Geoeconomic rehab

"Nothing changes if nothing changes"

It has taken some time, including time to be bored with even the idea of this blog, to come up with the framework, and to watch as the United States tears itself apart and China digs in with both feet and hands, while Europe and the rest scramble to shore up the vulnerabilities that they can. One thing stands out among all of the geopolitics: the economy, stupid.¹

The framework is essentially this: globalization is changing, it isn’t stopping, and we are neither in the 1930s or the 1910s. The biggest problem today is not frustrated imperial overreach as in those periods (what is happening in Ukraine is a tragedy, but it is hardly existential, otherwise). The military is not the decisive factor that it was at the end of the imperial era, either. Rather, the impulse that made a billion humans’ lives far better than they would have been becomes inoperable, and we become the poorer for it…

…we can then worry about the wars that emerge on the heels of that…

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Matthew Klein and Michael Pettis have provided a framework for why the global economy has arrived at this point, and the choices made by the two largest players (China and the United States) which are long-term, net-negative for both. They assert that this involves macroeconomic imbalances inherent in choices of political economy: the impulse to enable China to become the “workshop of the world”, while the United States would be the “consumer of last resort.” Doing so has led the Chinese economy to become low-consumption, high savings, highly productive economy with its investment in production capacity and physical infrastructure, while the United States benefits from lower consumer prices, expanded credit, an enormous and productive services economy and the “soft power” that comes with it. Both have benefitted within this framework, but at the cost of much of the rest of the world becoming reliant on both for the advantages named above.

Klein and Pettis make the argument that the current production focus on the Chinese economy is ultimately unsustainable for China, in textbook terms, but Klein and Pettis never discuss the strategic advantages this affords the Chinese Communist Party (CCP). Similarly, Klein and Pettis note the unsustainability of the US economy’s configuration, without noting the supposed political aims that lie behind it.

However, it is clear that they’ve tapped into something fundamental in where the political intent and the economic mechanisms have become delinked, and it is necessary to rehabilitate, both politically and economically.

The US economy as a financial ouroboros

We will ignore China for the rest of this summary analysis, as it appears more the case that the CCP is digging in, and sees no critical need to overhaul the Chinese economy. The United States is in a different situation. There is simply more at stake for the United States to successfully rehabilitate for its long term prosperity and political stability.

The United States’ political establishment that lead the US to this point appears paralyzed and unable to adapt to the inequalities that have built up, at least not adequately or quickly enough for the US’ populace. This has lead Donald Trump in 2016, a “breather” via the traditional candidacy of Joseph Biden in 2020, and another rejection of the traditional establishment in selecting Trump in 2024. However, neither of these candidates could claim a “landslide” in any of these elections, so closely were they contested.

Arguably, what the Trump administration began in 2016, what the Biden administration continued in its own form, and what a returning Trump administration want to attempting is a reshaping of the US economy. The attitude is to get the United States out of a consumption spiral, and move it toward a higher concentration of production and manufacturing (beyond the current 6% of nominal Gross Domestic Product (GDP)). In doing so, the administration has chosen to use tariffs, and uncertainty, at the cost of the financial sector’s provision of one of the core service sectors of the US’ economy (as mentioned above). This has two effects.

The first is that it erodes political momentum in terms of support of the US’ financial sector. A second order effect has been a destruction in secondary market equity valuations.

The is nominally positive given the overvaluation of those securities, but net negative given the way it was done, which has increased the price of primary issuance, as well as the yield on debt instruments. This forcing of pricing declines in the financial sector and subordinating the sector to a perceived political mandate reduces finance’s political power, certainly in terms of its command of the short-term pricing return argument. This may force the sector to consider longer term investments that are long overdue (e.g. energy and production), but it also harms the centrality of the sector’s role in providing the United States with the capacity to engage in economic statecraft.

Secondly, the reduction of financial momentum has weakened the dollar substantially, but largely due to uncertainty stemming from the Trump administration’s methods.

This is “good” for exports, on paper, but again, production and manufacturing are only 6% of GDP. Arguably, this could improve the price advantage of services exports. However, it will come at the cost of the livelihoods of top earners, depending on the positioning of certain services (e.g. investment banking), in addition to any soft boycott/substitution effects due solely to the administration’s unpopularity abroad. The follow-on effect of any move out of the dollar, again, is at the expense of US economy statecraft, especially in the weaponizing of the dollar. The net benefit may be greater than the cost, long-term, especially if it enables a rehabilitation of the US economy, but the short-term pain this is causing makes this outcome very uncertain.

Market and State

Whether this administration is the one is actually realize that goal is doubtful. First, there is quite a bit of disagreement about how to do this in the United States (see Ezra Klein’s Abundance for one argument), and second, this administration does not inspire opposite sides to come to the table for a grand compromise. The general damage may level the playing field in terms of the loss of political heft in the highest economic tier, and over time, it could reduce the level of inequality. The cost of this is going to be very high, however, and in the meantime, the United States is likely to continue to careen from correction to correction as different political factions attempt to figure out how to rehabilitate the United States’ economy.

That said, nothing changes if nothing changes, and this is most definitely the first stage of an attempt at a rehabilitation of the United States’ economy. Only time, competence, patience, forgiveness, and resilience will determine if the United States can complete the steps of the transition and avoid the predators in their midst along the way.

1. https://www.nytimes.com/1992/10/31/us/1992-campaign-democrats-clinton-bush-compete-be-champion-change-democrat-fights.html