Using Tariffs to Reduce the Deficit? Not So Fast | SchiffGold

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

The U.S. Treasury market was once considered a bedrock of global finance, but it’s made of papier mache. Traditionally viewed worldwide as ultra-safe assets, Treasuries provide liquidity and act as benchmarks for interest rates, helping fund US government operations and providing an anchor for our relative financial stability. When it spends more than it makes, the government can issue Treasuries to borrow the difference. And now, the reputation of Treasuries as a safe haven is increasingly being called into question.

Requirements like the Supplementary Leverage Ratio (SLR) tightened the ability of dealers to stash Treasuries and provide liquidity for the market. The SLR requires large banks to hold more capital against their total assets. Since Treasuries count toward those assets, banks can’t load up on them as freely as they once could. 

Federal debt has soared beyond $37 trillion, adding roughly $1 trillion every five months, while debt held by the public stands near $29.6 trillion. Treasury issuance is surging to fund out of control deficits, fueling concerns about the liquidity of the Treasury market. Even just interest payments on the debt will cost American taxpayers over $1 trillion dollars this year alone. Rosy claims by Trump and Treasury Secretary Bessent that tariffs can solve the debt burden are both over-optimistic and also totally contradict their former promise: using tariffs to eliminate income tax. 

US Government Debt, 10-Year Chart

It seems that, just like the illusion of American prosperity, promises to meaningfully tackling deficits or eliminating taxes using tariff revenues were made of paper all along. While rosy predictions claim the debt could be tamed by external revenue, the US will never come anywhere close to paying its debt back.

One way or another, all roads lead to inflation. Give a human being the authority to create money, and you can rest assured that they’ll find a justification to create too much of it. 

During the March 2020 “dash for cash,” institutional holders sold Treasuries en masse. Dealer balance sheets couldn’t keep pace. The Federal Reserve intervened with nearly $1 trillion in Treasury purchases.

In other words, the US printed money to “invest” in its own debt, at the expense to all across the world who receive dollars for goods and services. It’s a trick we’ve seen before, and Keynesians say it doesn’t matter because “debt is money we owe to ourselves, as Paul Krugman famously wrote in 2018:

“…a rise in debt isn’t an indication that we’re living beyond our means, because as Fatas puts it, one person’s debt is another person’s asset; or as I equivalently put it, debt is money we owe to ourselves…”

Before all the deficit reduction talk, Trump hyped a return to pre-1913 tariff-only revenue where the US would abolish income and payroll taxes entirely, which is laughable in an economy as huge and global as the modern-day US. Tariffs would allegedly fund everything from a sovereign wealth fund to childcare. But the U.S. collected roughly $2.4 trillion in income taxes in 2024, whereas tariffs delivered only around $100 billion.

Central planning through tariffs and monetary interventions compound the issues they aim to fix, like imbalanced markets, out of control inflation, and fiscal instability. The Treasury market is strained under swelling debt, structural regulation, and leveraged fragility. 

Pretending that tariff revenues can eliminate the debt or abolish income tax isn’t a solution, and no amount of carrot dangling about deficit and tax reduction will allow us to avoid the economic consequences of the game.

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