Trump’s Tariffs Stunned Main Street. Now They Could Starve Wall Street.
Stock and bond markets find themselves on a precarious edge over the Trump administration’s tariffs and the impact of Congress’ budget measures on the federal deficit. Recently, a downgrade by a bond-rating agency affected America’s credit worthiness, leading to an increased risk premium on U.S. Treasury debt. However, this is not the most significant issue faced by financial markets.
Some conservative lawmakers claim the federal budget deficit and the expanding national debt are the primary concerns. While there is some truth to this, the situation could be resolved by allowing the generous 2017 tax cuts to expire at the end of 2025. Instead, Washington’s lawmakers engage in questionable accounting practices and extend tax breaks. Concurrently, social-spending cuts and tariffs could lead to a recession, inadvertently increasing the budget deficit. This was evidenced by the lukewarm response to the latest U.S. Treasury bonds auction.
America’s Tariff Trials
The federal deficit may not affect Wall Street as significantly as the U.S. trade deficit does. Since the 1980s, the U.S. has been experiencing a growing trade deficit, allowing Americans to live beyond their means while supporting the economies of other countries. This deficit has primarily resulted in a decline in U.S. manufacturing jobs.
President Donald Trump, acknowledging this at some level, initiated measures during his first term to address the issue through tariffs on steel, aluminum, and China. However, these actions did not substantially shift manufacturing capacity back to the U.S. Instead, they increased the cost of manufacturing and construction domestically. Now, Trump’s strategical view includes using tariffs as both a form of industrial policy and a revenue source.
As an industrial policy, tariffs are ineffective, as new plants cannot be built overnight, and the resultant economic damage will inevitably compel a U.S. retreat from such measures. As a revenue source, tariffs are insufficient to balance a multi-trillion-dollar U.S. deficit. Given their temporary nature, the deficit may initially decline, but Wall Street may not appreciate more balanced U.S. trade.
Wall Street Against a Wall
Trump has disrupted the foundational order of the global economic system. For years, the U.S. has been running a deficit of approximately a trillion dollars, which stimulated global trade growth and allowed the U.S. dollar to be the cornerstone of the world’s financial system. Foreign savings, a byproduct of the U.S. trade deficit flooding the market with dollars, have been heavily invested in liquid American markets.
If the U.S. trade deficit decreases, foreign savings, a crucial source of new investment, could dwindle. This surplus of foreign capital has propelled U.S. stock prices to unprecedented heights, and now these investments are jeopardized by Trump’s challenge to the global trading structure that has supported the world economy for eight decades.
We exist in an interconnected global system with minimal checks and balances. Trump’s interference with the natural order of financial systems involving dollars, yen, euros, and the movement of physical goods necessary for global economic growth introduces instability. America’s unilateral tariffs and contentious trade policies can lead to chaos in global financial markets and potentially a recession in the U.S. and beyond.
Wall Street and Main Street are observing closely, as these economic decisions could have profound and lasting impacts on both domestic and international financial systems. The interconnectedness of global markets means that what began as tariffs intended to protect American interests may, in fact, lead to unforeseen challenges for U.S. economic supremacy.
In summary, while Trump’s tariffs aimed to rectify trade imbalances and bolster U.S. industry, the broader economic repercussions might starve the financial avenues Wall Street relies upon, with potential recessionary consequences looming on the horizon.
