I’ll make this short and sweet this week, as I really don’t have an answer to my own question (posed here in a bit). I’d love to have some input, maybe you have an answer that makes sense. But before I continue, do let us know if you “found” any money using the retirement account “Lost & Found” we highlighted last week!
Let’s start with some background. Since April, the market has been “saying” that the tariffs will be inflationary. Bond rates have risen accordingly.
Then, when inflation didn’t take hold like economists thought, they said, “Well maybe they won’t be inflationary…”
Meanwhile, President Trump has vacillated on the level of tariffs per region, country, or economic bloc. Trying to get a good idea of where the tariff rates will ultimately fall is definitely a moving target.
Then, to add further complexity to this web, the U.S. Appeals Court for the Federal Circuit in Washington D.C. ruled yesterday that most tariffs are not legal. The crux of the argument is that Congress is in charge of tariffs and taxes through their power of the purse. The President has circumvented this by acting under the IEEPA (International Emergency Economic Powers Act).
This will obviously be appealed to the Supreme Court, at which time we will find out whether this does or does not apply.
But then this headline pops up today…
What this is saying is that the bond market is saying that this latest ruling is a problem for the nation’s ability to pay down debt. Meaning that the tariff money actually helped with our debt issue. But at the same time hurt because of inflation.
So, my conundrum is tariffs are inflationary and bond yields go up, but without tariffs the government has a harder time paying its debt and so interest rates go up.
Does that mean that “free trade” is actually bad for the United States because it doesn’t generate tariff revenue? Or would free trade actually reduce “inflation” so that rates would come down? Or does it really not matter because we have too much debt to begin with and it turns out we have kicked the can too far down the street? If you have read my blogs for long enough, you probably are wondering, “Is this a rhetorical question?” Anyway, just inviting you to ponder this with me, remembering of course that the world is much more complex than the “tariff/no tariff” debate we’ve seemed to boil it down to as a result of our politicization of just about everything.
As always, please let us know if you have any questions or comment about this or any other topic. We will be happy to have a conversation. Otherwise, best wishes to all the students and teachers heading back to the classroom this week! May it be a fantastic year for all.