 "US President Donald Trump at CPAC in Maryland. AFP")
US President Donald Trump’s honeymoon period has ended as his policies appear to be slumping the US economy and national standing.
Trump’s erratic announcements of tariffs where he has repeatedly gone back and forth on the timeline has rattled markets and hurt US credibility. His alignment with Russia and withdrawal from Europe has put the continent on the path of economic and military revival. The escalating tariff wars have put the United States at risk of inflation as well as recession — a worrying phenomenon known as stagflation that even Trump has acknowledged.
In the midst of such worrying signs, there are clear indicators that Trump’s policies are backfiring: the US dollar has lost all recent gains, the Treasury bond yield has fallen compared to European bonds, and investor sentiment is falling in the United States.
Strategic blunders: Friendship with Putin, free hand to Musk
Two defining features of Trump’s second term have been the conversion of Russia from an adversary into an ally and the political rise of Elon Musk who is essentially the Co-President of the United States. Both of these policies are backfiring.
In the name of ending wars, Trump has turned Russia into an ally and Europe into an adversary. The trans-Atlantic alliance with Europe is barely standing and the United Kingdom, France, and Germany are working on national and collective economic and military revival to prepare for a post-US world order.
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Incoming German Chancellor Friedrich Merz has announced new €500 billion special fund for infrastructure and defence spending. There are also signs that European nations are forming at least informal intelligence-sharing forums to support Ukraine as the United States has suspended intelligence-sharing with Ukraine.
Impact Shorts
View AllThe way Trump has turned his yearslong admiration of Putin into outright alliance has stumped Europe and has put the continent on the path of self-reliance. While Europe is not cutting ties with the United States, it knows it cannot rely on US security assurances or even on US-made warplanes and other weapon platforms as the Trump administration has convinced the continent that the United States cannot be trusted in the hour of need.
In the name of cutting wasteful expenditure, Musk is essentially dismantling the US government. He is even revealing government secrets by listing intelligence agencies’ facilities in the public domain and is seeking to fire air traffic controllers at a time when the United States is witnessing a string of aviation accidents.
Moreover, Musk has been openly interfering in European politics, running regime-change operations in the UK and Germany, and has been abusing whoever he wants. That’s bound to affect US ties with European nations.
US staring at real risk of stagflation
The United States is facing inflation as well as recession and even Trump is not refuting the crisis in the making.
In an interview with Fox News, Trump refused to rule out the possibility of a recession .
“I hate to predict things like that. There is a period of transition because what we’re doing is very big. We’re bringing wealth back to America. That’s a big thing. And there are always periods of it takes a little time,” said Trump.
On the other hand, prices are expected to rise as a result of Trump’s tariffs. As companies will pass the cost of expensive imports to consumers, it would mean an average per household consumer loss of $1,600–2,000, according to Yale Budget Lab.
JP Morgan Chase has said in a note there is a 40 per cent chance of recession this year “owing to extreme US policies”.
US down, European up — thanks to self-goals
The economic gloom extends to markets as well as investors’ sentiment. Dow Jones Industrial Average futures fell 0.5 per cent on Sunday, futures at S&P 500 fell 0.5 per cent, and futures at Nasdaq fell 0.6 per cent. All three major indexes fell by more than 2 per cent last week and S&P500 witnessed worst week since September 2024.
On the other hand, as European Union (EU) has announced to raise €150 billion for defence spending as a result of Trump’s alliance with Russia, shares of defence contractors and investor sentiment is on the rise in Europe.
Summing up the crisis, Bloomberg’s Bailey Lipschultz and Carter Johnson noted, “Accelerating the shift away from US assets: Germany’s plan to massively increase spending, announced last week, is being lauded as a sea change in European policymaking, lifting the region’s stocks, currency and government bond yields. Meanwhile, the emergence of AI startup DeepSeek in China is raising questions about America’s supremacy in the tech sector.”
They further note, “The once-unstoppable S&P 500 Index, less than a month removed from a record high, just logged one of its worst weeks of underperformance relative to the rest of the world this century. The US share of world market capitalization has also slipped since peaking above 50 per cent early this year.”
Peter Tchir, head of macro strategy at Academy Securities, told Bloomberg, “For the first time you are getting compelling arguments to invest elsewhere. That’s been a shift. America was the only game in town and capital flows came here without much thought, and that might be reversing or at least changing.”