via Peter Schiff:
During the months leading up to the 2008 GFC, the government and mainstream financial media remained clueless about what was obviously coming. They are making the same mistake again.
Tariffs mean fewer goods will come into the country, and fewer dollars will go out. More money chasing fewer goods means higher domestic prices. This is an economic certainty. As import prices rise sharply, demand will increase for domestically produced goods, sending those prices higher too. Meanwhile, lower trade deficits will result in fewer dollars being recycled into U.S. bonds, sending long-term interest rates higher.
Higher consumer prices and long-term interest rates will combine to weaken the U.S. economy, increasing the size of federal budget deficits. Middle-class tax cuts will worsen the problem by not only adding to deficit spending but by directly fueling demand for a diminishing supply of goods.
The Fed will respond to this “unexpected” economic weakness with rate cuts, ignoring the surge in consumer prices as a transitory effect of tariffs. They will also incorrectly assume that lower inflation will be the silver lining to the recession cloud.
All of this will weaken the dollar, compounding the effects of tariffs by making import prices rise even higher. Meanwhile, a weaker dollar and larger budget deficits will put even more upward pressure on long-term interest rates, which the Fed will try to offset with a return to QE, throwing gasoline on an already burning inflation fire. This will not be 1970s-style stagflation. It will be something much worse.