boom continues, and the more asset prices rise, the higher interest rates are likely to go. That will create problems outside the U.S., since rising interest rates stateside will drag them higher elsewhere. Canada has already experienced this impact, with yields on government bonds rising alongside those of the United States, running against the course of the Bank of Canada’s easing policy.
That would eventually boomerang on the U.S. Higher interest rates will crimp economic recoveries, with European economies being especially vulnerable since they are already so weak. Continued economic sluggishness in its trade partners will thus limit demand for American exports, which will complicate Mr. Trump’s aim to raise them.
Higher interest rates in the United States would eventually hamper growth there as well. With mortgage and credit-card rates rising, consumers will be forced to rein in their spending. Ultimately, a tipping point could come at which investors anticipate a slowdown and dump stocks, causing a market crash. Unless Mr. Trump moderates his stated plans once in office, the risk that this happens must be assumed. The question is whether the crash happens before or after Mr. Trump finishes his term.
But there is no question that this is the trajectory. A second Trump administration will be more coherent and focused than the first. Mr. Trump learned from his experience that time not to trust experts who were more committed to the institutions of the state than to him. This time around, he will fill his cabinet with loyalists who’ll do his bidding. Then, with only one term in which to act, he’ll move quickly.
Americans who voted for Mr. Trump often cited the high cost of living and mortgage rates as the reasons they turned on Democrats. The irony is the economy might get too much of a boost from Mr. Trump, which ultimately exacerbates both. The great American satirist H.L. Mencken once said that “democracy is the theory that the common people know what they want and deserve to get it good and hard.” Americans may in due course find out that adage still holds.