@ Cykros
2025-04-06 15:56:23
### Libertarian tariff controversy
GM. First long form note, so let's see how this goes.
Reading a lot of Libertarians complaining about tariffs on twitter this morning. And I get it — they're a tax on imports, and furthermore, a barrier to free trade. Not exactly something libertarians are fans of, lowercase "l" or doctrinaire capital "L" party members.
But there's something I've been pointing out to many. That is: being the issuer of the global reserve currency (which itself relies upon inflation, and thus is *also* a tax) necessarily creates trade deficits. I'm preaching to the choir on this one a bit I expect, but it's a key reason as to why *given* that we have this backdrop, and we can't simply overnight completely change the monetary system, it is not an unreasonable stance for a libertarian leaning person to hold the idea that using tariffs as a way to offset this trade deficit *while* moving away from a fiat currency is actually a sound idea. There are plenty of places for devils to hide in details of course, and by all means, I'm not a Trumpist, but speaking generally, this seems like a sound stance. It's all well and good to have an idea of where you want to go, but if you want to actually get there, charting a course is often harder than picking a destination.
### Now, as for what I think we can expect
Tariffs will raise consumer prices. It's not inflation, because it's not about an expansion of the money supply, but it's also true that the cost has to be born by someone. However, tariffs will also decrease imports. Which will reduce dollar outflows into foreign nations, where, thanks to the mechanics of the Eurodollar system, will create a panic. The reality is, dollars outside of the US are *not* something that is created by the Federal Reserve, because foreign banks *can't* hold reserves. Rather, Eurodollar deposits are loaned into existence by private banks, and are generally settled by a variety of creative means, including offsetting liabilities, and sale of assets — most commonly, US Treasury securities. This means they *need* dollars to flow — it's not about getting wealthier, but rather, about covering their debts that they simply have no way to bail out. Reduced dollar outflow is a reduction in supply; as such, the price of the dollar goes up (or at least, goes down slower). That is, there's deflation, or at least disinflation. The end result is, those prices that went up thanks to tariffs start going back down to American consumers.
Meanwhile, dollars being more expensive than they were when liabilities were taken on likely leads to recessionary conditions — both domestically and internationally. However, companies importing goods into the US that can onshore their production will seek to do so, which will have an effect of offsetting that recessionary impulse domestically. In effect, "exporting" the recession.
### As for what this means for the national debt
The national debt of course has been a sore point given that interest expense has been astronomical, and rolling the debt has been necessary thanks to Yellen's failure to term it out. Foreign parties will of course *want* more treasury assets, as a way to cover their dollar liabilities amid diminished dollar flow, but it doesn't take a doctorate to know that desires and needs are not the same thing as increased aggregate demand. Some may have good enough credit to borrow more dollars from American banks, and thus, buy treasuries, which would of course be good for bringing down interest rates, but I'm not sure I'd bet too much on that horse, especially amid an environment where recession is being exported. There is a fair bit of exposure to US equities abroad that may rotate into American sovereign debt, though the time to do that was probably *before* 10% of the value got evaporated off of that over the past week.
There may be increased domestic demand for treasuries, as all of this on-shoring means a lot of running in place, so to speak, by companies pivoting to domestic production, and thus under performance by equities. This is a place I'd be curious about the overall impact on the Treasury market, and am certainly not qualified to weigh in on it. But I'd *love* to see some sober analysis by those who recognize it as worth taking a closer look at.
Then there's the Fed, which is almost an afterthought for me, given that they're simply **not** going to do the levels of QE that it would take to actually bring interest rates on long term debt down, but it is worth pointing out that amid the churning deflation there will likely be at least a few rate cuts that come into play. Note, however, that rate cuts only help so much, as they directly affect the immediate end of the curve, with very little impact on the longer end where it's needed, regardless of what Greenspan would have you believe about "series of forward rates." That said, as inflation expectations come down, it may be that longer tenor rates come do down as well, because inflation expectations are an actual driver of rates, rather than Fed Funds policy rates, but that may take longer than the Treasury can wait for. That said, US10Y rates are already down 26 bps in a week, so things do seem to be starting out in the right direction. We'll see if that holds once issuance starts ramping up.
### Where this all leaves us
There seem to me to be too many variables to really predict how this all plays out on the treasury market, which is hard enough to predict given that it's the largest asset class in the world. I'm inclined to think Bessent knows what he's doing (and that Trump is at least smart enough to listen to him, if not game it all out himself). What's clear is that he's trying *something* to address the bigger issue rather than simply kick the can down the road, which is more than we can say of policymakers for at least the past half century, and likely longer.
With any luck all of this turbulence will drive further adoption by Bitcoin, as foreign nations need to resort to something to get them out of their crushing dollar denominated liabilities. At the end of the day, being free of *both* taxes on imports *and* "invisible" taxes by deflation should be something we can all cheer for. In the meantime, hopefully this article has given a bit of perspective on what developments will be of interest in the bond market as this fourth turning plays out.
#Finance #Tariffs #Bitcoin #NationalDebt #Libertarianism #FreeTrade