Donald Trump’s top economic advisor, Kevin Hassett, recently outlined the administration’s economic vision, and after digging into the details, one thing stands out: it looks eerily similar to what Europe did following the Great Financial Crisis (GFC). If Trump gets his way, the U.S. economy could end up looking a lot like Europe’s—stagnant growth, higher unemployment, and structurally weaker economic conditions. Let’s break it down.
The Core Strategy: Fighting Inflation by Shrinking the Economy
Hassett laid out two main pillars of Trump’s economic plan:
- Increase Labor Supply – This means pushing those receiving government assistance into the workforce, which effectively increases unemployment before they find jobs.
- Lower Aggregate Demand – Achieved through government spending cuts, meaning less money flowing through the economy.
Theoretically, this will bring down inflation. But at what cost? If history is any guide, slashing government spending and pushing more people into the labor market without increasing demand leads to stagnation—a scenario Europe found itself in after the GFC.
Learning from Post-GFC Europe vs. the U.S.
To understand what this could mean for America, let’s compare what happened in the U.S. and Europe following the GFC. The key difference was government spending. The U.S. took a more aggressive approach, increasing spending significantly compared to Europe, where austerity measures reigned supreme. The result?
- U.S. Growth Surged: Increased government spending helped drive economic recovery faster, lowering unemployment and boosting wages.
- Europe Stalled: Austerity policies led to sluggish growth, prolonged high unemployment, and weaker wage growth.
If Trump aims to shrink government spending and unemployment policies to align with Europe, we could see similar stagnation here in the U.S.
The Trade Deficit and Interest Rates
Another key piece of Trump’s vision is rebalancing trade and lowering interest rates—again, mirroring Europe’s strategy post-GFC. Europe’s trade balance remained relatively neutral, while the U.S. has long run significant trade deficits. Additionally, the European Central Bank kept interest rates near zero (even negative at times), whereas the U.S. maintained higher rates. Trump appears to want to move toward Europe’s approach—lowering interest rates and reducing the trade deficit.
But here’s the catch: Europe’s strategy didn’t lead to stronger long-term growth or better financial market performance. In fact, when a supply shock hit—like the COVID-19 pandemic—Europe suffered far worse inflation than the U.S. because their slower growth made them more vulnerable to disruptions.
A Credit-Driven Boom, Followed by a Bust?
One wildcard in this scenario is private sector credit. Unlike Europe, the U.S. has historically relied more on private debt to fuel economic expansion. If Trump pursues aggressive deregulation to encourage private investment while simultaneously cutting government spending, we could see a short-term boom driven by credit growth. However, as history has shown, credit-driven booms often end in busts (think 2008).
The big question is: can Trump actually implement these policies? There are political hurdles, court challenges, and congressional battles that could prevent full execution of his vision. However, if successful, the U.S. could be heading toward a more fragile economic future, resembling post-GFC Europe rather than its own historically stronger trajectory.
What This Means for Investors
For traders and investors, the takeaway is clear: if Trump follows through on his economic vision, expect choppier waters ahead. While a short-term credit boom could drive markets higher, a longer-term stagnation risk looms.
The key indicators to watch? Government spending trends, unemployment rates, and trade balance shifts. If spending slows, unemployment rises, and trade policies tighten, we could be looking at a very different economic environment than the last decade.
To track these trends, check out the tools available at AppliedMMT, where I provide real-time data on government spending, tax receipts, and other key economic indicators.
For a deeper dive into the full discussion, check out the video linked below.