The US’s trade war against the world could hit the country’s ability to live beyond its means, wrote Howard Marks, the co-chairman of Oaktree Capital Management.
In a memo published on Thursday, Marks warned that President Donald Trump’s tariff war could “dramatically” impact the US’s fiscal position. The world’s largest economy has long issued low-cost debt to lenders who were confident it would be repaid, fueling decades of economic expansion.
“To date, the world’s high opinion of the US economy, rule of law, and fiscal solidity has allowed us to hold a ‘golden credit card,’ where there’s no credit limit and no bill ever comes,” wrote Marks.
This debt issuance has allowed the US to run fiscal deficits for the last 25 years, including massive deficits of over $1 trillion each year over the last five years. The US now runs a national debt of over $36 trillion.
“In other words, we’ve been able to live beyond our means, with the federal government spending more than it takes in via taxes and fees,” wrote Marks. He added that “grossly irresponsible behavior in Washington” has caused the massive debt.
Even so, Marks doesn’t expect Washington to suddenly start living with balanced budgets.
“I’m left to wonder how much longer we can count on that golden credit card,” he wrote.
Marks wrote that Trump’s tariff reasoning is “desirable” — the president says he is seeking to support US manufacturing, encourage exports, and deter unfair trade practices, among other reasons. Marks cautioned there are what economists call second and third-order consequences to consider.
Tariff repercussions include inflation, demand destruction, a recession, supply shortages, retaliation by country countries, and a massive change in world order, he said.
Marks’ note comes just as Trump paused most reciprocal tariffs while keeping the baseline 10% rate in place — except for China.
The suspension came after a rout in Treasurys that sent yields up, which would kick up interest rates.
Some analysts called the sell-off in US equities, Treasurys, and the dollar the “Sell America” trade due to worries about the safety of US assets and their capacity to act as havens.
Trump’s trade war pause on Wednesday sent the markets into a massive relief rally. But investors can’t yet breathe easily: The 90-day pause is a reprieve as the president’s administration negotiates deals.
Marks raised several related issues about the fallout from Trump’s new policies.
‘”Might other countries become less willing to buy US Treasurys? Might they conclude that our fiscal management is unreliable?” he wrote.
“Even if we remain the world’s strongest credit, might they cut back on purchases out of worry, spite, or political motivation? Will we remain the world’s strongest credit if the dollar comes to be less accepted as the world’s reserve currency?”
Buyers’ appetite for Treasurys would impact the US’s national debt — and, in turn, the country’s finances.
“What would happen to the deficit — and thus the national debt — if buyers demand higher interest rates on Treasurys? To date, some of our trade deficits have probably been recycled into purchases of US Treasurys,” he wrote. “What happens to rates on Treasurys if that ceases?”
