What Can Be, Unburdened By What Has-Beens?
By Michael Every of Rabobank
Global IT systems crashed on Friday. Two days later, a week after the attempted assassination of former President Trump, President Biden crashed. It seems full steam ahead for Kamala Harris, so far. Elsewhere, Israel destroyed the Houthis’ port and oil storage, yet Russia may now arm them, all risking wider Mid-East war; as ‘China and Russia are breaking the world into pieces’, says Hal Brands, as “Global governance and problem-solving increasingly look like artifacts of a happier age. International violence is intensifying, as the risk of major war --even global war-- ticks higher. US power still looms large, but America’s behaviour grows more erratic as its politics become less stable.” Indeed, 80 years ago last weekend, at Bretton Woods, the world set up a (gold) US dollar-centric economic architecture, which we all live with today (absent gold). Now, concerns are it will face a blue screen of death: and neither IT systems, nor US politics, geopolitics, nor the global economy can be easily re-set by turning them off then back on again.
Indeed, *what* a mess the West is in. Inflation is lower – but still too high in key areas. Real GDP per capita has flat-lined or fallen for years–and median GDP is worse. Housing is ever less affordable in many places - but making it cheaper slows ‘growth’. Ageing populations mean poorer health, at huge cost, and labor and skills shortages - yet there is less appetite for mass immigration. Debt is too high everywhere even as we pay more tax. We are deindustrialising. Energy costs are too high - yet we need to make a green transition that will cost trillions. Defense spending must soar - but there’s no money, no supply chains, nor young people to fight for their country. China dominates global production - everyone else wants to reclaim it. War rages on several fronts - everyone fears more. Far right and far left voices are loud as polarisation increases. Europe is unable to move forwards; and conspiracy theories are clotting round the assassination attempt on one 78-year old US presidential candidate, and what some see as a possible ‘palace coup’ against the 81-year old other, who is still the leader of the free world.
As historian Niall Ferguson just put it, “We’re all Soviets now.” I made the same point years ago, arguing neoliberal ideology guaranteed economic failure, then socio-political and geopolitical chaos; yet we remained wedded to it because we refused to embrace the political-economy changes required, the same way the late Soviet bloc knew it was failing, but just built new statues of Marx or Lenin and hoped something would turn up. Until Gorbachev did.
Today, it’s the West which needs reform and openness about what that pain will have to mean. As Brands puts it:
“The battle of ideas is on again. Russia and China didn’t get the memo about the irresistible triumph of democracy. They are rewiring international norms and organizations to make autocracies more secure. They believe their illiberal systems can produce greater discipline, effort and strength than decadent democracies.”
On that side, Bloomberg notes, ‘Xi Cements Role as ‘Chief Economist’, Shrinking Space for Debate’, underlining that Beijing sees the pro-market actions of the past as responsible for many of China’s current weaknesses. Elsewhere, @henrysgao argues the CCP’s 3rd Plenum language on “the dominant position of public ownership” suggests a mixed-ownership economy ahead - meaning private capital following state goals. The Plenum certainly recognized affordable housing, state built and owned, as needed; and it clearly has no issue with deflation if it means lower prices – and more Chinese exports to the world. The irrelevant 10bp PBOC rate cut this week will help CNY weaken, so exports grow, but won’t boost domestic demand.
On the other side, what can the West now be starting from here? Is it already a has-been? In answering, it’s important to know we’ve been here before. There is the now-common Cold War analogy, for one. Yet there is also the comparison with the problematic period after the official Bretton Woods system collapsed in the early 70s, Middle East and South-East Asia wars raged, then inflation was unleashed. In 1978, ex-Soviet dissident Solzhenitsyn, noted in ‘A World Split Apart’:
“The anguish of a divided world gave birth to the theory of convergence between the leading Western countries and the Soviet Union. It is a soothing theory which overlooks the fact that these worlds are not at all evolving toward each other and that neither one can be transformed into the other without violence…
The Western world has lost its civic courage, both as a whole and separately, in each country, in each government, in each political party, and, of course, in the UN. Such a decline in courage is particularly noticeable among the ruling and intellectual elites…
It has become possible to raise young people.., preparing them for and summoning them toward physical bloom, happiness, the possession of material goods, money, and leisure, toward an almost unlimited freedom in the choice of pleasures. So, who should now renounce all this, why and for the sake of what should one risk one’s precious life in defence of the common good and particularly in the nebulous case when the security of one’s nation must be defended in an as-yet distant land?
…a society without any objective legal scale is a terrible one indeed. But a society with no other scale but the legal one is also less than worthy of man… And it will be simply impossible to bear up to the trials of this threatening century with nothing but the supports of a legalistic structure.
Today’s Western society has revealed the inequality between the freedom for good deeds and the freedom for evil deeds. A statesman who wants to achieve something important and highly constructive for his country has to move cautiously and even timidly… Thus mediocrity triumphs under the guise of democratic restraints… Society has turned out to have scarce defence against the abyss of human decadence… The culprit can go unpunished or obtain undeserved leniency - all with the support of thousands of defenders in the society. When a government earnestly undertakes to root out terrorism, public opinion immediately accuses it of violating the terrorists’ civil rights.
The press, too, of course, enjoys the widest freedom… Because instant and credible information is required, it becomes necessary to resort to guesswork, rumours, and suppositions to fill in the voids, and none of them will ever be refuted; they settle into the readers’ memory.
Without any censorship in the West, fashionable trends of thought and ideas are fastidiously separated from those that are not fashionable, and the latter, without ever being forbidden, have little chance of finding their way into periodicals or books or being heard in colleges...
It is almost universally recognized that the West shows all the world the way to successful economic development, even though in past years it has been sharply offset by chaotic inflation. However, many people living in the West are dissatisfied with their own society. They despise it or accuse it of no longer being up to the level of maturity attained by mankind...
Some people sincerely wanted all wars to stop just as soon as possible… But if the full might of America suffered a full-fledged defeat at the hands of a small Communist half-country, how can the West hope to stand firm in the future? …In the 20th century Western democracy has not won any major war by itself; each time it shielded itself with an ally possessing a powerful land army, whose philosophy it did not question…One must be blind in order not to see that the oceans no longer belong to the West, while the land under its domination keeps shrinking… The West kept advancing steadily in accordance with its proclaimed social intentions, hand in hand with a dazzling progress in technology. And, all of a sudden, it found itself in its present state of weakness.”
I won’t apologize for the lengthy quotes because they are such an eerily familiar litany of woes. Yet within just a few years the US had leaped, and borrowed its way, into the dayglo, ‘Top Gun’ 1980s – and by the end of that decade, decisively won the Cold War.
The problem is that there can’t be any easy repeat of that formula now. More freedom isn’t the solution. Lower taxes, alone, aren’t the solution. More state spending, alone, isn’t the solution. Lower rates, alone, aren’t any solution. The old playbook simply won’t work vs. a ‘USSR’ that makes everything that the West consumes. Such ideas are all has-beens.
So are many of the easy alternatives, i.e., higher taxes, less state spending, and higher rates – alone. As a result, things will have to change.
Indeed, in ‘Trump and Gorbachev’, inequality expert Branko Milanovic draws a structuralist comparison between the Soviet leader who ended up destroying the USSR and Warsaw Pact, and billionaire Trump. Gorbachev sat at the head of a Soviet hierarchy where nobody could resist him when he started to dismantle the pillars that held up communism. He parallels that with the post-1945 architecture --WTO, IMF, NATO, EU, etc.-- which Trump will undermine to cement US power. (However, there is clearly lots of opposition to Trump fighting tooth, nail, and bullet, albeit often then following his policy lead on China and trade.)
His conclusion is that even if the Western elite are as at a loss as those of the East were 30+ years ago (and they themselves were before 40+ years ago), Western democracies, unlike Soviet one-party states, are flexible enough to pivot when needed.
Reassuringly, Milankovic adds, “Trump will not, I think, destroy some essential structures of the Western system as it was built after WW2, but he might, with his rough, chaotic and unpredictable government, scare the ruling elites in the West, encourage “revisionists”, and bring about changes that will alter the world as it was created in Yalta and Potsdam. Trump is unlikely to create a new structure, but he can break parts of the old one. If he does that, he might usher in a post-Cold War era, and close the book on 1945. But note that the Cold War had one good feature: it was “Cold”.”
I have also referred to Potsdam and Yalta in the past few weeks, which underlines how extremely large the policy pivots we may yet see are. Indeed, the key questions are this:
- Is it to be one world economy or blocs? Which blocs, if so? Can we choose which we are in? Trading with others how?
- Will the US dollar be globally dominant?
- Will US Treasuries be globally dominant? This is not necessarily the same as the dollar!
- What energy policy will be used?
- Only then do we get to monetary and fiscal (and industrial, trade, housing, transport, labour, and defence) policies each bloc will use – but they will have to work in sympathy with the above, not in the opposite direction.
In short, potential ‘Trump’ or ‘Harris’ trades should start with the questions above and work their way down to imagine what can be, unburdened by *what* has-beens.
For those who want a deeper overview of this theme, and what it means, see what I wrote in ‘The Great Game of Global Trade’ in January 2017, which is still relevant in July 2024. (Though critics would then add. ‘You mean you got the timing wrong!’)