Stripe’s acquisition in October of stablecoin orchestration startup Bridge sent shockwaves through the crypto world. For the first time, a major payments company committed over a billion dollars to accelerate its use of this technology. Though this isn’t Stripe’s first attempt at crypto, the timing feels different. Enthusiasm for stablecoins is at an all-time high.

Bridge might be worth $1.1 billion to Stripe, but on its own, it most likely wouldn’t have hit that mark. This isn’t due to any lack of talent, but rather because making money with stablecoins is extremely challenging. Whether through issuing, orchestrating (i.e. converting between stablecoins) or integrating them with legacy banking rails, achieving long-term profitability will be a significant challenge.

The reality is that network effects in the stablecoin market are likely to be much weaker than most anticipate, and it’s far from a winner-take-all environment. In fact, stablecoins may function as loss leaders and, without essential complementary assets, could even become a losing venture. While industry insiders often cite liquidity as the primary reason only a few stablecoins will dominate, the truth is far more complex. Here are three common misconceptions about stablecoins.

When we designed Libra, it was clear that stablecoins require a complementary business model to thrive. The Libra ecosystem was structured around a non-profit association that brought together wallets, merchants and digital platforms to support both stablecoin issuance and the payment rails on which these assets would move.

Relying solely on reserve interest isn’t a sustainable way to monetise a stablecoin. We learned this early on, as we were planning to issue stablecoins backed by currencies with minimal (euro) or even negative (yen) interest rates at the time. Stablecoin issuers like Circle and Tether seem to overlook that today’s high-interest environment is an anomaly, and a sustainable business can’t be built on a foundation that’s likely to crumble when market conditions shift.

Of course, it’s not just the ‘stock’ of stablecoins that can be monetised; their ‘flow’ can be too. Circle’s increase in redemption fees suggests they’re starting to realise this. However, this approach violates a fundamental principle in payments: to build user trust and retention, entry and exit must be seamless. Exit fees undermine the basic expectation that money should feel unrestricted and readily available. This leaves transaction fees as a potential revenue source – but enforcing them on a blockchain is challenging without strict control over the protocol. Even then, it’s impossible to impose fees on transactions occurring between users within the same wallet provider. These are all scenarios we explored exhaustively with Libra, highlighting just how complex and uncertain the business model was for the non-profit association.

So what options do stablecoin issuers have? Unless they’re relying on temporary regulatory loopholes – which are unlikely to hold long term – they’ll need to start competing with their own customers.

Circle’s initiatives – including programmable wallets, a cross-chain protocol and the Mint programme – reveal exactly where the company is going. And that’s unwelcome news for many of its closest partners. But for Circle to survive, it must transition into a payments company, even if that means encroaching on its allies’ territory.

Stripe doesn’t face this dilemma. As one of the world’s most successful payments companies, it has mastered the art of deploying and monetising a streamlined software layer on top of global money movement – a model that scales efficiently through network effects without being slowed down by the need for country-specific banking licences. Stablecoins accelerate this approach by acting as a bridge between Stripe and domestic banking and payment rails. What was once a network constrained by legacy institutions – including card companies – can now overcome its last-mile problem, delivering significantly more value to merchants and consumers.

Many assume that stablecoins will seamlessly operate as low-cost, global dollar accounts for consumers and businesses. The reality is far more complex.

Countries that value monetary policy independence, fear capital flight in a crisis and worry about destabilising their domestic banks will strongly oppose the large-scale adoption of frictionless dollar-based stablecoin accounts. They’ll use every tool available to block or limit these accounts, just as they’ve resisted other forms of dollarisation. And while it may be impossible to stop crypto transactions entirely, governments have numerous ways to restrict access and curb mainstream adoption.

Does this mean stablecoins are doomed in emerging economies with capital controls or concerns over capital flight? Not at all – the rise of domestic stablecoins that adhere to local banking and regulatory frameworks is inevitable.

While the US dollar has traditionally dominated the stablecoin market, things could change rapidly. In Europe, following the implementation of the Markets in Crypto-Assets regulation, banks, fintech companies and new entrants are rushing to issue euro-denominated stablecoins. This approach has the benefit of preserving the stability of the local banking system and will be even more important in regions like Latin America, Africa and Asia.

The reality is that a stablecoin’s most important feature – its peg to a currency like the dollar or euro – is also its greatest weakness. Today, these assets are seen as distinct, but once regulation standardises stablecoins and makes each equally safe, individuals and businesses will view them simply as dollars or euros.

When that happens, the economics of stablecoins will favour entities with either a complementary business model or those that control the interface between stablecoins and the assets backing them – be it bank deposits, US treasuries or money market funds.

That is bad news for pure-play issuers like Circle, whose current banking system interfaces depend on entities such as BlackRock and BNY. These financial giants are well-positioned to become direct competitors.

Tech companies with banking licences, like Revolut, Monzo and Nubank, are well-positioned to lead in their markets, and other players are likely to accelerate their licensing efforts to gain similar advantages. However, many players in the stablecoin market will struggle to compete with established banks and may face acquisition or failure.

Banks and credit card companies will resist a market dominated by one or two stablecoins. Instead, they’ll advocate for a landscape with multiple interoperable and interchangeable issuers. When that happens, liquidity and availability will be driven by existing distribution channels to consumers and merchants – an advantage already held by neobanks and payment companies like Stripe or Adyen.

Fully-backed stablecoins like USDC and USDT will need high-velocity use cases to remain viable – such as enabling cross-border money movement – or they’ll need to attract a decentralised finance ecosystem that can introduce transparent fractionalisation to subsidise their narrow-bank model. Meanwhile, deposit tokens issued by banks or tokenised funds will benefit from stronger underlying economics, which will drive their adoption across both consumer and institutional use cases.

In every region, national champions—from banks to crypto firms—will position themselves as the essential entry point into the local market. However, they’ll need to carefully consider how stablecoins, by linking domestic rails to blockchain networks, could also lower barriers for foreign competitors to enter and compete. After all, the core transformation here from a business perspective is that these systems will run on open protocols.

The future is bright for payments, fintech and neobank players, who can leverage stablecoins to streamline operations and accelerate global expansion. It also opens new opportunities for domestic stablecoin issuers to position themselves and ready their payment systems for global interoperability—an area where stablecoins are poised to succeed where the bureaucratic Bank for International Settlements’ Finternet vision will quickly fall short.

Leading crypto exchanges will also leverage stablecoins to enter the consumer and merchant payments space more aggressively, positioning themselves as credible challengers to major fintech and payment companies.

While questions remain about how stablecoins will scale anti-money laundering and compliance controls as they go mainstream, there’s no doubt they offer an opportunity to rapidly modernise our financial services and shake up industry leadership.

At this writing, a week after the US national elections, it appears that President-elect Donald Trump’s Republican party will gain control of both chambers of Congress, enabling him to enact his economic agenda. He has been clear about his intentions: tariffs to protect the United States, tax cuts to help business, and the expulsion of unauthorized immigrants.

Equipped with textbook macroeconomic principles, but also the humility appropriate for any forecast, I predict that he will be disappointed by the results. I also predict, however, that the outcome will not be the economic catastrophe that his critics warn of—unless he forces the US Federal Reserve to do his bidding, in which case all bets are off.

Take tariffs. Trump has promised to impose a 10 percent tariff on all imports and a 60 percent tariff on those from China. (Some argue that he may use this as an opening gambit in a negotiation and back down if he gets what he wants. I am skeptical, if only because of his apparent love for tariff revenues.)

The initial effects may work largely as he hopes. US imports will drop, tariff revenues will increase (although not by as much as he predicts, precisely because the tax base, namely imports, will decrease), and the country’s trade deficit will decrease.

But this will be just the beginning of the story.

Assume first that there is no tit-for-tat tariff retaliation by China or Europe. As US demand shifts from foreign to domestic goods, higher demand for domestic goods in an economy that is already at full employment will put upward pressure on prices. That pressure will force the Fed to increase interest rates to keep inflation under control. Because of both higher rates and an improved trade balance, the dollar will strengthen, just the opposite of what Trump wants. US exports will suffer, and the trade deficit will not improve much, if at all.

Chinese and European retaliation, both likely, modify the story, but not for the better. US exporters will suffer more. The trade balance may not improve at all. On net, lower imports and exports may lead to less rather than more economic activity. Even then, tariffs will still lead to higher inflation and higher interest rates, leaving the Trump administration with little to show for the tariff increase.

Unhappy exporters, little improvement—if any—of the trade deficit, likely higher inflation, and a stronger dollar, will not make Trump happy. What will he do?

Doubling down would be in character. But exporters’ opposition and the inflation effects of further tariffs are likely to deter him from taking that path. Backing down and reducing tariffs is equally unlikely. Thus, the most likely scenario is that tariffs will stay. If so, the initial good news on the trade and output fronts, maybe lasting up to the 2026 midterm elections, will fade away, leaving the usual adverse effects of less trade, i.e. less use of comparative advantage.

Turn to immigration: Trump has promised to deport unauthorized immigrants. They are estimated to number around 11 million, and the talk is of deporting about 1 million a year.

Total US employment is about 160 million people. So, if he deported 1 million immigrants a year, he would decrease employment by 0.5 percent a year, with a final total decrease of 5 percent. Job vacancies would jump and remain high, as would the ratio of vacancies to unemployed workers, leading to sustained inflationary pressures. The Fed would respond by raising interest rates, causing exchange rate appreciation—again, not what Trump is hoping for.

This will not happen, given the magnitude of the numbers in this scenario. Unhappy employers, especially in agriculture, construction, and restaurants, would quickly grow vocal enough to slow the pace of deportation. Inflation, which has also proven to be extremely costly politically, would likely make Trump think twice. Thus, one must assume that deportations, while they will occur, will be largely symbolic, involving tens or hundreds of thousands rather than millions of people. To the extent deportation happens, it will lead to inflation and higher interest rates, and a potential conflict with the Fed. More on this below.

Turning to taxation: Trump has promised to extend the tax cuts enacted in 2017. This is very likely to happen. In addition, he has, at different times, suggested that Social Security benefits and tips become fully nontaxable, that the state and local tax deductions be increased, and that the corporate tax rate, which was reduced from 35 to 21 percent in 2017, be further decreased to 15 percent for manufacturing firms. These additional measures may, however, be opposed by a number of conservative House Republicans, leading to a smaller but still substantial fiscal package.

Any discussion of fiscal plans must start from the fact that the federal budget deficit is already extremely large. The ratio of federal debt to GDP is 100 percent. The deficit is around 6.5 percent of GDP, and the primary deficit is around 3.5 percent. If the 2017 tax cuts were left to expire, that would shrink the deficit by roughly 1 percent of GDP in 2025. But even under this assumption, the Congressional Budget Office forecasts were for primary deficits of about 3 percent as far as the eye could see. The measures that Trump is considering would increase that number by roughly 1 to 2 percent, leading to a 4 to 5 percent sustained primary deficit and a rapid increase in the debt ratio. Were the interest rate and the growth rate to be roughly equal, which looks like a reasonable hypothesis, this would imply an adjustment of the primary deficit of 4 to 5 percent of GDP, or equivalently, 16 to 20 percent of the federal budget, to stabilize the debt ratio. This is an extremely large number, and there is no reason to think that corporate tax rate cuts, even if they boosted investment and potential growth, will substantially reduce the deficit over the next few years.

If Trump enacted all the measures he has suggested, a question would be how many years it will take for investors to question the risk-free status of US Treasuries. Nobody knows for sure whether such questioning would start during his presidency or after. If it were to happen, and investors started pricing a risk premium, it would probably lead to a more responsible fiscal policy. Leaving aside this risk issue, what is likely, however, is that a further fiscal expansion, starting from an economy close to full employment, will lead to inflation and, by implication, higher Fed policy rates and a stronger dollar. Once again, this scenario will trigger a potential conflict with the Fed.

Thus, perhaps the most crucial issue is what the Fed will do. If it sticks to its mandate, it will stand in the way of some of Trump’s hopes from the use of tariffs, deportation, and tax cuts. It will have to limit economic overheating, increase rates, and cause the dollar to appreciate.

The big question is thus whether Trump can force the Fed to abandon its mandate and maintain low rates in the face of higher inflation. Fed Chair Jay Powell has made clear he remains committed to the mandate and to staying at the Fed as chair until his term as chair expires in May 2026 (his term as board member ends in 2028). Current Fed board members are unlikely to follow a different line. But one board position opens in January 2026, and Trump could seek to name a more docile board member to the seat. If this is the case, and the board goes along (which is unlikely), the result will be low rates, overheating, and higher inflation. Given the unpopularity of high inflation, not to mention the reaction of financial markets to the loss of Fed independence, this prospect may be enough to make Trump hesitate to pursue this option.

I have left out other possible economic outcomes that are macro-relevant, including deregulation (especially of the financial system), energy policy, giving free rein to the crypto industry, and the effects of higher economic uncertainty on investment and consumption. If I had to summarize my predictions: The Trump economy may look good for a while, with strong growth (the perceptions of voters in the last election notwithstanding, the Biden administration has left the Trump administration a strong US economy, a precious gift in this context). Predicting an immediate catastrophe or a stock market crash, as some did in 2016, is unwise. But the initial positive effects will likely fizzle and possibly reverse, perhaps before the end of Trump’s mandate.

Trump 2.0 Tariffs Policy: The administration’s renewed focus on tariffs could weigh heavily on currencies of trade-exposed economies, particularly those in Asia and the Eurozone. The appointment of China hawks to the cabinet is spelling a clear near-term focus on trade and tariff policy, which is USD-positive. The Chinese yuan (CNH), euro (EUR), Mexican peso (MXN), and Australian dollar (AUD) are among the most vulnerable to this trade pressure, as these regions face heightened risks from tariff wars.

Trump 2.0 Fiscal Policy: The fiscal push, including tax cuts and deregulation, is likely to support US growth, which could drive yields higher. Rising yields, particularly in the US, increase the relative appeal of the USD against lower-yielding currencies, further boosting demand for the dollar.

Fed Easing from Strength: While the Fed is cutting rates, it is doing so from a position of economic strength, with the US economy continuing to show resilience. This strength provides a solid foundation for the dollar, as markets see the Fed’s actions as a proactive measure rather than a response to economic weakness.

US Exceptionalism: The continued political and economic challenges facing other major global players, particularly Europe and Japan, further bolster the USD. In Europe, political instability—especially in Germany where a ‘snap’ election will now be held next February – is adding to the economic malaise. Meanwhile, Japan’s delay in raising rates leaves the yen in a precarious position.

Geopolitical Risks: Geopolitical tensions, particularly in the Middle East, have the potential to flare up at any moment, further supporting the dollar’s safe-haven status. In times of heightened global uncertainty, investors typically flock to the USD, increasing its demand.

Given these factors, the USD still has room to run. With the ongoing pressures on trade-exposed currencies, the US dollar is likely to remain a dominant force in global markets.

EUR: Political instability in Europe, combined with an already fragile economic recovery and the looming threat of tariffs, leaves the euro vulnerable.

CNH (Chinese yuan) and China-proxies like AUD: As the US-China trade war intensifies, the yuan faces increasing pressure, especially with China’s policy stance favoring further stimulus.

JPY: Carry trades could gain interest once again with Fed’s easing stance likely to be more cautious and BOJ’s hesitant on rate hikes under the new government.

Commodities: Commodities are facing a double whammy—downward pressure on demand due to escalating trade frictions and a stronger US dollar. As tariffs hit global supply chains and trade volumes, the demand outlook for key commodities, such as industrial metals and oil, weakens. Additionally, a higher USD often makes commodities more expensive for holders of other currencies, further dampening global demand.

GBP: Sterling is less exposed to tariff-risks and an inflationary budget could slow down the pace of BOE rate cuts.

The rise in geopolitical risk and mounting trade tensions should have a counterpart in financial deglobalization, as investors pull back from global trouble spots. Most obviously, if friendshoring is a material phenomenon, this should be reflected in foreign direct investment flows, with, for example, stronger flows to Mexico, while China should see weaker inflows or even outflows. A similar trend may be visible in portfolio flows if Russia’s invasion of Ukraine makes markets wary of potential conflict zones. We assemble quarterly data on nonresident portfolio and direct investment flows to 25 emerging markets (EMs) from 2000 to 2024. These data show a healthy picture for EM overall, though China is a negative outlier. China has seen nonresident portfolio inflows weaken significantly from before Russia invaded Ukraine, in addition to foreign direct investment flows also softening recently. While these data points are consistent with financial deglobalization, a proper investigation will compare flows to a counterfactual linking them to underlying fundamentals such as interest and growth differentials. We leave a more definitive assessment of financial deglobalization for a follow-up post.

We collect quarterly nonresident portfolio and direct investment flows to EM from 2000 to 2024. The portfolio data capture investment flows into stocks and bonds. We filter direct investment flows for reinvested earnings, which—in an important case like China—are often involuntary due to the difficulty of repatriating earnings. These reinvested earnings move up and down with profitability in foreign-owned subsidiaries and say little about genuine foreign direct investment (FDI). FDI excluding reinvested earnings is a better proxy for greenfield investment in EM. That said, the distinction between genuine FDI and reinvested earnings is often not clear-cut, an issue we will explore further in future posts.

Figure 1 shows the rolling, four-quarter sum of nonresident portfolio flows to all 25 EMs we examine. It scales these flows by the combined dollar-denominated GDP for these countries. Figure 2 is the same thing but excludes China in the numerator and denominator. Two conclusions emerge. First, portfolio flows to non-China EMs have been stable over the past decade, so financial deglobalization does not appear to be a material phenomenon. Second, China is a different story. Flows were on a rising trend before Russia invaded Ukraine, but that period is over. Perhaps this is because markets are now more attuned to geopolitical risk since Russia’s invasion of Ukraine, but it could equally well reflect China-specific factors, like the disappointing recovery since COVID-19 lockdowns were lifted. A similar divergence is evident in FDI flows. Figure 3 shows the rolling, four-quarter sum of FDI flows excluding reinvested earnings for the 25 EMs, again scaled by dollar-denominated GDP, while Figure 4 is the equivalent excluding China. True FDI—excluding reinvested earnings—is quite stable for non-China EM, but is showing a precipitous decline for China recently.

We now examine flows to individual countries. We compare flows before and after COVID-19, since the pandemic was such an important event for the global economy. Figure 5 shows annualized quarterly portfolio inflows from Q1 2020 to Q2 2024 in percent of GDP on the horizontal axis, while the vertical axis shows the same metric from Q3 2015 to Q4 2019. We thus look at the 4 1/2 years since the pandemic versus the 4 1/2 years before. Figure 6 is the same for FDI. In both cases, China (red) and Mexico (purple) lie above the diagonal, which leans against the friendshoring narrative. After all, Mexico should be attracting stronger inflows in this narrative, while China should be seeing weaker inflows. Commodity-heavy countries like Chile (CL), Colombia (CO), Malaysia (MY), and Saudi Arabia (SA) do better in the recent time window, while commodity importers like the Czech Republic (CZ), India (IN), and Turkey (TR) are doing worse.

One widely held view is that FDI flows are more stable than portfolio flows. In this regard, capital flows to EM have become more stable in recent years. Figures 7 and 8 show portfolio inflows on the vertical axis and FDI inflows on the horizontal axis for 2020-2024 and 2015-2019, respectively. The more recent time window shows a shift downward and to the right, pointing to the relatively greater importance of FDI over portfolio flows. Of course, this no doubt is related to the post-COVID inflation scare and G10 central bank hikes, which weighed on portfolio flows to EM. Nonetheless, this says that the composition of EM inflows is more favorable now than it was in the run-up to COVID-19. Overall, portfolio flows to EM look quite healthy and stable, with the exception of China where financial deglobalization looks to be underway.

A full and literal implementation across taxes, trade and immigration could have unwelcome consequences for the economy in both the short and long run. A more partial implementation, (which seemed to be anticipated by financial markets last week), could net out to be positive for stocks and negative for Treasuries in the short run. However, even this more restrained policy path would likely result in sharply-rising government debt and the potential, in some areas, for building economic and market risks. For this reason and because of the further run up in the U.S. equity valuations in the wake of the election, investors would be well advised to continue to rebalance portfolios both across asset classes and around the world.

In his press conference last week, Jay Powell made it clear that the Fed was not going to prejudge any policies that might be implemented until they were outlined in detail and on their way to being enacted. In his words, “We don’t guess, we don’t speculate, and we don’t assume”. Unfortunately, investors don’t have the luxury of waiting that long and so have to make some base case judgements on what will or will not be implemented.

An assessment of probable federal government policy, over at least the next two years, should start with the election results themselves. In the end, despite very close polls going into election day, it was a decisive Republican sweep. With the White House and a comfortable majority in both Houses of Congress, a naive assessment might be that the President-elect would simply do everything he said he would do on the campaign trail.

However, this seems unlikely. A newly-elected President Trump will have less personal motivation to implement many of his campaign promises since he cannot run for office again. By contrast, those who have his ear, including big donors to his campaign, some foreign leaders and Republican members of Congress will be very motivated to further their interests. Seen from this perspective, a good question to ask, on any agenda item, is how much it might further the interests of interested parties.

One critical issue for markets and the economy going into 2025, will be how the Administration approaches extending those tax cuts from the 2017 Tax Cut and Jobs Act (TCJA) that were set to expire at the end of next year. A bill will likely wend its way through Congress over the course of next year containing the answer to this question.

It is reasonable to assume that current rates on individual and corporate income taxes and on the estate tax will all now be extended, including a continuation of annual inflation indexing of exemptions and tax-bracket thresholds. President-Elect Trump has also made it clear that any tax bill would allow the cap on SALT deductions, which funded a small part of the 2017 tax cut, to expire on schedule at the end of this year, adding to the cost of the bill although benefiting more affluent homeowners.

In addition to this, President-Elect Trump promised a further cut in the corporate income tax rate from 21% to 15% for “domestic production”. Such a tax cut would obviously boost the after-tax earnings of both public and privately-held corporations and they can be expected to lobby hard to achieve both the cut and a very broad definition of “domestic production”. In addition, business interests will argue that the President should follow through on his promise of a renewal of full expensing for investments in equipment and R&D, again for domestic production.

Some of the other campaign commitments will be harder to implement. The promises to eliminate taxes on tip income and overtime would be extremely expensive even if they didn’t change the behavior of management and workers. However, inevitably, both would game the system, claiming that more worker income was, in fact, tips or overtime, further boosting the cost. Because of this, a Republican Congress might be tempted to leave these items out of a broad tax bill. That being said, Democrats in Congress might try to add them back in and would surely highlight Republican attempts to omit them, if they occur, in future election campaigns. Consequently, despite their cost, a reasonable baseline forecast is that they will be included, although perhaps watered down to some extent.

The proposals to allow for the deductibility of interest on auto loans and the elimination of taxation on social security are more straightforward from a definitional perspective and so might also make their way into the tax bill. All told, the overall cost of this tax bill would be enormous and reckless in the context of our long-term debt outlook. However, the interests of interested parties will tend to push it up. The problem is that while everyone may decry the long-term trajectory of the federal finances, each interest group will have a heavy incentive to get their particular tax break and voters have made it clear that they will not punish the fiscally reckless or reward the fiscally prudent.

There are at least three possible areas in which the new Administration and Congress might attempt to pay for at least some of the cost of these tax cuts.

First, President-Elect Trump has proposed having Elon Musk head an effort to cut government spending. However, it should be recognized that if Social Security, Medicare, Medicaid, Veterans Affairs, Defense and interest payments are off the table, there is actually very little of the federal budget left to cut. Moreover, almost every area of federal spending has powerful defenders among Republican as well as Democratic senators and House members.

Second, President-Elect Trump is likely to cut aid to Ukraine and possibly to NATO. However, while this may result in some savings, there will again be powerful advocates of military spending among Republicans in Congress who have military bases or armament production facilities in their districts and President-Elect Trump has also vowed to increase troop pay and invest in advanced military technology.

Third, President-Elect Trump has said that revenue from tariffs would fund tax cuts. The problem with this is that higher tariffs, by inviting retaliatory tariffs, would slow the economy, reducing revenues from other areas of income taxation.

So, in short, the tax bill is likely to amount to significant fiscal stimulus and add to deficits with no major revenue or spending offsets. According to the Committee for a Responsible Federal Budget1, a full implementation of President-Elect Trump’s proposals could boost the debt to GDP ratio from 98.2% of GDP in fiscal 2024 to 143% of GDP by fiscal 2035. That being said, because of the way it will likely be enacted (through the once-a-year budget reconciliation process) its provisions would likely not take effect until the start of 2026. In addition, as was the case with the 2017 Act, the 2025 Act will very likely include a sharp sunsetting of tax cuts within a 10-year window in order to avoid a filibuster under Senate rules.

Two areas where the policy bite may be less severe than the campaign bark are tariffs and immigration.

On tariffs, President-Elect Trump said he would impose a 10% tariff on goods imports from all countries and a 60% tariff on goods from China. While he seems to be actually attracted by the idea of tariffs, there are reasons to believe that any actual implementation would be less severe.

First, higher tariffs would be passed through to consumers in the form of higher prices and this would be particularly unpopular with the U.S. population following the inflation seen earlier this decade. These price increases could also boost long-term interest rates, including mortgage rates, and might cause the Federal Reserve to slow their easing.

Second, any higher tariffs imposed early next year would be immediately met by retaliatory tariffs from other countries, hurting U.S. exporters and commodity producers. Moreover, this would occur before any fiscal stimulus arrived from any tax bill passed in 2025 and could slow the U.S. economy or even put it into recession. This would not be an easy situation for Republican members of Congress ahead of the 2026 mid-term elections. And while President Trump essentially implemented his first-term trade agenda without congressional approval, it is very doubtful that he could legally do so with the more expansive measures he proposes for his second term2.

Third, business leaders have decidedly mixed views on tariffs. Some would oppose them in general on economic grounds, some would like to see them imposed on their competitors and some would like to see carveouts to avoid putting tariffs on their own suppliers. In addition, the U.S. couldn’t put new tariffs on Mexico and Canada under terms of the USMCA agreement that needs to be renegotiated in 2026 and the U.S. would likely have to engage in negotiations with many other countries in favoring some nations and disfavoring others. The interests of interested parties would likely water down any new round of tariffs although even a watered-down version could be harmful in terms of inflation, economic growth and general business uncertainty.

On immigration, President-Elect Trump has promised mass deportations. Deportations might well rise. However, business leaders will continue to point out the necessity of having foreign labor available given almost zero growth in the domestic, working-age population. There is also a distinct possibility that a Republican Congress will take the opportunity to pass an immigration reform act which, while tightening the rules on asylum-seeking in the U.S. and shutting the southern border to new undocumented migrants, finds ways to keep current migrants working in the U.S. economy.

Part of the reason for the Wall Street rally following the election was, undoubtedly, the promise of less regulation. It may well be that the Trump Administration delivers on this promise, reducing environmental and health regulations, constraints on the housing, energy and tech industries and regulation in the financial industry. All of this would tend to boost corporate profits somewhat.

However, investors should be a little careful what they wish for in this area. Fewer environmental regulations would generally boost corporate profits. However, a lack of any U.S. commitment on global warming would severely limit the world’s ability to deal with this problem with potentially disastrous long-term consequences. A lack of financial regulation, taken to an extreme could eventually lead to a financial crisis as it did in 2008. The severe anxiety issues being caused by social media, particularly for young people, probably call for more regulation rather than less. Moreover, while everyone has their own opinions on these issues, from my perspective, the proliferation of on-line gambling, crypto currencies, semi-automatic weapons and marijuana dispensaries are a negative, rather than a positive, for society.

The basic problem is that with deregulation, the beneficiaries are generally a small group of interested parties who will be particularly adept at getting their own way while long-term costs are borne by society as a whole.

Under these assumptions, in the short-run, the economy may well stay on a similar path to 2024. In the absence of any immediate fiscal stimulus, mass deportations or significant tariff increases, the economy could continue to see moderate growth, a low unemployment rate and inflation in the vicinity of 2%. Long-term interest rates would be higher due to the anticipation of fiscal stimulus in 2026. However, the prospect of further deregulation and tax cuts might well support investment spending and the stock market.

However, in the long run, there is great danger in an economy run in the interest of interested parties. These groups, whether ideological, political or simply commercial, generally have an interest in the government imposing less regulation, lower taxes and higher spending in specific areas. In the long run, this can degenerate into an ever-more unequal and indebted nation with less dynamism and greater risk of bubbles.

This may be where America is headed. Or it may turn out to be too gloomy a view of the future. However with the S&P500 now selling at over 22 times future earnings, with 10 companies now accounting for 37% of its total market cap and with U.S. equities now accounting for 65% of the global stock market, the risk that the U.S. will head down this path clearly justifies a more cautious and globally diversified approach.

China’s leadership has moved aggressively in recent weeks to support the world’s second largest economy, in part by stabilizing the housing market. Policymakers’ efforts to put a floor under property valuations may mark a turning point, according to Goldman Sachs Research.

“We are finally at an inflection point of the ongoing downward spiral in the housing market,” writes Yi Wang, who leads the China real estate team in Goldman Sachs Research. “This time is different from the previous piecemeal easing measures, in our view.”

Some $1 trillion of additional fiscal stimulus could be injected to help stabilize the housing market in the coming years, according to Goldman Sachs Research. The scale of the problem is huge: Our researchers estimate that China’s unsold inventory of housing would amount to RMB 93 trillion ($13 trillion) if it were fully built. By comparison, there will be an estimated total of about RMB 9 trillion in property sales this year.

The housing market is still in a precarious position, and much depends on the government’s follow through on support. Without intervention, Goldman Sachs Research estimates that property values may be at risk of falling by another 20% or 25%, which would drop them to about half of the peak in prices. But the government moves are positive nonetheless, and our researchers now estimate that property prices may stabilize by late 2025.

“Incremental government implementation of housing destocking will provide much better visibility for the housing market to stabilize in the coming years,” Wang writes.

Up to this point, government measures to heal the property market have fallen short, according to Goldman Sachs Research. It estimates that the supply of saleable housing inventory will be equal to more than two years of demand, as of the end of 2024.

Previously, the central bank had come up with measures including RMB 300 billion in lending support for state owned enterprises to buy completed but unsold housing inventory. Another RMB 4 trillion in credit was targeted to boost project completions. This has been insufficient, and there have been issues with the execution of these programs. Without additional stimulus, Wang estimates that the housing downturn could last another three years.

Now, however, there are indications that the government will follow through with enough additional fiscal stimulus to address the real estate market breakdown in the coming years.

With around RMB 8 trillion in stimulus coming, Goldman Sachs Research expects there will be resources to reduce the saleable inventory in the primary market while also helping to clear the construction backlog and restructure debt. This amount of stimulus would also address developers’ presold but uncompleted housing units. This will be key to “boost confidence among market participants,” the team writes.

With several previous efforts to boost China’s economy having briefly raised optimism and then fallen short of expectations, Goldman Sachs Research says it will be important to monitor the level of follow-through of government stimulus measures.

It will also be critical to identify signs of a recovery in the average selling price for properties in China’s largest and most prosperous cities, where demand may find support first, Wang writes. A rebound in these places could “help boost confidence among market participants for a broader market recovery going forward,” she writes. 

Goldman Sachs Research also cautions, however, there’s no guarantee that these efforts will succeed. For example, our researchers note that there are similarities between China and Japan during its property downturn. Their case study of Tokyo real estate in 1992-93 suggests that negative demographic changes, a tough macroeconomic backdrop, and deflationary expectations can take the wind out of a property price rebound.