Trump Tariffs Will Be Deflationary as Solution to U.S. Debt Problem
President Donald Trump is using trade tariffs on allies to curb an economic crisis that he inherited.
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As President Trump took office, he was handed an economy with a huge debt pile, endless spending, sticky inflation with asset prices at highs and a Federal Reserve that had its arms tied behind its back.
One of President Trump's main campaign goals was to lower inflation, bring back jobs to the country and provide tax cuts and less regulation to help the economy grow. These plans would require more fiscal deficit spending, but the bond vigilantes were not playing ball. DOGE was set up to "drain the swamp" with regards to the bloated federal employees and spending. The GDP growth over the past few years under Joe Biden has been aided by massive increase in government spending aided by more and more debt issuance. This led to a massive rise in money supply bringing along with it inflation that hurt the average U.S. consumer. And people wonder how Trump won?
To put it in perspective, the United States had a $7.59 trillion nominal GDP increase between 2021 and 2024 compared to a rise of $8.47 trillion in government debt. 2024’s 2.8% GDP growth reflected almost $2 trillion in borrowing, a roughly one-to-one spending-to-growth ratio. Biden's era showed "good" growth but it was done via more debt, which is not entirely sustainable.
The U.S. national debt is now north of $36 trillion, highest since World War II, and this was before a crisis even. At the current rate, the net interest outlays were expected to grow from $881 billion in 2024 to $1.2 trillion by 2030, assuming no recessions or unemployment increases. No wonder the bond market was in dire straits before Trump took office.
Treasury Secretary Scott Bessent knows fully well how important it is to contain the rally in long-term yields. DOGE is going hard on cutting federal employees and useless expenditures, and this may cause the U.S. to experience a downturn, but in the grander scheme of things, it is wiping the slate clean to give the current administration room to bring in policies that will grow U.S. GDP without borrowing money.
Trump is trying to raise funds through any means, by bullying allies even. He is tired of the U.S. paying more for NATO. Europe needs to spend more on its military, as the U.S. is done doing all the heavy lifting. With respect to China, it is trying to level the playing field compelling companies to bring production and jobs back to the U.S. With the race for critical minerals, Greenland is geographically strategic, given its position in the north.
Just like Trump 1.0, these tariffs are being used to strong arm the counter party into giving in. At first, it may seem inflationary, but in the longer term, as prices move to adjust to these tariffs, it will be seen to be deflationary as it forces trade down.
It is no secret that Biden lost his sway over the Middle East over the past few years. Trump has had a much better relationship with the OPEC cartel, and he knows fully well that a lower oil price is the key to getting inflation down. OPEC has been holding back about 3 million barrels per day (MBPD) to 5 MBPD of oil for a good two years in the hopes of an expected demand rebound from China that never came. Now, it has finally announced that it would start releasing its oil gradually, from April onwards. This is not a coincidence, it is all part of Trumps bigger plan, i.e., getting costs down.
Headlines may seem erratic on any given morning, but if one looks through the noise, it is clear that Trump is cleaning shop and trying to lower the debt-to-GDP ratio, giving him some room to increase spending without killing the economy. It seems there may be some genius behind his madness after all.
