trump’s tariffs have upped the odds of a US
recession this year debt refinancing theories aside this is bad news for everybody but what
if I told you that this isn’t even the worst case scenario worst case scenario according
to some forecasts stagflation is now on the cards and it may sound goofy but if stagflation
bites we’ll be wishing it was only a recession today we break down what stagflation is why it’s
so bad and how likely this scenario is my name is Nick and this is a video you do not want to miss
with Liberation Day put on pause it’s back to the slammer for America until July and if you listen
real carefully you can hear the sound of penguins popping champagne somewhere just kidding looking
at the market reaction anyone would think that the tariffs have been called off but this is far
from the case the so-called reciprocal part of the tariffs you know the part that was made up by Chat
GPT has been paused however the base rate of 10% slapped on the entire world has not and this is
still a seismic shift in global trade that looks like it’s here to stay meanwhile the US China
trade war is ramping up on what seems like a daily basis with rates of around 125% on either side at
the time of making this video the White House has resorted to tweeting in all caps “Don’t retaliate
and you will be rewarded.” Only to be roasted by China’s US embassy posting memes about it it’s
kind of funny but uh it’s also really bad news china and the US together account for 43% of the
global economy according to the latest projections from the IMF slowdowns in both economies will
have knock-on effects on the rest of the world while the uncertainty created by Trump’s pause
is likely to deter corporate investment both internationally and domestically the spiraling
US China tariffs have largely negated the relief implied by the pause on the other tariffs before
Trump’s pause the average US tariff rate was set to reach 27% the highest in more than a century
and after the pause it has fallen to drum roll please 24% yep and that’s according to Yale’s
Budget Lab and Bloomberg economics so whatever doom and gloom you were feeling before the pause
you might want to resume the pause has not changed the economic outlook all that much and unless the
US China situation diffuses it could get worse but apparently not for big tech which recently
got an exemption from the tariffs lucky them now proponents of the tariffs mostly acknowledge that
they will cause some economic harm but justify this as a necessary step towards a greater good
as Trump said the patient is very sick and needed some medicine it’s short-term pain in exchange for
long-term gain let’s talk about that for a sec oh mainly by trade deficit reduction and reshoring a
recent events suggest that the deficit issue is a shorterterm project as the White House has said
that many countries were quick to request trade negotiations after Liberation Day now seeing
as the base rate of 10% has not been removed it may be a permanent fixture but if these trade
negotiations are to Trump’s satisfaction he can at least be expected to drop the chat GBT part of
the tariffs and if things keep moving this quickly some of the potential damage from these rates will
be avoided entirely reshoring on the other hand is a much longerterm project if tariffs are the
tool needed to make it happen they might be kept in place for years to come critics of reshoring
cast doubt on its feasibility time horizon and potential for massive job creation amid rapid
advances in robotics and AI they point out that US manufacturing is still alive and well it just
doesn’t need so many humans nowadays manufacturing share of US real GDP has remained fairly constant
since the 1940s it is only the share of nominal GDP that has declined and this means that the
change is a function of prices allow me to explain manufacturing has become more efficient in
the last 80 years and the resulting cost savings have meant that the price of manufactured
goods has increased at a slower rate than the overall increase in prices in the economy so
US manufacturing output has not created prices have hence why US manufacturing accounts for a
smaller share of the GDP one of the reasons for this is because it’s now possible to produce much
more stuff with far fewer human workers in other words a lot of the job losses can be attributed to
automation rather than offshoring and this casts some doubt on the idea that US manufacturing jobs
lost since the 1940s can be brought back as it would likely require undoing automation well jobs
or no jobs the US having more production capacity would surely be a win if nothing else than for
reducing dependence on external supply chains that could be subject to disruption if the US
can become more self-sufficient that’s a source of strength no doubt so when proponents of tariffs
say it’s short-term pain in exchange for long-term gain we think this is what they expect to gain
fair enough but what about the pain we’ve talked a lot about the effect on the markets per se now
to recap markets tanked to the tune of trillions of dollars while the fear and greed index for US
stocks reached four indicating sheer terror among investors markets did indeed bounce after Trump
announced a 90-day pause on non-China tariffs but the tariffs can easily be slapped back on any
country that doesn’t satisfy President Trump as was the case with Canada and Mexico earlier
this year treasury Secretary Scott Bessant has downplayed the market damage by pointing out
that most of the stock market is concentrated in billionaires hands in his portrayal the government
is for once putting the needs of the country above the interests of the wealthy this is misleading
because for example most pension funds are heavily invested in stock markets so collapsing stocks
means collapsing pensions billionaire stock portfolios can be dumped extremely hard without
making their owners poor the same is not true for retirees relying on the markets for their pensions
moreover the idea that the government was throwing billionaires under the bus has come into question
as the White House has been accused of market manipulation we’ll save that for another video
though anyway potential trade disruptions aside this short-term effect of tariffs was extreme
fear in the markets with very real consequences for working Americans but if you thought fear
was bad I’ve got news for you we might need to dust off the misery index soon yes that’s a real
thing scared and miserable america is going to need a good therapist now for context the misery
index was invented as a measure of stagflation a brutal economic phenomenon that is notoriously
hard to break out of the good news is it’s quite rare there have been occasional stagflation fears
over the years but the textbook case is still the 1970s the bad news is that some economists are
now saying that Trump’s tariffs are likely to cause stagflation so why is that and what even is
stagflation why is it such a big deal and is this just some Trump FUD okay let’s start with the
what a stagflation is an unusual combination of economic stagnation high inflation and high
unemployment this is an unusual combination because demand dynamics normally push inflation
and unemployment in opposite directions when unemployment is low employers compete for workers
driving up wages higher wages increase costs for businesses leading them to raise prices at the
same time more money in workers pockets leads to strong consumer demand so low unemployment drives
both cost push inflation and demand pull inflation conversely high unemployment slows wage growth as
more workers compete for the same jobs increased joblessness dampens consumer demand lowering price
pressures makes sense right now this correlation known as the Phillips curve was first observed
by the economist AW Phillips in 1958 it suggested that policymakers could trade off higher inflation
for lower unemployment and vice versa however the limits of this model soon became apparent in
the mid 1960s the UK experienced a period of simultaneous high unemployment stagnation and
inflation prompting one lawmaker to coin the port manto stagflation a phenomenon that the Philips
curve model couldn’t account for a few years later the same phenomenon would strike again but
on a much larger scale in October 1973 the US sent Israel billions of dollars to support its military
occupation of Syria and Egypt arab members of the Organization of Petroleum Exporting Countries
or OPEC did not appreciate this in retaliation they cut oil production and embargoed exports
to the US and other allies the double whammy of a production cut and embargo caused the price of
oil to quadruple while global supply fell by 7% and this crippled industries dependent on cheap
energy particularly in the US which depended on imports for 45% of its oil consumption at the time
so a huge shock to the global economy but uh why did this lead to stagflation instead of a standard
recession well let’s see the oil price hikes drove up production cost resulting in higher consumer
costs and pushing US inflation up to 12.3% by 1974 high inflation check at the same time the suddenly
exorbitant cost of energy forced factories to cut output lower output meant layoffs leading
to the unemployment rate hitting 9% in 1975 high unemployment check incidentally the misery
index is the sum of inflation plus unemployment so 12 + 9 made the US economy 21% miserable but
uh what about the other component stagnation the technical definition of stagnation is a prolonged
period of high unemployment weak wage growth weak productivity and low levels of investment all
of these features were present uh meaning the gangs all here high unemployment high inflation
stagnation check check check now why was this such a big deal well it’s because the tools
available to central banks like the Federal Reserve no longer provide any good options you
see normally in times of macroeconomic stress the general direction of the policy response is pretty
straightforward when inflation is running too hot uh the Fed will typically raise interest rates
increased borrowing costs cause households to re in spending and businesses to scale back their
investments this means lower demand and lower demand means less upward pressure on prices
so inflation cools off the trade-off per the Philips curve is higher unemployment most central
banks deem this a temporary and necessary cost to preserve economic stability and living standards
over the medium term however if unemployment is already high to begin with the prospect of raising
it even further to bring inflation under control doesn’t look like such a great choice so maybe
the Fed should tackle unemployment first then right well in times of high unemployment the Fed
typically lowers rates decreasing the demand of borrowing stimulates demand prompting employers
to hire more workers and therefore lowering unemployment oh uh but wait won’t higher demand
cause inflation to increase you’re damn right it will and with inflation already very high this is
not a good look what good is stimulating demand when prices are already running out of control
unchecked inflation can lead to wage price spiral where workers demand higher pay to keep up with
rising prices but businesses respond to increased labor costs by rising prices further this feedback
loop can theoretically lead to hyperinflation in the worst case scenario so stagflation means
you’re damned if you do and uh damned if you don’t faced with a choice between shooting itself
in the right foot or shooting itself in the left foot the Fed was paralyzed it hesitated to raise
rates aggressively fearing job losses and that’s how inflation ended up above 12% in 1975 believe
it or not it actually took another entire oil crisis before the Fed took decisive action after
the Iranian revolution in 1979 Iran’s oil output fell by 7% sparking global panic and causing oil
prices to double once more unemployment hit 7.5% in 1980 and GDP growth minus 8% once again the
Fed initially prioritized unemployment however the dreaded wage price spiral caused inflation to
hit 13.3% newly appointed Fed Chair Paul Vulkar eventually bit the bullet and chose which foot
America would shoot itself in the wage price spiral was causing runaway inflation which could
undermine public trust in the currency uh not a good look if your currency is the world’s reserve
currency so Vulkar chose to crash inflation he raised rates to 21% by 1981 the highest long-term
prime interest rates have ever existed in modern capital markets the plan worked and by 1983 price
stability had been restored with inflation back down to 3.2% but uh at what cost well that’s uh
not a rhetorical question vulkar’s harsh medicine caused backto back brutal recessions in 1980
and from 1981 to 1982 when unemployment peaked at 11% ouch it wasn’t the Fed’s fault that both
raising and lowering rates could only exacerbate stagflation but the resultant policy paralysis
was devastating market expectations of inflation became deankored and this is credited
with embedding stagflation for a decade many lessons were learned from this miserable
episode the Philips curve still has a place in macroeconomic theory but it is now weaker and less
stable than it was in the past it’s now understood that inflation is influenced by multiple factors
including supply shocks and expectations not just the labor market monetary policy and more
importantly the economy have changed a lot since the 1970s we’ve had occasional scares and episodes
of stagflation over the years but the world has never again seen anything like what it saw in the
‘7s but does that mean it would never happen again we haven’t seen another supply shock on the
scale of the 1970s oil crisis the price of oil quadrupling and then doubling is just bonkers
and few industries were left unscathed however Trump’s tariffs currently at a minimum of 10% on
the entire world are another once in a generation supply shock the shock is of comparable breath
because the tariffs are applied indiscriminately but to be sure it’s a much smaller shock than
the price of oil multiplying as it did in the 1970s but remember the most important country
in the US’s economic equation is China and huge tariffs on China will mean a huge increase in
input costs for US manufacturers so cost push inflation an April 2025 survey by the University
of Michigan has recorded 12-month consumer inflation expectations at 6.7% the highest reading
since 1981 at the same time US manufacturers will be hit by production delays because they are
dependent on Chinese rare earth metals now under embargo output and jobs will fall as a result
and as we learned in Trump’s first term China’s retaliatory tariffs can crash US farm incomes
exacerbating rural unemployment accordingly the chief economist at Moody’s Analytics projects US
unemployment to reach 7.5% if the tariffs persist beyond 2026 meanwhile JP Morgan estimates tariffs
could reduce the US GDP growth to nearly zero this year and Larry Fin says he is quote petrified
and that he thinks a recession is imminent if not already underway so stagnation high unemployment
and high inflation the gang is once again all here it’s a perfect recipe for stagflation how bad
it will get ultimately depends on how long the tariffs remain in place tariffs are popular with
Trump’s electoral base but they are cryptonite to big business and if the history of US policym
teaches us one thing it’s that what voters want is irrelevant if it conflicts with business
interests the tariffs are an aberration but at the time of making this video it’s looking
increasingly like they won’t last as I noted earlier Trump is already making concessions also
unemployment may not be too big of a concern in the latest data on job openings from February the
Bureau of Labor Statistics reported 7.6 6 million job openings in the US the labor market is also
much more flexible than it was in the 1970s with the gig economy buffering unemployment so on the
whole tariffs all but guarantee some amount of stagflation but that doesn’t mean a decade of
disaster like the 70s which looks unlikely even if stuff starts hitting the fan in the trade war
history has taught policymakers to take decisive action quickly as happened with the enormous
pandemic stimulus in March 2020 both the 1973 oil crisis and the 2025 tariffs were caused by
political choices by the US but the circumstances are completely different most importantly the
reduction in oil supply and massive increase in prices had effects that lasted long after the
embargo was lifted in March 1974 tariffs are different because they can be here today and gone
tomorrow just like those American iPhone assembly jobs if Trump caves and tariffs are lifted
the situation is likely to improve immediately a recession may still be on the cards but
that would be a walk in the park compared to a prolonged period of stagflation then again Trump
hates losing and as one White House official put it quote “He is at peak not giving a fuck.” Uh so
uh anything could happen well while you’re waiting for this to play out why not watch this video to
find out why the US housing market could be next on Trump’s hit list and if you’re not subscribed
to the channel yet you can do that right over here that’s me for now thank you very much
for watching and I’ll see you again soon
