Unbelievably, U.S. stock indexes are at or near their all-time highs.  The S&P 500 closed at a record on Friday, well above the 6,000 mark.  The Nasdaq is above 20,000 again.  The Dow is sitting close to 44,000.

It was only on April 2, 2025 (the day after April Fool’s Day) that Trump announced his liberation day tariffs.  It was supposed to liberate us Americans from inexpensive foreign goods.  The S&P 500 was down nearly 18% for the year in April as stocks sold off.

It looked quite disastrous for investors in April, but things have turned around as quickly as Trump changes his tune on various issue positions.

In terms of tariffs, Trump has certainly walked back from where he stood in early April.  It was somewhat of a self-correcting mechanism, as he received instant feedback from the marketplace.

But let’s be clear that increased tariffs are still an issue.  In fact, on Friday when stock indexes were hitting all-time highs, Trump announced a breakdown in trade talks with Canada.  Many people don’t know that Canada is the U.S.’s largest trading partner.

The fact that investors brushed off this news tells you one of two things.  Either investors aren’t too concerned about increased tariffs (as long as they are not obnoxiously high), or they don’t take Trump’s announcements seriously.

Tariffs Don’t Generally Cause Recessions

Tariffs are a tax on imported goods.  They can certainly make life more expensive for the people in the importing nation.  Sometimes they simply reduce trade, as people seek alternatives to what they otherwise would have purchased.

So, tariffs do impact our living standards.  We are generally wealthier when we have the advantages of open trade.  It is better to trade with 8 billion people than 340 million people.

With that said, higher tariffs or taxes do not generally cause recessions.  Just look at the markets right now.  The tariffs are lower now than what Trump announced in early April, but they are also higher now than when Trump took office.  Yet, stock indexes are near all-time highs.

If all you have are higher tariffs or any kind of taxes, people can generally adjust as long as the future is somewhat predictable and the rates aren’t overly confiscatory.  If the government implements a 90% income tax on every dollar of income, that will obviously destroy nearly everyone’s living standards who lives under that regime.  But that isn’t really a recession.  It is just a step turning the country into a poverty-stricken, third-world country.

Recessions are not really thought of as a permanent decline in living standards.  A recession is supposed to be a correction.  It is a reallocation of resources, as resources had been previously misallocated in places that weren’t in accordance with consumer demand.

What Causes Recessions?

Recessions generally happen because of tampering with the money and price of money (interest rates).  In our modern world, central banks control the base money supply and, to a certain extent, interest rates.

When the central bank creates money out of thin air and artificially lowers interest rates to help the government finance its deficits, this creates bubbles and misallocations of capital.  It sends false signals to market participants, including consumers, sellers, and entrepreneurs.

You can call this the Austrian Business Cycle Theory or whatever you want, but it is generally the central bank in today’s world that causes recessions.  The recession, or correction, is the readjusting of resources after the damage has been done.  The recession is when things seem to be the most painful, but it is actually correcting the past mistakes, or at least trying to.

Sometimes recessions can lead to more central bank intervention, which ultimately makes the problems even worse down the road.

Government taxes and regulations make us poorer, but this is on a consistent basis.  Barring any shocking and sudden changes, government policies do not really cause recessions other than the fact that they legalize the monopoly over money by the central bank.

The Coming Recession Doesn’t Need a Trigger

All of this is to say that we don’t need a trigger event to cause the next recession.  We don’t need an announcement of a breakdown of trade negotiations.  We don’t need another war.  We don’t need a tax hike.  A recession will come when the malinvestments have been exposed and people run out of money or the will to keep the bubble economy going.

When the 2008 financial crisis happened, there actually wasn’t really a triggering event.  Financial institutions began to collapse because they had too many bad loans and weren’t getting repaid.  But this was the recession.  This is how the misallocation of resources manifested in that recession.  There was a massive housing bubble, and people took out loans for houses that they couldn’t repay.  As soon as housing prices started to go down, the loans started to go bad.

We already had an inverted yield curve in 2023 and much of 2024.  It has somewhat normalized, although short-term rates are still close to long-term rates because the Fed is not cutting its target rate.

It is somewhat amazing that stock indexes are hitting all-time highs, and it seems that any sign of a downturn is short-lived.  It has made investors incredibly complacent.  We have to come to expect that any downturn in stocks will just turn around within months.

At some point, this will no longer be true.  The 2008 financial crisis is now almost 17 years old.  Someone who is 30 years old today was only about 13 years old when that happened.  Most 13-year-olds are paying attention to friends and activities and certainly not financial markets.  Someone who is 30 today has never really experienced a hard downturn in U.S. stocks that has lasted more than a few months.

This will not continue forever.