As Trump takes scythe to Uncle Sam Inc., markets begin to lose faith

(Originally published Feb. 12 in “What in the World”) I’m from the government and I’m here to… find a job.

Reuters has corroborated a Wall Street Journal report last week that the White House is preparing for mass layoffs at the federal government—the nation’s largest employer. Quoting an anonymous White House official, Reuters says Trump will today direct federal agencies to obey layoff orders from billionaire adviser Elon Musk’s fictional “Dept. of Government Efficiency.” He’ll also order them to hire only one person for every four they fire.

More than 40,000 federal employees are preparing to take the White House’s offer to pay them eight months’ severance if they just resign. And companies are reviewing investment plans to gauge just how much Trump’s tariffs and deportations will raise the cost of labor and raw materials. One has to wonder if rising costs for illegal-immigrant labor might be offset by the looming surfeit of unemployed bureaucrats. But clerical skills amassed in government may not be immediately transferable to work in America’s farms and slaughterhouses.

Growing pessimism about the impact of Trump’s policies on the economy is reversing a “Trump trade” in financial markets. Investors had been buying U.S. dollars in the belief that tariffs’ inflationary impact would keep the U.S. Federal Reserve from cutting interest rates, thereby making dollars more profitable to hold than currencies in countries with lower rates. By the same logic, investors were selling U.S. Treasuries, in part because they believed their yields needed to reflect higher inflation and Fed policy rates, and because of Trump’s threats on U.S. creditworthiness.

Most of those arguments still apply, though Trump’s tariffs have proved less extensive than many feared. So far. What’s shifted is expectations about the economy. Pessimism is now offsetting the argument in support of both the dollar and against Treasuries. So instead, the dollar has eased back from its mid-January high, as have yields on 10-year Treasury bonds. The reversal may also be nothing more than a slight, and temporary, correction.

The economy is doing only as well as markets predict, no matter what government statistics say it has done. And the U.S. economy is much worse off than government statistics indicate, according to former U.S. comptroller Eugene Ludwig. In an essay for Politico, Ludwig argues that official statistics are fundamentally skewed, particularly data for unemployment, which counts as “employed” people who’ve resorted to part-time gigs slinging mochaccinos at Starbucks because they can’t find a full-time job. Ludwig uses this to justify why Democrats felt so ebullient despite the sense of crisis among consumers before voting Trump into office. But it also suggests the economy is much more fragile than Trump may comprehend.

Of course, now that power has shifted, so have expectations: Three quarters of Republicans expect the economy to get better a year into Trump’s second term, according to a poll by the Pew Research Center. Democrats were optimistic, now nearly two-thirds expect the economy to get worse. I’ve always said equity investors are Democrats. Now, apparently, so are bond and currency investors.

Right or left, America’s own stock appears to be sinking with the dollar. Transparency International’s latest index of perceived corruption ranked the U.S. 28th, with an index level of 65%—its lowest level since the organization’s current scale was established in 2012. The U.S. hasn’t ranked in the top 20 in terms of clean government since 2017.

Fittingly, Trump has signed an executive order directing the U.S. Justice Dept. to stop prosecuting Americans for bribing foreign officials. Like his tariffs, Trump clearly sees policy as a way to negotiate a quid pro quo.

Meanwhile, global temperatures continue to climb. A newly published study in Nature Climate Change says there is an 80% chance they have already exceeded the Paris Agreement’s target of keeping them from rising no more than 1.5°C above pre-industrial levels.