GOING BUST

Nobel-Winning Economist Sounds Alarm on Looming Financial Crisis

Paul Krugman says the U.S. may be headed for trouble.

Nobel Prize–winning economist Paul Krugman warned that the economy is on thin ice—thanks to President Donald Trump’s wildly fluctuating tariffs.

Krugman wrote in a Substack post Wednesday that Trump’s tariffs have proven to be “bad for business” since taking effect earlier this year.

“We could say that the US economy in 2025 was schizoid,” Krugman wrote. “On the one hand Donald Trump abruptly reversed 90 years of U.S. trade policy, breaking all our international agreements, and pushed tariffs to levels not seen since the 1930s. Worse, the tariffs keep changing unpredictably.”

“This uncertainty is clearly bad for business and is depressing the economy,“ he continued. ”On the other hand, there has simultaneously been a huge boom in AI-related investment, which is boosting the economy.”

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Krugman pointed out how the AI investment boom shares a lot of similarities with the tech boom of the late 1990s—“a boom that turned out to be a huge bubble,” he wrote.

He went on to highlight some unusual market behavior surrounding AI-related stocks—primarily, how they shot back up quickly following a period of decline. Krugman theorizes this is likely due to predictions that the Federal Reserve would cut its rates next month.

“Analyst chatter about supposed causes of stock market swings should always be taken with many grains of salt,” Krugman said. “But it’s clear that this surge was catalyzed by remarks by Fed officials which the market interpreted as making a cut in the Fed Funds rate next month more likely.”

Krugman warned that Trump would not be able to lead the U.S. through this unpredictable economy.

“So as doubts about AI creep in, I’m hearing growing chatter to the effect that the Fed can and should save the industry,” Krugman wrote. “But the lesson from the last big tech bubble is that it can’t. In fact, I have doubts about whether the Fed can head off a broader recession if the tech boom collapses — but that’s a topic for a future post."

“My point is that if you’re worried about an AI bubble, don’t expect Jerome Powell or his Trump-appointed successor —rumors are not encouraging— to come to the rescue,“ Krugman added. ”They can’t."

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Vic VerbalaitisNight Breaking News Reporter

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