Navigating Economic Uncertainty: The Impact of Dollar Valuation and Fiscal Policies on Inflation and Growth
by Daniel Brouse
February 15, 2025
I) Tariffs and the Dollar
The imposition and threats of tariffs by the U.S. government have led to fluctuations in the value of the U.S. dollar relative to other currencies. Initially, the announcement of tariffs often results in a strengthening of the dollar, as investors perceive the U.S. as a safe haven amid global trade uncertainties. For instance, following recent tariff threats, the dollar gained against other currencies, with the euro nearing a two-year low.
However, over time, the economic repercussions of trade wars, such as reduced exports and potential slowdowns in economic growth, can lead to a weakening of the dollar. In early 2025, despite initial expectations of a stronger dollar due to tariffs and tax cuts, the dollar weakened as investors grew concerned about the negative impact of trade conflicts on the U.S. economy.
2) Inflation
The value of the U.S. dollar directly influences your purchasing power, particularly through its impact on inflation. When the dollar weakens, imported goods become more expensive, leading to higher consumer prices. This effect is amplified when tariffs are imposed on imports, further increasing costs and potentially causing a significant rise in inflation.
Economists are currently facing challenges in predicting future inflation trends due to several inflationary fiscal policies, including tariffs, restricted immigration, and a growing budget deficit. As of 2025, the United States is projected to spend approximately $952 billion on interest payments for the national debt, reflecting an 8% increase from the previous year. This substantial interest burden contributes to higher overall spending, which can exacerbate inflationary pressures.
Conversely, there are emerging deflationary pressures. In January 2025, retail sales experienced a 0.9% decline, the most significant drop in nearly two years. This decrease in consumer spending suggests reduced demand, which can lead to deflation. Additionally, ongoing trade tensions and tariffs are expected to slow economic growth and reduce the Gross Domestic Product (GDP), further contributing to deflationary trends.
3) Uncertainty
As the adage goes, “The only certainty is that nothing is certain.” In the current economic climate, businesses and markets are grappling with significant chaos and uncertainty. The unpredictability of policy changes, such as tariffs and immigration restrictions, has led to cautious business investments and hiring practices. This environment of instability poses challenges for companies attempting to navigate the fluctuating economic landscape.
4) The Future
As of January 2025, the United States has spent approximately $392 billion on interest payments for the national debt, accounting for 16% of total federal spending in fiscal year 2025.
Projections indicate that net interest spending will exceed $1 trillion in the next fiscal year.
If inflation rises, it could lead to increased interest rates, further escalating these interest payments. Notably, interest on the national debt is categorized separately from mandatory and discretionary spending, and its growth could significantly impact the federal budget.
The escalating national debt and its associated interest payments could become unsustainable if current fiscal policies remain unchanged. In fiscal year 2024, the United States spent $881 billion on interest payments for the national debt, surpassing most other federal budget components. Projections indicate that net interest payments will exceed $1 trillion in fiscal year 2026 and total $13.8 trillion over the next decade. This trajectory suggests that interest costs will consume an increasingly significant portion of the federal budget, potentially outpacing essential programs and services.
The Government Accountability Office (GAO) warns that this fiscal outlook is unsustainable and could lead to serious economic, security, and social challenges if not addressed.
Similarly, the Congressional Budget Office (CBO) projects that, within five years, interest payments on the debt will exceed the national defense budget.
Addressing this issue would require significant policy changes, including reducing budget deficits through spending cuts, revenue increases, or a combination of both. Without such measures, the national debt and its associated interest payments are on a path to becoming increasingly unmanageable, posing substantial risks to the nation’s economic stability.