07/22/2025
Are increased tariffs going to shut down world trade and plunge us into another Great Depression? Many economists think so and they use the below pictured "Kindleberger Spiral" as proof of that. This will take a minute to unpack.
First, let's talk about Trade and Deficits. The US is currently $37 TRILLION in debt. How does debt happen? Just like what happens when you use your credit card to buy more things than your paycheck can pay for, the balance on the card goes up and up while you pay massive amounts of interest on that debt - that is how the US debt grew so high. We "printed money" (our credit card) to buy stuff that our "paychecks" (Taxes) couldn't pay for. The current debt and future trajectory is unsustainable and something must be done soon to bring it under control.
When we buy imported goods, some of those "printed" dollars go over to the exporting country. In a healthy trade market, that country would then buy US goods and send those dollars back to us. If things are in balance, both countries benefit from this free exchange of goods. But when a country that we are buying goods from puts up barriers to US companies' ability to sell our goods to them (usually in the form of tariffs), our dollars end up overseas and they don't come back - so we have to print more, causing our "credit card balance" to keep going up and up.
The Kindleberger Spiral began in 1930 by actions taken during the Herbert Hoover administration. Enter the "Smoot Hawley Tariff Act" First intending to protect farmers from unfair foreign competition - where governments were subsidizing their farmers so they could sell their products to US buyers much cheaper than US farmers could produce them, and these governments got the money needed for these subsidies by charging US products super high tariffs. So Hoover raised tariffs on foreign goods to level the playing field. Unfortunately, the foreign governments raised their tariffs even higher. The US put tariffs on many other goods as well, and the same thing happened - and in short - it didn't work and world trade activity spiraled down and down and down, leading us into the Great Depression.
Is that where we are headed now with all these tariffs? Maybe, but there are differences. It is important to again remember, something needs to be done to slow down the mounting deficit. We have no choice - get that under control or we're done as a nation. What Trump is doing that is different from Hoover is he is targeting COUNTRIES and not specific GOODS. Hoover put tariffs on all wheat, for example, regardless of which country it came from. Trump is putting tariffs on a country vs country basis - if a country allows US goods in to their country, we'll buy their goods. If another country puts up barriers, we won't buy their goods. That's called marketplace competition, and will allow goods to still come in while opening up more markets to US producers.
One significant barrier that will cause this plan to fail is our current Federal Reserve policies. This is why Trump is putting so much pressure on Jerome Powell. In order for US producers to sell more goods overseas and fill the void left by foreign products not coming in because of the tariffs, our US producers need capital at affordable rates. To build new production capacity businesses need financing they can afford and these current interest rates won't provide that.
It is time to drop interest rates NOW!!! That will send a signal to these foreign governments that they need to open up their markets and drop their trade barriers. Lower rates will spur economic activity and create massive amounts of new high-paying jobs. That creates tax revenue that can reduce the deficit. That new economic activity and high-paying jobs are NOT handouts to billionaires - it is how hard-working everyday folks become billionaires.
