The Trump Trade

by Daniel Brouse
October 24, 2024

Why have interest rates been going up after the Fed cut rates? Because investors concur that Trump’s economic polices will be harmful to the economy, drive up inflation, and explode the national debt. Investors have been making “Trump Trades” based on this concern. Unfortunately, a large number of investors — approximately 75% — currently expect that Donald Trump will win the election.

One reason many believe Trump’s economic policies, particularly his tariffs, would be detrimental to the economy is their potential to drive up inflation. Tariffs on imported goods increase costs for businesses and consumers, as companies pass on higher import taxes in the form of price hikes. This can stoke inflation, especially if the targeted imports include essential goods or raw materials (like steel and aluminum). Tariffs also raise uncertainty, disrupt global supply chains, and result in retaliatory tariffs from other countries, further driving up costs for U.S. exports.

Another major concern is the national debt. Analysis of Trump’s economic plan suggests that his policies could increase the national debt by an additional $10-20 trillion over the next decade. This is largely due to a combination of aggressive tax cuts, which reduce federal revenue, and increased government spending, particularly on military and infrastructure projects. While tax cuts can stimulate short-term economic growth, they often fail to generate enough revenue to offset the loss, resulting in long-term debt accumulation.
Moreover, Trump’s tariffs and trade wars further burden the economy by reducing international trade, increasing costs for businesses, and weakening the competitiveness of U.S. industries abroad. These trade disruptions can also negatively impact GDP growth, limiting the government’s ability to manage the national debt. With interest payments on the debt projected to rise significantly in the coming years. In fiscal year 2024, the U.S. government is projected to pay approximately $892 billion in interest on the national debt. This figure is expected to rise significantly in the coming years, reaching $1 trillion in 2025 and $1.7 trillion by 2034. Over the next decade, total net interest payments are estimated to amount to $12.9 trillion. These figures do not account for potential changes in debt repayments that could result from a Trump presidency​

The economic strain from Trump’s policies could push the U.S. into an unsustainable fiscal situation.

For historical reference see “The Great Depression.” Tariffs, especially the Smoot-Hawley Tariff of 1930, played a significant role in deepening the Great Depression.

Agricultural Sector Collapse: U.S. farmers were particularly vulnerable to tariffs. They had benefited from international markets, especially after World War I, when European agriculture had been disrupted. The Smoot-Hawley Tariff and the subsequent retaliatory tariffs drastically reduced demand for American agricultural products abroad, leading to falling prices and farm bankruptcies. This deepened rural poverty and unemployment.

Investor and Consumer Confidence: The tariff policy also hurt investor and consumer confidence. Businesses feared the impacts of the trade war, leading them to cut back on production and investment. Consumers, already cautious due to the economic downturn, faced rising prices on imported goods. This further depressed consumption and business activity, worsening the economic contraction.

Business & Economics

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