The news cycle has been so erratic since Trump’s inauguration. I have tended to avoid topical matters, as I don’t want to spend hours writing posts about tariffs or about the Middle East or China, only for my efforts to be wasted when a new development breaks.
But with the stock market crashing due to fears of Trump’s newly-enacted reciprocal worldwide tariffs, the matter cannot be avoided. In spite of the hype and the market crash, here are my thoughts for why the tariffs are not a big deal.
The Milton-Friedman types that you commonly see on Twitter always invoke their tired arguments about how tariffs are bad for the economy. This may be true to some extent, but any economic impact will be minimal. Consumer spending will remain intact against the predictions otherwise. The US is not like an economics textbook or a Milton Friedman YouTube video. The economy is so big and consumers have so much discretionary income, that the tariffs amount to noise or a rounding error. I agree though that the tariffs are much worse for the affected smaller countries than the US. Emerging markets are much more dependent on the US than the converse.
Consumers don’t care if prices go up a bit due to tariffs. Prices surged from 2020-2024, yet that did not stop consumers from emptying their wallets. The stores are flooded with patrons.
McDonald’s stock keeps going up, again as I correctly predicted despite fears over GLP-1 drugs hurting business. I correctly predicted in 2023 that these drugs would have no negative effect on the company, and same for Walmart stock, which also surged. Moreover, McDonald’s and other restaurants have hiked prices considerably since 2020, so much so it has become news in and of itself:
…yet this has not hurt sales:
The YouTube video “Food Theory: Why Did McDonald’s Get SO Expensive?” in the screenshot above got over 1.5 million in just the past eight months alone, since it was uploaded. So people are abundantly aware of the price increases. But as much as consumers may complain about prices, they cannot stop eating out. Or in other words, revealed vs. stated preferences. If price was the main concern, Uber Eats and other delivery apps would not be thriving as much as they are now.
In the ’90s and earlier, fast food was mostly for the lower-middle-class, and the expectation was prices would remain low. But post-Covid, fast food has become a luxury/premium experience for the upper-middle class, not just low-income people. Along with Chipole and Wingstop, the notion of spending $40-60 for 2 on lunch is an afterthought, whereas this was inconceivable as recently as a decade ago. So I am skeptical that tariffs will be the breaking point or too much to bear, when consumers have long been accustomed to paying more.
For these reasons, the market selloff presents a good buying opportunity. In the unlikely event the situation worsens, there are a few options.
Trump can simply backtrack, and then use the selloff as an excuse to do a 180 by passing stimulus. The federal reserve may also respond by lowering interest rates if the anticipated inflation fails to arrive. It would be unlikely for tariffs to both cripple the US economy and be inflationary. Treasury bonds have actually rallied a bit since early February, likely in anticipation of deflation and interest rate cuts in spite of tariffs. Historically, inflationary recessions are very rare, the last occurrence being in 1980. A more drastic option if things get bad enough is Congress can pass a 2/3 vote to override Trump.