Trump and Musk, sorcerer's apprentices

The system of ocean currents that runs through the Atlantic prevents the countries located further north in Europe from freezing under Arctic temperatures. It is something like a natural thermostat, composed of a flow that transports warm, surface waters from the coast of Florida to the north and another flow in the opposite direction of colder, deeper waters. There is a certain risk that climate change could alter these currents, intensifying extreme weather events on both sides of the North Atlantic. Apart from this, the world economic system also depends on a delicate balance of trade and financial currents and countercurrents between the main economies. Over the last few decades, the United States has acted as the main driver of world demand for goods and services. By spending more than it earns from its domestic production, the American economy drives the export machinery of other large economies, such as China, Japan and Germany. In return, these countries recycle a significant part of their commercial income by buying financial assets denominated in dollars – shares of listed companies and American public and private debt.

This circuit of trade flows and financial reflows makes it possible to compensate for the imbalances between savings and investment in the different economies, to their mutual benefit. The purely exporting economies of Europe and the Far East, in the process of demographic regression and accelerated ageing, save much more than they are able to invest productively in their own countries. On the other hand, the American economy, more dynamic in demographic and technological terms, creates investment opportunities in excess of its saving capacity. The key that allows the US to invest beyond its resources is the ability to attract them from abroad, which is the counterpart to its current account deficit. The only way to reduce this deficit necessarily involves adjusting investments to the savings generated internally. On the other side of the scale, the European and Asian economies should compensate for the fall in exports by finding new opportunities for productive investment in their countries or, alternatively, they should accept a painful contraction in the level of activity.

The tariff dance initiated by President Trump aims to significantly reduce the trade deficit, while Elon Musk's volcanic hyperactivity pursues a radical reduction in the fiscal deficit. In principle, a simultaneous reduction in the trade and fiscal deficits could be positive for the US, assuming that savings are adjusted upwards and investment is maintained. But an adverse scenario is also possible, in which the closure of the American economy on itself weakens its dynamism, the tariff war slows down the world demand for goods and services, and tax cuts more than offset possible savings on the side of public spending. In this second scenario, it is investment that would tend to fall to the level of internal savings insufficient to finance the current rate of growth of the American economy.

Stock market calm

As in the well-known musical by Paul Dukas, in which a sorcerer's apprentice unleashes forces beyond his control, the unleashed actions of the Trump-Musk duo could have disastrous consequences if they end up altering the deep currents that keep the world economy in balance without offering a viable alternative. For the moment, the stock markets have calmly received the first bursts of executive orders from the White House. So far, investors seem to be discounting a strong dollar in a moderately inflationary and business-friendly environment, but at any moment they could begin to react to erratic policies that could end up undermining confidence in the American economy. As the renowned monetary policy expert Richard Clarida writes in a recent article in Financial Times, it is possible that the uncertainty associated with the new government's economic policies will end up having a negative impact on investment decisions greater than that which would result directly from tariff increases.

In Dukas's work, the chaos unleashed by the sorcerer's apprentice ends when the master arrives, takes away the magic wand and restores order. Growing tensions between Trump and Fed Chairman Jay Powell cannot be ruled out if the former continues to dispute with the latter how to lead monetary policy. But the markets will have the final say. If they lose confidence in the direction the American economy is taking, they will simply begin to undo positions in dollar-denominated assets, until they make the sorcerer's apprentices see that the global economic system does not allow for too much improvisation.