Post Segments
With the appointment of Kevin Warsh as incoming Fed chairman all America’s key economic policymakers are fiscal/monetary hawks and supply side reformers. Recent data point to a sustainable US economic recovery, driven by business investment, re-industrialisation and rising net exports. Fears of a boom/bust US economy are misguided. The UK should focus on a comprehensive FTA with the US and emulating US policy successes. Labour won’t do this but a future centre-right UK government would have a successful template to follow.
America Now Has Outstanding Economic Policymakers
Apart from the President the key economic policymakers are Treasury Secretary Bessent and the Fed Chairman. Bessent, in place from day one of Trump 2.0, is a fiscal Hawk who believes that sustainable economic growth is supply side driven. He aims to reduce the 7% of GDP fiscal deficit he inherited to 3% by end 2028, with radical supply side reforms raising potential economic growth and federal spending strictly controlled. Remarkable progress has been made, as described below, but monetary policy needs to be fully aligned with these goals and policies – an alignment is more likely after the appointment of Kevin Warsh as Fed Chairman.
Pessimists on the US outlook have assumed that Trump’s attacks on current Fed Chairman Powell meant he intends to “trash” its independence and appoint a “patsy” to drastically cut interest rates and weaken the dollar. I felt this was misreading Trump’s intentions, predicting that he would not attempt to fire Powell and would adhere to the selection process set out by Bessent, who was never going to nominate a “patsy”, or anyone who did not respect Fed independence. So it has proved.
Kevin Warsh is a superb appointment. He was a Fed governor from 2006-2011, who played a major role – due to his Wall Street contacts and credibility – in steering Fed policy through the Global Financial Crisis. He resigned because of his opposition to excessive expansion of the Fed’s balance sheet, presciently arguing that this would boost Wall Street but undermine the real economy and enable excessive fiscal expansion. He was critical of the Fed’s excessive easing during the pandemic, foreseeing it would be highly inflationary. He is a staunch defender of central bank independence but wants to reform the Fed- including cutting its bloated staff by 30% – so that it focuses on its core mission of controlling inflation. He argues that the Fed is wrong to assume that more rapid economic growth always leads to higher inflation – faster growth that arise from supply side reforms that raise productivity is not inflationary.
Warsh is bullish about the administration’s supply side programme and believes that the AI boom is beginning to significantly raise US productivity. He therefore currently supports the case for modestly lower US interest rates, but Warsh is not going to dilute the Fed’s independence, not going to reduce interest rates to 1%, and not going to oversee a major Fed bond buying programme or inflationary increase in money supply. Indeed, a bond selling programme is more likely, reducing what he calls the “bloated” Fed balance sheet. It may prove no coincidence that the gold price reversed spectacularly upon news of Warsh’s appointment.
It is crucial to understand that both Warsh and Bessent share the same close mentor and personal friend in Stanley Druckenmiller. Druckenmiller is the world’s most successful macro hedge fund manager with a superb grasp of macro-economic issues and understanding of financial markets. He has warned for decades of the long-term dangers of US fiscal recklessness and is an American patriot who in his private life has quietly been an extremely active and generous philanthropist. The economic views of Bessent, Warsh and Druckenmiller are in alignment. Warsh will maintain Fed independence, but Fed policy is likely to be better coordinated with the Treasury. While Druckenmiller has no official role, he is sure to exert influence.
The critics will argue that Trump is not a fiscal/ monetary Hawk and has long seen a weaker dollar as key to restoring American competitiveness, but he has nevertheless appointed Warsh and Bessent. If US competitiveness can be restored by supply side reforms, targeted tariffs, and fiscal and monetary discipline then Trump will take the win. With Trump as an immensely effective political enabler this triumvirate is in the right place at the right time. Great strategic thinking or just extraordinary luck?
Progress in Reducing the “Twin Deficits” and Raising the Sustainable Growth Rate
US GDP declined slightly in Q1 2025 but grew at an annualised of around 4% in Q2, Q3, and Q4*, driven by strong growth in business investment and rising net exports. Real Federal spending declined slightly over the period. Employment levels barely changed, implying a marked rise in productivity – the key to sustainable growth. According to Ambrose Evans-Pritchard (AEP), D. Telegraph economics editor, this rise in productivity partly reflects the US lead in AI investment. Investment in new technologies tends not to raise productivity until critical mass is achieved, but the US may have moved onto the strong upward leg of the AI technology curve – a view shared by Warsh. Combined with the major supply side reforms included in the Big Beautiful Bill (BBB) – full investment expensing for companies large and small, aggressive deregulation, abandonment of net zero, shrinking the public sector – this means that higher growth can be maintained without inflationary effects.
Equally significant progress is being made in reducing the so-called “Twin Deficits” – the current account deficit and the Federal budget deficit. The US has had a current account deficit every year since 1981, threatening the dollar’s status as the world reserve currency. It is a key mission of Trump 2.0 for the US to achieve a sustainable trade balance, with aggressive use of tariffs to promote US “re-industrialisation” and incentivise other countries to reduce unfair tariff and non-tariff barriers on US goods and services. Since “Liberation Day” on April 1st, 2025, more than 50 trading partners have agreed to reduce such barriers, commit to bulk purchase US products (mainly energy or agricultural) and/or invest in new US manufacturing plants. Following these deals the average US tariff rate has fallen from a peak of 30% at the end of April to 16% now. This negotiating process is ongoing – a deal was recently reached with India – but is already achieving the desired results. In H2 2024 the US current account deficit was 4.3% of GDP, its highest level since 2008. The deficit temporarily jumped to 5.8% in Q1 due to a massive pre-Liberation Day surge in imports, but by Q3 the deficit had already fallen to 2.9%. Based on early Q4 data the deficit had fallen to about 2.5% by year-end with exports rising at 8% and imports falling at 3% annual rates.
The US Federal Budget Deficit was 6.9% of GDP in the calendar year 2024, the last year of the Biden Presidency. In the fiscal year to September 2025 – includes three months under Biden – the deficit fell to 5.8%. The deficit for calendar 2025 has fallen further to 5.5%, and for the first three months of fiscal year 2026 is running at an annual rate of less than 5%. The critics lazily repeat that the US is running unsustainable deficits in the 6-7% range when this is no longer true. This turnaround has come about by strong revenue growth from the new and higher tariffs and from the faster growing economy, plus control of Federal spending which fell slightly in real terms, partly due to an astonishing 9% reduction – that’s 271 000 employees! -in Federal employment. If the US economy grows at around 3% for the next three years Bessent will reach his 3% deficit target– the level needed for a sustained reduction in the US national debt to GDP ratio.
Trump Accounts and School Choice –Long Term Initiatives to Reduce Income Inequality and Welfare Dependency and Raise Educational Standards
My previous article on the US outlook – “Trumponomics is Already Working” – covered the main Trump 2.0 supply side reforms contained in the BBB, plus other executive measures. To give a flavour of the depth of the revolution in US policymaking we examine two BBB initiatives that receive little attention but may prove extremely beneficial long-term.
The first is the introduction of Trump Accounts, which are scheduled to open in July 2026, and allow parents, guardians and other authorized individuals to open an account for children under 18 with a valid social security number. Up to $5000 per year can be deposited in these tax-free accounts, which are invested in low-cost stock market index funds. Withdrawals can be made after the age of 18 for specific purposes – starting a business, paying college fees – or on retirement. Companies can make contributions for their employee’s children and philanthropists can make donations, both tax-deductible within limits. Large numbers of companies and philanthropists have already committed to participate. The Federal government will kick start the programme by making a $1000 contribution for all children born between Jan 1st, 2025, and Dec 31st, 2028. The concept behind Trump accounts is to use the power of compound interest and the long-term upward trend of stock prices to empower ordinary families by giving them a stake in the economic system and the opportunity to accumulate significant savings and wealth. This will not impact the US outlook in Trump’s term, but in twenty or thirty years could have a massive impact in reducing income inequality and welfare dependency. I watched a podcast featuring Scott Bessent, normally a dry and reserved speaker, in which he revealed a profound passion for this project.
The second initiative is Federal backing via tax credits for the increasingly widespread “School Choice” policy. This allows parents to opt out of the state school system while still receiving state funding, either by use of vouchers or state tax credits. This is similar to the UK Free Schools initiative introduced by the Cameron government. As in the UK the system is popular with parents – polling suggest 70-80% of Americans support School Choice – and has achieved above average school standards even when a disproportionate number of pupils are from economically disadvantaged backgrounds. The BBB will from 2027 allow parents in states that have opted in (27 have so far, only one of which is Democrat) to use federal tax credits in addition to state tax credits to donate up to $3400 to scholarship-granting private schools. The BBB is thus substantially boosting a policy proven to raise educational standards and reduce inequality. The Starmer government has done the opposite by refusing to allow any new Free Schools – success punished and failure rewarded.
Implications for the UK
In a desperate attempt to boost the flatlining (at best) UK economy Kier Starmer has adopted two policies – “resets” with the EU and with China – neither of these policies will raise UK growth and taken to extremes could do serious harm. The supposed need for an EU “reset” rests on the misconception that UK/EU trade is not growing because the post-Brexit Trade and Cooperation Agreement contains major impediments to that trade. It does not – UK trade with the EU is tariff and quota free – as conclusively demonstrated by many Briefings for Britain articles. Overall UK/EU trade is stagnating because the EU itself is stagnating. The remaining minor impediments to UK/EU trade will only be removed at the disproportionate cost of direct payments to the EU and the imposition of damaging EU regulations. Rejoining the customs union would be a wilful act of self-harm. Amongst the many disadvantages all FTA’s signed since Brexit would have to be scrapped – including the comprehensive FTA with India and accession to the giant trading bloc CTPPP – thus reversing the governments only economic policy successes.
The “reset” with China is based on even bigger misconceptions. Certainly, China is a very large economy and our exports of goods and services to it are very low – the UK is the 6th largest global economy but only the 14th largest exporter to China. If China was a normal trading nation this might present an opportunity, but it is not. Starmer seems unaware that the Chinese growth “miracle” is over**, not least because it is now in a state of terminal demographic collapse – unlike India which looks set to continue rapid growth for the foreseeable future.
Furthermore, President Xi has doubled down on the long-standing Chinese policy of autarky which prioritises self-sufficiency while maximising exports by ignoring global fair-trade rules. Hence its enormous overall 2025 trade surplus of $1.2 trillion – perhaps the largest surplus as a % of global GDP in recorded history. China has no interest in providing greater access to our goods and even less to our highly competitive services sector. It was therefore inevitable that Kier Starmer’s recent visit to China would achieve risible economic benefits, all in return for downplaying manifold Chinese threats to our national security and shamefully turning a blind eye to China’s appalling and massive abuse of human rights. “Two Tier” Kier indeed.
The obvious implication of this analysis is that it would be in the national interest for Starmer to focus on reaching a full and comprehensive FTA with a resurgent US and emulating the policy approach behind it. Starmer is probably the most economically illiterate post-war PM, is a prisoner of socialist nostrums and his own backbenchers, either receives bad economic advice or ignores good advice, so of course he will do no such thing. To finish on a positive note, if there is to be a centre-right UK government after the next election they will at least have a clear template to follow and strong evidence that it works.
Robert Lee February 5th, 2026
*Assuming the Atlanta Fed growth tracker Q4 estimate of 4.2% growth is in the ballpark
**See AEP’s D. Telegraph article “Starmer’s China is already in economic decline”, 30th January 2026
