"Fire the Fed, Raise Tariffs, and Hope for the Best"

"Fire the Fed, Raise Tariffs, and Hope for the Best"

by MN Gordon

“Protectionism is a policy of wasting a 

country’s resources to support inefficiency.”
- Ludwig von Mises, "Planning for Freedom "(1952)

Paris, France - "Uh, oh… here comes the counter-punch. French newspaper, Le Monde, has the latest…"EU approves €93 billion in counter-tariffs on US goods. Brussels prepares to strike back with up to 30% levies on US goods and services starting August 7 if no deal is reached, responding to US President Donald Trump's tariff threats.

EU states on Thursday, July 24, approved a €93 billion ($109 billion) package of counter-tariffs on US goods that would kick in from August 7 if talks with the United States fail, European diplomats said. US President Donald Trump blindsided the European Union this month when he threatened a 30% levy on EU goods unless the two sides reach a trade deal by August 1."

Brussels and Washington appear to be inching toward a deal with a baseline 15% levy on EU goods, but the bloc is still forging ahead with detailed retaliatory plans in the event of no accord. Trade wars might be a useful tool to rouse the rabble, but they rarely work out well for the people themselves. More taxes… more friction… more state intervention in what ought to be win-win deals; the history of tariffs does not argue in their favor.

Ah, but perhaps this time is different. President Trump is a genius, his supporters argue. He understands the “Art of the Deal.” Maybe. Maybe not... All we know is we never met a government program – be it tax, subsidy or market intervention by any another name – that didn’t inspire a furrowed brow and a heavy heart. Recall Ludwig von Mises’s warning, from Human Action (1949): “The worst thing that can happen to a nation is not to be conquered by a foreign power but to be subjected to domestic policy of protectionism.”

In today’s guest essay, MN Gordon takes a closer look at this topic du jour. As mentioned before in these Notes, we have no financial arrangement with Mr. Gordon and do not profit from publishing his work… we simply enjoy his thought-provoking articles and reckon you might, too.

Whether you agree or disagree with Mr. Trump’s tariffs, it’s worth taking a step back and considering them from the macro perspective. Check out Gordon’s latest musing, in today’s guest column, below. And if you like it, be sure to comment and share. Cheers ~ JB

"Fire the Fed, Raise Tariffs, and Hope for the Best"

by MN Gordon

"President Donald Trump and Treasury Secretary Scott Bessent want lower interest rates so they can lower the financing costs of America’s massive debt. The net interest on the debt for fiscal year 2025 is on track to hit $1 trillion.

Federal Reserve Chair Jerome Powell has resisted daily lambasting from Trump to cut rates. Powell wants to first wait and see how Trump’s tariff policies impact consumer price inflation. Moreover, with unemployment moderately low, the CPI rising at an annual rate of 2.7 percent, and the stock market at all-time highs there is no compelling reason to cut rates.

Nonetheless, Trump’s had enough of Powell’s disobedience. This week Bessent revealed that active steps are being taken to fire Powell before his term runs out next year. He will be replaced with someone who will comply with Trump’s rate cut demands.

Of course, a sensible way to lower interest rates would be to eliminate deficit spending. With a balanced budget, the Treasury would no longer have to issue new debt. It could merely finance the existing debt. Under this scenario the pool of Treasuries would no longer be expanding. As the supply of Treasuries is reduced the continued demand would likely drive interest rates down. This would help Trump and Bessent achieve their desire for lower interest rates.

But instead of forcing Congress to balance the budget, Trump pushed his One Big Beautiful Bill Act. The combination of tax cuts and spending increases will add over $3 trillion in additional debt – over and above the already projected debt – over the next decade. This will blow the national debt out to over $60 trillion by 2040.

Can Tariffs Reduce the Deficit? The addition of all this new debt makes the prospect of lower interest rates highly unlikely. Still, Trump thinks he can influence the budget through other means. His big idea is to generate revenue from tariffs. He believes this will reduce the budget deficit.

Until the monthly Treasury Statement for June was reported, it appeared the U.S. government was on track to run a budget deficit of $2 trillion for fiscal year 2025. But something remarkable happened in June. The U.S. government ran a surplus of $27 billion. This is on the heels of a $315 billion deficit in May. Of note, the $27 billion surplus was the first time there has been a budget surplus in June since 2017. In June 2024, there was a $71 billion budget deficit. Tariffs do appear to have had a positive effect on the budget.

The monthly Treasury Statement shows that custom duties for June were $27 billion. This is up from $22 billion in May. What’s more, since October, total tariff revenues are $108 billion, which is the highest they’ve ever been for the first nine months of a fiscal year. At this point in the 2024 fiscal year, only $56 billion in custom duties had been collected. And for the full 2024 fiscal year custom duties totaled just $77 billion.

At a recent White House cabinet meeting Bessent noted that the U.S. could grow its tariff revenue to $300 billion by the end of the 2025 calendar year. Trump said he believes “the big money will start coming in on August 1.” Trump, however, didn’t elaborate on where the big money will come from…

Tariffs are Taxes: The status of Trump’s “on-again, off again” tariffs is hard to keep up with. As we understand it, the average U.S. tariff rate increased from 2.5 percent to an estimated 27 percent by April 2025, the highest in over a century. Trump’s apparent strategy has involved announcing tariffs, then pausing them for negotiation periods, only to re-impose or adjust them. If you recall, after announcing reciprocal tariffs on Liberation Day, April 2, 2025, a universal 10 percent tariff took effect, with additional tariffs for 57 trading partners initially planned but then paused for 90 days when Wall Street panicked.

The pause on reciprocal tariffs has now been pushed out to August 1, with Trump sending letters to countries detailing new tariff rates. These new tariffs are why Trump expects the “big money” to start coming in on August 1. Certainly, reducing the budget deficit via increased tariff revenue sounds like a positive outcome. But what are the consequences?

Trump’s trade tariff policies are designed to protect domestic production, bring manufacturing jobs home, and reduce America’s massive trade deficit. However, there are two sides to every coin. The flipside to Trump’s trade policies is higher prices. Very simply, tariffs are taxes. They are not paid by foreign producers out of some generous desire to subsidize American consumers. They are duties levied on imported goods. And like all taxes, they are ultimately paid by the end-user. In this case, American consumers.

For example, when Trump slaps a 10 percent, 25 percent, or even a 60 percent tariff on goods from China, Europe, Mexico, or anywhere else, that cost is absorbed into the price of those goods. Importers pay more, distributors pay more, retailers pay more, and eventually, you pay more.

Fire the Fed, Raise Tariffs, and Hope for the Best: Tariffs, and their associated effects, will touch just about every consumer good that people regularly buy and use. The clothes people wear, electronic gadgets they use, the car components they rely on, and raw materials for manufacturing. As you know, a significant share of these originate from beyond America’s borders.

When tariffs are imposed, the cost of bringing these goods to market escalates. Businesses, operating on razor-thin margins, have two choices. Absorb the cost and potentially go bankrupt or pass the cost along to the consumer. Most retailers will choose the latter, as this is the inevitable path of survival.

But the inflationary impacts don’t stop there. Tariffs, by their very design, are meant to make foreign goods less competitive. The objective is to give domestic producers an advantage. These protectionist policies result in higher consumer prices. They also reduce the competitive pressure that keeps prices in check. With less competition from abroad, domestic industries face reduced incentives to keep their prices low. Why innovate? Why cut costs? Why offer discounts?

If the playing field is artificially tilted in the favor of American producers, they can simply raise their prices to match the now-inflated cost of imports. This is the downside of protectionism. It breeds complacency and, ultimately, higher prices for everyone. It also reduces the choices consumers have and generally leads to lower quality goods. Trade tariffs also mess with the broad and complex economic supply chain. A tariff on steel, for example, doesn’t just make imported steel more expensive, it makes everything that uses steel – from cars to refrigerators to construction materials – more expensive.

The cumulative effect of these actions is a direct assault on the purchasing power of the average American. Your hard-earned dollars buy less. Real wages decline. The cost of living goes up.

Tariff induced higher prices act as a stealth tax on every household. This erodes savings and makes it harder for families to make ends meet. Gambling to close the budget deficit through massive trade tariffs and artificial rate cuts is madness. The consumer – that’s you – will be the one who pays the “big money” Trump’s counting on. The real solution is to cut spending. Yet politics won’t allow it. Thus, the folly continues."

- https://joelbowman.substack.com/