Investing is rarely straightforward. And with an unpredictable individual at the helm of the world’s most influential country, it certainly doesn’t get any easier. However, to consistently dismiss the man as ‘dumb’ as a coping strategy is far too simplistic. You can say many (unpleasant) things about Donald Trump, but ‘dumb’ is not necessarily one of them.
Below is a chart from Deutsche Bank showing revenues from import tariffs. While this should not come as a surprise, I suspect not everyone has this image firmly in mind.
After the last round of ‘Trump tariffs,’ the U.S. Treasury saw a significant influx of revenue, primarily from levies on Chinese goods. Trump is well aware of this, which explains why he frequently insists that other countries, which he claims buy almost nothing from the United States, should pay hefty amounts. From the perspective of the U.S. Treasury, this approach works remarkably well.
A different perspective
This is usually the moment when critics and economists begin their arguments about how damaging these import tariffs are for American consumers. And, of course, there is some truth to that. Especially for goods where the United States lacks an attractive alternative, Americans often end up footing the bill. However, this does not necessarily equate to an inevitable wave of inflation, as many media outlets claim. After all, American consumers can only spend their money once.
But there is another angle that is far less frequently discussed. Virtually all major economies are grappling with explosively rising debts, necessary to compensate for a declining growth rate (due to ageing populations). This raises the question of how these debts can remain sustainable.
One of the key pillars of debt sustainability is that a sovereign nation with its own currency and the ability to levy taxes is unlikely to go bankrupt. And this is precisely where the challenge lies. In most countries, the room to raise taxes has been almost entirely exhausted. Even if they could be increased further, this would be far from sufficient to cover the enormous rise in mandatory government expenditures.
In the United States, these increasing expenditures are primarily directed towards healthcare and social services, which are spiralling out of control. Add to that the rising defence budget and interest payments, and it becomes clear why a structural budget deficit of ‘just’ 3 percent of GDP is simply unrealistic.
A new revenue source
None of this is lost on Trump. As a staunch advocate of lower taxes, he knows that the United States will not close the budget deficit with domestic tax revenues alone. So, he looks elsewhere. By imposing massive import tariffs on foreign goods, he can also reduce the deficit. And as the Deutsche Bank chart illustrates, this can have a significant impact when applied on a large scale.
This is precisely what the United States, as the world’s largest economy, can do—whereas smaller nations like Panama, Mexico, and even Canada cannot.
A new fund
But that’s not the whole story. It is no coincidence that Trump, at the very moment he implemented the first round of import tariffs, also signed an executive order to establish a ‘Sovereign Wealth Fund.’
This aligns perfectly with Trump’s second major priority: maintaining the U.S. dollar as the world’s reserve currency. As he recently stated, any country seeking to move away from the dollar can expect a 100 percent import tariff. The result? You guessed it—a U.S. Treasury brimming with funds.
Such an enormous state fund—requiring at least 500 billion dollar to play in the Sovereign Wealth Fund arena—would serve as an additional defence for the dollar. How ideal would it be to have others fill your coffers while simultaneously forcing them to transact exclusively in your currency?
Diversification
Finally, and this is rarely discussed, the big question remains: where will this Sovereign Wealth Fund invest? A quick glance at the Bitcoin chart suggests that Bitcoin investors think they have the answer. And frankly, I wouldn’t be surprised if Bitcoin does become part of the fund. TikTok also appears to be on the radar, so anything is possible.
Additionally, the fund will likely hold a significant portion of U.S. government bonds. This way, the fund and Federal Reserve Chair Jay Powell can take turns in absorbing national debt.
Whether Trump’s actions will ultimately benefit the global population is up for debate. But dismissing his policies as ‘dumb’ is overly simplistic and naive. Perhaps something for policymakers in Brussels to consider, as they search in vain for a magical solution to restore competitiveness—while the rest of the world runs off with the spoils.
Jeroen Blokland analyses striking, current financial market and macroeconomic charts in his newsletter The Market Routine. He is also the manager of the Blokland Smart Multi-Asset Fund, which invests in stocks, gold, and Bitcoin.