Will Trump’s economic policies really cause ‘the mother of all stagflations’? Here’s what experts say

The Federal Reserve has been hoping to forestall this state of affairs with its insurance policies for years now, however that work may very well be undone with a number of swipes of the pen, no less than in line with Summers.

“Trump’s tax proposal to exchange a significant quantity of income-tax income with tariffs is a prescription for the mom of all stagflations,” the economist wrote in a June 15 tweet. “It burdens the center class and the poor who buy items on worldwide markets. It might additionally create worldwide financial warfare.”

Trump has mentioned that if he’s re-elected this November, he’ll impose a ten% tariff on all merchandise imported into the U.S., whereas additionally slashing the company tax price from 21% to as little as 15%.

Summers didn’t pull any punches in his critique of that financial agenda final week, warning that Trump’s tariff proposals are more likely to trigger a big provide shock within the U.S. as overseas items suppliers pull again on delivery merchandise to the U.S. or increase costs amid a brewing commerce struggle.

All of that may exacerbate inflation, and will drive the Fed to hike charges much more aggressively. The fed funds price is already on the highest degree in 23 years. Summers even mentioned he may see a state of affairs the place mortgage charges surge above 10% for the primary time for the reason that Nineteen Eighties if Trump’s tariffs undergo.

“I don’t assume there’s been a extra inflationary presidential financial coverage platform in my lifetime,” he informed Bloomberg TV. “That is actually harmful stuff.”

To Summers’ level, the non-partisan Peterson Institute for Worldwide Economics discovered that Trump’s 10% tariffs on all imported items, when coupled with the extra hefty 60% proposed levy on Chinese language imports, would value the everyday middle-class family roughly $1,700 a yr in further prices because of inflation.

Past the specter of aggressive tariffs and commerce wars, Summers criticized Trump’s want to curb immigration sharply at a time when an plentiful labor provide has helped forestall vital wage pressures that may exacerbate inflation.

“And he’s for scaling again the subsidies to renewable vitality, elevating vitality prices,” Summers added. “So take a look at it from demand, take a look at it from provide. It is a prescription for a significant improve in inflation.”

Nevertheless, Bob Elliott, a former Bridgewater exec who now runs Limitless Funds, argued that solely a part of Summers’ forecast appears legitimate in his view. “Tariffs, at their core, are a regressive tax that’s inflationary,” Elliott informed Fortune. “However they’re additionally a modest help to U.S. financial situations.”

Elliott argued that tariffs will, on the margin, deliver some items manufacturing again to the U.S. and mildly improve tax revenues. He additionally famous that Trump’s tax cuts can have a equally stimulative impact for financial progress by boosting asset costs. 

Nonetheless, whereas Elliott doesn’t foresee something just like the “mom of all stagflations” that Summers is predicting, he doesn’t consider Trump’s insurance policies are the best selection within the present financial surroundings.

“It might have been a extra acceptable set of insurance policies after we have been coping with a low progress surroundings, with issues about longer-term deflation,” the Wall Avenue veteran informed Fortune. “We’re type of within the reverse circumstances right this moment, the place progress is fairly good and inflation is simply too elevated. So the coverage is simply not in step with the macroeconomic dynamics which are actually in play right this moment.”