By Pablo Heller

If there is one thing that distinguishes today’s global economy, it is the proliferation of storm fronts with explosive potential. The trade and tariff war has escalated with Trump’s announcements in April this year. Clashes and confrontations between different countries and capitals have become significantly more pronounced. This paves the way for trends that were already hinting at a world war. Trump’s offensive is part of an attempt by the US to counteract its decline and regain its waning economic and political power and the place it has been losing in the international arena. But the outcome so far is uncertain, crossed by light and shadow.

Recession with inflation 

The key point when assessing the US tycoon’s management is that not only has he failed to revive US production with this offensive, but that it continues to show negative signs. A recession is looming, and he has failed to mitigate inflationary trends. Tariffs are causing prices to skyrocket, leading to a trend toward stagflation (recession with inflation).

Meanwhile, unemployment rates have begun to rise. Data reveals a smaller-than-expected increase in new jobs created in the US in July. We are witnessing a marked slowdown in the labor market, where job growth has been just 35,000 jobs per month over the last three months, compared to 168,000 per month during 2024.

Trump’s promises that imposing tariffs would lead to a new boom in productive activity have not been fulfilled. «In the first quarter of 2025, there was a contraction of 0.5%. The 3.3% growth in the second quarter does not reflect real growth, as the nearly 30% drop in imports distorts the GDP calculation upward». Real growth in the second half of the year could be around 1.3%, with an annual average for 2025 close to 1.7%. Despite these trends—which would normally raise the unemployment rate—it has remained stable at around 4.2 percent over the past year. This was largely due to what Powell described as “the sharp drop in immigration,” a result of the Trump administration’s repressive measures against immigrants since he took office.

Although still faint, the first impacts on prices are already beginning to be felt. Tariff increases have not yet been fully reflected in official consumer inflation data, as some companies have chosen—at least so far—not to raise prices in order to preserve their revenues and market share. But this situation cannot be sustained indefinitely, and the increases are already beginning to be felt in consumer durables. Wholesale prices, as measured by the producer price index (PPI), were 3.3 percent higher in July than a year earlier.

“General Motors has stated that tariff increases have reduced its profits by more than $1 billion. Stellantis has said that import tariffs will reduce its bottom line by $350 million; Nike faces cost increases of $1 billion and has said it plans to apply ‘surgical’ pricing to try to offset the effect on its results. General Motors has indicated that it will absorb the tariff blow, as will other companies. Smaller industries face serious consequences. According to a Bloomberg report, the U.S. Chamber of Commerce has estimated that around 236,000 small importers—those with fewer than 500 employees—purchased goods worth about $868 billion in 2023. The chamber said the combined annual tariff impact for these companies would be $202 billion, an average of $856,000 for each company”.

Collisions and fractures

The tariff war, meanwhile, fuels uncertainty and disruption in the global economy. This affects US corporations themselves, whose business structure is highly integrated and which are harmed by the barriers imposed by the government on goods manufactured abroad entering the US. Similarly, increases in tariffs on supplies result in a jump in domestic costs and affect the profitability of companies based in the country. The trade reprisals adopted by China are already stirring up trouble in the US agricultural sector following Beijing’s announcement that it would buy soybeans from Brazil instead of the US. The retaliation goes so far as to threaten to paralyze production, as is the case with Beijing’s halt to the supply of “rare earths,” a strategic material for several cutting-edge industries, of which it is the world’s leading supplier. Since the truce between the US and Europe, supplies have been restored, but they have not reached pre-crisis levels.

Washington has managed to impose its tariff agreements on Europe, Japan, and Korea. However, it is postponing the application of tariffs on China, its main rival and target, without achieving significant changes in its favor. Tariffs against India, due to its trade with Russia, have caused Russia to move closer to China. Trump’s attacks in this context are not only aimed at political concessions (Bolsonaro’s freedom in Brazil, India’s break with Russian oil imports) but also economic concessions in all areas (opening of markets, primacy for its investments, goods, and contracts in public works and services, recognition of payment for its corporations’ pharmaceutical patents).

Despite the announcement of the aforementioned agreements and a truce between the United States and China until November, the chaos caused by the tariffs imposed by President Trump persists and is even intensifying.

The greatest confusion revolves around the 25 percent tariffs on automobiles imposed under Section 232, which particularly affect Germany, South Korea, and Japan.

“Japan and the US announced an agreement on July 25 that reduced overall tariffs to 15 percent. While this overall tariff has been implemented, the 25 percent tariff on cars remains in place. Nearly a month after the announcement, Japanese officials have yet to see an executive order from Trump indicating that the 15 percent does not apply to tariffs on cars. Japan’s chief trade negotiator, Ryosei Akazawa, said last Friday: ‘We continue to see damage: the bleeding has not stopped. We want the US to sign the executive order as soon as possible’. The ‘bleeding’ for Japan will be significant. South Korea has received a 15 percent general tariff, but the 25 percent surcharge on cars remains in place. Trade data shows that its car exports to the US fell by almost 17 percent in value in the first half of the year, while its steel exports—also subject to Section 232 measures—fell by 11 percent”.

The EU, for its part, believed that a 15 percent cap would be applied to cars. But so far, this has not been the case. The German Association of the Automotive Industry (VDA) is pushing for a quick resolution, as its members are being hit hard. In a statement to Bloomberg last week, VDA President Hildegard Müller said: “The agreement between the EU and the US has not yet brought clarity or improvements for the German automotive industry. The costs incurred amount to billions and continue to rise.”

If these obstacles are not overcome, there will be pressure from car manufacturers for the EU to retaliate, meaning that far from ending the crisis between the US and the EU, it could reopen with even greater virulence. Let us remember that one-sided agreements, such as the Versailles Peace Treaty at the end of World War I, with the war reparations imposed on Germany by the Allies, were the fuel that fed the path to World War II.

Trump said the tariff rate on chips would be “approximately 100 percent,” but that it would not apply to companies that are building production facilities in the US. «Apple appears to have obtained an exemption after committing to increase its investments in the US from $100 billion to $600 billion. But Apple relies on other suppliers that do not have the capacity to move their operations to the country. Large chip manufacturers are finding it difficult to determine what they must do to obtain concessions.”

The extension of the truce is linked to an extraordinary decision by the Trump administration that «allows the export to China of high-end chips used in the development of artificial intelligence (AI) by Nvidia and Advanced Micro Devices (AMD). Under the agreement, Nvidia and AMD will give the US government 15 percent of all revenue from chip sales to China in exchange for export licenses. This is an “unprecedented” agreement, as no US company has ever agreed to hand over part of its revenue in order to obtain export licenses. Allowing chip sales to China represents a reversal of Trump’s decision in April to ban the export of Nvidia’s H20 chip, which provoked a strong reaction in US military and intelligence circles.

Democrats also weighed in, denouncing Trump’s decision as an undermining of U.S. national security and a “dangerous misuse of export controls.” Trump’s decision, part of the extension of the truce, has exposed deep divisions within the U.S. ruling class.

The Bubble and Artificial Intelligence

The record stock market boom creates the illusion of an upward trend, but in reality, the boom is concentrated exclusively in leading companies, especially the so-called Magnificent Seven in the technology sector. The latter are growing at an annual rate of 26 percent, while the other 493 companies in the index have barely increased. The 10 largest companies in the S&P 500 by market capitalization are dominated by technology companies led by Nvidia, Microsoft, Alphabet, Apple, Amazon, Tesla, Meta, and Broadcom, joined by Berkshire Hathaway and JP Morgan Chase. They account for 56 percent of the S&P’s increase since April 8th.

However, even the rise in the aforementioned stocks has weak foundations, given that expectations of increased profits resulting from the incorporation of artificial intelligence have not been verified. Profitability is well below investment levels.

By the end of this year, Meta, Amazon, Microsoft, Google, and Tesla “will have spent more than $560 billion on capital investment in AI over the past two years, but have only accumulated revenues of about $35 billion. Amazon plans to spend $105 billion on capital investment this year, but will only generate revenues of $5 billion. And revenue is not profit, as revenue is measured before the costs of providing AI services. Capital investment in AI is now $332 billion in 2025 for only $28.7 billion in revenue. Investment in the huge data centers needed to train and obtain AI models is planned to reach $1 trillion by the end of the decade.”

But if any of the Magnificent Seven begin to cool off on what they are spending relative to revenue and earnings and therefore reduce their chip purchases, Nvidia’s stock price could quickly fall, taking others with it.

Are the expected returns on this massive capital investment likely to materialize?

Let’s take the example of the well-known ChatGPT. “It supposedly has 500 million weekly active users, but in the latest census, only 15.5 million are paying subscribers, a conversion rate of just 3%. While an increasing number of people use AI chatbots, only a small number pay for the AI service they use, producing annual revenues of around $12 billion, according to a survey of 5,000 American adults by Menlo Ventures. When it comes to AI profits, the situation is even worse. The annual profit growth results of big tech companies have stagnated or slowed over the past few quarters and are expected to decline further in 2025 and 2026.”

Therefore, it is not unreasonable to warn that the AI boom could end in the same way as the dot-com crisis in the late 1990s. One of the questions is the impact of AI on labor productivity. As the OECD report states: «Over the past half-century, we have filled offices and pockets with ever-faster computers, yet labor productivity growth in advanced economies has slowed from about 2 percent per year in the 1990s to around 0.8 percent in the last decade. Even China’s once-growing output per worker has stagnated.» Research productivity has slowed. The average scientist now produces fewer innovative ideas per dollar than his or her counterpart in the 1960s.

The key factor in increasing labor productivity is investment in new labor-saving technology. But business investment has slowed significantly in all countries. And the OECD makes it clear why. The “slowdown in investment despite readily available and cheap credit for firms with access to capital markets is in line with historical patterns showing that uncertainty and expected returns tend to play a more important role than financial conditions in investment decisions.” In other words, the return on capital declined, reducing the incentive to invest in new technologies. 

And investment in so-called “intangibles”, such as software, did not offset the decline in investment in plants, equipment, etc. It is worth noting the change in the structure of American capitalism in recent decades. About 30 years ago, the leading companies were industrial, energy, basic consumer goods, and technology companies. Today, eight of the ten largest companies are technology companies, and the remaining two are financial companies.

This transformation has led to a significant change in the composition of assets and the way profits are accumulated. The assets of large S&P companies used to consist of physical assets, such as factories, equipment, and inventories. Around 90 percent of their assets are now intangible, ranging from intellectual property, brand value, and networks to code, content talent, and knowledge. In the United States, investment in intangible assets surpassed investment in tangible assets as a share of GDP in the late 1990s, and the gap has continued to widen.

There is a shift in the way profits are accumulated in key sectors of the economy. “Industrial companies, for example, sought to increase their profits by investing more in plant and equipment. But technology companies increasingly rely on parasitic forms of accumulation. Apple’s profits, for example, depend on the monopoly they have over their operating systems, for which they charge what is essentially a rent. If the price of an iPhone were based on the cost of its components, its retail price would be reduced by hundreds of dollars. One of the sources of profit for the Magnificent Seven derives from establishing, if not a monopoly, at least a dominant position in the market.”

Significant changes are also taking place “in corporate financing, which are having an impact on share prices. Large companies are increasingly relying on debt and leverage, rather than raising funds by issuing new shares. On the contrary, the dominant feature is the phenomenon of share buybacks.” 

Until 1982, this practice was illegal, as it was considered market manipulation. But since the law changed under the Reagan administration, it has become commonplace.

US companies are buying back their shares at a record pace, having announced repurchases worth $983.6 billion so far this year, a total that is expected to rise to $1.1 trillion by the end of the year, an all-time high. Among the major players are Apple and Alphabet, Google’s parent company, as well as large banks such as JP Morgan, Bank of America, and Morgan Stanley.

This stock market boom creates the illusion of a healthy economy. But the resources are not going to finance new investments, productive capacity, or job creation. This has led to a fictitious increase in the value of shares, inflating profits that are distributed among shareholders, CEOs, and company executives.

The debt crisis and the fall of the dollar

The global economy, and in particular the US economy, has been sustained on the basis of growing debt. Stock market booms are not consistent with the performance of companies in the real economy, which are posting meager results or outright losses. We are witnessing “zombie” companies that are unable to even meet their debts and are refinancing them. High interest rates are making this increasingly unsustainable and compromising the financial system that has lent to them. This parasitic structure has been sustained through bailouts by central banks, starting with the Fed, which has come to the rescue, to which must be added private debt of $14 trillion and public debt of another $18 trillion. The total US debt amounts to $69 trillion, more than double its GDP. The US endured a shock in March 2020 when the Treasury bond market—the foundation of the global financial system and supposedly the safest in the world—froze. Its collapse was only averted by the Fed injecting more money, along with government bailouts. Three years later, the run on Silicon Valley Bank and First Republic broke out in March 2023, when interest rates rose and the Treasury bonds they held were devalued. This forced the Fed and other government authorities to intervene to organize a bailout, not only for the banks involved, but also with an implicit guarantee for all the others.

The capitalist crisis and the decline of the United States are reflected in the dollar. One of the signs illustrating this phenomenon is the rise of gold, which has reached historic highs. In recent weeks, it has taken another leap and is approaching $3,700 per ounce. One of the main buyers is central banks. Gold has become the second largest component of central bank reserves, displacing the euro.

The current decline of the US currency completes a cycle that began more than half a century ago with President Nixon’s decision to make the dollar inconvertible in August 1971, since when the dollar has functioned as a fiat currency. In other words, it is not backed by any real value, but is based on the financial power of the US government and its institutions.

Confidence in that power has been steadily eroding with the evolution of the global capitalist crisis and, in particular, with the decline of the United States. Recurring crises of ever-increasing magnitude are forcing the state to bail out the economy, which is reflected in the Federal Reserve’s increasing issuance of dollars and the Treasury’s growing debt.

Trump’s policies, starting with the tariff war, have encouraged clashes between states and capitalists and ultimately undermined the postwar international financial and economic order, which in turn erodes US power. In this context, Treasury bonds and the US currency itself have ceased to serve, as they did in the past, as a “safe haven” from crises.

The government has reduced capital taxes while increasing defense spending and, we might add, interest payments amounting to a whopping $1 trillion. Spending cuts in various government agencies, including personnel, as well as social programs, have failed to offset this imbalance. The role that the organization led by Elon Musk (DOGE), created by the tycoon at the beginning of his term, was called upon to play has ended in resounding failure.

The White House’s promise that tariff revenues will offset the decline in revenue from tax cuts and thereby counteract fiscal deficits has not been verified.

The dispute over the interest rate

In this context, lowering interest rates has become imperative not only for Wall Street, but also for financial and business circles as a whole, as a crash would drag down the entire economy. Trump’s insistence is linked to this fact, but its consequences could be counterproductive in other areas. A reduction in interest rates would reignite inflationary trends. It would reduce the cost of debt, including public debt, but at the same time, it would cause an outflow of capital invested in US debt in the face of falling yields and would exacerbate existing trends toward a devaluation of Treasury bonds and the decline of the dollar, which has been losing ground against other currencies and assets, especially gold, which has reached historic highs. The unprecedented phenomenon is that, unlike other crises, US Treasury bonds have ceased to serve as a “safe haven.” Investors are beginning to have doubts about the US’s ability to pay its debt, which has led international consulting firms to decide to downgrade its triple-A rating.

The Jackson Hole conclave—which annually brings together top representatives from central banks around the world from the academic and financial spheres—was marked by the turbulence shaking the global economy.

One of the main expectations was focused on what Federal Reserve Chairman Jerome Powell would say about interest rates. Over the past two years, we have seen high interest rates in contrast to the cheap money that prevailed in the past. Pressure on the Federal Reserve to cut interest rates is growing. More than a 25 basis point (0.25 percentage point) cut—which Powell has just announced—what is sought is a clear signal that this is only the beginning. The Fed’s intention would be to make two more similar cuts of 0.25 percentage points each before the end of the year. The feeling in the “market”—and obviously in Washington—was that this was not enough.

One of the fundamental concerns is the stock market bubble. The question is: how long can this spiral continue? Trump’s announcement of new tariffs in April initially caused a shockwave in the stock market, and although there was a rebound, the situation remains extremely precarious. Wall Street wants to play it safe and is calling for a reduction in the cost of money to finance stock market operations, prolong speculation, and avoid a crash.

Trump wants to use government intervention to prevent an economic downturn that could become severe. A central aspect of this interventionism to lower interest rates—which should be 3 points, according to the tycoon—is at the root of growing tensions with the Federal Reserve chairman, who opposes this request. After failing in his attempt to remove him, he has been calling for the removal of other members of the agency’s leadership. Governor Lisa Cook was dismissed from her post. This move is part of his campaign to bring the Fed under his control by placing his supporters on the seven-member board, which plays a central role in determining interest rates by the 12-member Federal Open Market Committee (FOMC).

But it’s not that simple, as the Fed official is resisting dismissal and we are facing the beginning of a legal battle that will have repercussions and will reach the US Supreme Court. This has already caused a great deal of controversy, as what is at stake and under discussion is the independence of the Federal Reserve. Significant sections of the academic world and business circles have distanced themselves from the White House offensive, warning of the danger it could pose to financial and institutional stability, the dollar itself, and the global position of US capitalism. We cannot ignore the fact that Trump’s attempt is aimed at concentrating power in the hands of the executive branch, which seeks to establish a Bonapartist-style regime with fascist characteristics, above the republican institutions. But this attempt is meeting with resistance from sectors of the capitalist class, which is also reflected in the judicial sphere. The tycoon has had to endure a series of adverse rulings declaring illegal deportations carried out by the government, the removal of the Federal Reserve governor, the intervention of the National Guard in Los Angeles, and, recently, the declaration of illegality of the tariffs themselves. In short, there are multiple and often contradictory fronts of conflict. This speaks to the explosive nature of the situation and at the same time explains the clashes, hesitations, and divisions within the capitalist class itself over the course to follow. This scenario, meanwhile, is eroding the Trump administration’s support base, resulting in a loss of popularity among the population and a rift within the ranks of the capitalist class, as evidenced by the split with Elon Musk, which is spreading to other corporate leaders.

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Notes:

1. Data extracted from the Department of Commerce through the Bureau of Economic Analysis https://www.commerce.gov/bureaus-and-offices/bea
2. Beams, Nick (8/14/2025), «Trump’s tariffs: A war against the working class», WSWS, https://www.wsws.org/en/articles/2025/08/15/maxc-a15.html
3. Beams, Nick, 8/20/2025, «A pesar de los «acuerdos» de Trump, reina la confusión sobre los aranceles», WSWS https://www.wsws.org/es/articles/2025/08/20/nohq-a20.html
4. Ibid
5. Ibid
6. Ibid
7. Roberts, Michael, (7/27/2025), «AI:Bubbling up», The Next Recession, https://thenextrecession.wordpress.com/2025/07/27/ai-bubbling-up/
8. Ibid
9. Beams, Nick, (8/22/2025), «El gráfico de la fiebre bursatil», WSWS, https://www.wsws.org/es/articles/2025/08/22/344c-a22.html