Abraham Lincoln once said that a house divided against itself cannot stand. That was true in 1858 and it’s true today when it comes to economic policy.
The Trump administration’s strategic economic objective is to rebalance the global economy.
That is, the Trump administration intends to reverse the substitution of more expensive domestic manufacturing with cheaper foreign production, with the goal of narrowing the prodigious U.S. trade and current account deficits.
But that objective stands in contrast with a macroeconomic policy mix that will most likely result in the opposite taking place because of the nature of the populist policies that lie at the heart of the agenda.
That is, government-financed tax cuts and increased spending will put more cash in the hands of firms and households, which will increase aggregate demand. That demand will create the conditions for rising yields as public and private actors chase scarce capital, causing the dollar to appreciate.
All of this will cause the trade and current account deficits to widen, not narrow.
This is why Trump 2.0 is so focused on imposing tariffs, which are the symbolic heart of the administration’s efforts to rebalance the global economy.
But that is not how financial markets are likely to behave with respect to valuation of the dollar and the setting of interest rates.
Instead, the way to narrow the trade and current account deficits is through fiscal consolidation, featuring higher taxes and reductions in government spending.
Read RSM’s global economic outlook for 2025 in the latest issue of The Real Economy.
That approach would promote a weaker dollar as a complement to a selective tariff policy. But that approach is clearly not on the agenda for this administration.
Given the basic internal inconsistency inside the Trump economic framework, something has to give over time.
Under Trump’s policy framework—which we think will be implemented—the administration will be forced to consider either far higher tariffs than those being discussed or turn to devaluing the dollar, something the president and the Treasury secretary have said they do not support.
Or, the administration will have to consider taxing the purchase of U.S. government securities by foreign entities, which would drive up yields.
This administration is not the first nor will it be the last to have at its heart a set of contradictory economic policies and objectives.
The extent to which it achieves a synthesis might be determined by the financial markets. If the internal contradictions of the policy framework are not resolved, the bond market will push yields higher, and the markets will become the ultimate arbiter of why the policies succeeds or fail.
Lincoln is also supposed to have said, “You can please some of the people all of the time, you can please all of the people some of the time, but you cannot please all of the people all of the time.”
The current administration and its economic team will soon need to decide on what it wants. Based on the internal inconsistencies and contradictions in its economic policy matrix, it is clear that it cannot have it all.
