Professor Krugman, what are your thoughts on the recent CBO's updated prediction? If, as the CBO says, tariffs can reduce the deficit by $4 trillion over the next decade, that would completely offset the $3 trillion deficit increase from the "big beautiful bill" and even leave a $1 trillion surplus?
Just an armchair economist here, but I suspect this is due to changes in how CBO makes estimates to avoid being defunded by a MAGA Congress & FOTUS, an example of 'Obeying in Advance.'
They're whistling past the graveyard, assuming there will be little reduction in imports despite tariffs, and there will be little effect on the economy, so the only effect is an increase in tax income. Unlikely, IMO.
They do hedge:
"We estimate that the changes in tariffs, both by the United States and its trading partners, will reduce the size of the U.S. economy."
Without reading it I wonder if CBO is assuming all thing remain equal in their assessment... which is that the tariffs do not result in reduced imports (wasn't that the bait? Tariffs would force manufacturing back to our shores?) .. reductions in imports would equal fewer dollars to paying the deficit ... assuming that is where the revenue our actually flow ... not to ICE or to buy shares of Intel ...
A lot of maybes here ... and what they say about assumptions being the mother of ...
What happens if tariffs done under the emergency powers act are nullified by the SC ? If I am correct in thinking that the CBO accepted tariff revenue ( not sure how much was projected in the BBB ), what happens then ?
Content-wise (musically anyway) I would expect it to become a hit worldwide, but I am a biased boomer. Not too many politically engaged young people may know of Neil Young.
I'd say most probably do. Granted he's not Led Zep, but his stint in Crosby Stills Nash and Young really put him on the map. I'll bet you most youngsters today know plenty about everyone who played at Woodstock.
Agree. My kids are millennials and they know Neil Young and CSNY because we controlled the music on long car trips :-)
I grew up with Glenn Miller for the same reasons. "In the Mood" was played often on the jukebox in the student union when I was in college -- in the 70's.
I’m a Boomer, and I bet they know Neil quite well. One of our favorite nightclubs is on Bleecker St near NYU, full of college students, and the kids there LOVE our generation’s music. It’s the best!
Thank you for printing the full transcript. It's so much easier for me to read and absorb an article than listen to a podcast...and I can easily re-read sections if I missed something.
Thank you Paul. Note eichengreen was lisa cook's dissertation prof at Cal Berkeley . Go Lisa! "Eichengreen: So I'm going to be careful about this because I was Lisa Cook's PhD dissertation supervisor here at UC Berkeley in 1997. I know nothing about mortgage documentation. But I think I do know quite a bit about the character of the individual here. I know Lisa to be careful and ethical. She’s also one of the strongest people I know. I think coming out of her background—her family's background in the civil rights movement where they were close personal friends with Martin Luther King and family. There is a lot of history there. This is not someone that we should be making predictions about, but I think we have a very strong individual on the other side of this controversy."
I did yesterday, as soon as the news was announced.
“ Another black woman terrorised - Kamala Harris the former VP and presidential candidate has lost her Secret Service protection. Not only Has America lost its friends and allies but it is eating itself alive. An excellent post today by Dr Krugman.
Yes, add in Robert Primus being fired from the Surface Transportation Agency, as well and it simply seems that if they can find a target who is a person of color, they pick that target. However, that was not his personal take on this.
The first few names on the Forbes 400 list together have more than $1 trillion.
What are the odds these ultra-rich, who are solidly behind Trump, are using their fortunes to juice the market to soothe anxieties and advance him and their authoritarian agenda?
I was wondering the same. If 90% of the market is owned by the top 10% and they just maintain their assets,
the bottom 10% will think, “hey, not as bad as they make it out to be”. The billionaires have good incentive to do so and historically have manipulated the market to their advantage. It’s too weird that the market is so stable.
It's kinda like the billionaires all gathering in Nov 2012 to celebrate Romney's victory.
While the top 1% may not move much, the next 10% may well bail when stocks start sliding, so there's a substantial downside risk.
Probably not as much as 1929 though. When Radio was trading at 275 and started to fall, a shoeshine boy put in a bid for $1 and bought100 shares at that price.
(The Great Crash, John Maynard Keynes)
I was startled by your statistic, so I checked it (you're right!):
"New Federal Reserve analysis of stock markets has found that the concentration of ownership of the public equity stock market has hit an all-time high.
“The rich now own a record share of stocks,” Axios reported on January 10, noting that the top 10 percent hold about 93 percent of U.S. households stock market wealth.
“The running of the bulls in 2023 was more like the waddle of the fat cats,” quipped Irina Ivanova in Fortune.
Our Institute for Policy Studies Inequality.org analysis of the Fed data found that the lion’s share of these gains went to the richest 1 percent. This elite group owns 54 percent of public equity markets, up from 40 percent in 2002. The next 9 percent (or households in the 90th to 99th percentile) saw their share of public market value grow from 38 percent in 2002 to 39 percent"
Not really. The total value of financial markets in 2025 is expected to reach $500 trillion; perhaps even more since multiple U.S. markets are hitting all-time highs. Even if all the wealth of the Forbes 400 was in financial markets, that would represent at best 0.20% of that $500 trillion. No matter what, 20 ten thousandths of total market wealth does not move in any measurable way the prices in those markets.
I think U.S. markets are maintaining their values for three reasons. The first is that, for most people, denial is just the name of a river in Egypt. Most market makers just aren't factoring in the enormous macroeconomic risks Trump is currently ladling into the economy. The second is that a lot of the ability of markets to reflect new information in a timely manner has been undermined by the dominance of passive no load mutual funds as market participants. These funds buy and sell only when they need to rebalance their holdings to reflect the whatever market serves as each fund's index. Moreover a lot of the money coming from no load funds are from employee 401k and IRA contributions that are made automatically regardless of what's happening in the economy, as long as the employees making those contributions are actually employed; this ends up serving as a price support for markets. The third is the mythos surrounding buying and selling financial instruments as the sine qua non for wealth building. All the advice given to retail investors is the same - hold, hold, hold, no matter what, hold! And to be fair, that has been really good advice. Over the long run, a buy and hold strategy for a well-diversified portfolio has worked really well. Frankly, as of 8/29/25, it's still working well. It's hard to bet against the U.S. as a wealth generating enterprise, regardless of your politics, when you look at that history.
But Trump and the GOP have started a war against macroeconomic sanity. Their policies have been the equivalent of trying to modify and/or repair a very complicated machine by taking a 2 by 4 and beating the crap out of it! That can't help but have dire consequences eventually.
Anyway, the resistance of markets to all that's going on isn't because of some nefarious plan hatched by a handful of rich jerks. It's a bit more complicated than that.
FWIW, the total value of US markets was about $62t as of 7/31, but your points make sense. Still, I find it confusing that the market could plunge 1000 points the day Trump used the word recession in one of his ramblings but ignore his unchallenged attacks on the Fed, BLS, free trade, and other stabilizing institutions.
The $500 trillion figure I posted is an estimate for all the world's financial markets for 2025. The $62 (with rounding $63) trillion is just for the U.S. stock markets. US stock and bond markets for 2025 are estimated in total to be worth a little over $112 trillion. Anyway, it's all very weird that investors are just shrugging off what the POTUS and his lickspittles in the GOP controlled Congress are doing.
The hijackers of democracy - the billionaire class - won't have to goose the economy to maintain power. In fact, it doesn't matter one way or the other when they control the media and rule like a quasi-fascist regime already. The USA is well on its way to becoming a second Russia.
I agree. But trump wants to create a global economic crisis and maintaining the stock market will give the minions the greatest loss when it inevitably does respond. The broligarchs removing a good chunk of their money would certainly hasten it.
Here's how critical Fed independence is, especially now:
A new Fed of St. Louis report just came out showing that because of now net negative immigration thanks to Trump's massive, often cruel, but effective deportation of undocumented immigrants, the rate of new monthly job creation needs to be cut drastically from 150,000/month to just 32,000-84,000/month, depending on whose projection of deportations you use: https://www.stlouisfed.org/on-the-economy/2025/aug/lower-immigration-projections-mean-lower-breakeven-employment-growth
This means that when you see a "slowing" job creation number now, it doesn't mean a a recession is coming, just that there's fewer people growing the population and fewer jobs that need to be created. The corollary effect is also that inflation should be more of a concern to the Fed now than if those "low" job creation numbers occurred with the same amount of immigration (not just illegal immigration either; Trump has banned travel from many Muslim majority countries too, for better or worse). Of course, there are fewer consumers to drive up inflation too, so it MAY balance out, but maybe not.
But who expects the already compromised Labor department to give honest figures at this point?
If the Fed is similarly compromised by the replacement and intimidation of Fed officials and staff, there may be no place to get honest government figures anymore, at least on the federal level (which states would you trust?).
A smaller population and reduced consumer confidence sounds like not only declining GDP but at some point a domino loss for jobs, as well, and rising unemployment, I assume, even if immigrant labor is gone. The immigrants were also consumers we need to consider. However, noticing that according to the Fed this the loss of labor could reduce the impact from fewer jobs being created (impact on unemployment figures needed for a recession) is a good point. We also have the increasing retiree population that will not be out seeking jobs and thus, not included in unemployment figures either, as is often the case in conditions like this, more simply retire early.
However, if people are spending a lot more for goods like basic necessities due to inflation, that is less left over for consumers to spend in other businesses, as well. This then hits services too. Eating out declines and travel and other things begin to be put off. I think many are also underestimating the increasing share of seniors living on fixed incomes added to all of this.
Somehow, it seems to me that our economy would have to get fairly Depression era for our new grads to start picking strawberries and milking cows and replacing a lot of the immigrant labor, so unemployment may shoot up regardless, sooner than we think.
It's not the new grads who will be working the fields. It's all the unemployed Federal workers. As you know, Trump promised more "black jobs" and a disproportionate number of Federal workers are black. Trump's disgusting racism has been on display and rewarded by our dumb electorate for too long.
OTOH, farming might be one's best option in an Asimovian Foundation/climate change scenario.
Al, I'm trying to understand your comment about integrity not being fungible. I would have thought that if you asked any Republican Senator if their principles were fungible, they would say no (that is, they had integrity). But if you asked that of any informed observer of Republican Senators, they would say, "not just fungible, but awaiting orders from Donald J. Trump" (that it, they had NO integrity).
I wish I really understood all that was discussed here, but I appreciate the opportunity to read these transcripts and try to get my head around the implications. Keep challenging us with your work and interviews….even for those of us who have little background in Economics.
I don't know about "some AI program", but while reading the transcript I wanted to look up the Rudi Dornbusch paradox on the chance I'd get some real info or else a chance to sneer at some bullshit, and I got back a long and coherent little dissertation, complete with notes on sources! OK, ok, I now concede that real info can come from a public AI source.
Well, speaking of uncertainty, we do not know what will happen when SCOTUS gets a hold of the ruling on tariffs from the appeals court. SCOTUS seems to be allowing "whatever" is happening to continue under Trump, though, and leave their names off these emergency decisions (except those objecting).
Super concerning is Modi joining Putin and Xi for some summit.
It is becoming more and more clear that anyone who can find a way to flee the USA, is doing so, as a way to reduce Trump's bullying and leverage, and are no longer assuming things will get better anytime soon, or even for long, as he can change his mind on a whim should they form any trade agreement (not worth the paper or handshake it is written on).
By the time some currently in power realize that we need these trading partners, will it be too late?
Add in the harm to healthcare and the sciences and what seems to be a gradual dismantling or eroding of things like the CDC and NIH and maybe even the Federal Reserve and we could plummet pretty quickly from our standing as a place where all things relevant and new and cutting edge in science are happening, along with our ability to be a reliable place to invest.
We may also cut off our ability to find any way to quickly recover should this horror come to an end.
One must remain a strong economy to remain a superpower, as well.
Snooping into mortgage documents targeting political opponents is not normal and these Gestapo tactics are happening in plain sight. Elon's fake 'agency' DOGE broke into government computers and downloaded mountains of material. His techie broz also most likely uploaded spyware.
It's almost beyond belief the Supreme Court ruled DOGE could access Social Security information, so where's the outrage? People abducted off the streets, armed troops in D.C. and coming soon to a Democrat-led city near you. We are on a fast train to becoming a police state ruled by one crazed egomaniac.
1. I don't think Paul and Barry should have let the Fed off the hook so easily for the inflation of 2021 and 2022. In the fall of 2020, an the winter of 2021, it was obvious from the Fed's own data that inflation was rising. Interest rate should have risen in the spring of 2021, a full year before they did. As the Chief operating officer of a global manufacturing company, I had a front row seat to see that wage and supply pressures were raising prices beyond current inflation starting in September of 2020. The cause was COVID which resulted in the stimulus of spring 2020 and the unavailability of shop floor workers which in turn caused in shortages of people and record demand from customers. Inflation was the inevitable result and it was foreseeable in the fall of 2020.
You could also argue that the slowness of the Fed is what led to the inflation which led to Trump getting elected, so they are on the hook for all the economic nonsense that has followed.
2. With the US record deficits, it is obvious that we need overall higher taxes and a rational tax policy. I am not a Trump supporter, nor a fan of regressive taxes such as tariffs, but it seems to me that the high tariffs being imposed could, in fact, be one of the higher taxes that helps close the deficit. This, of course, supposes that the tariffs do not have a large impact on the GDP (which Paul has even argued they will not). I can imagine that many companies will absorb the tariffs (as some have initially done) and will only gradually raise prices at an acceptable (to consumers) rate over the next several years which will look like normal inflation so consumer spending and the GDP will not suffer. The result might be slightly lower stock prices, but not a crisis due to the tariffs.
I completely agree that the risks associated with eliminating the Fed's independence are very high and could lead to unanticipated, unintended consequences, and, therefore, the Fed's independence must be maintained.
How much of the tariff income is sliding into you-know-who's pocket?
So much of what's happening with this regime can be directly tied to how much he can squeeze out of pockets. The whole "law firm pro bono" stuff isn't about pushing their ridiculous "policies," but rather an opportunity for a convicted felon to get free legal services. Much like the "... Europe is giving me $600 million to spend any way I want," -- which, of course, doesn't reference the country at all, or the $650 million Jared & Ivanka skimmed off the top in Round One, his "policies" usually reflect the most opportune way to suck cash into his greedy maw. IOW, I'd be very surprised if the tariffs paid will end up in the US Treasury.
I think Trump needed to keep the middle class tax cuts in place because it would be too obvious his tax policy was a give away to the rich if they went away.
Tariffs are a way to raise taxes on a broad base that doesn't matter much to his most favored constituency, the wealthy. It would have worked pretty well (not for most people but it wouldn't have been obvious.) except he wanted even more money for his projects like paying for his new para-military and concentration camps.
It is impossible to overstate the value and importance, of the insights Prof Krugman brings daily to the craziness that is so pervasive. The market’s complacency is a head scratcher.
The adage that the stock market is not the economy is especially clear these days:) I respect Investment manager, Michael Green, who has worked with billionaires at opposite ends of the political spectrum (Thiel and Soros). Green has warned that one of the stock market’s fundamental challenges today is its lessened ability to process information with the advent decades ago of passive investing through index funds like ETFs, to the point where passive vs active investing is now the norm. “Green argues that the basic finance lessons he learned at Wharton are no longer pertinent. ‘Historically, we’ve thought about the market as discounting information, and it no longer does that,’ he says. Investors who analyze a company regarding its prospects ‘have been replaced by machines that are simply saying, ‘Did you give me cash? If so, then buy. Did you ask for cash? If so, then sell.’ That’s it. That’s the secret of passive.’ I’ve invested in the market in a professional capacity for over 20 years. It would seem to me that if the market’s ability or capacity to process corporate information has lessened because as Green says, “Passive is really just the world’s simplest algorithm”, then the same can be said of the market’s ability to process economic and political info on a timely basis. I would love to see a thoughtful discussion between Krugman and Green.
When the economy starts to go south in a very noticeable way, I bet all those passive investors are going to get real active all of a sudden. This happened during the 2008 crisis but apparently we haven't had a big enough trigger yet to ignite a panic. I think the chances are high that we will have one soon.
Once again I'm blown away by the tremendous grasp of information and theory. And I'm watching this mid-day on a Saturday! I never imagined economics could be this interesting and relevant. My subscription to the Krugman substack is the gold standard.
Isn’t there an increasing economic gap between citizens who are investors and who aren’t? What if this time in history the markets arent reflecting so much what's happening because, instead of being a passive mirror, the markets and “Investors” are an active stakeholder contributing to the problem?
Indeed, the finance sector and many citizens with money in the stock market voted for Trump. We are living a moment of absolute abuse, political and also from corporations, with no rule of law or accountability for all negative externalities (plastics, water pollution, addictive algorithms, theft of private data) where investors in the stock market are happily and blindly benefiting, while normal citizens are losing their rights, their wealth and their health. But at least we keep our sanity and our eyes open!
Krugman: Good God. Another thing that I might need to keep track of. But maybe everybody's just kind of deadened. My sense is that our colleagues in the economics profession are looking at what's happening now as being sort of epochal. This is maybe looking at fundamental regime change in the whole way monetary policy is made. But markets are not reacting like that at all.
This may be it, kind of deadened. Once this boat rocks, there is a good chance it will sink, with the devalued dollar under the current regimes direction ?? Excellent conversation, thank you
It's what Paul quoted, problems build until all of the sudden they crash. Not a direct quote but my general gist 8 hours after reading this essay I have been wrong many times in my life. I hope I am wrong now
This is a very interesting discussion, but it could be amplified by discussing two issues. First, the strange calm in the market is probably attributable to the market's focus more on AI and crypto potentialities than on tariffs or monetary policy. That may be irrational, but it is not irrational in the same way as the article seems to imply, viz. that the market is just overlooking the threat to the Fed, etc. My view is that the market is aware of the issues of Fed independence and monetary policy, but sees the potential of AI and crypto to outweigh those issues. The market is easily mesmerized by the current hot topics. Second, more focus is needed on the threat of irresponsible deregulation: a Trumpified Fed will obviously relax as much as possible of the post-crisis regulatory system, for ideological reasons, to please the financial-services lobbies, and to stoke the ruling family's returns from crypto. That plus the danger of an AI or crypto equivalent of the dot-com boom will be the triggers of the next crisis, in my view. The damage that Trump's fed will do on the monetary side will be background to the next crash, not the fundamental cause of it. (The Silicon Valley Bank episode, a liquidity crisis following promptly after relaxation of liquidity requirements, is a precursor.)
What a wonderful guest and conversation
Thank you Prof Krugman your substack newsletter is amazing, thank you for your constant work
Professor Krugman, what are your thoughts on the recent CBO's updated prediction? If, as the CBO says, tariffs can reduce the deficit by $4 trillion over the next decade, that would completely offset the $3 trillion deficit increase from the "big beautiful bill" and even leave a $1 trillion surplus?
https://www.cbo.gov/publication/61697
Just an armchair economist here, but I suspect this is due to changes in how CBO makes estimates to avoid being defunded by a MAGA Congress & FOTUS, an example of 'Obeying in Advance.'
They're whistling past the graveyard, assuming there will be little reduction in imports despite tariffs, and there will be little effect on the economy, so the only effect is an increase in tax income. Unlikely, IMO.
They do hedge:
"We estimate that the changes in tariffs, both by the United States and its trading partners, will reduce the size of the U.S. economy."
That’s based on ten years of tariffs at the current levels. How likely is that?
Without reading it I wonder if CBO is assuming all thing remain equal in their assessment... which is that the tariffs do not result in reduced imports (wasn't that the bait? Tariffs would force manufacturing back to our shores?) .. reductions in imports would equal fewer dollars to paying the deficit ... assuming that is where the revenue our actually flow ... not to ICE or to buy shares of Intel ...
A lot of maybes here ... and what they say about assumptions being the mother of ...
That’s right. Ten years of tariffs at current rates, assuming imports don’t decrease (the whole idea of using in the first place).
What happens if tariffs done under the emergency powers act are nullified by the SC ? If I am correct in thinking that the CBO accepted tariff revenue ( not sure how much was projected in the BBB ), what happens then ?
Agree 💯.
New coda for you -- Neil Young's new tune, called "Crime in DC in the White House"
https://neilyoungarchives.com/news/1/article?id=Viewpoint%20-%20%20%20BIG%20CRIME%20AT%20CHICAGO%20SOUNDCHECK
Instant classic. This would make a great theme tune for a Bernie rally.
Content-wise (musically anyway) I would expect it to become a hit worldwide, but I am a biased boomer. Not too many politically engaged young people may know of Neil Young.
I'd say most probably do. Granted he's not Led Zep, but his stint in Crosby Stills Nash and Young really put him on the map. I'll bet you most youngsters today know plenty about everyone who played at Woodstock.
Agree. My kids are millennials and they know Neil Young and CSNY because we controlled the music on long car trips :-)
I grew up with Glenn Miller for the same reasons. "In the Mood" was played often on the jukebox in the student union when I was in college -- in the 70's.
I’m a Boomer, and I bet they know Neil quite well. One of our favorite nightclubs is on Bleecker St near NYU, full of college students, and the kids there LOVE our generation’s music. It’s the best!
This is a teachable moment.
Neil Young is reprising "Ohio" (a song about the Kent State massacre).
There is a reason why us boomers don't like soldiers in our streets.
Sending armed National Guard troops, who are not trained in policing, up against unarmed American protesters can only lead to tragic outcomes.
'Pets eaten in Oh-hi-oh'?
Thank you for printing the full transcript. It's so much easier for me to read and absorb an article than listen to a podcast...and I can easily re-read sections if I missed something.
And thank you for all the great info!
I, too, appreciate the transcript format. Please continue to publish transcripts of all your podcasts.
Thank you Paul. Note eichengreen was lisa cook's dissertation prof at Cal Berkeley . Go Lisa! "Eichengreen: So I'm going to be careful about this because I was Lisa Cook's PhD dissertation supervisor here at UC Berkeley in 1997. I know nothing about mortgage documentation. But I think I do know quite a bit about the character of the individual here. I know Lisa to be careful and ethical. She’s also one of the strongest people I know. I think coming out of her background—her family's background in the civil rights movement where they were close personal friends with Martin Luther King and family. There is a lot of history there. This is not someone that we should be making predictions about, but I think we have a very strong individual on the other side of this controversy."
I do wish that one of them had brought up the very blatant racism and sexism that is at play here.l
I did yesterday, as soon as the news was announced.
“ Another black woman terrorised - Kamala Harris the former VP and presidential candidate has lost her Secret Service protection. Not only Has America lost its friends and allies but it is eating itself alive. An excellent post today by Dr Krugman.
Yes, add in Robert Primus being fired from the Surface Transportation Agency, as well and it simply seems that if they can find a target who is a person of color, they pick that target. However, that was not his personal take on this.
https://www.youtube.com/watch?v=ag6UgcnyPok
The first few names on the Forbes 400 list together have more than $1 trillion.
What are the odds these ultra-rich, who are solidly behind Trump, are using their fortunes to juice the market to soothe anxieties and advance him and their authoritarian agenda?
I was wondering the same. If 90% of the market is owned by the top 10% and they just maintain their assets,
the bottom 10% will think, “hey, not as bad as they make it out to be”. The billionaires have good incentive to do so and historically have manipulated the market to their advantage. It’s too weird that the market is so stable.
until the wile e coyote syndrome hits
It's kinda like the billionaires all gathering in Nov 2012 to celebrate Romney's victory.
While the top 1% may not move much, the next 10% may well bail when stocks start sliding, so there's a substantial downside risk.
Probably not as much as 1929 though. When Radio was trading at 275 and started to fall, a shoeshine boy put in a bid for $1 and bought100 shares at that price.
(The Great Crash, John Maynard Keynes)
I was startled by your statistic, so I checked it (you're right!):
"New Federal Reserve analysis of stock markets has found that the concentration of ownership of the public equity stock market has hit an all-time high.
“The rich now own a record share of stocks,” Axios reported on January 10, noting that the top 10 percent hold about 93 percent of U.S. households stock market wealth.
“The running of the bulls in 2023 was more like the waddle of the fat cats,” quipped Irina Ivanova in Fortune.
Our Institute for Policy Studies Inequality.org analysis of the Fed data found that the lion’s share of these gains went to the richest 1 percent. This elite group owns 54 percent of public equity markets, up from 40 percent in 2002. The next 9 percent (or households in the 90th to 99th percentile) saw their share of public market value grow from 38 percent in 2002 to 39 percent"
https://inequality.org/article/stock-ownership-concentration/
Thanks for the link.
Ditto - same thought occurred to me.
Not really. The total value of financial markets in 2025 is expected to reach $500 trillion; perhaps even more since multiple U.S. markets are hitting all-time highs. Even if all the wealth of the Forbes 400 was in financial markets, that would represent at best 0.20% of that $500 trillion. No matter what, 20 ten thousandths of total market wealth does not move in any measurable way the prices in those markets.
I think U.S. markets are maintaining their values for three reasons. The first is that, for most people, denial is just the name of a river in Egypt. Most market makers just aren't factoring in the enormous macroeconomic risks Trump is currently ladling into the economy. The second is that a lot of the ability of markets to reflect new information in a timely manner has been undermined by the dominance of passive no load mutual funds as market participants. These funds buy and sell only when they need to rebalance their holdings to reflect the whatever market serves as each fund's index. Moreover a lot of the money coming from no load funds are from employee 401k and IRA contributions that are made automatically regardless of what's happening in the economy, as long as the employees making those contributions are actually employed; this ends up serving as a price support for markets. The third is the mythos surrounding buying and selling financial instruments as the sine qua non for wealth building. All the advice given to retail investors is the same - hold, hold, hold, no matter what, hold! And to be fair, that has been really good advice. Over the long run, a buy and hold strategy for a well-diversified portfolio has worked really well. Frankly, as of 8/29/25, it's still working well. It's hard to bet against the U.S. as a wealth generating enterprise, regardless of your politics, when you look at that history.
But Trump and the GOP have started a war against macroeconomic sanity. Their policies have been the equivalent of trying to modify and/or repair a very complicated machine by taking a 2 by 4 and beating the crap out of it! That can't help but have dire consequences eventually.
Anyway, the resistance of markets to all that's going on isn't because of some nefarious plan hatched by a handful of rich jerks. It's a bit more complicated than that.
FWIW, the total value of US markets was about $62t as of 7/31, but your points make sense. Still, I find it confusing that the market could plunge 1000 points the day Trump used the word recession in one of his ramblings but ignore his unchallenged attacks on the Fed, BLS, free trade, and other stabilizing institutions.
The $500 trillion figure I posted is an estimate for all the world's financial markets for 2025. The $62 (with rounding $63) trillion is just for the U.S. stock markets. US stock and bond markets for 2025 are estimated in total to be worth a little over $112 trillion. Anyway, it's all very weird that investors are just shrugging off what the POTUS and his lickspittles in the GOP controlled Congress are doing.
The hijackers of democracy - the billionaire class - won't have to goose the economy to maintain power. In fact, it doesn't matter one way or the other when they control the media and rule like a quasi-fascist regime already. The USA is well on its way to becoming a second Russia.
I agree. But trump wants to create a global economic crisis and maintaining the stock market will give the minions the greatest loss when it inevitably does respond. The broligarchs removing a good chunk of their money would certainly hasten it.
Here's how critical Fed independence is, especially now:
A new Fed of St. Louis report just came out showing that because of now net negative immigration thanks to Trump's massive, often cruel, but effective deportation of undocumented immigrants, the rate of new monthly job creation needs to be cut drastically from 150,000/month to just 32,000-84,000/month, depending on whose projection of deportations you use: https://www.stlouisfed.org/on-the-economy/2025/aug/lower-immigration-projections-mean-lower-breakeven-employment-growth
This means that when you see a "slowing" job creation number now, it doesn't mean a a recession is coming, just that there's fewer people growing the population and fewer jobs that need to be created. The corollary effect is also that inflation should be more of a concern to the Fed now than if those "low" job creation numbers occurred with the same amount of immigration (not just illegal immigration either; Trump has banned travel from many Muslim majority countries too, for better or worse). Of course, there are fewer consumers to drive up inflation too, so it MAY balance out, but maybe not.
But who expects the already compromised Labor department to give honest figures at this point?
If the Fed is similarly compromised by the replacement and intimidation of Fed officials and staff, there may be no place to get honest government figures anymore, at least on the federal level (which states would you trust?).
A smaller population and reduced consumer confidence sounds like not only declining GDP but at some point a domino loss for jobs, as well, and rising unemployment, I assume, even if immigrant labor is gone. The immigrants were also consumers we need to consider. However, noticing that according to the Fed this the loss of labor could reduce the impact from fewer jobs being created (impact on unemployment figures needed for a recession) is a good point. We also have the increasing retiree population that will not be out seeking jobs and thus, not included in unemployment figures either, as is often the case in conditions like this, more simply retire early.
However, if people are spending a lot more for goods like basic necessities due to inflation, that is less left over for consumers to spend in other businesses, as well. This then hits services too. Eating out declines and travel and other things begin to be put off. I think many are also underestimating the increasing share of seniors living on fixed incomes added to all of this.
Somehow, it seems to me that our economy would have to get fairly Depression era for our new grads to start picking strawberries and milking cows and replacing a lot of the immigrant labor, so unemployment may shoot up regardless, sooner than we think.
Just my personal thinking on this.
It's not the new grads who will be working the fields. It's all the unemployed Federal workers. As you know, Trump promised more "black jobs" and a disproportionate number of Federal workers are black. Trump's disgusting racism has been on display and rewarded by our dumb electorate for too long.
OTOH, farming might be one's best option in an Asimovian Foundation/climate change scenario.
What sort of figures would you expect to get from the States? Why would you trust figures provided by States like Florida?
I read somewhere that states without income tax often have higher sales and property taxes. The government needs the money one way or the other.
I don't see why that would matter in terms of reporting integrity, though it certainly matters fiscally and politically.
Al, I'm trying to understand your comment about integrity not being fungible. I would have thought that if you asked any Republican Senator if their principles were fungible, they would say no (that is, they had integrity). But if you asked that of any informed observer of Republican Senators, they would say, "not just fungible, but awaiting orders from Donald J. Trump" (that it, they had NO integrity).
I wish I really understood all that was discussed here, but I appreciate the opportunity to read these transcripts and try to get my head around the implications. Keep challenging us with your work and interviews….even for those of us who have little background in Economics.
Try asking some AI program your questions. I did. I can’t say I know for sure the answers are correct but they seem to be.
I don't know about "some AI program", but while reading the transcript I wanted to look up the Rudi Dornbusch paradox on the chance I'd get some real info or else a chance to sneer at some bullshit, and I got back a long and coherent little dissertation, complete with notes on sources! OK, ok, I now concede that real info can come from a public AI source.
Well, speaking of uncertainty, we do not know what will happen when SCOTUS gets a hold of the ruling on tariffs from the appeals court. SCOTUS seems to be allowing "whatever" is happening to continue under Trump, though, and leave their names off these emergency decisions (except those objecting).
Super concerning is Modi joining Putin and Xi for some summit.
It is becoming more and more clear that anyone who can find a way to flee the USA, is doing so, as a way to reduce Trump's bullying and leverage, and are no longer assuming things will get better anytime soon, or even for long, as he can change his mind on a whim should they form any trade agreement (not worth the paper or handshake it is written on).
By the time some currently in power realize that we need these trading partners, will it be too late?
Add in the harm to healthcare and the sciences and what seems to be a gradual dismantling or eroding of things like the CDC and NIH and maybe even the Federal Reserve and we could plummet pretty quickly from our standing as a place where all things relevant and new and cutting edge in science are happening, along with our ability to be a reliable place to invest.
We may also cut off our ability to find any way to quickly recover should this horror come to an end.
One must remain a strong economy to remain a superpower, as well.
I think Russia proved the truth of your last sentence.
Yes, they had to go running to Xi and Kim and I think we know who has the upper hand in that relationship and it is not Russia.
Russia is a gas station with an army, and its army isn't looking that great these days.
Snooping into mortgage documents targeting political opponents is not normal and these Gestapo tactics are happening in plain sight. Elon's fake 'agency' DOGE broke into government computers and downloaded mountains of material. His techie broz also most likely uploaded spyware.
It's almost beyond belief the Supreme Court ruled DOGE could access Social Security information, so where's the outrage? People abducted off the streets, armed troops in D.C. and coming soon to a Democrat-led city near you. We are on a fast train to becoming a police state ruled by one crazed egomaniac.
I’m livid over the absence of more outrage. I mean it proves that we’re screwed long term.
Nice discussion. Thought provoking.
I have two points:
1. I don't think Paul and Barry should have let the Fed off the hook so easily for the inflation of 2021 and 2022. In the fall of 2020, an the winter of 2021, it was obvious from the Fed's own data that inflation was rising. Interest rate should have risen in the spring of 2021, a full year before they did. As the Chief operating officer of a global manufacturing company, I had a front row seat to see that wage and supply pressures were raising prices beyond current inflation starting in September of 2020. The cause was COVID which resulted in the stimulus of spring 2020 and the unavailability of shop floor workers which in turn caused in shortages of people and record demand from customers. Inflation was the inevitable result and it was foreseeable in the fall of 2020.
You could also argue that the slowness of the Fed is what led to the inflation which led to Trump getting elected, so they are on the hook for all the economic nonsense that has followed.
2. With the US record deficits, it is obvious that we need overall higher taxes and a rational tax policy. I am not a Trump supporter, nor a fan of regressive taxes such as tariffs, but it seems to me that the high tariffs being imposed could, in fact, be one of the higher taxes that helps close the deficit. This, of course, supposes that the tariffs do not have a large impact on the GDP (which Paul has even argued they will not). I can imagine that many companies will absorb the tariffs (as some have initially done) and will only gradually raise prices at an acceptable (to consumers) rate over the next several years which will look like normal inflation so consumer spending and the GDP will not suffer. The result might be slightly lower stock prices, but not a crisis due to the tariffs.
I completely agree that the risks associated with eliminating the Fed's independence are very high and could lead to unanticipated, unintended consequences, and, therefore, the Fed's independence must be maintained.
Your point is well taken, EXCEPT...
How much of the tariff income is sliding into you-know-who's pocket?
So much of what's happening with this regime can be directly tied to how much he can squeeze out of pockets. The whole "law firm pro bono" stuff isn't about pushing their ridiculous "policies," but rather an opportunity for a convicted felon to get free legal services. Much like the "... Europe is giving me $600 million to spend any way I want," -- which, of course, doesn't reference the country at all, or the $650 million Jared & Ivanka skimmed off the top in Round One, his "policies" usually reflect the most opportune way to suck cash into his greedy maw. IOW, I'd be very surprised if the tariffs paid will end up in the US Treasury.
The government has always collected some tariffs so the mechanism is already there.
But Covid was reducing the number of workers (as you said) and higher interest rates increase unemployment. The Fed has to balance two things at once.
The tariffs are all about paying off the debt. Trump could have skipped the tax cuts but he’s beholden to the wealthy donors that helped elect him.
So he desperately needs that tariff income. The tariffs are a tax too but unlike income taxes, they fall more on the general population.
I think Trump needed to keep the middle class tax cuts in place because it would be too obvious his tax policy was a give away to the rich if they went away.
Tariffs are a way to raise taxes on a broad base that doesn't matter much to his most favored constituency, the wealthy. It would have worked pretty well (not for most people but it wouldn't have been obvious.) except he wanted even more money for his projects like paying for his new para-military and concentration camps.
It is impossible to overstate the value and importance, of the insights Prof Krugman brings daily to the craziness that is so pervasive. The market’s complacency is a head scratcher.
The adage that the stock market is not the economy is especially clear these days:) I respect Investment manager, Michael Green, who has worked with billionaires at opposite ends of the political spectrum (Thiel and Soros). Green has warned that one of the stock market’s fundamental challenges today is its lessened ability to process information with the advent decades ago of passive investing through index funds like ETFs, to the point where passive vs active investing is now the norm. “Green argues that the basic finance lessons he learned at Wharton are no longer pertinent. ‘Historically, we’ve thought about the market as discounting information, and it no longer does that,’ he says. Investors who analyze a company regarding its prospects ‘have been replaced by machines that are simply saying, ‘Did you give me cash? If so, then buy. Did you ask for cash? If so, then sell.’ That’s it. That’s the secret of passive.’ I’ve invested in the market in a professional capacity for over 20 years. It would seem to me that if the market’s ability or capacity to process corporate information has lessened because as Green says, “Passive is really just the world’s simplest algorithm”, then the same can be said of the market’s ability to process economic and political info on a timely basis. I would love to see a thoughtful discussion between Krugman and Green.
https://www.institutionalinvestor.com/article/2e5um1swovwbm3x5yyk1s/corner-office/why-michael-green-is-known-as-the-cassandra-of-passive-investing
When the economy starts to go south in a very noticeable way, I bet all those passive investors are going to get real active all of a sudden. This happened during the 2008 crisis but apparently we haven't had a big enough trigger yet to ignite a panic. I think the chances are high that we will have one soon.
Did you read:
https://paulkrugman.substack.com/p/why-arent-markets-freaking-out
Once again I'm blown away by the tremendous grasp of information and theory. And I'm watching this mid-day on a Saturday! I never imagined economics could be this interesting and relevant. My subscription to the Krugman substack is the gold standard.
Isn’t there an increasing economic gap between citizens who are investors and who aren’t? What if this time in history the markets arent reflecting so much what's happening because, instead of being a passive mirror, the markets and “Investors” are an active stakeholder contributing to the problem?
Indeed, the finance sector and many citizens with money in the stock market voted for Trump. We are living a moment of absolute abuse, political and also from corporations, with no rule of law or accountability for all negative externalities (plastics, water pollution, addictive algorithms, theft of private data) where investors in the stock market are happily and blindly benefiting, while normal citizens are losing their rights, their wealth and their health. But at least we keep our sanity and our eyes open!
This was a most educational post! Thank you both for your professional generosity!
Krugman: Good God. Another thing that I might need to keep track of. But maybe everybody's just kind of deadened. My sense is that our colleagues in the economics profession are looking at what's happening now as being sort of epochal. This is maybe looking at fundamental regime change in the whole way monetary policy is made. But markets are not reacting like that at all.
This may be it, kind of deadened. Once this boat rocks, there is a good chance it will sink, with the devalued dollar under the current regimes direction ?? Excellent conversation, thank you
As the guys on the NPR "Marketplace" program repeated over and over - "The market is not the economy."
It's what Paul quoted, problems build until all of the sudden they crash. Not a direct quote but my general gist 8 hours after reading this essay I have been wrong many times in my life. I hope I am wrong now
This is a very interesting discussion, but it could be amplified by discussing two issues. First, the strange calm in the market is probably attributable to the market's focus more on AI and crypto potentialities than on tariffs or monetary policy. That may be irrational, but it is not irrational in the same way as the article seems to imply, viz. that the market is just overlooking the threat to the Fed, etc. My view is that the market is aware of the issues of Fed independence and monetary policy, but sees the potential of AI and crypto to outweigh those issues. The market is easily mesmerized by the current hot topics. Second, more focus is needed on the threat of irresponsible deregulation: a Trumpified Fed will obviously relax as much as possible of the post-crisis regulatory system, for ideological reasons, to please the financial-services lobbies, and to stoke the ruling family's returns from crypto. That plus the danger of an AI or crypto equivalent of the dot-com boom will be the triggers of the next crisis, in my view. The damage that Trump's fed will do on the monetary side will be background to the next crash, not the fundamental cause of it. (The Silicon Valley Bank episode, a liquidity crisis following promptly after relaxation of liquidity requirements, is a precursor.)