Experts Discuss Why Donald Trump May Intentionally Drop the Market

Trump's economic policies have created significant instability over the past few months, stifling the stock market and shaking investor confidence. However, as the United States faces a substantial maturing debt of 7 trillion dollars and high yields, theorists are wondering whether Trump's tariffs could lead the Federal Reserve to lower interest rates. BeInCrypto spoke with Erwin Voloder, Head of Policy at the European Blockchain Association, and Vincent Liu, Investment Director at Kronos Research, to understand why Trump might use tariff threats to boost American consumer purchasing power. However, they warn that the risks are much greater than the benefits. The dilemma of U.S. debt The United States currently has a national debt of $36.2 trillion, the highest among countries in the world. This figure reflects the total amount of money that the federal government has borrowed to fund past expenditures. In other words, the United States owes a lot of money to investors both domestically and internationally. They will also have to repay some loans in the coming months.

When the government borrows money, they issue debt securities, such as treasury bills, bonds, and notes. These securities have specific maturity dates. Before this maturity date, the government must repay the principal amount borrowed. In the next six months, the United States will have to repay about 7 trillion dollars of debt. The government has two options: Either use available funds to pay off maturing debt or refinance. If the federal government chooses the latter option, they must borrow more to pay off current debt, further increasing the ballooning national debt. Since the United States has a history of choosing the refinancing option, direct debt repayment seems unlikely. However, high interest rates are currently complicating refinancing. High interest rates: A barrier to debt refinancing Refinancing allows the government to roll over debt, meaning it does not need to find money from existing funds to pay off old debts immediately. Instead, the government can issue new debt to pay off the old debt. However, the Federal Reserve's decision on interest rates significantly affects the federal government's ability to refinance debt. This week, the Federal Reserve announced it will keep interest rates at a range of 4.25% to 4.50%. The Federal Reserve has continuously raised the percentage above the benchmark of 4% since 2022 to control inflation. Although this is good news for investors expecting higher returns from their bonds, it is not a good outlook for the federal government. If new debt is issued to cover old debt, the government will have to pay more interest, which will put pressure on the federal budget. "In fact, even an interest rate higher than 1% on 7 trillion dollars is equivalent to 70 billion dollars in interest costs each year. A 2% spread would add 140 billion dollars more each year – a real amount that could fund programs or reduce deficits," Voloder told BeInCrypto, adding that "the United States has a national debt exceeding 36 trillion dollars. Higher refinancing rates exacerbate the debt problem, as more taxes must be allocated to pay interest, creating a vicious cycle of larger deficits and debt." This scenario shows that the United States needs to be cautious in implementing its monetary policies. With the debt repayment deadline approaching and concerns about inflation, the government should embrace stability rather than uncertainty. However, the Trump administration seems to be doing the opposite by threatening neighboring countries with high tariffs. The main question is: Why? Trump's tariff policy: Strategy or gamble? During his first and second terms in office, Trump continuously considered tariff policies targeting neighboring countries Canada and Mexico and his long-time rival China. In his most recent inauguration speech, Trump reaffirmed his commitment to this trade policy, stating it would bring money back to the United States. "I will immediately begin restructuring our trade system to protect workers and American families. Instead of taxing our citizens to enrich other countries, we will tax and impose tariffs on foreign nations to enrich our citizens. For this purpose, we are establishing the Department of Revenue to collect all kinds of tariffs, duties, and revenues. There will be a massive influx of money into our Treasury, coming from foreign sources," Trump said. However, the subsequent instability regarding trade relations and retaliatory actions from the affected countries has inevitably created instability, causing investors to react strongly to this news. At the beginning of this month, the market experienced a widespread sell-off due to concerns about Trump's tariff policy. This led to a sharp decline in U.S. stocks, a decrease in Bitcoin value, and the Wall Street fear index soaring to its highest level of the year. A similar scenario also occurred during Trump's first presidential term. Liu said: "Deliberately increasing economic instability through tariffs will pose significant risks: the market may overreact, plummet, and increase the percentage rate leading to a recession, as seen in the downturn during the trade war in 2018"

Whenever the traditional financial market is affected, cryptocurrencies are also affected. Voloder stated: "In the short term, Trump's America First manufacturing economy means that the digital asset market must struggle with higher volatility and more unpredictable policy factors. Cryptocurrency is not isolated from macro trends and is increasingly trading in parallel with tech stocks and risk conditions." While some people view Trump's measures as reckless and erratic, others see them as calculated. Some analysts have considered these policies as a means for the Federal Reserve to lower interest rates. Does Trump use tariffs to influence the Federal Reserve? In a recent video, Anthony Pompliano, CEO of Professional Capital Management, argued that Trump is trying to lower Treasury bond yields by deliberately creating economic instability. Tariffs can disrupt trade relationships by acting as a tax on imported goods, thus increasing the cost of goods for consumers and businesses. Because these policies are often a major source of economic instability, they can create a sense of uncertainty in the economy. The evidence is the strong reaction of the market to Trump's announcement about tariffs; investors panicked due to fears of an impending economic recession or downturn. As a result, businesses may reduce risky investments while consumers limit spending in preparation for a surge in prices. Investor habits can also change. With less confidence in the volatile stock market, investors may shift from stocks to bonds in search of safe-haven assets. U.S. Treasury bonds are considered one of the safest investments in the world. In turn, the flight to safety increases the demand for them. When the demand for bonds increases, bond prices rise. This chain of events indicates that investors are preparing for prolonged economic instability. In response, the Federal Reserve may lean towards lowering interest rates more. Trump achieved this during his first presidential term. "The theory suggests that tariffs can enhance demand for bonds driven by the fear of market upheaval. Uncertainty surrounding tariffs can trigger stock sell-offs, boosting Treasuries and lowering yields to facilitate the $7 trillion in U.S. debt refinancing evidenced in 2018, when trade shocks cut yields from 3.2% to 2.7%. However, with inflation at 3-4% and yields at 4.8%, success is not guaranteed. This would require tariffs to be reliable enough to adjust the market without increasing inflation," Liu told BeInCrypto. If the Federal Reserve lowers interest rates, Trump could buy new debt at a lower price to pay off maturing debt. This plan could also benefit the average consumer in the U.S. to some extent. Potential benefits The yield on treasury bonds is the benchmark for many other interest rates in the economy. Therefore, if Trump's trade policy causes treasury bond yields to decrease, this could have a trickle-down effect. The Federal Reserve may lower interest rates for other loans, such as mortgages, auto loans, and student loans. In return, interest rates on loans will decrease and disposable income will increase. As a result, the average American citizen can contribute to overall economic growth with greater purchasing power. "For an American family, reducing mortgage rates can mean significant savings on monthly payments for a new home or refinancing. Businesses may find it easier to finance expansion or hire new staff if they can borrow at a 3% interest rate instead of 6%. Theoretically, greater access to low-interest loans can stimulate economic activity on Main Street, aligning with Trump’s goal of promoting growth," Voloder explained.

However, this theory relies on very specific reactions from investors, which is not guaranteed. Liu said: "This is a high-risk gamble with a very small margin of successful error depending on various economic factors" Ultimately, the risks are much greater than the potential benefits. In fact, the consequences can be very serious. Inflation and market instability The theory of intentionally causing market instability revolves around the fact that the Federal Reserve will lower interest rates. However, the Fed intentionally keeps interest rates high to curb inflation. A trade war threatens to drive up inflation. Liu said: "The yield could reach 5% if inflation spikes rather than decreases, and the ability to maintain high interest rates by [Jerome] Powell will gradually undermine the plan." Regarding that point, Voloder added: "If the plan is ineffective and yields do not decrease sufficiently, the United States may have to refinance at high interest rates and a weaker economy, which would be the worst outcome." Meanwhile, as tariffs directly increase the costs of imported goods, these costs are often passed on to consumers. This scenario results in higher prices for many types of products and causes inflationary pressure, eroding purchasing power and destabilizing the economy. Voloder said: "Inflation stemming from tariffs means that every dollar earned will buy less. This hidden tax hurts low-income families the most, as they spend a larger portion of their income on affected essential goods." In this context, the Federal Reserve may raise Treasury bond interest rates. This scenario could also seriously impact the health of the U.S. job market. Impact on employment and consumer confidence Economic instability from tariffs may deter businesses from continuing to invest in the United States. In this context, companies may delay or cancel expansion plans, reduce hiring, and cut back on research and development projects. Voloder said: "The impact on employment is a major concern. Deliberately cooling the economy to force interest rates down is essentially courting a higher unemployment rate. If the market declines and business confidence weakens, companies typically respond by cutting back on hiring or even laying off workers." Price increases and market fluctuations can also undermine consumer confidence. This move will reduce consumer spending, which is the main driver of economic growth in general. "Americans are facing higher prices and eroded purchasing power as a direct result of tariffs and instability. Tariffs on everyday goods – from groceries to electronics – function like a sales tax that consumers ultimately have to pay. These costs impact consumers at a time when wage growth may stagnate if the economy slows down. Therefore, any cash saved from lower interest payments may be offset by rising consumer prices and potentially higher taxes in the future," Voloder told BeInCrypto.

However, the consequences are not limited to the United States. As with any trade dispute, countries will feel inclined to respond - and recent weeks have proven that they have done so. Trade war and diplomatic tensions Both countries reacted strongly when Trump imposed a 25% tariff on imported products into the United States from Canada and Mexico. Canadian Prime Minister Justin Trudeau called this trade policy "very stupid". He then announced retaliatory tariffs on U.S. exports and stated that a trade war would have consequences for both countries. Mexican President Claudia Sheinbaum also did the same. In response to Trump's 20% tariff on imports from China, Beijing imposed retaliatory tariffs of up to 15% on many important agricultural products from the United States, including beef, chicken, pork, and soybeans. In addition, ten American companies currently face restrictions in China after being placed on the country's "entity list of trustworthy entities." This list prevents them from engaging in import and export trade with China and limits their ability to make new investments there. The Chinese embassy in the United States also stated that they are not afraid of threats.

Tariffs will also have consequences that go beyond just harming international relations. The disruption of the global supply chain International trade wars can disrupt global supply chains and harm export businesses. "From a macro perspective, there are also fears of a global escalation of trade wars, which could have a boomerang effect that reduces exports and production in the United States, meaning U.S. farmers lose export markets or factories face higher input costs. This global retaliation could amplify the recession and also strain diplomatic relations. Additionally, if international investors see U.S. policies as chaotic, they may reduce investments in the U.S. in the long term," Voloder told BeinCrypto. Inflationary pressure and economic recession may also drive people to accept digital assets. Voloder explained: "Additionally, if the United States pursues mercantilist policies that undermine the confidence of foreign creditors or weaken trust in the stability of the dollar, some investors may increase their allocation to alternative stores of value such as gold or Bitcoin as a hedge against currency or debt crises." Consumers may face shortages of essential goods, while businesses will see an increase in production costs. Those businesses that rely on imported materials and components will be particularly affected. High-risk strategy: Is it worth it? The theory that tariffs can reduce yields by creating instability is an extremely risky strategy that has the potential to cause harm. The negative impacts of tariffs, such as inflation, trade wars, and economic instability, far outweigh the potential short-term benefits. As products become more expensive and companies cut their workforce to balance their balance sheets, the average consumer in the U.S. will bear the brunt of the consequences.