Speaker 1: Bloomberg Audio Studios, podcasts, radio news.
Speaker 2: Maybe that will be the story for the global economy
Speaker 2: in twenty twenty six. Yes, the risks are there, but
Speaker 2: actually it's the momentum and the optimism and the AI
Speaker 2: revolution which continue to dominate the narrative.
Speaker 3: I'm Stephanie Flanders, head of Government and Economics at Bloomberg,
Speaker 3: and this is Trumpnomics, the podcast that looks at the
Speaker 3: economic world of Donald Trump, how he's already shaped the
Speaker 3: global economy and what on earth is going to happen next.
Speaker 3: And this week it's a traditional Trumpanomic look ahead to
Speaker 3: twenty twenty six. As we look forward, I hope to
Speaker 3: the holidays. I wanted to take a deep breath and
Speaker 3: think a little bit about what's happened in the past year,
Speaker 3: and a lot about what it means for the year
Speaker 3: ahead and the Christmas bundle I've selected to help me
Speaker 3: with this, and I hope provide just the right amount
Speaker 3: of illumination. Are in Washington, Mario Parker, our managing editor
Speaker 3: for US Politics, amazingly joining Trumponomics for the first time. Mario, Hello,
Speaker 3: I am very happy to be here.
Speaker 4: Thank you.
Speaker 3: Also in Washington, frequent visitors to the pod. Tom Orlick,
Speaker 3: chief economists for Bloomberg Economics.
Speaker 2: Great to be a Stephanie and in London.
Speaker 3: Welcome back. Palmei Olson, a Bloomberg opinion columnist covering technology,
Speaker 3: whose book Supremacy, AI, Chat, GBT and The Race That
Speaker 3: Will Change the World was the FT's Business Book of
Speaker 3: the Year for twenty twenty four. Parmey, welcome back.
Speaker 5: Thank you for having me.
Speaker 3: I mean I wanted the three of you for various reasons,
Speaker 3: some of them pretty obvious. You've been right at the
Speaker 3: heart of the action this year, and I find you
Speaker 3: always wise about what's to come. The way we always
Speaker 3: start these things where I like to start, is just
Speaker 3: for each of us to think, what was the most
Speaker 3: memorable moment of this year? So Mary, I'll put you
Speaker 3: on the spot. What was the most memorable moment for you?
Speaker 6: I think it was in the specific to this podcast
Speaker 6: very much, which was the Liberation Day rollout where it started.
Speaker 4: There were fits and starts.
Speaker 6: There were problems with the White House's copying machine, there
Speaker 6: were typographical errors on some of the cars, and there
Speaker 6: was just a lot of confusion, and I think that
Speaker 6: set the stage for what we saw with both a
Speaker 6: teariff rollout, and the way and the many things that
Speaker 6: the administration promised it did not quite come to fruition,
Speaker 6: but also the fast pace and the chaos that we've
Speaker 6: seen wrought by the administration deliberately so where they want
Speaker 6: to move fast and quote unquote break things, and we've
Speaker 6: seen that throughout the rest of the year.
Speaker 4: So that was the most memorable moment I think, Tom.
Speaker 2: There was a moment just before the US made that
Speaker 2: faithful decision to join Israel in attacking Iran's nuclear facilities,
Speaker 2: and there was still intense speculation about whether Operation Midnight Hammer,
Speaker 2: as it was called, would go ahead or not, and
Speaker 2: President Trump took to truth social and said, I may
Speaker 2: do it, I may not do it. Only I will decide,
Speaker 2: and I expect everyone else's way ahead of me on this.
Speaker 2: But for me, that was a real clarifying moment, right
Speaker 2: and it clarified that the intense uncertainty, the kind of
Speaker 2: presidency as a soap opera with a cliffhanger at the
Speaker 2: end of every episode to keep you tuning in the
Speaker 2: next day. That wasn't a bug of some of the
Speaker 2: trade policies and security policies we'd seen in the previous
Speaker 2: few months. It was a feature, a deliberate strategy to
Speaker 2: allow the President to very successfully dominate the conversation, dominate
Speaker 2: the headlines, keep himself at the front of everyone's consciousness.
Speaker 4: Pa well.
Speaker 1: The highlight for me was actually at the very beginning
Speaker 1: of this year in January, when a little company in
Speaker 1: China called deep Seek released an AI model that caused
Speaker 1: a freak out in Silicon Valley.
Speaker 5: This was an AI model that was as good as.
Speaker 1: Chat GBT, but developed for what apparently was a fraction
Speaker 1: of the price, and it was an open model some
Speaker 1: would call it open source, so they essentially put the
Speaker 1: blueprints of this AI model on the Internet for anybody
Speaker 1: to develop on themselves. And I thought it was just
Speaker 1: such an interesting twist on this effort by the Trump
Speaker 1: administration and previous White Houses before to restrict chip exports
Speaker 1: to China to try and ensure that the US would
Speaker 1: stay ahead on tech. And yet the constraint bread innovation,
Speaker 1: the lack of chips, led this one company to try
Speaker 1: and do more with less. And since then, deep Seek
Speaker 1: isn't quite as popular as I would have thought it
Speaker 1: would be by this point in time, but other Chinese
Speaker 1: open source models are becoming much more popular, in particular
Speaker 1: Ali Baba's Quen. So lots of Silicon Valley startups are
Speaker 1: using models from China now, and I think that's just
Speaker 1: such an interesting highlight for this ascendancy we're seeing from China,
Speaker 1: both in AI and also in robotics.
Speaker 3: And it's funny for me because your slightly relates to
Speaker 3: one of mine. If I'm completely honest, if I think
Speaker 3: of what was the most memorable, I think watching in
Speaker 3: the office and watching in real time the feed coming
Speaker 3: in of that' Zelenski, the sort of car crash Zelenski
Speaker 3: session in the White House with the President, the visceral
Speaker 3: reaction we all had of oh my god, this is
Speaker 3: really very bad. But if I think about what was
Speaker 3: the most eye opening, it was when we'd all been
Speaker 3: completely focused on the US and I went to a
Speaker 3: sort of reasonably high level senior people involved in global business,
Speaker 3: some of them based in Hong Kong, were others in US,
Speaker 3: and I'd asked them on this panel, you know what's
Speaker 3: the thing that surprised you so far this year? Assuming
Speaker 3: they would all talk about Donald Trump, every single one
Speaker 3: of them pointed to a technological advance that they'd been
Speaker 3: surprised that China had made whether it was in electric
Speaker 3: vehicles or I'm sure a couple of them were talking
Speaker 3: about deep seek and it just sort of made me think, Ah,
Speaker 3: maybe China's just going to win this, even as we
Speaker 3: spend an awful lot of time watching every move coming
Speaker 3: out of the White House, so Tom partly because of that,
Speaker 3: how the rest of the world has absorbed and responded
Speaker 3: to trumpernomics has obviously been a big theme for the year.
Speaker 3: The big surprise being that countries, in many ways most
Speaker 3: almost all of them apart from China, did not retaliate
Speaker 3: to the tariffs, and that has had its own consequences.
Speaker 3: But how do you see the global ramifications of mister
Speaker 3: Trump's economic policies playing out now in twenty twenty six.
Speaker 3: We've had stage one? What's stage two going to look like?
Speaker 2: So I think if we think about trade, if we
Speaker 2: think about security, if we think about AI, if we
Speaker 2: think about the FED, the twenty twenty five story isn't
Speaker 2: over right. The consequences are still going to be playing
Speaker 2: out in twenty twenty six. On trade, I think one
Speaker 2: of the surprises is that we've not seen this enormous
Speaker 2: hike in tariffs playing out immediately in higher prices for
Speaker 2: US consumers and lower profits for US businesses. But I
Speaker 2: think that passed through of tariffs to the rest of
Speaker 2: the economy. Higher prices at the shops, lower margins for
Speaker 2: US businesses, potentially a hit to US stocks. That's still
Speaker 2: something that will play out in the early months of
Speaker 2: twenty twenty six. If we think about security, I think
Speaker 2: one of the big things we're looking for in twenty
Speaker 2: twenty six is resolution of that terrible ongoing conflict in Ukraine.
Speaker 2: If we think about the situation right now, well, it
Speaker 2: seems like that resolution could be on terms which are
Speaker 2: very favorable to Moscow, and that's something which has significant
Speaker 2: economic consequences. We're already seeing Germany and other European nations
Speaker 2: responding with a significant increase in their defense spending. Good
Speaker 2: news for growth, good news for defense stocks, bad news
Speaker 2: for countries already struggling under a heavy burden of debt.
Speaker 2: On AI, well, one of the good news stories in
Speaker 2: twenty twenty five was just the enormous optimism about AI,
Speaker 2: and I'm sure we'll hear more about that from Pami later.
Speaker 2: Big question for twenty twenty six, is that optimism going
Speaker 2: to be sustained? And on central banks, well, huge challenges
Speaker 2: to FED independence in twenty twenty five. In twenty twenty six,
Speaker 2: Trump's going to be able to pick the chair of
Speaker 2: the Federal Reserve.
Speaker 3: And I think we probably all of those things we're
Speaker 3: going to end up touching on. If I just think
Speaker 3: about China, because that was such a focus of the
Speaker 3: administration's attention at the starts of the year and has
Speaker 3: been such a dominant theme if you sort of look back,
Speaker 3: is China stronger or weaker economically going into twenty twenty
Speaker 3: six as a result of trumpnomics?
Speaker 2: So I think about it on a couple of dimensions, Stephanie.
Speaker 2: The first one is how hawkish on China is Donald Trump?
Speaker 2: And it's actually quite hard to answer that question. In
Speaker 2: one respect, he's America's biggest China hawk. Until he descended
Speaker 2: that Golden Escalator to start his presidential bid in twenty sixteen,
Speaker 2: the view in Washington, DC was, yeah, there's some problems
Speaker 2: with China. We've got some issues, but we can work together.
Speaker 2: And it was Trump who was responsible for that enormous pivot,
Speaker 2: that big reorientation saying, actually, China's not our friend, not
Speaker 2: someone we're going to work with. China's our rival and
Speaker 2: our adversary. But if you look at the details of
Speaker 2: China policy right now, well, tariffs have come down, Controls
Speaker 2: on China's access to the chips which power the Ai
Speaker 2: Revolution have been relaxed. Apparently Trump got on the phone
Speaker 2: with Japan's Prime Minister Takaichi and said, cool it on Taiwan.
Speaker 2: You don't want to upset President Shei. Right, So the
Speaker 2: big reorientation starting in twenty sixteen that positions Trump as
Speaker 2: an enormous China hawk, the details of policy in the
Speaker 2: last few months a bit less hawkish.
Speaker 4: I think.
Speaker 2: The other big question for China, the other dimension I
Speaker 2: would think about this is kind of short term long term.
Speaker 2: So short term, China's facing a crisis in its property sector,
Speaker 2: collapse in real estate, the consequences of years of overbuilding,
Speaker 2: and when you've got weak domestic demand, what you really
Speaker 2: want is strong global demand, strong exports to keep your
Speaker 2: economy going. Clearly, facing new high tariffs from the United
Speaker 2: States is not very constructive. Longer term, though, there's a
Speaker 2: narrative in China that democracy plus capitalism doesn't work. Democracy
Speaker 2: plus capitalism ends if you're going to be generous in plutocracy,
Speaker 2: if you're going to be less generous in kleptocracy. And
Speaker 2: I think when Beijing looks at what's happening in Washington, DC,
Speaker 2: that's very much their understanding of how things are playing out,
Speaker 2: and I think long term they think that can only
Speaker 2: be positive for China and China's emergence as a global power.
Speaker 3: I mean, there was quite a lot of focus just
Speaker 3: in the weeks leading up to the end of the
Speaker 3: year on trade surplus still being enormous in China and
Speaker 3: having quite successfully diverted a lot of exports that are
Speaker 3: not going to the US to other parts of the world. Pami,
Speaker 3: We're going to get into the relative strength, I would
Speaker 3: suggest of the US economy this year. Some pain may
Speaker 3: be still to come, but I think as a general
Speaker 3: feeling that the impact of AI investment has been a
Speaker 3: big part of that, supporting the economy and indeed just
Speaker 3: making it hard to read the economy. Do you see
Speaker 3: that level of capex as Tom talked about continuing next
Speaker 3: year and as we say see this rollout of AI,
Speaker 3: what are the potential bear traps there? Waiting down the
Speaker 3: road for the administration or the economy.
Speaker 5: Well, I think you're absolutely right in a lot of ways.
Speaker 1: AI boom has given the Trump administration a lot of
Speaker 1: cover because it's just made it look like everything is
Speaker 1: going so well. And in aggregate, the Magnificent seven tech
Speaker 1: stocks have seen their market valuations increase by trillions of
Speaker 1: dollars just in the last three years since chat GBT
Speaker 1: came out. I personally think there is going to be
Speaker 1: some kind of correction in twenty twenty six, and for
Speaker 1: all the reasons that people are saying, which is that
Speaker 1: there is very high risk of near term monetization not happening.
Speaker 1: In other words, there's been this huge buildout of infrastructure
Speaker 1: anticipating all this demand that probably will come in eventually,
Speaker 1: but it's just not going to come in fast enough
Speaker 1: to meet the expectations of investors.
Speaker 5: And this is exactly why we saw.
Speaker 1: Booms and bust in the dot com era early two thousands.
Speaker 1: You had this big rollout of fiber optic cables that
Speaker 1: eventually got used, but just didn't get used quickly enough.
Speaker 1: Same with the railroads in the nineteenth century. I think
Speaker 1: we'll just see perhaps that the sparks will be leaked
Speaker 1: reports from open ai showing a kind of soft demand
Speaker 1: for their enterprise AI products, or something in the earnings
Speaker 1: reports from Microsoft or Google or Amazon DAWs, just showing
Speaker 1: that it's actually been quite difficult to get businesses to
Speaker 1: adopt these AI services because that's where.
Speaker 5: All the money is. Right now.
Speaker 1: The huge success of generative AI is consumer based. You've
Speaker 1: got nine hundred million people, that's about a ten percent
Speaker 1: of the global population is using chatchbt every week every week.
Speaker 1: That's astoundingly successful from a market dominance perspective, but it's
Speaker 1: not really making money from open.
Speaker 5: Ai because very few of those people are paying subscriptions.
Speaker 1: The real money is going to come when businesses start
Speaker 1: paying for the access to that service, and that's just
Speaker 1: taking longer than these companies need. So the more signals
Speaker 1: we get that lack of demand, which I guess will
Speaker 1: happen next year, the more likely we'll have some kind
Speaker 1: of decline in the markets. But I do think ultimately
Speaker 1: that'll probably could work out quite well for the biggest
Speaker 1: tech companies because they're the ones that can weather the storm.
Speaker 5: They're so well capitalized.
Speaker 1: It's the startups and the smaller companies who will really struggle,
Speaker 1: who will see their valuations fall, and then here comes
Speaker 1: an opportunity for big tech firms to acqui hire those
Speaker 1: companies or buy those companies, acquire all their talent and
Speaker 1: IP and just become even stronger out of all of this.
Speaker 4: And that's a very good point.
Speaker 3: In your book, your award winning book, you chart the
Speaker 3: history of that crucial bits of the AI revolution, and
Speaker 3: I think in the process we're reporting very closely on
Speaker 3: the individuals in the industry. And of course the tech
Speaker 3: bros are unusually close or at least people who have
Speaker 3: the back of the AI industry, and these big tech
Speaker 3: companies are very close to the White House and sort
Speaker 3: of famously have the ear of the President. Some of
Speaker 3: the kind of inconsistencies in China policy that Tom mentioned
Speaker 3: is a reflection of that. The decision to allow Nvidia
Speaker 3: to sell some of these more advanced ships to China.
Speaker 3: If we start to see pame that AI costing jobs
Speaker 3: or being associated with other social ills like we've already
Speaker 3: seen with social media, if it starts being associated with
Speaker 3: higher electricity costs for a lot of people as they
Speaker 3: roll out these data processing centers, is there nervousness in
Speaker 3: Silicon Valley about the kind of political exposure they have now.
Speaker 3: And it's great to be influencing policy, but then means
Speaker 3: they're a bit more implicated, I suppose.
Speaker 5: But what choice do they have?
Speaker 1: I think right now their view as this is the
Speaker 1: strategy that has worked till now, which is to lobby
Speaker 1: as hard as you can to try and prevent any
Speaker 1: other regulations from coming down the pipeline that are going
Speaker 1: to affect you. So that approach seems to be working
Speaker 1: the Trump administration. As soon as Trump got into power,
Speaker 1: he rescinded the executive order that Biden had put in
Speaker 1: place on AI that calls on tech companies to do
Speaker 1: some very basic stuff around auditing of their algorithms.
Speaker 5: That was scrapped.
Speaker 1: And now there's of course talk of trying to prevent
Speaker 1: states from implementing their own AI rules because that might
Speaker 1: create this kind of patchwork effect of regulation that will
Speaker 1: hinder innovation. I'd personally find that completely exaggerated and overblown.
Speaker 5: That has not been an issue in the past. With
Speaker 5: privacy laws.
Speaker 1: Usually companies will find the state with the strictest law,
Speaker 1: like California, and then they'll just implement that across the board,
Speaker 1: it's very workable. So I think this kind of narrative
Speaker 1: spun by large companies around if you regulate US will
Speaker 1: hinder innovation for everyone.
Speaker 5: And we see this in Europe as well.
Speaker 1: It's just not true, but somehow it has really taken
Speaker 1: hold when Europe. The real issue is we just don't
Speaker 1: have enough funding on this side of the pond for
Speaker 1: tech startups.
Speaker 5: The issue is not regulation.
Speaker 1: The real problem is there's a real vacuum of thoughtful,
Speaker 1: specific regulation, rules and standards that are going to govern
Speaker 1: how this incredibly transformative technology that's addictive for some people,
Speaker 1: that is actually affecting people's mental health already, there are
Speaker 1: no rules out there to govern how that is used.
Speaker 3: Mario, you've been nodding patiently through some of this. I mean, clearly,
Speaker 3: the sort of the buzzword as we end twenty twenty five,
Speaker 3: at least in sort of politically, has been affordability. And
Speaker 3: there is a bit of a read a cross from
Speaker 3: this AI discussion. And I know people who are being
Speaker 3: told that the big increase in electricity supply that's going
Speaker 3: to be needed for their area, which everyone knows is
Speaker 3: due to data processing centers and big tech companies at
Speaker 3: least everyone in that area knows is going to double
Speaker 3: or sometimes even trouble their electricity costs. Is that going
Speaker 3: to be one of the things that could continue to
Speaker 3: stoke questions about affordability and cost of living.
Speaker 6: Absolutely, And I was nodding with just the comments that
Speaker 6: you all have been making just because I see the
Speaker 6: through line of it all politically, right, So as PARMI
Speaker 6: kind of mentioned or alluded to, you saw the influence
Speaker 6: of the tech sector on display last week two ways
Speaker 6: right with the easing the restrictions on in videos eight
Speaker 6: two hundred the chips. But then also Donald Trump, I
Speaker 6: mean almost verbatim repeated the rationale for AI not being
Speaker 6: having a patchwork with the States and that they would
Speaker 6: inherit bit the innovation of the industry as well, but
Speaker 6: also the sugar high, right that it provides in an
Speaker 6: economy that Americans are pretty sour on and giving Trump
Speaker 6: pretty bad marks. The sugar high. That one bright spot
Speaker 6: is that AIDS are showing the president the proliferation of
Speaker 6: data centers, building the data centers across the country, and
Speaker 6: he sees that as a win, appealing to his sense
Speaker 6: of that the US can lead the way with this
Speaker 6: breaking edge, this cutting edge technology as well.
Speaker 4: Now, the other part of that coin is.
Speaker 6: The fact that it leaves him vulnerable, he and the
Speaker 6: party vulnerable to arguments about affordability, even as he touts
Speaker 6: lower energy costs for gasoline, etc. Electritricity prices have skyrocketed,
Speaker 6: and we saw that play out in some of the
Speaker 6: elections that we saw in November, where Republicans lost pretty
Speaker 6: handily in several places in affordability became a salient issue
Speaker 6: and electricity prices became a salient issue. The other part
Speaker 6: of it politically is, as you all have both alluded to,
Speaker 6: Americans still don't quite understand all of the nuances of AI.
Speaker 6: The administration hasn't been able to or the industry explain
Speaker 6: it in a way that common Americans can really grasp it.
Speaker 6: They see it as something that's fun, They see it
Speaker 6: as something that can be confusing, They see it as
Speaker 6: something that could be toxic to mental health at times.
Speaker 4: They see it as a threat to their livelihoods and jobs.
Speaker 6: Right, and then you add on the affordability issue as well,
Speaker 6: and so we'll see that continue to play out in
Speaker 6: twenty twenty six.
Speaker 3: The President has been on something of an affordability tour,
Speaker 3: quite a few big events on this, and yet it's
Speaker 3: not clear what levers he's going to pull because in
Speaker 3: some ways he doesn't recognize that there is an affordability crisis.
Speaker 3: As we go into the midterms, how crucial is that
Speaker 3: going to be. Do you think that there's going to
Speaker 3: be actual moved by the administration more direct efforts or
Speaker 3: is the White House going to still feel like this
Speaker 3: is really just about messaging more than substance.
Speaker 4: I think a little bit of both, right.
Speaker 6: I think the problem for the White House is the
Speaker 6: fact that Donald Trump, went back to our interview with
Speaker 6: him in summer of twenty twenty four, has looked at
Speaker 6: tariffs and argued that tariffs don't have a material effect
Speaker 6: on consumer prices. Well, what you've seen over the last
Speaker 6: month and change or so is some of the reversals
Speaker 6: on food stuffs, right, bananas, coffee as well. So you
Speaker 6: see the administration also trying to pull levers on things
Speaker 6: like beef. So it's an acknowledgment in some ways that
Speaker 6: tariffs are having this additive cost to the consumer from
Speaker 6: the administration, even as Trump has argued, so you've got
Speaker 6: this discordant message coming from the administration, and quite frankly,
Speaker 6: if anyone saw the president's speech the rally, his heart
Speaker 6: just wasn't into this affordability message. I mean he all
Speaker 6: but said that his chief of staff, Susie wils told
Speaker 6: him you need to go out here in campaign on this.
Speaker 6: So almost sounded like someone who was grudgingly told you
Speaker 6: got to go outside and do something that you really
Speaker 6: don't want to do.
Speaker 3: It's convenient for the purposes of this podcast to feel
Speaker 3: that the economy is central to everything, we should step
Speaker 3: back and ask what is the state of the US
Speaker 3: economy going into twenty six. I mean, I know many
Speaker 3: of us, certainly a year ago, if we've been told
Speaker 3: what the administration was going to do, what was going
Speaker 3: to happen in terms of tariffs and uncertainty and other things,
Speaker 3: we probably would not have expected it to be as
Speaker 3: strong or inflation to be as low. But what does
Speaker 3: it look like now and what are you watching going
Speaker 3: into twenty six on just the strength of the economy.
Speaker 2: So I think there's quite a lot to be optimistic
Speaker 2: about on the US economy heading into twenty twenty six.
Speaker 2: Inflation's a bit higher than the FED would like it
Speaker 2: to be, but it's certainly not spiraling higher growth pretty
Speaker 2: robust looking into twenty twenty six. We've got easier monetary conditions.
Speaker 2: The FED is cutting interest rates. We think they're going
Speaker 2: to be cutting quite a lot more in the year ahead.
Speaker 2: We've got supportive fiscal policy, the one big beautiful bill
Speaker 2: cutting taxes for big US businesses. We've got a bonfire
Speaker 2: of regulations. We can argue about whether or not that's
Speaker 2: socially optimum or not, but certainly it sparks animal spirits.
Speaker 2: And of course we've got the AI revolution and all
Speaker 2: that means for market optimism and for capital spending. So
Speaker 2: if you put all of those things together, I think
Speaker 2: the base case for US growth in twenty twenty six,
Speaker 2: US growth heading towards the midterms is pretty optimistic. There's
Speaker 2: stuff that could go wrong. AI optimism could evaporate. A
Speaker 2: new FED chair could potentially overplay their hand, bringing concerns
Speaker 2: about lost FED independence back into perspectiveishing interest rates higher.
Speaker 2: So some risks there, but the base case heading into
Speaker 2: twenty twenty six I think pretty optimistic.
Speaker 3: Well, you mentioned the FED, and obviously the independence of
Speaker 3: the FED has been a great focus. There's been this
Speaker 3: kind of horse race around who was going to be
Speaker 3: named by the President as the new chairman of the FED.
Speaker 3: The betting as we're recording this is still on. Kevin
Speaker 3: has it, but there's been some desire from the White
Speaker 3: House to still preserve the element of surprise. But that's
Speaker 3: a power that the president has always had, but there
Speaker 3: is uncertainty about whether the president also has the power
Speaker 3: to fire members of the FED Board. I mean, Maria,
Speaker 3: there's some pretty crucial Supreme Court decisions coming down the track,
Speaker 3: and that's one of them.
Speaker 4: Yes, absolutely.
Speaker 6: One of the cases stems around nineteen thirty's era law
Speaker 6: that prohibited presidents from firing people on independent branches of government.
Speaker 6: This one is an FTC case that we're quite eager
Speaker 6: to get the results of, but the Supreme Court is
Speaker 6: already signaling that it will likely side with the president.
Speaker 6: Another extraordinary expansion of executive authority that we've seen. Another case, obviously,
Speaker 6: is the president's use of AIBA in order to enact
Speaker 6: some of the tariffs. He's characterized that as essentially make
Speaker 6: or break for the country. We'll see whether or not
Speaker 6: the Supreme Court sides with him or not, but make
Speaker 6: no question about it.
Speaker 4: What we've seen the security.
Speaker 6: So this Supreme Court just grant the president just an
Speaker 6: enormous amount of executive leeway.
Speaker 3: Here, Tom, there's the Lisa Cook judgment. There's been some
Speaker 3: question about whether or not there would be a line
Speaker 3: drawn between the FED and other independent eights supposed so
Speaker 3: called agencies, where the Supreme Court appears set to say
Speaker 3: that the president can kind of do what he wants
Speaker 3: with almost all the agencies. But they have suggested earlier
Speaker 3: in the year that the Federal Reserve had a slightly
Speaker 3: different status, which might effect whether they ruled differently in
Speaker 3: the case of Lisa Cook, which we've talked about before.
Speaker 4: On this program.
Speaker 3: But how important is that do you think in terms
Speaker 3: of the way the Fed is viewed, Because at the moment,
Speaker 3: obviously the market seem to be quite relaxed about the
Speaker 3: pressure that the White House is putting on the Central Bank.
Speaker 2: So a few years ago we talked about the twilight
Speaker 2: of the economic idols, right, kind of slightly grandiose term.
Speaker 2: Can't remember who came up with it, but the idea was, well,
Speaker 2: the populists have smashed down the door of so many institutions,
Speaker 2: right the universities, the media, the law firms, the scientific profession.
Speaker 2: Maybe they'll come for the central banks. Right, The Federal
Speaker 2: Reserve has failed on its basic task of controlling inflation.
Speaker 2: The Federal Reserve back then had to kick out two
Speaker 2: members of its governing council because of concerns about insider trading.
Speaker 2: This is a vulnerable institution. The populists have knocked over
Speaker 2: so many other institutions. Maybe they'll come for the FED
Speaker 2: as well. And sure enough, here we are at the
Speaker 2: end of twenty twenty five, looking ahead into twenty twenty six,
Speaker 2: and the populists are certainly banging at the Fed's door.
Speaker 4: Right.
Speaker 2: We already have Stephen Myron, the chair of the Council
Speaker 2: of Economic Advisors for President Trump, serving on the FED board.
Speaker 2: We have the court case against Lisa Cook that you mentioned,
Speaker 2: which could open up another board seat for the President
Speaker 2: to fill. And we have Chair Powell exiting in May
Speaker 2: and scope for the President to appoint his own chair.
Speaker 2: And whoever he picks, no matter how credible they are,
Speaker 2: is going to be laboring under the suspicion that they've
Speaker 2: made some kind of low rate loyalty pledge to the
Speaker 2: president in order to get the job.
Speaker 4: Now.
Speaker 2: We haven't seen the markets reacting to this much so far,
Speaker 2: but it really is quite consequential. And independent federal reserve
Speaker 2: is a fundamental underpinning of market confidence that the US
Speaker 2: will be serious about controlling inflation. And that's a fundamental
Speaker 2: underpinning of the role of the dollar as the world's
Speaker 2: reserve currency and US treasuries as the world's safe asset.
Speaker 2: If that confidence is undermined, well, the status of the dollar,
Speaker 2: the status of the treasury market both open to question.
Speaker 3: This kind of maximalist view of presidential power that we've
Speaker 3: seen so far. Mario, I mean, how does that play politically?
Speaker 3: Do you think there is a chance of this Congress,
Speaker 3: previously rather feeble biting back.
Speaker 6: Yeah, that's a great word for it. It's been mostly
Speaker 6: feeble for the better part of this year. But we
Speaker 6: have seen signs of life in recent months.
Speaker 4: Right.
Speaker 6: We saw obviously the evergrain here is the split between
Speaker 6: the president and Marjorie Taylor Grain. We're also saying at
Speaker 6: the state level, and if democracy functions the way it
Speaker 6: should in operation, it could funnel up to Congress as well.
Speaker 6: But we've seen pushback at some of the redistricting efforts
Speaker 6: as well. We've seen the Congress, bipartisan Republicans even kind
Speaker 6: of blanching a bit at the boat strikes in the Caribbean,
Speaker 6: particularly the one in which it was like a double
Speaker 6: what's called a double tap in a boat as well.
Speaker 6: So we've started to see the president called for during
Speaker 6: the shutdown, the President called for Republicans to eliminate the
Speaker 6: filibuster that was aligned too far for them as well,
Speaker 6: that they didn't heed. And then obviously, and again I
Speaker 6: mentioned Marjorie Taylor Green, the fact that the Epstein files
Speaker 6: and the legislation there, they forced the President to do
Speaker 6: an about face on that issue as well. So we're
Speaker 6: starting to see some semblances of life. Maybe that's because
Speaker 6: of what the polls are bearing out with some erosion
Speaker 6: among parts of the MAGA base, the pressure that we
Speaker 6: have for congress people representatives as we head toward the
Speaker 6: midterms as well, So that kind of tension may we
Speaker 6: may see some checks there on a president's power.
Speaker 3: You've both mentioned that the White House has been trying
Speaker 3: to establish that it's going to be the president and
Speaker 3: certainly federal government that dictates a single set of rules
Speaker 3: for AI. But we also know there's plenty of individual states,
Speaker 3: not least California, and indeed some in Congress that would
Speaker 3: like to have more of a role and not just
Speaker 3: leave it to the president. What should we be watching
Speaker 3: on that? What are the key debates we should be
Speaker 3: looking out for next year if we're kind of concerned
Speaker 3: about the form that AI is going to take.
Speaker 1: Personally, I think this allowing states to roll out their
Speaker 1: own laws is actually quite a healthy approach, because then
Speaker 1: it almost becomes like a lab Each state becomes like
Speaker 1: its own laboratory for running an experiment on what law
Speaker 1: works best, whether it's on tackling deep fakes or deep
Speaker 1: fake porn or spam or fraud, or whatever approach you
Speaker 1: want to take. In there are so many different ways
Speaker 1: to approach AI. Centralizing regulation isn't always the best approach.
Speaker 1: And I hate to say this because when the European
Speaker 1: Union first rolled out it's AI Act, I was so
Speaker 1: excited and I thought, this is the first comprehensive law
Speaker 1: addressing AI, and it's so great and we need this
Speaker 1: and they're moving so quickly. And then that was like
Speaker 1: maybe two and a half years ago, and now I'm
Speaker 1: just so disappointed on how it has turned out because
Speaker 1: they've delayed it, they've blamed the standards organizations that are
Speaker 1: trying to make it more specific, which is what it
Speaker 1: really needs. It's all just been quite a big disaster.
Speaker 1: But to answer your question about what to watch out for,
Speaker 1: I would also just watch out for what's happening in
Speaker 1: the court system, because some of the lawsuits that have
Speaker 1: been thrown against that have targeted open AI, that have
Speaker 1: targeted anthropic over copyright infringement, I mean, these are pretty
Speaker 1: big cases. There is several there's some several cases against
Speaker 1: open ai from more than a dozen families of people
Speaker 1: who've experienced some kind of mental health serious mental health
Speaker 1: harm from using chat GBT, and these are getting a
Speaker 1: lot of attention, and open ai has publicly addressed them
Speaker 1: and talked about making changes.
Speaker 5: So I almost feel like, actually the.
Speaker 1: Court system is having much more of an impact than
Speaker 1: any kind of legislation is right now.
Speaker 3: One of the surprises that we've had over the last
Speaker 3: few years actually has been the strength, the relative strength
Speaker 3: of US productivity.
Speaker 4: Growth.
Speaker 3: Economists tend to be obsessed with it because making more
Speaker 3: stuff with the same number of people is how you
Speaker 3: get richer. A key part of having AI feed into
Speaker 3: continued productivity growth is going to be that, as you mentioned,
Speaker 3: partly the diffusion across the economy. How has it applied
Speaker 3: historically if I look at Europe, certainly of looking at
Speaker 3: the UK, but I think in other places as well.
Speaker 3: It's the diffusion of technology that's been lacking. Actually, the
Speaker 3: best companies have had the best know how, but it's
Speaker 3: not spread through the economy nearly as well as it
Speaker 3: has in the US. Regulation is going to be an
Speaker 3: important part of a rollout, but its diffusion is the
Speaker 3: other big piece. What should we be looking at there
Speaker 3: because obviously it also feeds into whether those at least
Speaker 3: some of those high prices for AI companies are justified.
Speaker 5: Yeah, that's a really great point to bring up.
Speaker 1: Actually, and it's a point that politicians and lawmakers have
Speaker 1: been making that. Actually in Europe we might not be
Speaker 1: developing the big models that everybody's using in Silicon Valley,
Speaker 1: but hey, let's use that as an opportunity. Let's capitalize
Speaker 1: on all this money that Silicon Valley is spending and
Speaker 1: all this infrastructure, and let's just use this technology to
Speaker 1: make ourselves more productive. So to your point, exactly, this
Speaker 1: is about winning the AI race. What does that even mean?
Speaker 1: Does it mean that you have developed the most capable
Speaker 1: AI model from a company in your country, or does
Speaker 1: it just mean that the citizens of your country have
Speaker 1: actually adopted this technology much more quickly than anyone else
Speaker 1: and are exploiting it much more quickly. The government of Estonia,
Speaker 1: for instance, they've a population of one and a half
Speaker 1: million people, and they're the first in the world to
Speaker 1: roll out chat ept to all their schools. It's an
Speaker 1: educational version of chat ept. And someone else in Silicon
Speaker 1: Valley has built this, but they're tweaking it. They're trying
Speaker 1: to make it less of an answer engine and more
Speaker 1: of a question engine, where the bot doesn't just give
Speaker 1: the kids the answer all the time, but ask them
Speaker 1: questions to get them thinking more. Now, if they can
Speaker 1: make that work, they're going to be doing the rest
Speaker 1: of the world a favor, but they'll also be doing
Speaker 1: a huge favor to their students and to their educational system.
Speaker 3: He's talked about on this show, the possibility of a
Speaker 3: stock market correction or even something bigger than that, due
Speaker 3: to reduce confidence in that handful of AI companies tech companies.
Speaker 3: Tom I know that the economists have done a bit
Speaker 3: of analysis on this. What's our guess in terms of
Speaker 3: what the impact on the real economy would be of
Speaker 3: that kind of stock market correction? I mean, given that
Speaker 3: we I remember we saw in the tech bubble bursting
Speaker 3: in two thousand and two thousand and one that actually
Speaker 3: didn't have much impact on the economy. Could we expect
Speaker 3: something like that this time?
Speaker 4: Yeah.
Speaker 2: So it's a big question, Stephanie, and it's one that
Speaker 2: it's all too easy to wave your hands out in generalities.
Speaker 2: What we've done at Bloomberg Economics is take out the
Speaker 2: fed's big model of the US economy that's called FURBUS,
Speaker 2: and we modeled a specific scenario. We looked at what
Speaker 2: would happen if stock prices dropped around twenty twenty five
Speaker 2: percent and there was a broadening of credit spreads for
Speaker 2: corporate borrowers. And if you plug that shock into the
Speaker 2: Furbus model, what it tells you is, well, you have
Speaker 2: a blow to confidence, you have a blow to wealth
Speaker 2: that starts hitting consumption. Is more expensive for corporates to borrow,
Speaker 2: so it starts hitting investment as well. And as those
Speaker 2: shocks hit the economy in the end, you have a
Speaker 2: blow to GDP growth of around zero point seventy five
Speaker 2: percent and a blow to employment or a boost to
Speaker 2: unemployment of around zero point five percent. So those are
Speaker 2: macro significant shocks. You'd see them in the numbers, and
Speaker 2: if you have a snowball effect, well things could be
Speaker 2: even worse. Still, those numbers are numbers which would damage
Speaker 2: the growth trajectory for the US economy in twenty twenty six,
Speaker 2: they wouldn't entirely derail.
Speaker 3: It, and to short term if the bubble did burst,
Speaker 3: or at least you had a big correction. Given the
Speaker 3: relative to other countries, there's quite widespread holding of stock markets.
Speaker 3: There's a lot of households that have feel that they've
Speaker 3: got quite a lot richer as a result of this,
Speaker 3: the run up in the stocks. Do you think we
Speaker 3: should worry about the short term economic consequence of that?
Speaker 2: Yeah, I think I'd worry about it in a couple
Speaker 2: of respects, Stephanie. The first, as you mentioned is the
Speaker 2: stock market. US households hold a lot of stocks. They
Speaker 2: feel richer, They feel more inclined to consume if the
Speaker 2: stock market is going up. If the stock market is
Speaker 2: going down, that dynamic swings into reverse. Secondly, the funding
Speaker 2: for the AI infrastructure build out is also tied to
Speaker 2: market confidence on AI, right, and if that confidence evaporates, well,
Speaker 2: companies like Google and Meta they're still going to have
Speaker 2: the money to spend, but there's an entire ecosystem of
Speaker 2: other AI startups which are going to suffer, and that
Speaker 2: would be an additional negative for growth.
Speaker 3: There was a lot of discussion earlier in the year,
Speaker 3: especially in the wake of the Big Beautiful Bill, that
Speaker 3: there would be pressure on the bond market, and indeed
Speaker 3: you would expect if you look at the highlight level
Speaker 3: of government borrowing in the US at a time when
Speaker 3: the economy is pretty strong, there's certainly a very unsustainable
Speaker 3: debt path. You see the path of debt as a
Speaker 3: share of GDP just continuing to go up, which is
Speaker 3: kind of by definition unsustainable. And yet it's one of
Speaker 3: the few countries, certainly developed economies where the ten year
Speaker 3: yield was for most of the year was lower than
Speaker 3: the second half of the year was than it had
Speaker 3: been at the start. Most governments are sort of dealing
Speaker 3: with a higher cost of borrowing. That has been less
Speaker 3: true in the US. Despite all of this, marriage, does
Speaker 3: the administration kind of feel that it doesn't have to
Speaker 3: worry about fiscal risks at all, and is it going
Speaker 3: to feel sort of vindicated by the fact that despite
Speaker 3: that passing of that bill, you know, investors just don't
Speaker 3: seem to be worried about it.
Speaker 6: So you say, one feature of both Trump one point
Speaker 6: zero and two point zero is just the absence of
Speaker 6: the presidents speaking about fiscal policy. That's something that had
Speaker 6: traditionally been and tried and true point of American conservatism.
Speaker 6: When it has come up in Trump two point zero,
Speaker 6: you've seen the president both rationalize it with both his
Speaker 6: tear of policy, saying that the US is going to
Speaker 6: take in these massive amounts of good tear funds, but
Speaker 6: then also the output from the one big beautiful bill,
Speaker 6: the supercharging of the economy from his different policies, the
Speaker 6: regulatory easing as well, and he's rationalized it in that way.
Speaker 3: One thing I'm going to be watching. I don't know
Speaker 3: about you, Tom, but we might see, ironically, if if
Speaker 3: the president's power is kind of checked by the midterms,
Speaker 3: you might find that the last few months of next
Speaker 3: year are actually a tougher time in terms of the
Speaker 3: bond market and investors than the previous few months, because
Speaker 3: we saw in the UK that it's not now the
Speaker 3: policies you have, it's kind of the way it's being done,
Speaker 3: and the feeling that there's no constraints or no possible
Speaker 3: checks if you end up with sort of genuine gridlock
Speaker 3: in Congress at a time where naturally there's also questions
Speaker 3: about whether the FED is going to tighten policy as needed.
Speaker 3: If inflation starts heading up again, which many people see
Speaker 3: is potentially happening in the second half of next year.
Speaker 3: I think things could get a little bit ugly in
Speaker 3: the bond markets. Ironically, even though in theory the president
Speaker 3: looks a bit less powerful. That will actually worry some
Speaker 3: in the markets. But who knows, Tom, what are you
Speaker 3: going to be watching? What's the kind of wild card?
Speaker 3: Now we're reaching the end and we're thinking about potential
Speaker 3: risks or just yeah, things that we need to be
Speaker 3: watching twenty twenty six that we might not otherwise be
Speaker 3: paying attention to.
Speaker 2: Yeah, maybe I could just pick up briefly on that
Speaker 2: last thought, Stephanie, I think that's really interesting. So I
Speaker 2: think traditionally we think about US presidents who are constrained
Speaker 2: by congressional gridlock at home, trying to do more abroad. Right,
Speaker 2: I can't get anything through Congress, Let me pursue an
Speaker 2: aggressive foreign policy on one dimension or another.
Speaker 4: Right.
Speaker 2: I think the possibility, as you're pointing to, which I
Speaker 2: hadn't occurred to me before, was well, President Trump my
Speaker 2: begridlocked in Congress. But if he's got his man in
Speaker 2: at the FED and he's unembarrassed about pulling that lever, well,
Speaker 2: perhaps that's an unconstrained option for him.
Speaker 1: Right.
Speaker 2: So it could be that there's some dynamic between loss
Speaker 2: of power at the midterms, greater capacity to and willingness
Speaker 2: to influence the Fed, which could potentially play out in
Speaker 2: a pretty negative way for the US bond market. In
Speaker 2: terms of wild cards for twenty twenty six, I guess
Speaker 2: my wildcard is everything goes great. Right, I'll tell you
Speaker 2: why I was thinking that, So Bloomberg Economics. One place
Speaker 2: in the world we pay a lot of attention to
Speaker 2: is Taiwan because Taiwan sits at this kind of nexus
Speaker 2: of geopolitical and trade risk. Right, Concerned that Shi Jinping
Speaker 2: has ambitions to extend Chinese control to Taypeay, concern that
Speaker 2: tariffs would be a real negative for an economy which
Speaker 2: relies more on exports than pretty much any other economy
Speaker 2: in the world. Guess what Taiwan's GDP growth was in
Speaker 2: the first three quarters of twenty twenty five.
Speaker 3: Pretty high.
Speaker 2: I think you're going to tell me seven percent? Seven
Speaker 2: percent growth, right, So, all of these very real concerns
Speaker 2: about trade, all of these very real concerns about geopolitics.
Speaker 2: Through it all, this rebel island, which should be at
Speaker 2: the absolute nexus of these risks, continuing to significantly outperform,
Speaker 2: precisely because of that optimism about Ai supercharging demand for
Speaker 2: Taiwan's chips. Maybe in a microcosm, that will be the
Speaker 2: story for the global economy in twenty twenty six. Yes,
Speaker 2: the risks are there, but actually it's the momentum and
Speaker 2: the optimism and the Ai revolution which continue to dominate
Speaker 2: the narrative.
Speaker 3: So, Mario, are you girding yourself for things to go
Speaker 3: really right next year as you contemplate your Christmas holidays?
Speaker 6: No, absolutely, I mean it's similar to Tom kind of
Speaker 6: His answer was kind of similar to what I was
Speaker 6: thinking as well. Just I mean in the last fifty
Speaker 6: or sixty years or so, only two times has a
Speaker 6: president been able to buck the midterm historical midterm trend
Speaker 6: and keep their majority or expand it. Last month was
Speaker 6: a bad month for the president and he continues to
Speaker 6: be in a rut. Right now, Democrats are abiliate in
Speaker 6: some ways and looking toward a blue wave.
Speaker 4: But what if it doesn't happen, What if it doesn't materialize.
Speaker 6: This is a president who was indicted, who went through
Speaker 6: court cases, who was impeached twice, and still ended up
Speaker 6: back in the White House.
Speaker 4: What if he ends up with a hot hand electorally
Speaker 4: again and keeps control of Congress next year.
Speaker 3: It's interesting that we think that as the wildcard. Well,
Speaker 3: funnily enough, and of course you can tell from this
Speaker 3: that none of us coordinated. Mine was a combination of
Speaker 3: those two. In the sense, I do think a lot
Speaker 3: more could go right economically than people might expect. I
Speaker 3: was just looking today noticing that both the trade deficit
Speaker 3: and the federal deficit have been falling in recent months,
Speaker 3: and in fact, the budget deficit has been falling for
Speaker 3: most of this year. In that sense, you could say,
Speaker 3: big picture, President Trump's policies are working. If he was
Speaker 3: coming in wanting to shrink the trade deficit, well, that
Speaker 3: is very much what has been happening. He has had
Speaker 3: a big impact on the Chinese imports coming into the US,
Speaker 3: as he suggested. Inflation has been pretty stable, Growth is
Speaker 3: pretty stable, as we've noted, Productivity is a bit higher
Speaker 3: than it has been elsewhere. I guess the kicker I
Speaker 3: would add to that is I think that things could
Speaker 3: go right in the big picture economically, and we could
Speaker 3: all be giving a certain amount of credit to the
Speaker 3: President for that, and he'll still lose the midterms, because
Speaker 3: if we've learned anything in the last few years, it's
Speaker 3: a household don't necessarily give credit for those kind of
Speaker 3: big picture macro achievements if they're still seeing quite a
Speaker 3: lot of micro pain. And I think they will be
Speaker 3: still seeing a bit of micro pain, and even the
Speaker 3: shrinking of that trade deficit will be reflecting a bit
Speaker 3: of pain on the ground because US manufacturers will be
Speaker 3: under pressure by those tariffs. So a combination these go
Speaker 3: really well, but not so well for the president despite that,
Speaker 3: and then he will fulminate at how unfair it is
Speaker 3: and just finally put me from you your wild card
Speaker 3: or the thing that you're going to be watching that
Speaker 3: we might not otherwise be watching in twenty six.
Speaker 5: Well, my wild card isn't a particularly wild name.
Speaker 1: It would just be to look at Google and how
Speaker 1: much it continues to move ahead in the race against
Speaker 1: open AI. They if you think about the story of
Speaker 1: the hair and the tortoise, I would really put open
Speaker 1: ai as the hair and Google.
Speaker 5: As the tortoise.
Speaker 1: They started off on the back foot, way behind when
Speaker 1: chatgybt came out three years ago, and they have just
Speaker 1: gradually caught up. And now their latest model, Gemini, is
Speaker 1: better than the latest model of open aies by some benchmarks,
Speaker 1: and they're gaining ground in terms of market share.
Speaker 5: They've got this.
Speaker 1: Very cautious, corporate scientific approach to AI, which is very
Speaker 1: different samal than an open AI, who is much more
Speaker 1: product oriented and let's make this an engaging product with
Speaker 1: lots of features that are going to keep people engaged
Speaker 1: for as long as possible. So maybe Google's approach of
Speaker 1: this kind of utilitarian approach to building AI it's not
Speaker 1: as exciting, it's a little bit more boring, but they
Speaker 1: are slowly gaining ground. And of course they are the
Speaker 1: established company and so I would not be surprised to
Speaker 1: see them actually maybe surpass Open Ai certainly in terms
Speaker 1: of capabilities of their AI models.
Speaker 3: Next year, all right, Google the boring company to watch.
Speaker 3: Thank you very much, Marion Parker, pome Elsen, Tom Wllick,
Speaker 3: thank you so.
Speaker 4: Much, thank you, thank you, thanks definitely, and.
Speaker 3: Happy New Year. Thanks for listening to Trumponomics from Bloomberg.
Speaker 3: It was hosted by me Stephanie Flanders. I was joined
Speaker 3: by Bloomberg Opinion columnist Pame Olsen, Bloomberg Economics Chief economist
Speaker 3: Tom Orlick, and our managing editor for US Government, Mario Parker.
Speaker 3: Trumponomics was produced by Summer Sadi and Moses and Am,
Speaker 3: with help from Amy Keen and special thanks to Rachel
Speaker 3: Lewis Chrisky. Sound design was by Blake Maples and Sage
Speaker 3: Bowman is Bloomberg's head of podcast. To help others find
Speaker 3: the show, please rate and review us highly wherever you
Speaker 3: listen to your podcasts, and I hope whatever you're doing
Speaker 3: you have a really great holiday.
Speaker 4: The mat found the p