Using Tariffs to Reduce the Deficit? Not So Fast

After posturing to use tariffs to eliminate income tax, the Trump administration has now shifted to a narrative that they’ll pay off deficits. Both promises are hollow. 

Deficits as massive and persistent as ours demand massive Treasury issuance. That means markets have to absorb ever-larger supply, pushing yields higher if demand fails to keep up. A supply-demand mismatch is bad news for liquidity in any market, and it elevates term-premium demands from investors. Liquidity is also influenced by the capacity of dealers to intermediate. If the financial institutions acting as intermediaries don’t have the balance sheet space to be functional middlemen between buyers and sellers, things fall apart.

Sell today’s Treasury rally. Powell’s pivot is bearish for bonds, as it wil lead to a weaker dollar and higher inflation. As a result, demand for Treasuries will fall just as supply rises thanks to soaring budget deficits. To control long-term rates, the Fed will revert to QE.

— Peter Schiff (@PeterSchiff) August 22, 2025