Nobel Prize-winning economist and political commentator Paul Krugman issued a dire warning in his new Substack post, published Wednesday: the stock market is currently not properly pricing in the risk of President Donald Trump’s economic chaos — and when it finally does, things will get ugly fast.
Krugman, a frequent critic of the president and advocate for more liberal economic policies, said that Wall Street performance doesn’t at all reflect what is going on.
“The great majority of economists, in both the academic and business worlds, believe that Donald Trump is pursuing destructive economic policies,” he wrote. “He has imposed high tariffs, undoing the effects of 90 years of trade negotiations. His deportation policies are already creating labor shortages and supply disruptions in multiple sectors of the economy. His Big Beautiful Budget Bill, aside from being cruel, is fiscally irresponsible. Deportations will undermine Social Security and Medicare. His drastic cuts to scientific research will undermine U.S. technology, and hence long-run economic growth.”
Despite this, stock prices “have fully recovered” to where they were before Trump announced his “Liberation Day” tariff policies.
Part of this is because the medium-term effects of Trump’s tariffs, while bad, are manageable, shaving around 0.4 percent off GDP growth, and markets have decided they can tolerate that, wrote Krugman. But another factor is that there is an underlying “bubble” in the market that is obscuring erosion elsewhere.
“The way I see it, during any given period the market is driven by a narrative, positive or negative,” he wrote. “The current narrative is strongly driven by optimism about AI. And it takes a major shock to change a market narrative. Nothing in history suggests that we should expect a really strong stock market reaction to the kinds of warnings we’re getting so far about Trumponomics.”
In fact, he wrote, the spike in investment from AI “accounts for about half of U.S. economic growth in the first half of 2025. Without that surge we’d probably be looking at an economy at stall speed, that is, growing so slowly that it could easily slip into recession.”
As for what that bubble bursting looks like, he said, “That will have to be the subject of a future post, or maybe several posts.”