'Disaster in the making': Nobel economist warns US headed for 'Wile E. Coyote' moment
A Nobel Prize-winning economist argued that the United States may not see the damage of President Donald Trump's economic policies until it's too late.
Paul Krugman, who won the Nobel Prize in 2008 for his work on trade theory, argued in a new Substack essay that the financial markets have not yet responded to Trump's economic policies because they act in "complacency until the last possible moment." Markets seldom price in the "huge, disruptive" changes that Trump's policies seek to make, according to Krugman, and will act as if nothing is wrong "until it’s blindingly obvious that it isn’t."
"So if the conventional wisdom is that economic conditions will remain more or less normal despite highly abnormal policy, markets will remain calm until the illusion of normality becomes unsustainable," Krugman wrote. "At that point market prices may 'change violently.'"
"The current technical term for this phenomenon is a 'Wile E. Coyote moment' — the moment when the cartoon character, having run several steps off the edge of a cliff, looks down and realizes that there’s nothing supporting him," he added. "Only then, according to the laws of cartoon physics, does he fall."
Trump and his surrogates have claimed that his economic policies will unleash a new "Golden Age" for America. However, some economists have noted that warning signs are appearing in economic data.
For instance, hiring flatlined during Trump's first quarter, according to the Bureau of Labor Statistics. Inflation data shows prices for household goods and groceries have increased as well.
"All of which says, in turn, that the absence of a strong reaction to Trump’s assault on the Fed isn’t a sign that everything is OK." Krugman continued. "We are, in fact, looking at a policy disaster in the making. But markets probably won’t react strongly until the disaster is already upon us."