Ankur Singh, O.P Jindal Global University
As fears of a U.S. recession grow, policymakers continue to frame economic policies through a misleading lens that conflates government debt with household debt and views trade deficits as signs of economic weakness. This flawed narrative has contributed to damaging fiscal austerity, misguided protectionism, and heightened economic uncertainty.
When Donald Trump took office, flanked by America’s financial elite, few could have predicted those same billionaires would lose more than $209 billion in less than two months.
What began as an economic optimism has since shifted into growing whispers of recession which has now curdled into recessionary anxiety, with whispers of a downturn growing louder. According to a J.P Morgan analysis the probability of an economic downturn (and hence a recession) in the United States has risen to 40% as businesses freeze investments and consumers tighten their belts in preparation of worse times and greater clarity on their ‘operational environment’.
At the heart of this economic turmoil is the persistent myth that the U.S. government must “balance its books” like a household: conflating sovereign debt with personal debt and trade deficits with economic weakness. This fundamental misunderstanding has historically fuelled harmful policies, fiscal austerity, misguided protectionism and mounting economic uncertainty, with tariffs becoming the administration’s weapon of choice in an unnecessary economic battle.
The Fallacy of Trade Deficits and National Debt
The Trump administration’s obsession with trade deficits reflects an outdated, pre-modern view of economics. Just as 18th-century mercantilists equated national wealth with gold reserves, modern protectionists mistakenly equate trade deficits as economic losses. This zero-sum thinking disregards the nature of fiat currency systems, in which governments with monetary sovereignty can issue currency and thereby influence economic outcomes in ways traditional models fail to capture.
Consumer Confidence is the lowest in last 6 months (Source: CEIC Data)
Despite consumer confidence hitting a six-month low which only modestly rebounded in May, policymakers still frame trade deficits as economic threats, rather than recognizing that they often reflect a strong consumer-driven economy. Contrary to popular belief, deficits are not just unavoidable but can be essential for economic growth. When the government runs a deficit, it injects money into the economy, enabling businesses and households to invest, spend and expand. The private sector typically accumulates wealth under these conditions, as deficits add net financial assets to the economy. In contrast, government surpluses withdraw resources from the system, slowing growth, reducing employment and contributing to economic stagnation.
A notable example is the Clinton administration’s budget surpluses from 1998 to 2001, which were followed by a recession in 2001. Economists like James K. Galbraith argue that these surpluses reduced private sector savings and aggregate demand, contributing to the downturn. Similarly, Stephanie Kelton contends that the surpluses were built on unsustainable private sector borrowing, leading to economic instability.
In a fiat system, the federal government does not need to raise taxes before spending. Instead, it spends first and taxes later to manage demand, curb inflation and maintain currency value. Modern Monetary Theory (MMT) challenges conventional wisdom by demonstrating that the real constraint on government spending is not a debt ceiling but the economy’s productive capacity. If spending exceeds that capacity, inflation becomes a concern not because the country is “out of money,” but because demand is outpacing supply.
Taxes, therefore, serve a different function: They regulate inflation, reduce inequality and encourage productive economic activity. Recognizing this reframes the debt debate from fearmongering to a strategic discussion about government spending’s role in achieving economic and social objectives. Yet, conventional politics clings to the household budget analogy, imposing artificial limits that harm economic stability.
How a U.S. Surplus and Trump’s Tariff Obsession Could Reshape Global Trade
Trump’s tariff push is not merely a negotiating tactic; it is a deeply held conviction. In the 1980s he demanded tariffs on Japan, fearing economic competition. Today, despite a vastly different and more integrated global economy, he applies the same protectionist instincts, worsening economic instability. Unlike past trade wars, today’s supply chains and financial markets are highly interconnected, making such policies far more disruptive.
With inflation rising, U.S. growth is projected to slow down by 1.9% in both 2025 and 2026, prompting market concerns. Pushing the U.S. into a balance of payments surplus could have severe consequences both domestically and globally. History shows that every time the U.S. has moved toward a surplus, economic disruptions followed. The Interest Equalization Tax (from 1963 to 1974), designed to curb capital outflows, ended up distorting financial markets. More recently, in 2025, a surge in gold imports pushed the U.S. trade deficit to $131.4 billion, triggering recession fears and causing GDP growth forecasts to plummet from 2.8% to (-)1.6%.
(Source: U.S. Bureau of Economic Analysis & FRED)
If Trump’s policies push the U.S. into a balance of payments surplus, reduced dollar liquidity would tighten global financial markets, making borrowing costlier for nations reliant on dollar-denominated trade. Slower global trade and rising debt servicing burdens in emerging economies driven by higher interest rates and a stronger U.S. dollar could trigger financial instability.
Domestically, a tightening of the money supply would raise interest rates. This would slow consumer spending and restrict business borrowing, leading to weaker investment, sluggish hiring and a potential recession. These risks are compounded by Trump’s outdated trade policies and an increasingly uncertain global economy.
Whether Trump doubles down on these economic missteps or pivots to avoid a crisis will determine not just America’s trajectory but also the stability of the global financial system.