Donald Trump’s tariffs triggered a sharp downturn threatening a recession. (Photo: NYI Collage)
Donald Trump has tipped the US economy into a death spiral.
High tariffs (essentially a sales tax on consumers) will cut demand. Thousands of layoffs, already underway, will continue to snowball.
Remember each person laid off represents a household, a provider who will be suddenly unable to pay their bills.
Pushed by rising prices, businesses will be forced to cut back as well, as demand for products and services fall, both domestically and overseas, thanks to reciprocal tariffs.
Those cutbacks will lead to more layoffs, subtracting more previously healthy households from the economy.
The banking system will be pressured as those households begin to default on mortgages, car loans, credit cards and other household debt. Banks will begin to fail.
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The effects will ripple through the economy, affecting such sectors, most immediately, as construction, housing, travel, hospitality, technology, consumer products and transportation.
The Federal Reserve will be forced to flood the market with money to stave off financial collapse, creating stagflation. The inflation rate will rise to 5% to 7% annually, and the unemployment rate will soar.
Economic growth will fall below zero and the real possibility of deflation will set in as the death spiral, known in economic circles as a “deflationary spiral” grows tighter… and inescapable.
Soon, the economy will have no chance of pulling out, barring massive government intervention, until it hits rock bottom, signaled by a 20% or more correction in the stock market.
Millions of lives will be ruined, millions will be pushed into poverty and thousands of businesses will go bankrupt.
For what?
This will be Trump’s legacy.
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It will take a decade to unravel the wreckage. Meanwhile, hedge funds, private equity and billionaires will have a field day, scooping up assets at bargain prices and watching the collapsing market eliminate competitors.
Buckle up; the ride down will be perilous, and many of you won’t make it.
The long history of U.S. tariffs. (Chart: James 4)
Anyone who flies an airplane will know immediately how dangerous a death spiral can be. It refers to a situation that keeps getting worse and worse and ends with potentially devastating consequences.
Not surprisingly, Irving Fisher, a U.S. academic economist, coined the term “deflationary spiral” in the 1930s as the nation collapsed into “The Great Depression.”
He defined the spiral as as persistent combination of deflation and stagnation in economic activity and employment.
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Back then, it was triggered by the 1929 stock market crash, the banking crisis, the Hoover administration’s miscalculations and the imposition of the Smoot-Hawley Tariff Act of 1930.
More than 1,000 economists wrote to President Herbert Hoover, pleading to veto the bill. Hoover signed it anyway, despite once calling it a “vicious, extortionate and obnoxious,” according to references.
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If the scenario sounds familiar, it’s because the Trump administration is repeating the same mistakes. Smoot-Hawley’s impact on world commerce is a harbinger of a similar, looming outcome under the Trump tariffs.
Back then, Canada imposed reciprocal tariffs on U.S. goods. At the time they accounted for 30% of American exports. Last year, 49.25% of Canadian imports came from the United States, out of $3.2 trillion in goods and services exported worldwide.
Other big trading partners, France, Germany and Great Britain and two dozen other countries followed suit. Global trade dramatically collapsed, causing prices and unemployment to rise.
The downturn continued for almost a decade. Only the advent of World War II and its demand on production restored the nation’s prosperity.
Following the war, the United States led the integration of the world economy. An unprecedented economic boom followed led by low barriers to international trade.
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Fifteen recessions have occurred over that time of varying depth and duration, due to a variety of economic factors. But if the nation slips into a recession this time, it will be the first ever purposely induced by the government.
If Trump’s policy changes stick, the average effective tariff rate would rise to 22.5%, the highest since 1909, according to an analysis by the Yale Budget Lab, and nearly equal to the Smoot-Hawley increase.
Trump initially proposed raising tariffs to raise revenue. effectively a sales tax on U.S. consumers. But at best, the tariffs he envisions would raise only $2.8 trillion over 10 years, according to the Tax Policy Center.
Tariffs also lead to other negative effects. The Federal Reserve could raise interest rates to offset price increases and quell inflation, and US corporate profits would fall along with household incomes.
Lower projected corporate and individual tax revenues would offset nearly $1 trillion of increased tariff revenue, according to estimates.
The tariffs will cause prices to rise by an estimated 2.3% in the short-run, costing the average U.S. household about $3,800 and lower income households about $1,700. Trump’s second round of cuts, announced Apr. 2, would had $2,100 and $980 respectively to those amounts, according to the Yale analysis.
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Since the Trump tariffs caused a sharp reaction in world markets, the administration has shifted its rationale. It now says the tariffs represent a bargaining chip to lower foreign tariffs against U.S. goods.
But now that leaves unanswered how the administration plans to pay for promised tax cuts.
On the fiscal front, Trump promised no taxes on tips, Social Security payments or overtime pay, while car loan interest and state and local taxes would be deductible.
He also promised an across-the-board income tax cut for taxpayers, new cuts in the corporate tax rate and extension of Trump’s 2017 corporate tax cut.
Social Security and Medicare would be off limits including any increase in the retirement age.
In all, they would cost as much as $9.75 trillion over ten years, according to analysts.
Most of that cost will be layered on top the current $35 trillion national debt, which Trump increased by 25 percent during his first administration.
Between the tariff impacts and the inconsistency in Trump’s stated goals, the nation is headed for rough sledding ahead and U.S. citizens will bear the brunt for years to come.
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