Regime Change: The End of the Economy as we have Known it

 “There are decades where nothing happens: and there are weeks where decades happen.”

                       Attributed to V. I. Lenin

In the short span of twelve weeks, Donald Trump has undone the Bretton Woods monetary order established in 1944, the GATT free trade order of 1947, and the NATO collective security order of 1949. (See: https://shulmaven.blogspot.com/2018/02/my-amazon-review-of-benn-steils-marshal.html) As a result the world is now facing a simultaneous geopolitical and economic crisis and it is no surprise,  that stocks and especially treasury bonds and the dollar have sold off. (See: https://shulmaven.blogspot.com/2025/04/a-broken-stock-market-and-broken-trust.html) Simply put, the old world order is gone, an there is nothing, as of yet, to replace it. The transition will be painful.

Those who expect that the Trump tariffs are negotiating tactic will be sorely disappointed. Trump needs the revenue to finance his tax cuts, and the Democrats only differ with Trump as to the way his policy has been conducted. They still hope to reclaim their union support by being pro-tariff and they too need the revenue to finance an ever-larger welfare state. The era of free trade, as we have known it, is over.

Three years ago, I wrote that the United States was about to enter a new 13-year economic cycle. I noted:

“My guess is that we are at the very beginning of new thirteen-year cycle with unknown consequences. I would speculate that the next thirteen years will bring with it a much higher rate of inflation than we have been used to, a multi-year bond bear market and a partial deglobalization of the economy caused by local politics, supply chain issues and geopolitical tensions. To me the big question is whether this cycle will bring with it a stagflation or a high cap-ex/high inflation economy with a cap-ex boom coming from the in-shoring production and energy transition. As they say, time will tell.” ( See: https://shulmaven.blogspot.com/2022/05/the-useconomy-is-entering-new-thirteen.html)  

Although it has taken a bit longer to play out, we are now in the midst of it and perhaps something much more. We are likely entering an eighty-year super cycle in what Neil Howe has called a “fourth turning” which will involve economics, politics, values, and the way we relate to each other in society. (See: https://shulmaven.blogspot.com/2023/09/my-review-of-neil-howes-fourth-turning.html)  This is far bigger than my 13-year cycle in that it encompasses six 13-year cycles that began in, not coincidentally 1945.

If this is close to correct, then we are now entering unchartered waters. The stock market and economic histories that we have been used to over the past 80 years may no longer be relevant in understanding the future. Instead of ever rising share prices we may now be in an era where stocks go sideways for an extended period of time. I would note that between 1924-1949 the Dow Jones Industrial Average traded in a range of between 100-200 with the significant upside exception of 1928-30 and the significant downside exception of 1931-1933. For example, in 1927 the high in the Dow was 201 and which was nearly identical to that recorded in 1949 and the 1929 high was not exceeded until 1954. The equivalent going forward would be for the S&P 500 to trade in a broad 3500-6500 trading range over the next several years.

The recent action of the bond, currency and stock market is indicative of a sea change in the markets. Instead of rallying in a time of turmoil both the treasury bonds and the U.S. Dollar have sold off. Indeed, the dollar has declined 9% since the end of February. Simply put foreigners are losing trust in the U.S. Dollar and with 18% of U.S. stocks held by foreigners the selling is only now beginning. I would say the same thing for foreign holdings of U.S. real estate.

Over the weekend the Trump Administration announced that it would reduce the Chinese tariff of 145% to 20% on smart phones, computers, and other electronic products. That action has lifted the Sword of Damocles hanging over Apple. This suggests a major relief rally for Apple and the stock market as a whole, but what multiple can you put on company and the stock market as whole whose share prices are subject to the whim of one very unstable man? I would sell the rally.  

My Amazon Review of Graham Moore's "The Wealth of Shadows"

 Economic Warfare

Oscar winning screenwriter Graham Moore (“Imitation Game”) has written an international economics book in the guise of an historical novel. Moore’s topics involve America’s economic war against Germany prior to our direct entrance into the war in December 1941 and the need to establish a postwar economic architecture that would avoid the foibles of the interwar years. The idea of economic warfare has relevance to today given Russia’s invasion of Ukraine and ongoing trade issues with China.

Moore’s protagonists are Minnesota tax attorney Ansel Luxford and his wife Angela who end up working in Washington D.C. in 1939. Moore goes to work for senior Treasury advisor Harry Dexter White in a super-secret group dedicated to disrupting the Nazi economy and Angela who finds a job as a clerk in the F.B.I. All of the characters in the book are real people and Moore lets the reader know where his account diverged from the historical record. The group initially fails in preventing Brazil from exporting iron ore to Germany largely because of

State Department opposition led by the Nazi sympathizing Assistant Secretary of State Breckenridge Long. Long also worked tirelessly to prevent Jewish immigration to the United States.

 

After the initial failure with Brazil, the group succeeds in freezing German funds in the United States, comes up with the cash and carry scheme to allow France and England to purchase war materials from the United States and accurately predicts that Hitler would have to invade Poland because the German economy was based on continuous plunder.

 

There is much dialogue between British economist and treasury aide John Maynard Keynes and Harry Dexter White. Most of the dialogue is derived from written communications between them. It is no secret that these two did not get along and had serious differences of opinion. This came to a head at the Bretton Woods Conference in 1944 where Keynes backed his proposed international currency, the Bancor, while White succeeded in having the gold convertible U.S. Dollar as the core of global finance.

 

We don’t find out until the very end that Harry Dexter White was all along a Soviet spy. Ansel and Angela discover this when they witness a “dead drop” in the New Hampshire woods outside of the conference.

 

Moore utilized the works of Adam Tooze in explaining Nazi finance, Zachary Carter on Keynes’ views on the economics of global peace, and Benn Steil on the Bretton Woods Conference. He also threw in for good measure a vignette on one of the members of the team buying a used car which highlighted the role of information asymmetry that won George Ackerlof the Nobel Prize.

 

My few qualms about the book are that Moore seems to tilt too much towards modern monetary theory in explaining how the U.S. and Britain financed the war and sets Lindberg’s infamous Des Moines speech in 1940, instead of 1941. Notwithstanding these qualms, Moore offers us an easy way to understand some of the history of World War II and the economics behind it and it highlights the career of the hitherto anonymous Ansel Luxford who was in the room where much history was made.

For the full Amazon URL see:  Economic Warfare (amazon.com)

My Amazon Review of Peter Zeihan's "The End of the World is Just Beginning......."

 

The Coming Global Disorder

 

Peter Zeihan “end of the world” thesis is based on the demography of collapsing birthrates and the globalization we have been living with since the 1944 Bretton Woods agreement is in terminal free fall. To him, the era of “order” is over and will soon be remembered as an aberration. I agree with him with respect to global demographics, but, although weakening, globalization will still be with us. Of course, if Zeihan’s view of the end of globalization is correct, the world as we know it will be in a world of hurt.

 

Simply put, much of the world has benefitted from the international division of labor brought about by the monetary stability of Bretton Woods and the presence of the U.S. Navy protecting freedom of the seas for all of the participants in the global economy. Instead of pirates trawling the seas, we have giant container ships bringing a harvest of goods to global producers and consumers.

 

Zeihan adopts a neo-Trumpian view of global trade where the U.S. worker has subsidized the rest of the world and as a result the U.S. will withdraw from the global economy no longer interested in enforcing international norms. Thus, with the unity of the Cold War struggle with the Soviet Union over, the support of Western Europe and East Asia less important. Less important, maybe; irrelevant not quite.

 

Where Zeihan is on much sounder footing is his discussion of demographics. Both Russia and China along with most of Europe and northeast Asia are rapidly depopulating. Simply put, the world is getting older at a very rapid pace and will soon be without workers. Watching Russia and China grow old might not be so benign for the world, because I fear that their leaders understand this and are in the process of expanding their reach before it is too late. Hence Russia’s invasion of Ukraine and China’s increasing aggressiveness over Taiwan. Further Zeihan under-rates the capabilities of the Chinese navy.

 

Zeihan goes into great detail in discussing global transportation, finance, energy industrial materials, manufacturing, and agriculture. In the case of the last the end of globalization will bring with it the prospect of mass starvation. During World War I the Central Powers were cut off from global agricultural trade bringing with it mass starvation.

 

According to Zeihan the United States, because of better demographics, its resource base and proximity to both Canada and Mexico is in far better shape than the rest of the world. To be sure the U.S. would end up poorer, but compared to the rest we would be looking pretty. Of course, a war with Russia or China would radically alter this picture.

 

Zeihan has a breezy writing style making the book easy to read. My guess is that he is directionally right, but he over-states his case.

For the full Amazon URL see: The Coming World Disorder (amazon.com)

My Amazon Review of Jeffrey Garten's "Three Days at Camp David..........."

 

The Nixon Shock

 

Former Yale School of Management Dean and long-time economic policy official in the Nixon, Ford, Carter, and Clinton administrations as well as being husband of Ina Garten, the Food Network’s Barefoot Contessa; Jeffrey Garten placed you in the room where global monetary policy was upended over an August weekend in 1971. Garten offers keen insights into the personalities in the room at Camp David. Of course there is Nixon whole loved to do bold and daring things, there is his Secretary of the Treasury John Connally who was the super hawk on trade and who was completely transactional, there was Arthur Burns the pipe smoking and vacillating Fed Chief, there was Peter Peterson forward thinking Nixon policy advisor, there was William Safire, the man who would write Nixon’s speech and there was Paul Volcker, the Under-Secretary of the Treasury for Monetary Policy who knew more about what they were about to do than anybody else.  And although Henry Kissinger wasn’t present he had to deal with the after effects of of upsetting America’s allies.

 

What they did that weekend was to take the United States off the gold exchange standard which was the foundation of international economic policy since the 1944 Bretton Woods agreement. What they also did was enact a 90-day price and wage freeze which would ultimately turn into an unmanageable regime of wage and price controls that would last for a few years. They also put a 15% tariff on European and Japanese imports upending the United States’ postwar free trade policy. It truly was the Nixon shock. U.S stocks initially rallied and Japanese stocks crashed.

 

Garten explains in a nontechnical manner how the U.S. was running out of gold to back its currency and the economy was suffering from a bout of stagflation with rising inflation and unemployment. Although he doesn’t specifically mention it, Garten was writing about the Triffin Dilemma where the supplier of a global reserve currency has to continually supply increasing reserves to the world and in order to do that it has to run a balance of payments deficit. Thus, in the summer of 1971 U.S. gold reserves stood at $10 billion while foreign central banks had accumulated $40 billion in claims. Simply put we were broke.

 

Garten starts his story in the late 1960’s when in fact he should have started it in November 1960 when after Kennedy’s election the price of gold soared from its fixed $35 an ounce to $40 an ounce. The market feared a U.S. devaluation which last occurred in 1933.  The Kennedy Administration talked the market down but from then on, the balance of payments issue outlined by Triffin was top of mind among economic policy officials.

 

Although it didn’t happen right away the Camp David meeting set into motion the transition away from fixed exchange rates to floating exchange rates, a regime we live under to this day. It also signaled that balance of payments considerations would no longer affect domestic monetary and fiscal policy opening the way to very expansive policies. After all Nixon wanted a booming economy to get re-elected. He got it and along with OPEC the way was open to the 1970’s inflation. Garten, I think rightly argues that the Nixon team didn’t have much of a choice with respect to leaving the gold exchange standard but was horribly wrong with respect to wage and price controls.

 

One of the things that impressed me was Garten’s insights into John Connally. Connally was a brilliant synthesizer of complex information and he greatly respected Paul Volcker. He backed him to the hilt even when Nixon had his doubts. He also writes very favorably about Peter Peterson who ultimately hired him at Lehman Brothers and later at Blackstone. How influenced he was by his friendship with him, the reader does not know. Lastly as with Nixon’s sense of the dramatic, only one month before Nixon upended 30 years of U.S. policy by announcing his visit to China.  All I can say the heads of my left-liberal friends were spinning as Nixon adopted many of their policies.

 

Jeffrey Garten has given us great insights as to how a major policy decision was made and the importance of the personalities involved. I highly recommend the book.

For the full Amazon URL see: The Nixon Shock (amazon.com)

My Amazon Review of Benn Steil's "The Marshal Plan: Dawn of the Cold War"

The Cold War through the Lens of the Marshall Plan

Benn Steil, a senior fellow at the Council on Foreign Relations has written a very well researched history on the role of the Marshall Plan as the fulcrum of the Cold War. He previously wrote a history of the 1944 Bretton Woods monetary conference and that certainly prepared him to deal with the economic and geopolitical issues facing Europe at the beginning of the postwar era. He chronicles how the U.S. attitude changed from plans to deindustrialize Germany and to make the U.N. central to foreign policy toward rebuilding Germany and making NATO the focus of U.S. policy in Europe.

The very fact that the U.S. would take part in both the rebuilding of Europe and entering into peacetime multi-lateral alliance represented a revolution in U.S. foreign policy. Steil highlights the role of such key figures as Marshall himself, Harry Truman and George Kennan. More importantly he brings to light the roles of Republican Senator Arthur Vandenberg moved the necessary legislation through Congress and Under-Secretary of State Will Clayton, a former cotton baron, who first articulated the strategic vision of a united Europe.  We also witness the work of former car executive Paul Hoffman running the day-to-day operations of the plan along with General Lucius Clay who acted as America’s proconsul in Germany.  He also noted the important role played by Massachusetts Congressman Christian Herter who led a congressional fact finding delegation to Europe that was influential in generating the political support for the plan.

The Marshall Plan was enabled in Europe by the far sighted leadership of British foreign minister Ernest Bevin and his French counterpart George Bidault. Here we had a socialist politician working hand in glove with a center-right one. Most interesting was the fact that Stalin understood the implications of the Marshall Plan far better than his western counterpart. He knew that it would divide Europe and that in turn would make it impossible for him to neutralize a united Germany. Thus it was the Russian backed coup in Czechoslovakia to prevent that government from participating in the plan that sealed the fate of Europe. From there it was quickly realized that aside from economic support, Europe would need military support. That realization was crystalized by the Berlin Airlift where a logistics wizard, General William Tunner did the nearly impossible task of supplying Berlin by air. NATO would come soon thereafter.

Steil does a service in describing the role of British spies (The Cambridge Five) of informing Stalin of western plans and the role Soviet mole Henry Dexter White in Treasury in his continued support of keeping Germany down. We also see Henry Wallace following Stalin’s line in opposing the Marshall plan in the 1948 presidential race. Although it is not clear the full role Russia played in the 2016 election, it certainly had a candidate in Henry Wallace.

Steil goes on to present his views on the NATO expansion after the Cold War ended in 1991. His take is that the U.S. was far from being clear-eyed in the 1990s of the implications of moving NATO east and the effect it would have on the Russians. I don’t think that was necessary in this book. This topic should be taken up in a future book.

I read Steil’s book with a great deal of sadness. In the 1940s we had brilliant statesmen who rose to the occasion.  Unfortunately our statesman of the past twenty years or so have been found wanting and this is especially true of the current administration.

The full amazon URL appears at: https://www.amazon.com/review/R3RBSFMIF1IODA/ref=pe_1098610_137716200_cm_rv_eml_rv0_rv