บทถอดความฉบับเต็มของ The Year Ahead: Tariffs, AI and Fed Independence

facilities, and there was still intense speculation about whether Operation Midnight Hammer, as it was called, would go ahead or not, and President Trump took to truth social and said, I may do it, I may not do it. Only I will decide, and I expect everyone else's way ahead of me on this. But for me, that was a real clarifying moment, right and it clarified that the intense uncertainty, the kind of presidency as a soap opera with a cliffhanger at the end of every episode to keep you tuning in the next day. That wasn't a bug of some of the trade policies and security policies we'd seen in the previous few months. It was a feature, a deliberate strategy to allow the President to very successfully dominate the conversation, dominate the headlines, keep himself at the front of everyone's consciousness. 00:04:05 Speaker 4: Pa well. 00:04:06 Speaker 1: The highlight for me was actually at the very beginning of this year in January, when a little company in China called deep Seek released an AI model that caused a freak out in Silicon Valley. 00:04:18 Speaker 5: This was an AI model that was as good as. 00:04:20 Speaker 1: Chat GBT, but developed for what apparently was a fraction of the price, and it was an open model some would call it open source, so they essentially put the blueprints of this AI model on the Internet for anybody to develop on themselves. And I thought it was just such an interesting twist on this effort by the Trump administration and previous White Houses before to restrict chip exports to China to try and ensure that the US would stay ahead on tech. And yet the constraint bread innovation, the lack of chips, led this one company to try and do more with less. And since then, deep Seek isn't quite as popular as I would have thought it would be by this point in time, but other Chinese open source models are becoming much more popular, in particular Ali Baba's Quen. So lots of Silicon Valley startups are using models from China now, and I think that's just such an interesting highlight for this ascendancy we're seeing from China, both in AI and also in robotics. 00:05:26 Speaker 3: And it's funny for me because your slightly relates to one of mine. If I'm completely honest, if I think of what was the most memorable, I think watching in the office and watching in real time the feed coming in of that' Zelenski, the sort of car crash Zelenski session in the White House with the President, the visceral reaction we all had of oh my god, this is really very bad. But if I think about what was the most eye opening, it was when we'd all been completely focused on the US and I went to a sort of reasonably high level senior people involved in global business, some of them based in Hong Kong, were others in US, and I'd asked them on this panel, you know what's the thing that surprised you so far this year? Assuming they would all talk about Donald Trump, every single one of them pointed to a technological advance that they'd been surprised that China had made whether it was in electric vehicles or I'm sure a couple of them were talking about deep seek and it just sort of made me think, Ah, maybe China's just going to win this, even as we spend an awful lot of time watching every move coming out of the White House, so Tom partly because of that, how the rest of the world has absorbed and responded to trumpernomics has obviously been a big theme for the year. The big surprise being that countries, in many ways most almost all of them apart from China, did not retaliate to the tariffs, and that has had its own consequences. But how do you see the global ramifications of mister Trump's economic policies playing out now in twenty twenty six. We've had stage one? What's stage two going to look like? 00:06:58 Speaker 2: So I think if we think about trade, if we think about security, if we think about AI, if we think about the FED, the twenty twenty five story isn't over right. The consequences are still going to be playing out in twenty twenty six. On trade, I think one of the surprises is that we've not seen this enormous hike in tariffs playing out immediately in higher prices for US consumers and lower profits for US businesses. But I think that passed through of tariffs to the rest of the economy. Higher prices at the shops, lower margins for US businesses, potentially a hit to US stocks. That's still something that will play out in the early months of twenty twenty six. If we think about security, I think one of the big things we're looking for in twenty twenty six is resolution of that terrible ongoing conflict in Ukraine. If we think about the situation right now, well, it seems like that resolution could be on terms which are very favorable to Moscow, and that's something which has significant economic consequences. We're already seeing Germany and other European nations responding with a significant increase in their defense spending. Good news for growth, good news for defense stocks, bad news for countries already struggling under a heavy burden of debt. On AI, well, one of the good news stories in twenty twenty five was just the enormous optimism about AI, and I'm sure we'll hear more about that from Pami later. Big question for twenty twenty six, is that optimism going to be sustained? And on central banks, well, huge challenges to FED independence in twenty twenty five. In twenty twenty six, Trump's going to be able to pick the chair of the Federal Reserve. 00:08:49 Speaker 3: And I think we probably all of those things we're going to end up touching on. If I just think about China, because that was such a focus of the administration's attention at the starts of the year and has been such a dominant theme if you sort of look back, is China stronger or weaker economically going into twenty twenty six as a result of trumpnomics? 00:09:12 Speaker 2: So I think about it on a couple of dimensions, Stephanie. The first one is how hawkish on China is Donald Trump? And it's actually

quite hard to answer that question. In one respect, he's America's biggest China hawk. Until he descended that Golden Escalator to start his presidential bid in twenty sixteen, the view in Washington, DC was, yeah, there's some problems with China. We've got some issues, but we can work together. And it was Trump who was responsible for that enormous pivot, that big reorientation saying, actually, China's not our friend, not someone we're going to work with. China's our rival and our adversary. But if you look at the details of China policy right now, well, tariffs have come down, Controls on China's access to the chips which power the Ai Revolution have been relaxed. Apparently Trump got on the phone with Japan's Prime Minister Takaichi and said, cool it on Taiwan. You don't want to upset President Shei. Right, So the big reorientation starting in twenty sixteen that positions Trump as an enormous China hawk, the details of policy in the last few months a bit less hawkish. 00:10:22 Speaker 4: I think. 00:10:22 Speaker 2: The other big question for China, the other dimension I would think about this is kind of short term long term. So short term, China's facing a crisis in its property sector, collapse in real estate, the consequences of years of overbuilding, and when you've got weak domestic demand, what you really want is strong global demand, strong exports to keep your economy going. Clearly, facing new high tariffs from the United States is not very constructive. Longer term, though, there's a narrative in China that democracy plus capitalism doesn't work. Democracy plus capitalism ends if you're going to be generous in plutocracy, if you're going to be less generous in kleptocracy. And I think when Beijing looks at what's happening in Washington, DC, that's very much their understanding of how things are playing out, and I think long term they think that can only be positive for China and China's emergence as a global power. 00:11:19 Speaker 3: I mean, there was quite a lot of focus just in the weeks leading up to the end of the year on trade surplus still being enormous in China and having quite successfully diverted a lot of exports that are not going to the US to other parts of the world. Pami, We're going to get into the relative strength, I would suggest of the US economy this year. Some pain may be still to come, but I think as a general feeling that the impact of AI investment has been a big part of that, supporting the economy and indeed just making it hard to read the economy. Do you see that level of capex as Tom talked about continuing next year and as we say see this rollout of AI, what are the potential bear traps there? Waiting down the road for the administration or the economy. 00:12:08 Speaker 5: Well, I think you're absolutely right in a lot of ways. 00:12:10 Speaker 1: AI boom has given the Trump administration a lot of cover because it's just made it look like everything is going so well. And in aggregate, the Magnificent seven tech stocks have seen their market valuations increase by trillions of dollars just in the last three years since chat GBT came out. I personally think there is going to be some kind of correction in twenty twenty six, and for all the reasons that people are saying, which is that there is very high risk of near term monetization not happening. In other words, there's been this huge buildout of infrastructure anticipating all this demand that probably will come in eventually, but it's just not going to come in fast enough to meet the expectations of investors. 00:12:58 Speaker 5: And this is exactly why we saw. 00:13:00 Speaker 1: Booms and bust in the dot com era early two thousands. You had this big rollout of fiber optic cables that eventually got used, but just didn't get used quickly enough. Same with the railroads in the nineteenth century. I think we'll just see perhaps that the sparks will be leaked reports from open ai showing a kind of soft demand for their enterprise AI products, or something in the earnings reports from Microsoft or Google or Amazon DAWs, just showing that it's actually been quite difficult to get businesses to adopt these AI services because that's where. 00:13:33 Speaker 5: All the money is. Right now. 00:13:34 Speaker 1: The huge success of generative AI is consumer based. You've got nine hundred million people, that's about a ten percent of the global population is using chatchbt every week every week. That's astoundingly successful from a market dominance perspective, but it's not really making money from open. 00:13:54 Speaker 5: Ai because very few of those people are paying subscriptions. 00:13:56 Speaker 1: The real money is going to come when businesses start paying for the access to that service, and that's just taking longer than these companies need. So the more signals we get that lack of demand, which I guess will happen next year, the more likely we'll have some kind of decline in the markets. But I do think ultimately that'll probably could work out quite well for the biggest tech companies because they're the ones that can weather the storm. 00:14:22 Speaker 5: They're so well capitalized. 00:14:24 Speaker 1: It's the startups and the smaller companies who will really struggle, who will see their valuations fall, and then here comes an opportunity for big tech firms to acqui hire those companies or buy those companies, acquire all their talent and IP and just become even stronger out of all of this. 00:14:41 Speaker 4: And that's a very good point. 00:14:42 Speaker 3: In your book, your award winning book, you chart the history of that crucial bits of the AI revolution, and I think in the process we're reporting very closely on the individuals in the industry. And of course the tech bros are unusually close or at least people who have the back of the AI industry, and these big tech companies are very close to the White House and sort of famously have the ear of the President. Some of

the kind of inconsistencies in China policy that Tom mentioned is a reflection of that. The decision to allow Nvidia to sell some of these more advanced ships to China. If we start to see pame that AI costing jobs or being associated with other social ills like we've already seen with social media, if it starts being associated with higher electricity costs for a lot of people as they roll out these data processing centers, is there nervousness in Silicon Valley about the kind of political exposure they have now. And it's great to be influencing policy, but then means they're a bit more implicated, I suppose. 00:15:48 Speaker 5: But what choice do they have? 00:15:49 Speaker 1: I think right now their view as this is the strategy that has worked till now, which is to lobby as hard as you can to try and prevent any other regulations from coming down the pipeline that are going to affect you. So that approach seems to be working the Trump administration. As soon as Trump got into power, he rescinded the executive order that Biden had put in place on AI that calls on tech companies to do some very basic stuff around auditing of their algorithms. 00:16:22 Speaker 5: That was scrapped. 00:16:24 Speaker 1: And now there's of course talk of trying to prevent states from implementing their own AI rules because that might create this kind of patchwork effect of regulation that will hinder innovation. I'd personally find that completely exaggerated and overblown. 00:16:40 Speaker 5: That has not been an issue in the past. With privacy laws. 00:16:44 Speaker 1: Usually companies will find the state with the strictest law, like California, and then they'll just implement that across the board, it's very workable. So I think this kind of narrative spun by large companies around if you regulate US will hinder innovation for everyone. 00:17:02 Speaker 5: And we see this in Europe as well. 00:17:04 Speaker 1: It's just not true, but somehow it has really taken hold when Europe. The real issue is we just don't have enough funding on this side of the pond for tech startups. 00:17:13 Speaker 5: The issue is not regulation. 00:17:15 Speaker 1: The real problem is there's a real vacuum of thoughtful, specific regulation, rules and standards that are going to govern how this incredibly transformative technology that's addictive for some people, that is actually affecting people's mental health already, there are no rules out there to govern how that is used. 00:17:47 Speaker 3: Mario, you've been nodding patiently through some of this. I mean, clearly, the sort of the buzzword as we end twenty twenty five, at least in sort of politically, has been affordability. And there is a bit of a read a cross from this AI discussion. And I know people who are being told that the big increase in electricity supply that's going to be needed for their area, which everyone knows is due to data processing centers and big tech companies at least everyone in that area knows is going to

double or sometimes even trouble their electricity costs. Is that going to be one of the things that could continue to stoke questions about affordability and cost of living. 00:18:27 Speaker 6: Absolutely, And I was nodding with just the comments that you all have been making just because I see the through line of it all politically, right, So as PARMI kind of mentioned or alluded to, you saw the influence of the tech sector on display last week two ways right with the easing the restrictions on in videos eight two hundred the chips. But then also Donald Trump, I mean almost verbatim repeated the rationale for AI not being having a patchwork with the States and that they would inherit bit the innovation of the industry as well, but also the sugar high, right that it provides in an economy that Americans are pretty sour on and giving Trump pretty bad marks. The sugar high. That one bright spot is that AIDS are showing the president the proliferation of data centers, building the data centers across the country, and he sees that as a win, appealing to his sense of that the US can lead the way with this breaking edge, this cutting edge technology as well. 00:19:30 Speaker 4: Now, the other part of that coin is. 00:19:33 Speaker 6: The fact that it leaves him vulnerable, he and the party vulnerable to arguments about affordability, even as he touts lower energy costs for gasoline, etc. Electritricity prices have skyrocketed, and we saw that play out in some of the elections that we saw in November, where Republicans lost pretty handily in several places in affordability became a salient issue and electricity prices became a salient issue. The other part of it politically is, as you all have both alluded to, Americans still don't quite understand all of the nuances of AI. The administration hasn't been able to or the industry explain it in a way that common Americans can really grasp it. They see it as something that's fun, They see it as something that can be confusing, They see it as something that could be toxic to mental health at times. 00:20:29 Speaker 4: They see it as a threat to their livelihoods and jobs. 00:20:31 Speaker 6: Right, and then you add on the affordability issue as well, and so we'll see that continue to play out in twenty twenty six. 00:20:39 Speaker 3: The President has been on something of an affordability tour, quite a few big events on this, and yet it's not clear what levers he's going to pull because in some ways he doesn't recognize that there is an affordability crisis. As we go into the midterms, how crucial is that going to be. Do you think that there's going to be actual moved by the administration more direct efforts or is the White House going to still feel like this is really just about messaging more than substance. 00:21:11 Speaker 4: I think a little bit of both, right. 00:21:13 Speaker 6: I think the problem for the White House is the fact that Donald Trump, went back to our interview with him in summer of twenty twenty four, has looked at tariffs and argued that tariffs don't have a material effect on consumer prices. Well, what you've seen over the last month and change or so is some of the reversals on food stuffs, right, bananas, coffee as well. So you see the administration also trying to pull levers on things like beef. So it's an acknowledgment in some ways that tariffs are having this additive cost to the consumer from the administration, even as Trump has argued, so you've got this discordant message coming from the administration, and quite frankly, if anyone saw the president's speech the rally, his heart just wasn't into this affordability message. I mean he all but said that his chief of staff, Susie wils told him you need to go out here in campaign on this. So almost sounded like someone who was grudgingly told you got to go outside and do something that you really don't want to do. 00:22:14 Speaker 3: It's convenient for the purposes of this podcast to feel that the economy is central to everything, we should step back and ask what is the state of the US economy going into twenty six. I mean, I know many of us, certainly a year ago, if we've been told what the administration was going to do, what was going to happen in terms of tariffs and uncertainty and other things, we probably would not have expected it to be as strong or inflation to be as low. But what does it look like now and what are you watching going into twenty six on just the strength of the economy. 00:22:46 Speaker 2: So I think there's quite a lot to be optimistic about on the US economy heading into twenty twenty six. Inflation's a bit higher than the FED would like it to be, but it's certainly not spiraling higher growth pretty robust looking into twenty twenty six. We've got easier monetary conditions. The FED is cutting interest rates. We think they're going to be cutting quite a lot more in the year ahead. We've got supportive fiscal policy, the one big beautiful bill cutting taxes for big US businesses. We've got a bonfire of regulations. We can argue about whether or not that's socially optimum or not, but certainly it sparks animal spirits. And of course we've got the AI revolution and all that means for market optimism and for capital spending. So if you put all of those things together, I think the base case for US growth in twenty twenty six, US growth heading towards the midterms is pretty optimistic. There's stuff that could go wrong. AI optimism could evaporate. A new FED chair could potentially overplay their hand, bringing concerns about lost FED independence back into perspectiveishing interest rates higher. So some risks there, but the base case heading into twenty twenty six I think pretty optimistic. 00:24:08 Speaker 3: Well, you mentioned the FED, and obviously the independence of the FED has been a great focus. There's been this kind of horse race around who was going to be named by the President as the new chairman of the FED. The betting as

we're recording this is still on. Kevin has it, but there's been some desire from the White House to still preserve the element of surprise. But that's a power that the president has always had, but there is uncertainty about whether the president also has the power to fire members of the FED Board. I mean, Maria, there's some pretty crucial Supreme Court decisions coming down the track, and that's one of them. 00:24:44 Speaker 4: Yes, absolutely. 00:24:45 Speaker 6: One of the cases stems around nineteen thirty's era law that prohibited presidents from firing people on independent branches of government. This one is an FTC case that we're quite eager to get the results of, but the Supreme Court is already signaling that it will likely side with the president. Another extraordinary expansion of executive authority that we've seen. Another case, obviously, is the president's use of AIBA in order to enact some of the tariffs. He's characterized that as essentially make or break for the country. We'll see whether or not the Supreme Court sides with him or not, but make no question about it. 00:25:28 Speaker 4: What we've seen the security. 00:25:29 Speaker 6: So this Supreme Court just grant the president just an enormous amount of executive leeway. 00:25:34 Speaker 3: Here, Tom, there's the Lisa Cook judgment. There's been some question about whether or not there would be a line drawn between the FED and other independent eights supposed so called agencies, where the Supreme Court appears set to say that the president can kind of do what he wants with almost all the agencies. But they have suggested earlier in the year that the Federal Reserve had a slightly different status, which might effect whether they ruled differently in the case of Lisa Cook, which we've talked about before. 00:26:05 Speaker 4: On this program. 00:26:06 Speaker 3: But how important is that do you think in terms of the way the Fed is viewed, Because at the moment, obviously the market seem to be quite relaxed about the pressure that the White House is putting on the Central Bank. 00:26:18 Speaker 2: So a few years ago we talked about the twilight of the economic idols, right, kind of slightly grandiose term. Can't remember who came up with it, but the idea was, well, the populists have smashed down the door of so many institutions, right the universities, the media, the law firms, the scientific profession. Maybe they'll come for the central banks. Right, The Federal Reserve has failed on its basic task of controlling inflation. The Federal Reserve back then had to kick out two members of its governing council because of concerns about insider trading. This is a vulnerable institution. The populists have knocked over so many other institutions. Maybe they'll come for the FED as well. And sure enough, here we are at the end of twenty twenty five, looking ahead into twenty twenty six, and the populists are certainly banging at the Fed's door. 00:27:14 Speaker 4: Right. 00:27:14 Speaker 2: We already have Stephen Myron, the chair of the Council of Economic Advisors for President Trump, serving on the FED board. We have the court case against Lisa Cook that you mentioned, which could open up another board seat for the President to fill. And we have Chair Powell exiting in May and scope for the President to appoint his own chair. And whoever he picks, no matter how credible they are, is going to be laboring under the suspicion that they've made some kind of low rate loyalty pledge to the president in order to get the job. 00:27:48 Speaker 4: Now. 00:27:49 Speaker 2: We haven't seen the markets reacting to this much so far, but it really is quite consequential. And independent federal reserve is a fundamental underpinning of market confidence that the US will be serious about controlling inflation. And that's a fundamental underpinning of the role of the dollar as the world's reserve currency and US treasuries as the world's safe asset. If that confidence is undermined, well, the status of the dollar, the status of the treasury market both open to question. 00:28:24 Speaker 3: This kind of maximalist view of presidential power that we've seen so far. Mario, I mean, how does that play politically? Do you think there is a chance of this Congress, previously rather feeble biting back. 00:28:36 Speaker 6: Yeah, that's a great word for it. It's been mostly feeble for the better part of this year. But we have seen signs of life in recent months. 00:28:46 Speaker 4: Right. 00:28:46 Speaker 6: We saw obviously the evergrain here is the split between the president and Marjorie Taylor Grain. We're also saying at the state level, and if democracy functions the way it should in operation, it could funnel up to Congress as well. But we've seen pushback at some of the redistricting efforts as well. We've seen the Congress, bipartisan Republicans even kind of blanching a bit at the boat strikes in the Caribbean, particularly the one in which it was like a double what's called a double tap in a boat as well. So we've started to see the president called for during the shutdown, the President called for Republicans to eliminate the filibuster that was aligned too far for them as well, that they didn't heed. And then obviously, and again I mentioned Marjorie Taylor Green, the fact that the Epstein files and the legislation there, they forced the President to do an about face on that issue as well. So we're starting to see some semblances of life. Maybe that's because of what the polls are bearing out with some erosion among parts of the MAGA base, the pressure that we have for congress people representatives as we head toward the midterms as well, So that kind of tension may we may see some checks there on a president's power. 00:30:08 Speaker 3: You've both mentioned that the White House has been trying to establish that it's going to be the president and certainly federal government that dictates a single set of rules for AI. But

we also know there's plenty of individual states, not least California, and indeed some in Congress that would like to have more of a role and not just leave it to the president. What should we be watching on that? What are the key debates we should be looking out for next year if we're kind of concerned about the form that AI is going to take. 00:30:39 Speaker 1: Personally, I think this allowing states to roll out their own laws is actually quite a healthy approach, because then it almost becomes like a lab Each state becomes like its own laboratory for running an experiment on what law works best, whether it's on tackling deep fakes or deep fake porn or spam or fraud, or whatever approach you want to take. In there are so many different ways to approach AI. Centralizing regulation isn't always the best approach. And I hate to say this because when the European Union first rolled out it's AI Act, I was so excited and I thought, this is the first comprehensive law addressing AI, and it's so great and we need this and they're moving so quickly. And then that was like maybe two and a half years ago, and now I'm just so disappointed on how it has turned out because they've delayed it, they've blamed the standards organizations that are trying to make it more specific, which is what it really needs. It's all just been quite a big disaster. But to answer your question about what to watch out for, I would also just watch out for what's happening in the court system, because some of the lawsuits that have been thrown against that have targeted open AI, that have targeted anthropic over copyright infringement, I mean, these are pretty big cases. There is several there's some several cases against open ai from more than a dozen families of people who've experienced some kind of mental health serious mental health harm from using chat GBT, and these are getting a lot of attention, and open ai has publicly addressed them and talked about making changes. 00:32:22 Speaker 5: So I almost feel like, actually the. 00:32:24 Speaker 1: Court system is having much more of an impact than any kind of legislation is right now. 00:32:30 Speaker 3: One of the surprises that we've had over the last few years actually has been the strength, the relative strength of US productivity. 00:32:38 Speaker 4: Growth. 00:32:39 Speaker 3: Economists tend to be obsessed with it because making more stuff with the same number of people is how you get richer. A key part of having AI feed into continued productivity growth is going to be that, as you mentioned, partly the diffusion across the economy. How has it applied historically if I look at Europe, certainly of looking at the UK, but I think in other places as well. It's the diffusion of technology that's been lacking. Actually, the best companies have had the best know how, but it's not spread through the economy nearly as well as it has in the US. Regulation is going to be an important part of a rollout, but its diffusion is the

other big piece. What should we be looking at there because obviously it also feeds into whether those at least some of those high prices for AI companies are justified. 00:33:25 Speaker 5: Yeah, that's a really great point to bring up. 00:33:28 Speaker 1: Actually, and it's a point that politicians and lawmakers have been making that. Actually in Europe we might not be developing the big models that everybody's using in Silicon Valley, but hey, let's use that as an opportunity. Let's capitalize on all this money that Silicon Valley is spending and all this infrastructure, and let's just use this technology to make ourselves more productive. So to your point, exactly, this is about winning the AI race. What does that even mean? Does it mean that you have developed the most capable AI model from a company in your country, or does it just mean that the citizens of your country have actually adopted this technology much more quickly than anyone else and are exploiting it much more quickly. The government of Estonia, for instance, they've a population of one and a half million people, and they're the first in the world to roll out chat ept to all their schools. It's an educational version of chat ept. And someone else in Silicon Valley has built this, but they're tweaking it. They're trying to make it less of an answer engine and more of a question engine, where the bot doesn't just give the kids the answer all the time, but ask them questions to get them thinking more. Now, if they can make that work, they're going to be doing the rest of the world a favor, but they'll also be doing a huge favor to their students and to their educational system. 00:34:58 Speaker 3: He's talked about on this show, the possibility of a stock market correction or even something bigger than that, due to reduce confidence in that handful of AI companies tech companies. Tom I know that the economists have done a bit of analysis on this. What's our guess in terms of what the impact on the real economy would be of that kind of stock market correction? I mean, given that we I remember we saw in the tech bubble bursting in two thousand and two thousand and one that actually didn't have much impact on the economy. Could we expect something like that this time? 00:35:30 Speaker 4: Yeah. 00:35:31 Speaker 2: So it's a big question, Stephanie, and it's one that it's all too easy to wave your hands out in generalities. What we've done at Bloomberg Economics is take out the fed's big model of the US economy that's called FURBUS, and we modeled a specific scenario. We looked at what would happen if stock prices dropped around twenty twenty five percent and there was a broadening of credit spreads for corporate borrowers. And if you plug that shock into the Furbus model, what it tells you is, well, you have a blow to confidence, you have a blow to wealth that starts hitting consumption. Is more expensive for corporates to borrow, so it starts hitting investment as well. And as those shocks hit the economy in the end, you have a blow to GDP growth of around zero point seventy five percent and a blow to employment or a boost to unemployment of around zero point five percent. So those are macro significant shocks. You'd see them in the numbers, and if you have a snowball effect, well things could be even worse. Still, those numbers are numbers which would damage the growth trajectory for the US economy in twenty twenty six, they wouldn't entirely derail. 00:36:43 Speaker 3: It, and to short term if the bubble did burst, or at least you had a big correction. Given the relative to other countries, there's quite widespread holding of stock markets. There's a lot of households that have feel that they've got quite a lot richer as a result of this, the run up in the stocks. Do you think we should worry about the short term economic consequence of that? 00:37:04 Speaker 2: Yeah, I think I'd worry about it in a couple of respects, Stephanie. The first, as you mentioned is the stock market. US households hold a lot of stocks. They feel richer, They feel more inclined to consume if the stock market is going up. If the stock market is going down, that dynamic swings into reverse. Secondly, the funding for the AI infrastructure build out is also tied to market confidence on AI, right, and if that confidence evaporates, well, companies like Google and Meta they're still going to have the money to spend, but there's an entire ecosystem of other AI startups which are going to suffer, and that would be an additional negative for growth. 00:37:48 Speaker 3: There was a lot of discussion earlier in the year, especially in the wake of the Big Beautiful Bill, that there would be pressure on the bond market, and indeed you would expect if you look at the highlight level of government borrowing in the US at a time when the economy is pretty strong, there's certainly a very unsustainable debt path. You see the path of debt as a share of GDP just continuing to go up, which is kind of by definition unsustainable. And yet it's one of the few countries, certainly developed economies where the ten year yield was for most of the year was lower than the second half of the year was than it had been at the start. Most governments are sort of dealing with a higher cost of borrowing. That has been less true in the US. Despite all of this, marriage, does the administration kind of feel that it doesn't have to worry about fiscal risks at all, and is it going to feel sort of vindicated by the fact that despite that passing of that bill, you know, investors just don't seem to be worried about it. 00:38:50 Speaker 6: So you say, one feature of both Trump one point zero and two point zero is just the absence of the presidents speaking about fiscal policy. That's something that had traditionally been and tried and true point of American conservatism. When it has come up in Trump two point zero, you've seen the president both rationalize it with both his tear of

policy, saying that the US is going to take in these massive amounts of good tear funds, but then also the output from the one big beautiful bill, the supercharging of the economy from his different policies, the regulatory easing as well, and he's rationalized it in that way. 00:39:33 Speaker 3: One thing I'm going to be watching. I don't know about you, Tom, but we might see, ironically, if if the president's power is kind of checked by the midterms, you might find that the last few months of next year are actually a tougher time in terms of the bond market and investors than the previous few months, because we saw in the UK that it's not now the policies you have, it's kind of the way it's being done, and the feeling that there's no constraints or no possible checks if you end up with sort of genuine gridlock in Congress at a time where naturally there's also questions about whether the FED is going to tighten policy as needed. If inflation starts heading up again, which many people see is potentially happening in the second half of next year. I think things could get a little bit ugly in the bond markets. Ironically, even though in theory the president looks a bit less powerful. That will actually worry some in the markets. But who knows, Tom, what are you going to be watching? What's the kind of wild card? Now we're reaching the end and we're thinking about potential risks or just yeah, things that we need to be watching twenty twenty six that we might not otherwise be paying attention to. 00:40:49 Speaker 2: Yeah, maybe I could just pick up briefly on that last thought, Stephanie, I think that's really interesting. So I think traditionally we think about US presidents who are constrained by congressional gridlock at home, trying to do more abroad. Right, I can't get anything through Congress, Let me pursue an aggressive foreign policy on one dimension or another. 00:41:07 Speaker 4: Right. 00:41:08 Speaker 2: I think the possibility, as you're pointing to, which I hadn't occurred to me before, was well, President Trump my begridlocked in Congress. But if he's got his man in at the FED and he's unembarrassed about pulling that lever, well, perhaps that's an unconstrained option for him. 00:41:24 Speaker 1: Right. 00:41:25 Speaker 2: So it could be that there's some dynamic between loss of power at the midterms, greater capacity to and willingness to influence the Fed, which could potentially play out in a pretty negative way for the US bond market. In terms of wild cards for twenty twenty six, I guess my wildcard is everything goes great. Right, I'll tell you why I was thinking that, So Bloomberg Economics. One place in the world we pay a lot of attention to is Taiwan because Taiwan sits at this kind of nexus of geopolitical and trade risk. Right, Concerned that Shi Jinping has ambitions to extend Chinese control to Taypeay, concern that tariffs would be a real negative for an economy which relies more on exports than pretty much any other economy in the world. Guess what Taiwan's GDP growth was in the first three quarters of twenty twenty five. 00:42:17 Speaker 3: Pretty high. 00:42:18 Speaker 2: I think you're going to tell me seven percent? Seven percent growth, right, So, all of these very real concerns about trade, all of these very real concerns about geopolitics. Through it all, this rebel island, which should be at the absolute nexus of these risks, continuing to significantly outperform, precisely because of that optimism about Ai supercharging demand for Taiwan's chips. Maybe in a microcosm, that will be the story for the global economy in twenty twenty six. Yes, the risks are there, but actually it's the momentum and the optimism and the Ai revolution which continue to dominate the narrative. 00:43:01 Speaker 3: So, Mario, are you girding yourself for things to go really right next year as you contemplate your Christmas holidays? 00:43:10 Speaker 6: No, absolutely, I mean it's similar to Tom kind of His answer was kind of similar to what I was thinking as well. Just I mean in the last fifty or sixty years or so, only two times has a president been able to buck the midterm historical midterm trend and keep their majority or expand it. Last month was a bad month for the president and he continues to be in a rut. Right now, Democrats are abiliate in some ways and looking toward a blue wave. 00:43:40 Speaker 4: But what if it doesn't happen, What if it doesn't materialize. 00:43:44 Speaker 6: This is a president who was indicted, who went through court cases, who was impeached twice, and still ended up back in the White House. 00:43:53 Speaker 4: What if he ends up with a hot hand electorally again and keeps control of Congress next year. 00:43:58 Speaker 3: It's interesting that we think that as the wildcard. Well, funnily enough, and of course you can tell from this that none of us coordinated. Mine was a combination of those two. In the sense, I do think a lot more could go right economically than people might expect. I was just looking today noticing that both the trade deficit and the federal deficit have been falling in recent months, and in fact, the budget deficit has been falling for most of this year. In that sense, you could say, big picture, President Trump's policies are working. If he was coming in wanting to shrink the trade deficit, well, that is very much what has been happening. He has had a big impact on the Chinese imports coming into the US, as he suggested. Inflation has been pretty stable, Growth is pretty stable, as we've noted, Productivity is a bit higher than it has been elsewhere. I guess the kicker I would add to that is I think that things could go right in the big picture economically, and we could all be giving a certain amount of credit to the President for that, and he'll still lose the midterms, because if we've learned anything in the last few years, it's a household don't necessarily give credit for those kind of big picture macro achievements if they're still seeing quite a lot of micro pain. And I think they will be still seeing a bit of micro pain, and even the shrinking of that trade deficit will be reflecting a bit of pain on the ground because US manufacturers will be under pressure by those tariffs. So a combination these go really well, but not so well for the president despite that, and then he will fulminate at how unfair it is and just finally put me from you your wild card or the thing that you're going to be watching that we might not otherwise be watching in twenty six. 00:45:34 Speaker 5: Well, my wild card isn't a particularly wild name. 00:45:38 Speaker 1: It would just be to look at Google and how much it continues to move ahead in the race against open AI. They if you think about the story of the hair and the tortoise, I would really put open ai as the hair and Google. 00:45:52 Speaker 5: As the tortoise. 00:45:53 Speaker 1: They started off on the back foot, way behind when chatgybt came out three years ago, and they have just gradually caught up. And now their latest model, Gemini, is better than the latest model of open aies by some benchmarks, and they're gaining ground in terms of market share. 00:46:10 Speaker 5: They've got this. 00:46:11 Speaker 1: Very cautious, corporate scientific approach to AI, which is very different samal than an open AI, who is much more product oriented and let's make this an engaging product with lots of features that are going to keep people engaged for as long as possible. So maybe Google's approach of this kind of utilitarian approach to building AI it's not as exciting, it's a little bit more boring, but they are slowly gaining ground. And of course they are the established company and so I would not be surprised to see them actually maybe surpass Open Ai certainly in terms of capabilities of their AI models. 00:46:51 Speaker 3: Next year, all right, Google the boring company to watch. Thank you very much, Marion Parker, pome Elsen, Tom Wllick, thank you so. 00:46:59 Speaker 4: Much, thank you, thank you, thanks definitely, and. 00:47:03 Speaker 3: Happy New Year. Thanks for listening to Trumponomics from Bloomberg. It was hosted by me Stephanie Flanders. I was joined by Bloomberg Opinion columnist Pame Olsen, Bloomberg Economics Chief economist Tom Orlick, and our managing editor for US Government, Mario Parker. Trumponomics was produced by Summer Sadi and Moses and Am, with help from Amy Keen and special thanks to Rachel Lewis Chrisky. Sound design was by Blake Maples and Sage Bowman is Bloomberg's head of podcast. To help others find the show, please rate and review us highly wherever you listen to your podcasts, and I hope whatever you're doing you have a really great holiday. 00:48:00 Speaker 4: The mat found the p