HAT Manifesto Part 1/3 - Rubric Cube - 250406 edit

 

How Tariffs Might Not Cause Inflation
In recent commentary “President Trump is all about growth,”
economist Larry Kudlow said, “tariffs don’t cause inflation, excess federal government spending and Fed money printing cause inflation.”
If this is true, why not put a 50% tariff on all imports?
ChatGPT:
The Claim:
“Tariffs don’t cause inflation, excess federal spending and Fed money printing cause inflation.”
True in part:
He’s referencing a monetarist view (Milton Friedman-style) that inflation is a monetary phenomenon—driven by too much money chasing too few goods.
Under that view, tariffs might shift prices around (causing some to rise and others to fall), but they don’t inherently drive overall inflation unless the money supply expands in response.
So, why not 50% tariffs on all imports.
Because while tariffs don’t necessarily cause inflation, they do cause real economic harm in several other ways:
…
Economic Problems with Across-the-Board 50% Tariffs, summary table:
Concern >> Explanation
1. Consumer Prices Rise (even if not inflationary in monetary terms) >
Tariffs raise the cost of imported goods but not of domestic-made prices and may even lower them.
2. Input Costs for U.S. Producers Go Up > Many U.S. firms rely on imported parts, materials, and machinery. A 50% tariff would raise costs, hurt competitiveness, and reduce productivity.
3. Retaliation > Other countries would retaliate with their own tariffs—hurting U.S. exporters (especially agriculture, manufacturing, and tech).
4. Trade Wars Hurt Growth > Global trade contracts. Investment falls. Firms delay expansion. Historical examples (e.g., Smoot-Hawley) show how this can deepen downturns.
5. Deadweight Loss > Tariffs cause efficiency losses—resources get misallocated. Domestic producers are shielded from competition, innovation slows, and consumers pay more for less.
6. No Guarantee of Reduced Imports > Even with 50% tariffs, Americans may still buy imports—just at higher prices. This leaves them with less money to spend on domestic-made goods driving down the prices of these.
That means tariff revenues rise, but net imports might not fall much, and the trade deficit might remain.
…
So, if tariffs are raised and money supply is not increased the result will be deflation and reduced or even reversed GDP growth?
ChatGPT:
Yes—that’s correct in principle.
If tariffs are raised and the money supply is held constant or tightened, the likely result is:
Deflationary pressure and slowed (or negative) real GDP growth.
…
Let’s walk through why this happens:
Economic Chain Reaction
Step >> Effect
1. Tariffs increase > Import prices rise, raising costs for consumers and firms
2. Consumer purchasing power drops > Households pay more for basics, cut back on other spending
3. Business costs rise > Especially for industries using imported inputs (e.g. raw materials and parts)
4. Investment and hiring slow > Margins shrink, uncertainty grows
5. GDP growth slows or reverses > Due to lower consumption, investment, and net exports
6. Price pressures weaken > Less demand overall → disinflation or outright deflation
7. Unemployment may rise > Lower output means fewer workers needed
…
Role of Money Supply
If the Federal Reserve doesn’t offset the drag by increasing the money supply:
Spending decreases
GDP falls
Price levels stagnate or decline
So even if tariffs raise some prices (like foreign cars or electronics), the broader economy may tip into deflation because overall demand is decreasing.
Historical Analogy: 1930–32
Smoot-Hawley Tariffs raised import costs
The Fed reduced money supply
Result: collapse in global trade, GDP shrank, and prices fell sharply,
this was the classic case of tariffs + less money = deflation + depression
The Bottom Line
You're right:
Tariffs + No increase in money supply → ↓ Demand → ↓ GDP growth or GDP shrinks + potential deflation
So, tariffs are not inflationary—unless offset by expansionary monetary (increase of money supply) or fiscal policy (more federal government spending).
…
Brief Summary: Why Tariffs Don’t Necessarily Cause Inflation
Tariffs raise the prices of specific imported goods, but tariffs themselves don’t increase the money supply—which is the main driver of inflation.
While tariffs increase prices of imported electronics or cars, they may also:
Because of having to pay more for desired imports, reduce consumer spending on domestically made goods which are not subject to tariffs, reduced demand for these drive down prices for these
Lower total economic demand
Cause deflation
Bottom line:
Tariffs change prices, prices of imported goods higher, prices of domestic goods lower
Inflation is about money
Unless the government or Federal Reserve increases the money supply, tariffs by themselves do not necessarily cause general inflation.
…
When the Federal Reserve lowers the interest rate how does this affect the money supply?
ChatGPT:
When the Federal Reserve lowers the interest rate, it typically leads to an increase in the money supply.
Here's how it works step by step:
Mechanism: Expansionary Monetary Policy
Lowering the Federal Funds Rate:
The Fed reduces the target rate at which banks lend reserves to each other overnight.
Cheaper Borrowing for Banks:
Banks face a lower cost to borrow reserves, increasing their willingness to make loans.
More Bank Lending to Businesses and Consumers:
Lower rates encourage businesses to take out loans for investment and consumers to borrow for homes, cars, etc.
Increase in Deposits:
As banks make more loans, those loaned funds are deposited in the banking system, expanding the money supply through the money multiplier.
Result:
Increased money supply
Lower short-term and long-term interest rates
More liquidity in the economy
In short:
Lower interest rates → more borrowing → more spending → increased money supply.
...
Why does President Trump want the Federal Reserve to lower interest rates when this will increase the money supply and make tariffs inflationary?
ChatGPT:
Great question — and it highlights a real economic tension between monetary policy and trade policy.
Here’s why former President Trump (and many others who favor looser monetary policy) might advocate for lower interest rates, even if that could conflict with tariff-induced price pressures:
Trump’s Likely Perspective (based on his public statements):
Lower interest rates stimulate growth:
He believes lower rates help fuel business investment, consumer spending, and stock market gains, which can boost GDP and employment — key political and economic goals.
Weaker dollar helps exports:
Lower interest rates usually weaken the U.S. dollar, making American exports cheaper abroad — which aligns with his goal of reducing the trade deficit.
Counterweight to tariff effects:
Even though tariffs can raise prices (potentially inflationary), Trump may view monetary easing as a way to keep overall economic momentum going, especially in sectors not directly affected by tariffs.
But yes, there’s a contradiction:
Tariffs restrict supply and raise prices on imported goods
Lower interest rates increase money supply and demand, which can amplify inflation
This means if tariffs are driving prices up, a lower interest rate could create and increase inflation rather than control it.
Presidents often prioritize short-term economic stimulus (growth, jobs, markets), while the Federal Reserve's primary mandate is long-term price stability and full employment.
These goals don’t always align perfectly.
… …