Deficit and the Dollar
Deficit and the US dollar are two sides of the same financial reality—both inscribed with the same chalk on the same slate. Attempt to eliminate one, and you'll inevitably erase the other.
Trump is doing that which a Chinese nuclear bomb could not have—systematically destroying US hegemony.
Few people understand long-arc narratives. The Roman Empire did not fall in a day; in the long arc, it disappeared with only some buildings left behind to show for it.
A country that does not respect intellectual property, one that is tremendously protective of its industry, does not allow too many imports and has a tax rate of 90%. This was the USA in 1900. Before the 2 world wars changed the character of the country. The debt that the US had provided to the Europeans to kill each other around the world formed the bedrock for the negotiations after the war.
This led to the capitulation by Keynes at Bretton Woods. The IMF and the World Bank were located in the US and London lost its crown as the financial heart of the world.
In the post-war years, America manufactured everything at factories built to supply the war effort. America was prospering, but its people were dying. By the 1960s, a considerable people engaged in manufacturing were dying of cancer. This led to globalisation, as I had explained in an earlier blog.
America started outsourcing production. They bought everything from everyone, so they insisted on paying in US dollars. After the Yom Kippur war, they convinced the Saudis to accept payment for crude oil in US dollars.
There was a time that petrol could only be bought with the dollar, and this established the dollar hegemony. Today, a whole bunch of countries buy petrol in currencies other than the dollar, and the dollar is used only out of inertia and expedience.
Let us say I make a bunch of shit. Capitalism says make more shit. But if I make more shit, I need somebody who will consume that shit. This is where America comes in. The country consumes like there is no tomorrow. The country invented obsolescence. The country produces drugs, guns and bombs. Oh, and also global financial disasters. Everything else comes from outside the country.
The tariffs make it far more expensive for Americans to consume. In the last 5 years, the people of the USA have already been fleeced in the name of the pandemic and the Ukraine war. They are going to get fleeced some more in the name of tariffs.
The demand for the dollar exists today because there is a trade deficit that exists with the US. That dollar gets used up to buy other things, such as oil, because a surplus exists. Not because people trust America, as Americans would like to believe.
The world is making too much stuff. That stuff will not get sold unless someone buys. Americans are the only ones who would, but they have nothing other than the USD to buy it with.
There is a shared fiction that the USD is a great store of value. Everyone agrees with this fiction because they are paid in that currency. This also allows the US to engage in quantitative easing and print currency several times each year to finance itself. They call it the debt ceiling, and politicians use it as a means of engaging in oneupmanship every year.
But - In the absence of a deficit, who needs the dollar? The demand for the dollar will fall. If our books are even and I don’t have extra dollars to pay for other stuff, I would insist to pay with a currency of my own rather than borrow dollars to buy petrol or any other thing.
The fiction will begin to unravel.
Not only that, the way Trump is playing this, he has no allies. NONE. Not a single country would want to defend the dollar.
This is not a trade war; it is a currency war, and Donald Trump is painting a big target on the greenback. His actions ensure that everyone has one common enemy.
Trump said only the weak will fail. The weak are those who make nothing. Exporting a financial disaster does not count as making something.
Best climate President
On the flip side, I would have never thought that Donald Trump would be president to usher in an era of de-growth. His actions are going to result in a shift in the consumption base. It will reduce the flow of trade and goods across the globe. At least the movement across the two massive oceans Atlantic and Pacific, are set to fall. This will reduce the overall carbon footprint in a significant way.
Additionally, if all of the production moves back to the US, finally, those responsible for the consumption will pay the environmental price. The rivers and lakes in the US will turn acidic and kill entire ecosystems on the continent. At last, the Americans will be able to see the effects of their consumption and perhaps introspect a little.
Either way, Best Climate President
We will no longer need COP. Americans will have to negotiate with themselves. It will simply become a class war within a society. The rich living is pristine habitats in upstate New York and the not-so-rich sinking in the effluents from factories in Pennsylvania.