World stock markets in the face of expected us stagflation
The US president, upon taking office on 20 January 2025, announced a series of economic policies. These included the imposition of tariffs to promote import-substitution industrialisation, reduction of the fiscal deficit, direct tax cuts, and the end of the war in Ukraine. Additionally, a mass deportation of undocumented immigrants was proposed, to be funded by the US Treasury. These policies, lacking a macroeconomic sense, immediately impacted not only the US but also its closest trading partners, leading to a double effect in the global stock markets and affecting the value of the dollar.
Cutting public spending in the North American country, which had a deficit of 6.2% of GDP in 2024 according to the Federal Reserve Bank of St Louis, seems to be an initial and indiscriminate goal of the White House, which has granted special powers to a new parastatal entity called the Department of Government Efficiency (DOGE) to disappear institutions (USAID), ministries (Education), reduce staff without well-defined criteria (Center for Disease Control, programmes in Spanish) and generate millions of unemployed. As a parastatal, it has no executive power. Its decisions are not binding. Thus, although the Supreme Court can reverse the mass of layoffs and closures with judicial appeals, the macroeconomic damage is done.
On the other hand, the problem is that the Federal Government spends the most on Social Security, Defence, and interest on the debt. Federal employment in itself is not the cause of the deficit. If you add direct tax cuts and increase public spending on national security and deportations, the fiscal balance comes out negative. The Trump team believes it can be counterbalanced with tariffs, as in the 19th century, without measuring tariffs' inflationary and recessionary effects. The transfer of US military spending in NATO to the governments of Europe is the icing on the cake. Savings within the US push Europe to spend more on defence. The result when it comes to stock markets has been that both US stock markets, the New York Stock Exchange as measured by the Dow Jones Industrial Index 30 and the Nasdaq 100 between 20 January and 20 March, plummeted.
The only stock market that followed the same trend was Japan. Its Nikkei 225 index fell. Its Nikkei 225 index fell when on top of the US president's peculiar macroeconomic analysis, plus the loss of popularity of the prime minister to what is perceived to be vote buying in parliament, and difficulties for the Japanese economy with the tariffs imposed by the US. Likewise, a problem exists as the pressure grows to increase military spending in a country without a large military industry since World War II.
On the other hand, in further evidence of the fracturing of globalisation (it is not de-globalisation), the stock markets of Hong Kong, London, Paris and Frankfurt took off with great enthusiasm in the face of increased public spending on defence in economies where there is an arms industry. Hong Kong's enthusiasm may be due to the perceived negative impact on the US economy, which will benefit Chinese companies listed in Hong Kong and China's booming electric car industry. The promotion of fossil fuels in the US will strengthen the renewable energy market in the face of evidence of global warming. In most of the world, the technology is theirs. The certainty of a US recession and rising inflation rate in 2025 and measures that accentuate the US's technological backwardness benefit China's economy.
Stock markets in London, Paris and Frankfurt have surged by the prospect that their governments will invest more in their own military industries. The business of war has so far been mostly centred on US industries. The declaration that peace in Ukraine would be the product of a negotiation between Trump and Putin repositioned European rulers who support Zelensky, in the face of what they perceive to be the threat of Russian invasion of the Baltic states. In a scenario of Europe's war against Russia without the US, i.e., without NATO, European arms companies will provide the equipment. It initiated with Trump's call for them to spend 5% of GDP on defence. Since they will not import weapons from the US but produce them at home, this will boost economies that have stagnated for a decade and a half. The good news is seen in the stock markets. The bad news is that they expect a Russian invasion of the Baltic states, with the US on Russia's side, in the form of non-intervention. In this analysis, we did not incorporate the London index for lack of space, but it follows the same trend as the Hong Kong Hang Seng, German DAX and French CAC.
Finally, the global financial fracture is a new and recent phenomenon as, historically, stock markets have operated either synchronously or diachronically but infrequently with different logics. Foreign exchange markets have suffered from the same trend, with a depreciation of the dollar against the euro and Latin American currencies and a vague appreciation against the yen. There are two facts in the Trump team's analysis: that they have a monumental fiscal deficit that the Government must cut in half and that they have a level of public debt whose interest is eating up the national budget. The phenomenon of discrediting US government policies in the financial markets, which live on expectations, is a problem they will have to face later on. Paradoxically, the countries with the best schools of economics and the highest number of Nobel Prize winners have awful economic indicators and worse prospects.
