Video Length: 00:05:47
The markets plunged on President Donald Trump’s announcement on tariffs.
It’s not that the initial announcement by itself was going to derail our economy. But investors have focused on the threat of a looming trade war.
There’s another elephant in the room, though, that many seem to avoid discussing when highlighting the risks of tariffs.
And it doesn’t even require other nations to retaliate.
I’m talking about the nation’s debt.
Sitting at $20.85 trillion and climbing, it is at an astronomical level that will be a force to reckon with some day.
No one right now has a rational plan to deal with it — and that’s a problem.
What we do know is that the trickle-down effects of protectionist policies like tariffs will upend the U.S. economy as we know it.
Here’s how it works.
Announcement on Tariffs
All tariffs start with the right frame of mind: to protect jobs, and hit back at countries that are manipulating prices — either through cheap labor or other actions.
Now, many, possibly including Trump, would argue that this is exactly what the U.S. should do. That the U.S. is strong enough to stand on its own.
And that is true.
The Elephant in the Room
But this is where the elephant in the room of government debt comes up.
Tariffs do one thing for certain — increase prices.
By nature, if we charge more for countries to export us raw goods, it means final products will see price increases. Higher costs will always hit the consumer.
Higher prices lead to an increase in inflation, because inflation, by definition, is the fall in the purchasing value of money.
Inflation rises because prices are rising.
The Federal Reserve is a tool to combat inflation. One of its mandates is to keep prices relatively stable. In order to do this, the Fed is able to manipulate interest rates.
A Relationship of Opposites
Think of this relationship as opposites.