Hold onto your hats: As Trump 2.0 nears, we should be afraid. Very afraid.

Bitcoin above US$80,000 and counting. The US dollar exploding. All three major Wall Street indices – Dow, S&P, Nasdaq – hitting record highs, all on the back of Donald Trump’s US re-election victory.

Let’s face it, everyone loves a circus. But will the world economy combust as the United States’ economic policy U-turns under Trumpenomics? And how will this risky, high-wire act impact Australia?

Summer tax holiday

Let’s rewind to January 2017. Barack Obama has just left the White House, and Trumpenomics is now the soup du jour.

On day two of his presidency, Trump withdraws from the Trans-Pacific Partnership (TPP), a 12-country, multicontinental, free-trade pact that has taken eight years to negotiate.

Mere months later, the new Republican administration announces its withdrawal from Obama’s signature policy, the Paris Climate Agreement, signalling Washington’s U-turn back to fossil fuels. The US began to produce so much oil and gas from fracking that, by 2020, it ran out of places to store it.

Then there were both income and corporate tax cuts. In December 2017, Congress passed the Tax Cuts and Jobs Act, which reduced corporate taxes from 35% to a flat 21%. The act included tax cuts for every bracket, except the lowest bracket (10%) for low-wage workers.

This did increase business investment, but there was a sting in the tail – the act devastated the federal budget bottom line, blowing out the deficit by US$1-2 trillion.

But wait, there’s more.

The December 2017 tax cuts also ushered in a major tax holiday, the first since George W. Bush’s 2004 initiative, benefiting US big tech, big oil and big pharmaceutical firms the most.

Eight of the US’s largest tech firms alone held more than US$500 billion in foreign tax havens – in other words, not counting what big oil and big tobacco might have stashed overseas.

With Trump’s tax holiday, Apple was gifted US$45 billion in cash it could repatriate to the US at an artificially low tax rate, while Microsoft reaped an impressive US$27 billion.

Bush’s generous 2004-05 corporate tax holiday was halted, once the deleterious fiscal impact was recognised. But that didn’t stop Trump duplicating it in 2017 regardless, and the impact was immediate – budget corporate revenue fell 31% in the first year, and the federal fiscal deficit hit almost US$1 trillion.

Despite promises to turbocharge the economy, Trump saw job losses in every year of his presidency – 2017, 2018 and 2019 – even when the disastrous COVID data of 2020 is excluded.

Moreover, Trump’s administration in 2017-19 saw job losses accrue every year. In comparison with Obama’s last three years (2014-16), there were fewer Americans in employment every single year of Trump’s presidency.

Ancient history now, right? No. This is the future.

The Tax Foundation estimates Trump’s extension of the expiring 2017 act will cost the budget more than US$3 trillion over 10 years. The upside of that would result in an estimated 597,000 full-time equivalent jobs, over the long run.

Damagingly, these gains would be more than offset by more than 1.3 million job losses arising from the planned Trump tariffs of 20% across the board, plus 50% tariffs on China.

These are conservative estimates, given that Biden implemented 100% tariffs on Chinese EVs in October 2024; Trump has threatened to go harder still, with 200% tariffs on Mexican auto exports, and even plans for 2000% tariffs on Chinese car exports.

None of these policies would do any harm to Trump’s new-found firm friend, Elon Musk, the CEO of Tesla. On Wall Street, Tesla shares have risen 25% since the election. Not a coincidence.

From Trumpflation to stagflation?

More ominous are Trump’s calls to rein in the Federal Reserve, the United States’ central bank that calls the shots on global interest rates.

Technically, the Fed is 12 privately-owned banks (and the Federal Reserve doesn’t even have “bank” in its name), but it is subject to Congressional oversight, and its chair is appointed by the President. However, the Fed is independent and conducts monetary policy (that is, interest rates) autonomously of party politics.

The Fed has been deeply unpopular among some Congressional factions – particularly Republican representatives – since the global financial crisis. More recently, the Fed’s rigorous commitment to disciplined monetary policy to combat post-COVID inflation has led to stubbornly-high interest rates, raising costs for both businesses and households.

Inflation globally has emanated partly from cost-push (supply-side) and demand-pull (demand-side) factors. The Ukraine war has been a major factor behind global inflation, although certainly not the only one.

Pre-2022, Ukraine was not only a global food basket, but also a key source of neon gas, a critical component in powering precision lasers used in semiconductor fabrication.

A combination of conflict on the back of COVID-era government spending to keep locked-down people and businesses afloat, plus the tariff wars, means the global economy is not only awash with cash, but also replete with unmet demand for EVs, chips and energy.

Oil and gas, while still sold cheaply by Russia to its partners in Beijing and New Delhi, have seen sustained price peaks until recently, as the Ukraine war saw Europe wean itself off Russian fossil fuels, while ratcheting up EU demand for alternative sources of gas and oil supplies.

Moreover, as the Israel-Gaza conflict has dragged on beyond 12 months, this raises heightened risks concerning the likelihood of instability in the Middle East and concomitant effects upon global energy prices.

Further exacerbating the risk is the near-certainty of friction between the Iranian regime and the incoming Trump 2.0 administration.

Shots have already been fired between the current Fed Chair, Jerome Powell, and Trump. In 2018, Trump refused to reappoint Janet Yellen, currently Biden’s Treasury Secretary, to a second term at the Fed.

Instead, Trump appointed Powell, who has proven fiercely protective of the central bank’s independence. Powell has already stated any attempt to fire him would be unlawful. But Trump and Congress could undermine him by appointing yes-men and women to the Fed’s board of governors.

Send in the clowns

The core problem is Trump is attempting an impossible trinity. He’s promised to reduce inflation. To accomplish this, the Fed must maintain monetary discipline via a tight interest rate regime.

But Trump’s economic policies will undermine the federal budget and blow out the deficit, forcing the government to borrow more to fund federal expenditures. Thus, the inherent contradictions in Trump’s policies are self-evident – inflation and interest rates cannot be reduced simultaneously.

In any event, the Fed has charted a clear course in the past few months. It’s initiated two major cuts of 0.50% in September and 0.25% in November, in order to induce a soft landing and avoid a US recession.

But Trump wants interest rates to fall further and faster, which itself would again release the inflation genie out of the bottle.

Certainly, if the Ukraine and Middle East conflicts end, this will remove some inflationary pressures, but the concept that inflation can simply be eliminated at a stroke is illusory.

Moreover, this cornucopia of smoke and mirrors cannot disguise the fact that the Trump tariffs, if implemented, will ramp up price pressures further on US businesses and households, which depend on cheap Chinese exports.

Trump’s campaign promise to cut taxes and make up the difference with tariff revenues doesn’t pass muster; tariffs make up little more than 2% of all federal revenue.

Border crossings also feed into the economic debate. The US economy relies upon a steady stream of both formal and informal migrant labour. But Trump’s announced mass deportation plans for undocumented migrants could see one million persons deported per annum.

This would not only cost billions to implement and drive up the cost of labour significantly, but also result in serious shortages in myriad industries throughout the US, affecting sectors such as farm output, infrastructure and housing construction.

Thunder Downunder

Think Australia is largely immune from all this? Think again. Australia has “imported” inflation as the US dollar has appreciated dramatically post-COVID.

Most of what we import (petroleum, cars, computers) have to be paid for with US dollars. As the Australian dollar has remained in the 60-cent range, this has been like setting a pyromaniac loose on domestic inflation. That’s why the RBA has kept interest rates high for a prolonged period – to defend the Australian dollar exchange rate.

Australia may also be collateral damage in Trump’s trade war with Beijing. Our two biggest exports – iron ore and thermal coal – power the Chinese economy. When the US, China’s biggest market, slams its tariff doors shut, Chinese firms will need less iron ore and less energy.

Beijing has held the keys to Australia’s prosperity for more than 25 years now; a plateauing Chinese economy would have serious effects on Canberra’s finances.

Indeed, the Australian National University’s Professor Warwick McKibben, a former member of the RBA board (and now a member of the “Shadow RBA”) likens our position to standing on fireworks fuses.

KPMG’s assessment gloomily predicts Trump’s policies could cost Australia’s GDP A$36 billion.

This week, Treasurer Jim Chalmers released Treasury modelling, showing the “indirect” impact of the Trump tariffs was worse than the immediate impact on Australia. This is meaningless drivel, to be frank. We can prove it’s drivel because Reserve Bank Assistant Governor Christopher Kent last week told the Senate that US deficits under Trump would lead to higher inflation and higher interest rates.

Revealingly, Treasury has not modelled the likely inflationary impact of Trump’s policies, because that would scare the living daylights out of the voters. (And we have one of those federal elections in 2025.)

It may be calm now before the storm, but Trump’s re-election proves lightning does indeed strike twice.

Hold onto your hats. It’s going to be a hell of a ride.