Al Charlson is a North Central Iowa farm kid, lifelong Iowan, and retired bank trust officer.
As Congressional Republicans and their very high income core supporters entered 2025, their highest priority was the extension and expansion of the 2017 income tax cuts. They told us so.
Back in January 2024, Senator Chuck Grassley told Semafor reporter Joseph Zeballos-Roig why Senate Republicans would not support an expanded child tax credit, which the House had approved by a bipartisan vote of 357 to 70. Grassley explained, “I think passing a tax bill that makes the president look good mailing out checks before the election means he could be reelected and then we won’t extend the 2017 tax cuts.” (There was nothing in the 2024 bill about mailing out checks.)
In any event, the heart of this summer’s budget reconciliation measure, which Republicans called the “One Big Beautiful Bill,” was extending and expanding the 2017 income tax cuts.
When they passed the budget reconciliation bill, Republicans knew bond investors were very concerned that the resulting deficits would reduce the long-term safety of U.S. Treasury bonds. To be clear, I am not criticizing bond investors, a group that includes both U.S. individuals, banks, insurance companies, and pension funds, and the governments of other nations. Bond investors are in fact very rational. Unlike stocks, bonds offer no room for hope. The best that can happen is that the investor will receive the promised interest and principal payments as they come due.
The Congressional Budget Office now projects that President Donald Trump’s roughly 900 percent increase in the weighted average tariff rate will generate enough income to offset the deficit increase from the budget reconciliation over the next ten years. In effect, Republicans have paid for income tax cuts for their very high income core supporters with a sales tax that hits low to middle income families the hardest.
Congressional Republicans not only stood aside and allowed the president to take over their Constitutional authority and responsibility to levy taxes, but also have pursued a coordinated strategy to avoid voting on tariffs.
The impacts of Trump’s “strategy” of high, arbitrary, and unpredictable tariffs are only beginning to become apparent. It’s not surprising that Iowa farmers are taking a major hit—we’ve seen this movie before. When the first Trump administration imposed a 25 percent tariff on $34 billion of Chinese products in July, 2018, China responded with 25 percent tariffs on U.S. agricultural products. Soybeans became the principal focus.
This year China has shut off the purchase of 2025 crop U.S. soybeans entirely. The international soybean markets also are showing us the adjustments our trading partners will make in response to our wall of high tariffs and trade restrictions. They will form new trade relationships and patterns.
China recently completed a new deep water port facility in Chancay, Peru, and is now working with Brazil to plan a railroad which will connect that port to the Brazil-Argentina farm belt. This will cut the at-sea shipping time for South American grain to Shanghai by about one-third, putting Iowa farmers at a further disadvantage.
We are seeing the ripple effect of depressed farm incomes in layoffs at farm machinery manufacturing plants. Less visible is the impact of high tariffs on essential inputs not produced in this country on a wide range of Iowa manufacturers. Those costs are piling up and, if they continue, will hurt Iowa workers and communities.
Congress is now deadlocked in the third week of a government shutdown, with no resolution in sight. Republican and Democratic Congressional leaders are not talking to each other, House Speaker Mike Johnson will not even call the chamber into session, and Trump is telling his party not to negotiate. Some of this is made for TV political theater. But bond investors are important, if unseen, players in this drama.
Bond investors remain very concerned about the safety of U.S. Treasury bonds. The risk of default (nonpayment of interest or principal when due) is very remote. The greater risk is high rates of inflation which erodes the real value, or purchasing power, of future interest and principal payments.
The deficit pressure created by this year’s income tax cuts significantly increases that risk. The budget reconciliation’s bills selective spending cuts, which primarily target programs important to low to middle income families, plus tariffs, which are really sales taxes also primarily hitting low to middle income families the hardest, have more or less “plastered over” the deficit impact of the income tax cuts for the time being.
Bond investors are skeptical, watching closely for any indication the patch is not going to hold. Signs of their concern are evident. The U.S. Treasury yield curve (the difference between yields on shorter-term and longer-term Treasury bonds) is steep, particularly at the long end. And risk-averse investors are moving to other assets.
The price of gold, generally considered a desperation or chaos investment, is up about 58 percent since the beginning of 2025, recently topping $4,000 per ounce. The 2025 year-to-date gold price chart is fascinating. The price spiked in April at the time Trump announced his tariff “policy,” more or less flattened out from May through August, then beginning about September 1 took off like a rocket. Hmm…
Congressional Republicans will be very sensitive to bond investors’ nervousness that their “spending cuts plus tariffs patch” will not hold. Their determination not to negotiate over extending health insurance subsidies for low to middle income families is really messaging to assure bond investors. To be honest, it’s hard to see where Congressional Republicans would find money to compensate soybean farmers for the loss of the China market.
In the meantime, any suggestions for finding a good buy on coffee would be welcome!