Bond managers Van Hoisington and Lacy Hunt warn that if the Federal Reserve does not lower interest rates, the U.S. could face a “Kindleberger Spiral” — a deflationary downturn brought on when tariffs constrict trade and choke cross-border capital flows.
They argue that a decline in trade reduces foreign demand for U.S. stocks and bonds, which in turn undermines international liquidity and the dollar’s role in global markets. That dynamic, they say, risks repeating aspects of the 1920s–30s episode when the Bank of England lost its effective reserve-currency dominance and the Federal Reserve did not supply sufficient liquidity to stabilize markets.
While several foreign central banks have begun easing monetary policy, the United States remains unique as the issuer of the global reserve currency. That status can create added exposure: if international trade and capital movements shrink, liquidity strains in dollar markets can intensify and transmission of shocks can be more severe.
Despite their concerns about liquidity and the potential for a deflationary spiral, Van Hoisington and Hunt support a higher-tariff stance to encourage reshoring and to rebuild domestic industrial capacity. They contend that tariffs can address structural vulnerabilities revealed by recent crises and reduce strategic dependencies, even though such measures can also dampen trade and complicate global capital flows.
They further note that the new fiscal package offers limited economic stimulus, which may be insufficient to offset the contractionary effects of lower trade and tighter global liquidity. Reflecting market conditions, their treasury-focused fund has experienced a decline of about 4% year to date.
The managers emphasize the need for policymakers to balance monetary policy, fiscal support, and trade policy to avoid a damaging feedback loop. In their view, failing to restore adequate liquidity through appropriate rate policy or other measures could allow tariff-induced trade reductions to propagate into capital-market stress, amplifying downturn risks.
In summary, Van Hoisington and Hunt caution that a combination of sustained high U.S. rates, rising tariffs and shrinking trade could produce a self-reinforcing deflationary episode similar in important respects to historical precedents. Policymakers, they argue, should consider the international implications of domestic rate decisions and the trade-offs inherent in tariff-driven industrial policy when designing responses to current economic vulnerabilities.