Following the market’s reaction to Donald Trump’s recent tariff hikes, many investors remain fixated on short-term stock declines. But I’m less concerned about the immediate drop in equities and more focused on the broader ripple effects — especially given the current state of U.S. fiscal policy.

The Trump administration inherited serious economic challenges from the last four years of Bidenomics, a mess made much worse by unsustainable levels of deficit spending.

A stock market downturn could cut tax revenue significantly. In that case, any interest savings might be wiped out — or worse.

U.S. debt has surpassed 120% of GDP. Deficits now resemble those of a wartime economy. The government’s interest payments exceed defense spending — a major warning sign for any nation. Meanwhile, inflation remains stubbornly high.

The new administration took office facing high interest rates — not historically high, but elevated relative to recent norms, especially given the nearly $37 trillion in national debt — and a strong U.S. dollar. That hinders Trump’s policy options.

Given that context, are tariffs a strategic move to lower interest rates, refinance the debt, and buy the administration some breathing room? If so, can that approach work — and at what cost?

Roughly $7 trillion in U.S. debt is scheduled for refinancing this year. Add a projected $2 trillion deficit, and the government faces an enormous financing challenge.

The administration may be betting that aggressive tariff policy triggers a “flight to safety,” prompting investors to move money out of equities and into long-term government bonds. Greater demand for bonds would push their prices higher and yields lower, since bond prices and yields move in opposite directions.

We saw some evidence of this last week when the 10-year Treasury yield dipped below 4%, though it rebounded above 4% by Monday.

A stock market sell-off could pressure the Federal Reserve to cut short-term interest rates. So far, Fed Chairman Jerome Powell has shown no willingness to step in — but that could change.

The strategy carries significant risk. Federal tax revenue depends heavily on both economic growth and stock market performance. If markets continue to tumble, government revenue could shrink, adding further strain to an already fragile fiscal outlook.

Even if yields on the 10-year Treasury dropped by 100 basis points (or 1%), and the government managed to refinance all $9 trillion in scheduled debt, the interest savings would total only about $90 billion.

But that scenario is unlikely. Issuing more Treasury bonds increases supply, which typically pushes yields higher — unless some outside force steps in. And if such intervention is possible, it raises a larger question: why pursue this risky strategy in the first place?

There are also other risks to consider. A stock market downturn could cut tax revenue significantly. In that case, any interest savings might be wiped out — or worse, deficits as a percentage of GDP could grow even larger.

On top of that, a declining market can trigger the “reverse wealth effect.” When portfolios shrink, consumers tend to spend less. Since consumer spending makes up about 70% of the U.S. economy, that kind of pullback can slow growth. Businesses may also become more cautious, further weakening economic activity.

Luke Gromen of Forest for the Trees recently pointed out that in 2022, a 20% drop in the stock market led to a $400 billion decline in federal tax receipts. If the same happens in 2025, the financial impact would far outweigh any gains from refinancing debt.

In a recent report, Luke Gromen noted that the last three recessions pushed the U.S. deficit higher by 6%, 8%, and 12% of GDP, respectively. In today’s terms, that would mean increases of $1.6 trillion, $2.1 trillion, and $3.2 trillion during a recession.

Yet, Congress has offered no serious plan to cut spending. Any reductions that do happen would likely shrink GDP, which makes solving the problem even more challenging. That leaves the administration with very little room to maneuver.

While the White House denies any intent to trigger a market crash, some economists believe the administration’s aggressive tariff strategy may be designed to lower interest rates by creating financial stress.

If true, it’s a high-risk approach to managing the government’s rising interest burden. The longer it takes to deliver results, the greater the danger it backfires — potentially triggering a debt spiral instead of relief.

Let’s hope for a resolution before those risks materialize.