In a new research paper published in Applied Economics on the impacts of policy uncertainty, the well known negative consequences were enumerated. In light of the surge in policy uncertainty Trump’s policies and behavior have caused, that is a danger to business investment and inflation expectations. We’re seeing this play out in real time—Goldman Sachs projects core inflation will reach 3.6% this year due to tariff effects, while business expectations for both sales and employment have turned decisively negative since inauguration. The human cost is becoming visible too: companies like Sinobec Group are filing bankruptcy explicitly citing trade war impacts, Walmart is cutting 1,500 jobs, and even critical defense contractors worry about losing skilled immigrant workers. Meanwhile, beef prices have hit record highs as cattle herds shrink to 75-year lows, creating a perfect storm of supply constraints and demand destruction.
This administration also seems to be doing whatever they can to deliver for the richest. Wall Street interests that profit from volatility have never had such high profits–Citadel Securities reported a 70% profit surge in Q1. Meanwhile, Trump made sure that investors knew that they would not bear the costs of his plan to reprivatize Fannie and Freddie goes through. More concerning–in order to protect companies like facebook and google–the House Republicans’ “revenge tax” proposal (Section 899) would effectively tear up decades of tax treaties with allies like Canada and the UK, potentially triggering capital flight from U.S. assets when foreign investors face punitive withholding taxes. This isn’t just economically self-defeating—it’s a geopolitical gift to competitors who would love nothing more than to see the dollar’s reserve currency status eroded.
Stagflationary Pressures
Economic Policy Uncertainty
Code
# Include my custom plot themeinclude("../scripts/oxocarbon-plot.jl")theme(:oxocarbon)# Connect to the Fred API usingFredData, DataFrames, Dateskey =ENV["FRED_API_KEY"]f=Fred(key)# Get the data for monthly average EPUepu=get_data(f, "USEPUINDXD"; observation_start="2015-05-01", observation_end="2025-05-02", frequency="m", aggregation_method="avg").data# Make the plotplot(epu.date, epu.value; title="Trump's Uncertainty", xlabel="Date", ylabel="Monlthy Average Uncertainty Index", label="", linewidth=2,)vline!([Date(2025,1,1)], label="Inauguration", linestyle=:dash,)vline!([Date(2025,4,2)], label="Tariffs", linestyle=:dash,)#=vspan!([Date(2007,12,1), Date(2009,6,1)],=##= label="Recession",=##= alpha=0.25,=##= color=:grey,=##=)=#vspan!([Date(2020,2,1), Date(2020,4,1)], label="Recession", alpha=0.25, color=:grey,)
Macroeconomic Consequences
Research Has Suggested That Elevated Economic Policy Uncertainty Contributes To Inflation Expectations Becoming Unanchored. According to Farag, Musa, Olayinka, Ogbonna, Yaya, and Olubusoye in Applied Economics, “For instance, the study on Japan by Athari (2021) demonstrates that EPU has a leading role in explaining inflation fluctuations. The findings suggest that when policymakers’ actions are perceived as uncertain, inflation dynamics become more volatile, which may feed into market fear by destabilizing expectations regarding economic stability and monetary policy.” [Applied Economics: Farag, Musa, Olayinka, Ogbonna, Yaya, and Olubusoye (p. 12), 2025-05-27]
A Considerable Body Of Research Has Found That Higher Policy Uncertainty Reduces Bank Lending, Especially To Business. According to Farag, Musa, Olayinka, Ogbonna, Yaya, and Olubusoye in Applied Economics, “Demir and Danisman (2021) found economic uncertainty significantly reduces bank lending, especially business loans. Bilgin et al. (2020) show World Uncertainty Index (WUI) negatively affects conventional bank loan growth, but not Islamic banks. Bouri, Hussain Shahzad, and Roubaud (2020) and Hu and Gong (2019), using Economic Policy Uncertainty (EPU), also report a negative impact on bank lending.” [Applied Economics: Farag, Musa, Olayinka, Ogbonna, Yaya, and Olubusoye (p. 3), 2025-05-27]
Higher Profits For High Finance
Q1 2025: Benefiting From The Surge In Volatility Trump’s Administration Caused, Citadel Securities Profits Surged 70 Percent. Mirroring A Broader Surge In Profits For Market Makers. According to the Financial Times, “Citadel Securities’ profits jumped nearly 70 per cent in the first quarter to $1.7bn, as the high-speed trading firm benefited from a surge of volatility across financial markets as Donald Trump took office. The company reported net trading revenues of $3.4bn in the first three months of 2025, up 45 per cent from the same period a year earlier, according to a document seen by the Financial Times. Both revenues and profits were records for the market maker. The boom in trading at Citadel Securities, founded by billionaire Ken Griffin, was mirrored across Wall Street when the series of executive orders Trump signed following his inauguration on January 20 sparked tumult across financial markets.” [Financial Times, 2025-05-27]
Q1 2025: Wall Street Banks Trading Revenues Were The Highest They Had Been In More Than A Decade. According to the Financial Times, “The first quarter of 2025 was marked by enormous market swings around announcements in the early months of the Trump administration. These volatile markets typically benefit banks and other trading firms as they lead to more buying and selling from clients. Wall Street’s biggest banks took in almost $37bn in trading revenues in the first quarter, their best performance in more than a decade.” [Financial Times, 2025-05-07]
WSJ: Short Term Bank Borrowing And Long Term Lending Would Allow Banks To Profit From Higher Long-Term Treasury Yields. According to the Wall Street Journal, “The recent leap in longer-term U.S. Treasury yields has unnerved investors. But it could play into the hands of the country’s lenders. One upshot of this is what’s known as a steeper yield curve. This means shorter-duration securities, such as those that mature in a matter of months, are yielding less than longer-duration ones. The difference in what 2-year and 10-year Treasurys yield recently has been around its biggest since 2022. If that continues, it’s a big change and good news for banks. For years, the curve had been fairly flat. That meant yields were roughly the same at different maturities, or even inverted, with shorter-term yields higher than longer-term ones. Those were challenging curve shapes for the core business of banking. Banks get the bulk of their funding in the short-term market, in the form of deposits. Payouts on those are mostly linked to very short-term rates. Then they either lend out or invest these funds, typically in longer-term assets such as loans, mortgage bonds or long-dated Treasurys. The difference between the rates at which they borrow and lend is their profit, also referred to as their net interest margin. The steeper the curve, the better it is for lending profits. So even if the short-term picture for the U.S. economy is muddied by tariffs, concern over long-term deficit expansion and inflation could actually fuel an improving dynamic for banks’ core lending profits.” [Wall Street Journal, 2025-05-26]
Context
The Trump administration’s rapid policy changes have created a significant amount of policy uncertainty. The empirical evidence is fairly conclusive that this uncertainty could contribute to stagflation wry pressure in two ways. The first is that when looking ahead, it is harder to know what prices could be, so inflation expectations become, at the very least, less well defined. This means that the consequences to firms for price increases are less likely to be negative, which could lead to higher inflation.
Along the same lines, providers of credit to businesses are less likely to lend when they are uncertain about the future. They do not want to lock in a price (interest rate) that could be too low if inflation rises. The mini-bank run of 2023 was largely driven by loans held on bank books that had lost value due to higher interest rates (also bad bank management, but that is a digression). If businesses cannot access financing, their operations become much harder, and they are likely to either try to boost existing capital flows by raising prices, or by delaying expenses. If they choose the second one, that has direct macroeconomic consequences, as economic activity is the only real driver of income.
Companies Suffering
May 2025: Sinobec Group, Which Arranged Transactions Involving Aluminum Ingots Filed For Bankruptcy, Blaming Trump’s Tariffs. According to Bloomberg, “A Canadian aluminum trader filed for bankruptcy in the US and Canada, saying the American trade war helped push the firm over the edge, Steven Church reports. Sinobec Group, which arranges deals between sellers and buyers of aluminum ingots, is one of the first companies to directly blame Trump’s trade war for contributing to its bankruptcy. Experts have been predicting a wave of restructurings will hit the US later this year, especially among retailers and importers that rely on Chinese manufacturers. For about two years, Sinobec had been working with lenders after defaulting on one of its loans, company owner and chief executive Zhong Li said in court papers. Tariffs imposed in recent months by Trump hit Sinobec hard, the company said. ‘This has exposed the debtors to the full impact of the trade war,’ company restructuring advisor Philippe Jordan said in court papers. ‘Significant accounts receivable collections have halted, as the supply chain upon which the debtors rely for payment has ground to a halt.’” [Bloomberg, 2025-05-27]
May 2025: Under Pressure, Walmart Announced 1500 Layoffs. According to the Wall Street Journal, “Walmart plans to cut around 1,500 corporate jobs in a U.S. restructuring aimed at trimming its expenses and speeding up decision-making. Walmart and other retailers have been cutting costs, putting pressure on suppliers, shifting production to other countries and increasing prices to offset the cost of tariffs. Last week, Walmart said that it would raise some prices because of tariffs, prompting President Trump to criticize the company. The company reported strong sales growth in the latest quarter and executives said they would work to manage profits to keep prices as steady as possible.” [Wall Street Journal, 2025-05-21]
“If We Lose These Workers, It Would Be Devastating To Our Business,” CEO Of One Of The Two Companies Making Parachutes For American Soldiers Said Of Trump’s Attempt To Strip TPS Protection. According to the Wall Street Journal, “Inside two low-slung brick buildings nestled here in the Blue Ridge Mountains, dozens of employees churn out parachutes for U.S. soldiers. Cutting and sewing the fabric is precise work with little margin for error. To make the main canopy for the MC-6, a parachute used mostly by the U.S. Army and Marines, takes 27 steps. One single skipped stitch, among thousands, is considered a major defect. Many of the employees have worked at these sewing machines for years. About a quarter of the staff are immigrants living and working under temporary legal protections that have come under fire from the Trump administration. The Supreme Court on May 19 allowed the administration to strip such protections for about 350,000 Venezuelans living in the U.S. John Oswald, the chief executive of Mills Manufacturing, has dozens of workers from Ukraine, Nicaragua and other countries who are at risk of losing their legal status. The 90-year-old business is one of just two companies left that are qualified to make the MC-6 and the T-11, the main personnel parachutes for the U.S. military. ‘If we lose these workers, it would be devastating to our business,’ said Oswald, walking around a factory filled with the humming of sewing machines. ‘That puts the rest of the workforce at risk.’” [Wall Street Journal, 2025-05-28]
Higher Prices
Goldman Sachs: Trump’s Tariffs Will Boost Core PCE Inflation To 3.6 Percent. According to Bloomberg, “Goldman Sachs economists expect the Trump administration’s tariffs will provide a one-time price level boost that causes core PCE inflation to rebound to 3.6% later this year. But price pressures will moderate again in 2026 due to weak economic growth.” [Bloomberg, 2025-05-27]
2025: As Costs For Beef Have Surged Over The Past Year, Cattle Herds Have Diminished To Their Lowest Level In 75 Years. According to CBS News, “The dinner shopping list for Darlowe Torkelson and his wife was short. At today’s prices, it consisted of just one sirloin steak and one potato. Torkelson of Argyle, Texas, told CBS News his family doesn’t yet know the upper limit of what they are willing to pay for certain groceries. ‘I haven’t found it, I’d like to see it back down,’ Torkelson said. The average cost of one pound of ground beef reached a record-high of $5.80 in April, according to numbers from the Bureau of Labor Statistics. That is up nearly 50% from five years ago. ‘We are very, very conscious of how high the prices are in the meat case,’ said rancher Stephen Kirkland, owner of the Z Bar Cattle Company. Kirkland said he has been trying to absorb the price increases at the two butcher shops he owns near Fort Worth, Texas. Kirkland says that a year ago, he could buy cattle for about $1,500 per steer. Now, he says the price has risen to nearly $2,400. ‘$2,400 for one steer going into the feed yard, and then feed and everything else, transportation, everything else that gets involved in that,’ Kirkland said of the cost. Raising those steers also comes at a higher cost, with prices going up for feed, land and financing. Those cost increases have contributed to U.S. cattle herds falling to their lowest numbers in more than 70 years, according to USDA data.” [CBS News, 2025-05-22]
Slowing Growth
Goldman Sachs: Trump’s Tariffs Will Slow 2026 Economic Growth. According to Bloomberg, “Goldman Sachs economists expect the Trump administration’s tariffs will provide a one-time price level boost that causes core PCE inflation to rebound to 3.6% later this year. But price pressures will moderate again in 2026 due to weak economic growth.” [Bloomberg, 2025-05-27]
May 2025: Service Sector Activity In Texas Contracted. According to the Dallas Federal Reserve, “Texas service sector activity contracted in May, according to business executives responding to the Texas Service Sector Outlook Survey. The revenue index, a key measure of state service sector conditions, fell nine points to -4.7, suggesting revenue contracted slightly.” [Dallas Federal Reserve, 2025-05-28]
May 2025: Retail Activity In Texas Declined Sharply, With An Index Of Sales Plunging To Its Lowest Point Since April 2020. According to the Dallas Federal Reserve, “Retail sales activity contracted sharply in May, according to business executives responding to the Texas Retail Outlook Survey. The sales index, a key measure of state retail activity, plunged 33 points to -30.5, its lowest level since April 2020. Retailers’ inventories pushed further negative, with the May index falling to -10.7 from -2.4.” [Dallas Federal Reserve, 2025-05-28]
May 2025: Weakness In Texas’s Retail Sector Was Driven By A Contraction In Employment, Weak Perceptions, And Activity. According to the Dallas Federal Reserve, “Retail sales activity contracted sharply in May, according to business executives responding to the Texas Retail Outlook Survey. The sales index, a key measure of state retail activity, plunged 33 points to -30.5, its lowest level since April 2020. Retailers’ inventories pushed further negative, with the May index falling to -10.7 from -2.4. Retail sector labor market indicators suggested continued contraction in employment and workweeks. The employment index remained at -8.1, indicating a decline in employment. The part-time employment index increased four points but remained negative at -3.6, and the hours-worked index was unchanged at -3.8. Perceptions of broader business conditions deteriorated further in May. The general business activity index declined deeper into negative territory, dropping to -23.7 from -14.8. The company outlook index remained negative at -25.3. The outlook uncertainty index retreated 11 points to 19.7, though it remained well above the series average of 11.3.” [Dallas Federal Reserve, 2025-05-28]
Code
# Gather The data sales=get_data(f, "TROSREVSAMFRBDAL"; observation_start="2015-05-01", observation_end="2025-05-02", ).data# Make the plotbar(sales.date, sales.value; title="Texas Retail Sales", xlabel="Date", ylabel="% Firms: Increased Sales - Decreased Sales", label="",)hline!([sales.value[end]], label="May 2025", linestyle=:dash,)vspan!([Date(2020,2,1), Date(2020,4,1)], label="Recession", alpha=0.25, color=:grey,)
Big Beautiful Bill
Incentives For Capital Flight
House Republican’s Bill’s Section 899 Would Impose Taxes On Dividends, Interest, And Royalties Earned From Investments In The United States. According to Bloomberg, “A section of the bill, which passed the House of Representatives on May 22, takes aim at countries including Canada, the UK, France and Australia that impose “digital services taxes” on large technology companies such as Meta Platforms Inc. It also targets countries using provisions in a multicountry deal for minimum corporate taxes. The move to target allies with which the US has decades-old tax treaties underscores US President Donald Trump’s willingness to change or break longstanding agreements with other nations. The so-called Section 899 provision includes “what you could call a ‘revenge tax’ against what the US considers to be unfair taxes that are levied by other countries on US businesses,” said Robert Kepes, partner with tax law firm Morris Kepes Winters LLP in Toronto. Institutional investors including sovereign wealth funds, pension funds and even government entities would be affected, as well as retail investors and businesses with US assets. Section 899 would increase the federal income tax rate on passive US income — such as dividends, interest and royalties — earned by people and institutions that are based in the targeted countries. The first increase would be five percentage points, rising by another five points each year to a maximum of 20 points above the statutory rate. Tax treaties are meant to prevent an entity from being taxed multiple times on the same income. This section of the bill “effectively overrides certain US tax treaty obligations — a significant departure from longstanding treaty commitments,” according to an analysis by attorneys at Greenberg Traurig LLP.” [Bloomberg, 2025-05-26]
Robert Nobrega: The Way The Legislation Has Been Written, It Could Apply To Central Bank Holdings Of Treasuries. According to Bloomberg, “The legislation also overrides special rules for government bodies such as central banks. For example, the Bank of Canada is currently exempt from having taxes withheld by the US, ‘but this suggests that a withholding tax would apply,’ Ronald Nobrega, partner with Fasken Martineau DuMoulin LLP, said of the bill.” [Bloomberg, 2025-05-26]
A Canadian Group Estimated It Would Cost Canadians With Investments In The United States As Much As $59 Billion Over Seven Years. According to Bloomberg, “The bill’s broad nature also suggests withholding taxes may apply to US income earned in tax-sheltered retirement accounts. ‘There would be an unexpected tax liability for many Canadian investors and Canadian companies,’ Nobrega said. The Securities and Investment Management Association, a Canadian industry group, estimates the US legislation would cost Canadian investors as much as C$81 billion ($59 billion) in additional taxes over seven years.” [Bloomberg, 2025-05-26]
Context
For individual savers, keeping their retirement savings in American investments would become more expensive, thereby making it less attractive to do so. For institutions like central banks, this would add costs to holding American assets, making it so that the cost of changing to a system in which the United States has less power over the global financial system could be worth it.
Facebook And Google Subsidy
May 2025: Canada And A Number Of European Companies Have Taxes On Digital Services Rendered In Their Countries. According to Bloomberg, “Canada’s government has adopted both a digital services tax and a global minimum tax. The former is a 3% tax on revenue over C$20 million earned in Canada from services that ‘rely on engagement, data, and content contributions of Canadian users’ and applies to major US technology firms including Meta and Alphabet Inc. European countries, including France, the UK, and Italy, implemented similar levies during Trump’s first term in the White House as they argued the US was slowing OECD global talks on tax rules for the digital age. Those moves angered US tech firms and Trump, who threatened tariffs. The French government said earlier this year it will not give up on its digital services tax despite the risk of the US retaliation.” [Bloomberg, 2025-05-26]
House Republican’s Bill’s Section 899 Would Impose Taxes On Passive Income Earned By People And Institutions In Countries With “Digital Service Taxes.” According to Bloomberg, “A section of the bill, which passed the House of Representatives on May 22, takes aim at countries including Canada, the UK, France and Australia that impose “digital services taxes” on large technology companies such as Meta Platforms Inc. It also targets countries using provisions in a multicountry deal for minimum corporate taxes. The move to target allies with which the US has decades-old tax treaties underscores US President Donald Trump’s willingness to change or break longstanding agreements with other nations. The so-called Section 899 provision includes “what you could call a ‘revenge tax’ against what the US considers to be unfair taxes that are levied by other countries on US businesses,” said Robert Kepes, partner with tax law firm Morris Kepes Winters LLP in Toronto. Institutional investors including sovereign wealth funds, pension funds and even government entities would be affected, as well as retail investors and businesses with US assets. Section 899 would increase the federal income tax rate on passive US income — such as dividends, interest and royalties — earned by people and institutions that are based in the targeted countries. The first increase would be five percentage points, rising by another five points each year to a maximum of 20 points above the statutory rate. Tax treaties are meant to prevent an entity from being taxed multiple times on the same income. This section of the bill “effectively overrides certain US tax treaty obligations — a significant departure from longstanding treaty commitments,” according to an analysis by attorneys at Greenberg Traurig LLP.” [Bloomberg, 2025-05-26]
Corruption
May 2025: Trump Confirmed His Plan To Reprivatize Fannie And Freddie Would Keep A Taxpayer Guarantee Of Those Companies. According to Bloomberg, “President Donald Trump said that the US government would retain guarantees and an oversight role over Fannie Mae and Freddie Mac even as he pursues a public offering for the mortgage giants. ‘I am working on TAKING THESE AMAZING COMPANIES PUBLIC, but I want to be clear, the US Government will keep its implicit GUARANTEES, and I will stay strong in my position on overseeing them as President,’ Trump wrote Tuesday night in a post on his Truth Social platform.” [Bloomberg, 2025-05-27]