Trump is cannibalising his economic base – will they turn on him?

Jonathan Edwards

One of the main reasons the Democrats lost the Presidency was the perceived failure of US economic policy under the Biden Administration.

It seemed somewhat surreal to me as the UK Government would have given their right arm for US levels of economic performance. In 2022 US GDP grew by 2.5%, 2.9% in 2023 and 2.8% in 2024. UK Growth on the other hand has struggled to get over the 1% mark.

The Republicans however zeroed in on inflation as a key battleground and argued that a Trump presidency was the only way to reduce the cost of living for ordinary people. His other key coalitions were the tech billionaires, some of whom are directly part of his administration, and private investors in highly speculative assets such as crypto currencies.

Trade tariffs

Trump’s key economic policy of date has been to turn to aggressive protectionist measures in the form of trade tariffs. As many commentators have noted, this is a strange tactic to deploy if reducing inflation is your aim, as tariffs increase the cost of imports leading to increased domestic prices. It is true that aggressive protectionism could potentially lead to the reshoring of supply chains and the boosting of domestic growth; however, that is unlikely to be in the short term.

Furthermore, Trump is an apostle of loose monetary policy, believing that low interest rates are critical for personal enrichment via low borrowing costs and asset price inflation. The Federal Reserve is less likely to reduce interest rates if inflationary pressures re-emerge. For those worried about the cost of living, therefore, most observers would argue that Trump’s economic policy is likely to prolong price pressures on day to day living.

Which then brings me to the second and third elements of the Trump economic coalition: the tech billionaires and the speculative high risk crypto enthusiasts. Confidence is by far the most important element driving financial transactions, and nothing undermines confidence more than uncertainty. Trump’s approach to tariff policy has been the economic equivalent of removing two Jenga pieces simultaneously. What looked like safe investments only a few weeks ago now appear remarkably overvalued – hence the fall of the main US stock indices.

Fan club

Trump’s fan club included the owners of some of the so-called magnificent seven companies: Tesla, Nvidia, Apple, Microsoft, Alphabet, Amazon and Meta. These companies have been a huge draw for investors not only in the US but across the world. However, US stocks have seen their value plummet since Trump assumed office.

On Monday this week alone Tesla nosedived 15% (though at the time of writing on Tuesday evening I can see a rebound of 4.6%). It will be interesting to see how long the love-in between the tech billionaires and Trump lasts if turbulence in share prices continues and the value of their companies fall. These losses are primarily a tragedy of course for small time investors who have seen the value of their investment portfolios and pensions plummet.

Another key element of the Trump coalition were the crypto enthusiasts who hoped that Trump would put an underpinning to crypto currencies via the establishment of a strategic reserve which they hoped would see Bitcoin used as an effective official currency. On his election the value of these assets flew through the roof. However, the policy announced by Trump last week didn’t go as far as some wanted – I would argue wisely as its impact would have been to undermine the dollar, which is the source of so much global economic power for the United States.

Furious

However, some crypto supporters are furious, believing they have been misled. The value of crypto assets has been in freefall by nearly 25% from its all-time high, decimating the fortunes of small-time investors who were late entrants.

Such has been the turmoil of the last few weeks that forecasters have been rapidly changing their analysis for this year, with many predicting a recession on the back of plummeting consumer confidence together with a difficult year for the financial markets.

Trump brazenly labels matters as a necessary ‘detox’. With reports that it costs $5m for a one-to-one dinner with the President at Mar-a-Lago, I suppose he feels somewhat inoculated. Some apologists of his believe that it’s all part of a masterplan to force the Federal Bank to initiate emergency rescue measures specifically by slashing interest rates.

I suppose once you emotionally invest so much in a political project you must come up with something to justify keeping the faith. I would further suspect that increasingly it may dawn on some of his supporters that they have been sold a pup.

Jonathan Edwards was the MP for Carmarthen East and Dinefwr 2010-2024