Kovač: Tariffs Could Burst the Real Estate and Financial Bubble

As we tally the customs damages and collect the remnants of prices for all possible types of goods across all possible markets, analysts of all colors, beliefs, methods, and viewpoints are trying to provide some frameworks for navigating the coming days. Literally days, as predicting a month ahead, let alone a year, has become meaningless. Admittedly, tariffs should not be as unexpected as biblical plagues since Mr. Donald Trump announced them very precisely, but it is clear that most were convinced he was partly bluffing. Nevertheless, the elephant has walked into the (Chinese) porcelain shop, so we must see what remains of the porcelain and where it will be produced in the future. Since Croatia practically has its own economist in America – Dejan Kovač is a postdoctoral fellow at Harvard, previously at Princeton – we have been tracking him across the US and Europe (he is often traveling) to gain insights into where this whole situation with tariffs and the trade war is heading. And not just that.

– Europe should not succumb to blackmail, but exclusively to democratic dialogue. If markets collapse, it will certainly not be a separate event, but simultaneous, meaning it will happen at the same time in the Union and the US. For NATO, this is a huge psychological shock in the short term, but I would posit a long-term thesis, then the picture completely changes. The US currently has a huge problem with public finances, with debt around 120% of GDP, and a trade deficit of about $1.8 trillion. On the other hand, Germany’s debt, which accounts for about 25% of the Union’s GDP and has the capacity to develop a military industry, is half as much, around 62% of GDP. In the short term, it seems that the US is leaving Europe militarily helpless, but when military capacities are examined, Europe is not that weak. In the medium term, from five to ten years, I see this as a burden-sharing in a common alliance that strengthens European military capacities and to which part of the economic growth is transferred. The US will maintain military supremacy and, I hope, manage to balance public finances. In five years, it will be a mutually satisfactory situation.

– In conversations with quite a few smart people from Harvard and Princeton, where I have worked, and even with individuals who were in the inner cabinet during the last term, I extracted the main message: you can have top economists around you, but the key question is whether the president listens to you or not. He views politics as a business, in terms of income and expenses, or profit, which is wrong. Public finances are very different from running a business because there are many immeasurable and intangible variables that the government needs to maximize: the well-being of citizens, the level of freedoms in society, the rule of law, democracy. Running a state is not just about the trade deficit with the world or the budget deficit. Admittedly, Trump also likes to engage in ideological topics, but only those that provide him with political support within his political flock.

– The range of scenarios goes from a somewhat unlikely recalibration of world trade, with America as the winner, to more likely scenarios such as a minor recession, or minor only if several mechanisms align, and a global recession worse than that of 2008. All the cards are on the table. I have been warning about this for over a year: the real estate and stock markets are inflated, and this time tariffs could be the needle that bursts that bubble, causing it to deflate. Financial markets are like balloons. It takes time to inflate them, but it only takes a second for a needle to burst them.

Read the full interview in the new printed and digital edition of Lider.