Martin Wolf on Trump's Shakeup of the Global Order

be speaking with. Martin Wolfe is, of course, the chief economics commentator over at the FT, sometimes described as the most important economics commentator in Britain, which, given that the UK exports a lot of commentators, is really saying something. Also the author of book on globalization, of course, although as I understand it, your feelings have evolved over the years. So Martin, welcome to the show. Thanks so much for coming on.

and principles from traditional economics. There's a lot to write about.

my life as a father and a grandparent. Grandfather terrified the wits out of me, and I would say the same now, but probably even more so.

Kinsian fiscal policies. This feels like to me right now is something that could metastasize into a truly bigger story in terms of the lasting imprint it has on the world.

the bank rum. And the most famous case obviously in history was what happened in the thirties, and it led the Federal Reserve completely failed to deal with it in any sensible way, and it led to the Great Depression, which was the biggest economic downturn in sort of modern

history of the last two centuries. And that led absolutely clearly, it's a theme of one of my books, or part of the theme with one of my books, to the election of Adolf Hitler, and that led to certain other events like World War two and the death of sixty million people and so forth. So during the financial crisis, I was really frightened now that they did do the sensible things, all the things I wrote at the time they should do. So I feel very happy about that.

They went back to Walter Badghocks, who knew how to deal with these things, and that's in fine now. Right now, I would agree with you, certainly, this is a bigger event, because it's a fundamental undoing of the world economic order as created after the Second World War. It is I think also in the backdrop, a fundamental remaking of the

American Republic. And right now, of course it involves a because it's both of these, and because of the extraordinary role the US has played in the world since the Second World War, since forty one. Really, with Paul Harbor, it really means a remaking of the entire world order. So we right now, I think the most important thing that I say when anybody asks me what's going to happen next, is I really don't know, because nobody can.

big shock. It had quite long lasting effects, notably so in the US, and I argue in that book that one of the reasons, probably the main reasons that the Republicans Party, when they start realizing what had happened, shifted from Mitt Romney to Donald Trump as the candidate, which was an enormous revolutionary change, is that shock had, as it percolated through, helped a very large number of relatively conservative, middle class Americans feel that this Reaganite stuff about free

markets and so forth was, to put it bluntly, crap, because these people are led them down the path and they wanted somebody to embody their ideology. Their attitudes very reactioning ones, in my view, but not with that economic baggage, and Trump was the perfect person. So in that sense, I do think the global financial crisis, it's a theme

of my book. It's not the only reason. The industrialization and other themes which Trump plays with are also important, and I have a long discussion that going back to the seventies. But that big shock I think played a very big part in shifting the Republican Party in the populist nationalist direction, and that's of course why we are where we are now. So in that sense, I think

there is a link. But of course, and this is the contrast for the reasons we've discussed in the end, the policy makers involved basically under the Obama administration, many of whom might of course know, some of them are quite good friends. They did manage it in the way it wasn't managed in the thirties, So there was a fairly quick recovery. The financial sector was put back on its feet, though within the immense amount of federal support,

and the economy is recovered. And what is striking about this revolutionary moment in economic policy we're seeing It is I think sort of unique, and I don't fully understand it. It depresses me because but I have to admit it, the American economy has done better than any other developed country since the pandemic. The pandemic was a shot, but it's motoring. Real incomes have been rising rapidly. The job's

performance was exceptional. Now that's about as far as Germany in the thirty three Is you going to imagine when unemployed was twenty five percent and it was not much of a welfare state. So the economic explanation in the classic sense doesn't really work.

percent or whatever. But the actual distribution of real resources when you look at the size of American houses, when you look at the number of people of cars, when you look at the size of American refrigerators with ice machines that typically work. America is an extraordinarily wealthy country

for a wide swath of the population. And so when I read history in that respect, it doesn't read at all to me like the actual real economic conditions that I would say associated with the nineteen thirties.

their positions. And those anxieties often related not just with their economic positions, but also more broadly with their cultural positions. And Americas are countries that's gone through some big revolutionary changes. The industrialization PUTAVL is real. That's a transformation of many many communities. The push for gender and racial equality is real, and it clearly runs up against anxieties and hostility that was also very very real the new economy. Well, you're

absolutely right, clearly right. But it's still true when I go through America, and on many occasions I've Pardikhar and gone across the country to place it like Erie, northern California, way far north. There are lots of poor people in America, and most Americans that I know and see them because they fly over them, but I've actually driven across It's there are lots of poor people, and people are frightened of ending up there. In my view, they have a sense.

You know, I'm one real hospital medical problem away from bankruptcy. So I think there is in an insecurity and anxiety which comes up with these cultural and economic things mixed up to which Trump addresses his appeal perfectly. He's the perfect populist for America. And one of the things I've learned, which is new because I've never lived through it with a political demogogue like this, how incredibly good a brilliant demogogue is at exploiting those resentments and offering himself up

as the solution to all this. And that's the way I would now see this.

to wrap my head around that particular position. Like, I understand there are downsides and upsides to that special status, but the Trump administration seems really committed to the idea that this is a giant burden being carried by the United States. What are your thoughts on that particular argument, Like how true is that or like what are the

actual downsides? And then secondly, what do you think of some of their policy proposals where they're trying to attend to this issue and I guess alleviate some of their complaints.

as the world's dominant currency. They really want to have their cake and eat it. Well, this is really quite complicated with the right answer is half an hour, which

we don't have. So the summary of it, the argument about whether the dollar is a burden or a privilege has really been going on since the sixties, and it's when I started studying economics, so I'm very familiar with it, and it led to the first attempt to readjust the cost of this, which is the closest parallels to what we are seeing now, which is Nixon under Nixon, the Nixon Shock of seventy one when he basically tried to get the dollar devalued to sounds familiar, right, I Mean,

that's what one of the things they're trying to do is to get everybody to appreciate their currencies against the dollar. And the reason they needed to get the dollar devalued is then is they had a fixture change rate system. Obviously not the situation. Now the dollar was tied to gold. The monetary policy of view as in no way represented what you should do if you're on the gold standard. One of my constant points is that lots of people say going off gold in seventy one was the worst

thing that ever happened. But my argument is that US was never really on gold. We can discuss that if you want, rather remote from this, but the key point is he imposed imputs charges. Sounds familiar, and he told them those will remain until you revalue your currencies, and indeed they did get them revalued. John Connolly, the Treasury sectually famously said the dollar is our currency and your problem. And so he sorted this out as it were, and

that ended up in the regime of generalized floating. So got its way, But after that no real effort was made to readjust it. What is true for reasons that are linked to the Asian financial crisis of the late nineties. After a lot, I won't go through the plaza to the louver simply because well it's part of the story. Of course, another period of similar problem arose. There to

two other periods when this problem re arose. The excessive appreciation of the dollar from the American sense and the sense that was leading to uncompetitiveness and that affected important parts of the economy and something had to be done about it. And so that was Nixon was the first one. The second one was the Reagan era, and he introduced

has some similarities with subsequent developments, more recent developments. He had Paul Volca running the FED, so hypertite monetary policy and a floating exchange rate and a big fiscal expansion, right tax cuts. The combination of very aggressive fiscal expansion tite monetary policy is a classic combination in economics to lead to an appreciation of the real exchange rate. And it did. The trade deficit exploded, Japanese cars wiped out

American cars. There was hysteria about this. The Americans introduced voluntary export restraint on pose them. Bob Leittheiser, interestingly was a negotiator at that time and has echoes, doesn't it, and finally got so this created so much protectionist pressure in the United States that the Americans decided that they needed to get the dollar dey valued, and that was what the Plaza Cord was about. And then two three years later, I think two years later the Louver Agreement,

they decided to stabilize it. So that was another example of this concern about people want the dollar too much. Want we want it to be the global currency, but we don't want too much demand for dollar. The third episode, the more recent one, is really very interesting. It's the theme of my previous book, The Chips and the Shops, which is about the financial crisis, is after the Asian

financial crisis, two things which came together happened. First with the explosion of China onto the world markets and China's massive accumulation of reserves as a byproduct with termination to keep the remnant be fixed against the dollar, and that led to the explosion of the Chinese current account surplus. It reached a peak of ten percent of GDP in

two thousand and eight. And the other thing that happened, which went parallels after the Asian financial crisis, every trading power in Asia decided we could never let that happen again. And what they thought had happened to them was running a current account deficit, a big trade deficit, and borrowing lots of dollars because they discovered well most of the dollars they borrowed was from Western banks and mostly American bankers. They ran and they didn't have a central bank. They

got print dollars. So when it they had a run, their economies crashed. And so their conclusion us, we must accumulate dollars without limit more or less and run chrent account surpluses to accumulate these dollars. Those two things came together and that led to an enormous expansion of the US external deficit, and that in my view, directly led to the global financial crisis. So these are the three episodes all around this same problem of the dollar's role,

and that's not wrong. Now, the question is how you manage it. It's not fundamentally a trade policy problem, pretty obviously, it's an exchange rate compativeness and macroeconomic policy problem. Interacted and reasonably sophisticated policy makers who handled the previous episodes. In the end, the presidents all of listened largely to relatively competent economists manage these episodes, including most notably the global financial crisis, which is the biggest of these episodes.

The basic point here is yes management of a global system in which the money in the system, which is the dollar is produced by one country does lead to very significant instabilities, which is why intelligent people have thought about this, have quite logically said, we'd have a better economy if we had a world currency, but we don't know how to produce a world currency. The Europeans created

the Europe for this reason. Within Europe. I won't go into the question of whether it worked, but the point is there is a problem here. Now. The problem is how you manage it without blowing up the system. A trade war with everybody at the same time won't solve the problem because underneath it, it's a currency and macroeconomic policy problem. And I think this mainly nowadays relates to the role of China in the system. They're not wrong about that.

I've written quite a lot about this, but unfortunately, the way the US is going about it, I don't see how they're going to get to a resolution. But in the end, the US has to decide do we really like having the dollars the global currency pulse.

the war. They could stop it, but they would lose an awful lot in the process of the idea that it's an unambiguous loss to the US. As has just been pointed out, the US is despite this terrible burden that they are whining about, an immensely rich and powerful country which can spend more than its income indefinitely and

it's not going to go bankrupt. So from our point of view, particularly speaking is a British person who knows what happened when we lost this all those Sterling crisis when I was growing up in the fifties and sixties. Obviously we're all about losing that very very undesirable because people ran from sterling and we couldn't run fiscal deficits

of six percent of GDP. We would blow up let's trust ride, So we would say, stop complaining, guys, you're rich, you're fat, and your currency is basically safe unless you screw up monstrously, So why are you screwing up monstrously? That's where we are now.

imagine gold is your currency. In that stage, gold pretty well was the currency, though there was and so if you ran a balance of payments deficit, you finance your deficit with exports of gold. And what that did is as the goal was disappearing from you you were being demonetized and the money in the economy was shrinking, and so what you had to do is lower your prices go. He was a moneitorist, as all economists were, and I still am in some ways. And so prices are just downward.

That makes you more competitive, and that will adjust the balance of payments and will move into surplus. That's how it's supposed to work. So if you're on the gold standard properly, and you have a currency linked to gold with a fixed price, which Sterling had the four nineteen thirty one, well we'll go into the history of Sterling and gold, and the US was supposed to have until seventy one. Then if there's a gold drain, you're exporting

gold to satisfy creditors who accumulating claims upon you. Your monetary based shrinks. So your monetary policy should tighten automatically, and that will introduce deflationary pressure in your economy, and your price level will fall, and that will equibrilate equilibrate it.

So in the late sixties and early seventies, let's take this episode, the US ran a huge current account deficit and the main reason was they decided to finance the Vietnam War by increasing the fiscal deficit, so they created access demand in the US. That created inflationary pressure in the US that went on for quite a long time and a huge current account deficit. But they didn't want to allow the FED to start tightening monetary policy and

deflating the American economy to reduce the prize level. They were very happy running these huge current account deficits, and that made, of course, the rest of the world was accumulating dollar claims at a very rapid base, particularly the Germans, the Japanese and so forth. And after a while while they started on France and they started saying, we don't want all these dollars, we want our real stuff, and they started converting their dollars for gold, and that's when

the drain on Fort Nosk happened. And then the US had a very simple choice. It was pretty obvious. We were discussing it when I was a student in the late sixties. They could ignore this and the goal would disappear, and then they would have to go off gold. They could reprice gold, which they didn't want to do because it was a recognition of failure, or they could go off the gold standard, and the one thing they didn't want to do was deflate the economy. That meant they

were ignoring the rules of the gold standard. The rules of the gold standard were, if you were losing gold, you had to deflate your economy to make it competitive again by lowering your dollar prices in a fixed rate regime. And at these crucial moments, this crucial moment, they chose not to do that. So the regime collapsed and in the Great Depression, by the way, even more important, they failed to do the reverse. At that stage, they had

a huge current account surplus. America was very very competitive, and the US was of course price level was collapsing, so it was becoming even more competitive, and that was exporting the depression to the whole world through the gold standard system. And so what the US should have been doing instead of allowing the money supply to collapse. Friedman of course wrote classically about this his book with Anna Schwartz. They should have been expanding the money supply like crazy.

So this was the inverse that was the first Great crisis. What I discussed earlier was the second crisis of the gold standard in the twentieth century. So in the Great Depression. The US failed to follow gold standard rules, which was precisely when they had a huge garret account surplus and they had this immensely strong position in the gold inflow,

they were not pursuing massively expansionary monetary policy. On the contrary, they were pursuing massively contractiony monetary policy, making it all worse and the price level was collapsing in the US. So again they failed to follow the rules of the gold standard. The US showed itself and like the UK in the long period it ran the gold standard a country incapable of allowing the foreign position basically the balance of payments to force its monetary policy in directions either

expantory or contractionary. So my view is that the gold standard under the US from the twenties onwards, that was basically when it shifted from a sterling base to a dollar based gold standard. The US never followed the rules of the gold standards. In two colossal episodes, it ignored them.

So of course the gold stander collapsed, and all these whining about this again is ridiculous because the US has never had any intention and that's what we're seeing now of allow any international rules of greed rules from actually forcing it to do something it didn't really want to do.

on salaries and real wages. I knew the UK had a productivity problem and a real wage problem, but I was surprised to hear the extent of it, at least according to some of my friends. What's going on there? Why has this happened?

and eight, British productivity growth was really pretty strong. So between nineteen ninety and two thousand and eight, output ahead in the British economy rose by I think it was about thirty eight percent, which is pretty good over a period of seventeen years. It was around two percent a year, and that was much better than our European peers and quite a notable improvement of what had happened in the seventies and eighty so we felt pretty happy we were

catching up again. Since then, since two thousand and eight, OURPA behead has gone up over the entire period by a little over five percent. Just think of that contrast. It's dramatic. Now. ALP behead in other European countries has not been much better over that period, but they were already doing relatively poorly before two thousand and eight. The slowdown in the UK has been greater than anywhere else.

Up to two thousand and eight, we were doing about as well as the US, and since then we've been in a different class. So it should be saying if you look at the whole period since two thousand and eight, the US has actually been doing worse than in the previous period the US looks so great because everybody else has been doing so badly. So the question is why has this collapse in the UK happened? And I honestly think we can think of lots of possible explanations, but

we don't fully understand it. You can't identify it in just one sector. Though there are some sectors which are particularly important. It seems to have happened in most sectors. Our investment rate is very low, but it's always been relatively low, so it's difficult to say the change there is decisive. There are some aspects of the public sector which clearly are important. The weakening and decline of the

oil and gas sector is important. The fact that the financial sector has never been as dynamic as it was before two thousand and seven and eight is important. But the extent of the decline and what is essentially the loss of dynamism in British capitalism, if you just look at the foot seat, look at the stock market, in most of the companies there are old and dying. We don't fully understand. It is no doubt that the complete absence of a dynamic, technological, high tech sector is important.

When you start looking at the detail, though, and that was very interesting in this column, and the work I did in this column is it's pretty clear that an even bigger difference is in the use of technology in the rest of the economy compared with the US. So I think that we can see what's happened. There's been a general loss of dynamism in the private sector, but it's very difficult to ascribe into specific policy changes because there really haven't been dramatic once we very much the

tax regulatory system is much like it was before. What looks like is that there's sort of just dying. And this is sort of a European wide problem in too so. And of course if productivity growth disappears, re waged growth stops, because in the end, the real wages are incredibly highly correlated, not perfectly with the rate of growth productivity in the economy. The same is true for the US if you look

at long periods, distribution matters a little. But Paul Gruman actually said this, well, a long time ago, productivity is and everything, but it's almost everything. So the basic answer to this question is we know, as it were, what the proximate cause is, but we don't know why it's happened. Fully, I have lots of theories, but we don't really know why this has happened. And it's a general European problem

to some degree. Also in East Asia Japan is noticeable, though actually in the recent past pandemic post pandemic period, Japan has done relatively well.

defense and stuff like that. Is that a realistic possibility in your view?

Do you have the two together. This is a crisis. So if not now when, If you believe, as John Maney, one of the great founding fathers of the EU said, that Europe is born in crisis, this is a big crisis. The world order is being transformed, and the crucial ally, the country on which we're heavily dependent, has got absent, as it were, possibly even hostile. So that's the plus side. Yes, they really ought to respond. The obstacles to change are

also very very big. Europe is fragmented. It doesn't have a genuine people. The brexitters were right when they always said Europe doesn't have a demos, it doesn't have a people. It has people's it's not surprising. Look, you know, the Roman Empire disappeared fifteen hundred years ago and Europe has effectively been dis divided ever since, except under the Catholic Church, and we know where that ended up in the sixteenth century.

So the answer is that I don't know whether this crisis is big enough to force the source of changes economically, which Mario Dragi wrote about in his report or politically to deal with the security questions. I tend to be skeptical simply because I know how big these challenges will be, in how much resistance there has been to every other necessary change. I think the crisis may have to get bigger.

But I don't rule out the possibility that the crisis will get bigger, because if you ask me what will the American policy look like a year from now, I have absolutely no idea, but it could be much more hostile than it is now. It's quite thickly possible, in which case maybe the Europeans really will be forced. At the moment it looks like individual nation state response, not collective, and they're the One really big change I think is that the Germans are panicking, and Germany, in the center

of Europe, is always prone to feeling insecure. That's part of its history. And I think it's pretty clear that the new government coming in will be much more aggressive on economic policy. It's forgotten the debt break nonsense. It clearly will mount a pretty big defense build up. It will become a much stronger motor of demand and all on its ow. Though it can't carry the whole of Europe.

That will make a big difference. But I think in the end, at least in the next few years, we should trust more and what individual nations, above all Germany do. It's much more difficult for France, which is also very divided politically. Remember there's a very big what i' referred to as fifth column, a Putinist fifth column in Europe, and France is usually fiscally constrained, unlike Germany. So I'm modestly optimistic about the near term, but a really big

leap into Union. I don't see the idea of.

Denmark do not typically particularly interest me. But in an environment of attempting to do deals, it strikes me as very relevant that the leaders of these countries have to

be accountable to the individuals who elected them. Talk to us about the mood either among the elites who are going to be involved in these theoretical negotiations which I don't even know if they're existing, and the impulse to try to rectify and to try to come with two friendly relations with the new administration in the United States right now, how bad is it and how much of a hindrance is that to achieving something that resembles a happy out come.

reach a deal if they can. The second issue, which is really important is they will need to feel that this is a deal and this is about trust. Particularly it's got politically painful aspects to it. I'll come to the substance of the deal in the next is they will need to feel that the US is going to stick with it, and there's no doubt whether in a way I think for policymakers who are reasonably professional, whether you like the country or not is not that important.

Though obviously the people really ate the Yanks. It's going to become more difficult. But the crucial question they have is can we trust that we're not going to go through this every week?

to do and that seems to know in detail. But there is something that somebody suggested to me and I've been thinking about that the Americans might be saying, which might fit into their general theme. Assume that all this smoke and mirrors is basically a cover for the complete decoupling of the world from China. China, that's all they're trying to do.

going to comple completely burn our boats with China. And it's particularly applies to some of the Europeans and Japan in all the countries in the region, we really have to trust America. So it's a very big ask. But that's a deal that maybe quite a few countries would be willing to sign, but I certainly wouldn't guarantee it because, as I said, it's a tremendous cost. They all know China is an immense and rising power for many countries.

It's their most important trading partner. For most countries they trade with the US. Though important. Isn't that europe can survive without it? Let's be clear. I mean, we are real adjustment, but it's not. You know, the most important trading partners are themselves, if I remember, they trade more with the UK than the US, so they can survive.

But if the US is really after getting everybody else to break with China and or agreeing that they're going to go on the holding the dog they are getting to, they're not going to crease their reserves. Europeans don't have much anyway. But I could imagine a very simple deal like this might work with quite a few countries, but it won't work with everybody, and it will shatter the world.

Up to two thousand and seven, the chief economists of the BIS was a very dear friend of mine whom I much admired, Bill White, a Canadian, and he was arguing against all the central banks, particularly Green Spans fed that monitor and then Ben Bernanke's fed the monetary policy was far too loose, that as a result, the financial sector was going completely crazy, and that if they didn't do something about this, they were going to end up

with a whacking great financial crisis. And the BIS did a wonderful job of warning people and nobody listened, which would suggest to me it's probably the clearest evidence that they don't run the world. And also quite possibly if they had run the world, and I wrote a bit about that in the time, I think it was a bit more complicated even than that, linked to the balance of payments and so forth. If they had, we were might be in great much greater shape, better shape now

and Trump would now be president. And so if only the BIS run the world is my answer. Builderberg was just a very meeting of business people, politicians and so forth, created by the Dutch of all people, heartily the world's greatest enemy of freedom and so forth, I might say, even the inventors of modern capitalism at a national level, and because they thought after the Second World War we needed it informal meetings among elites. Yes, there are elites,

to keep the Transatlantique relationship it working. That was what it was for and it was set up by the Dutch royal family to make this work. And I was many, many of meetings in Builderberg. I'm very proud of that. They were fascinating discussions in which people said things that would never, I think have been said in public, and

from which I learned hugely. The greatest example to me, which is unbelievable, was the relationships between the Americans and the Europeans, particularly the French, in the lead up to the Iraq War, when it became perfectly obvious that the US was crazy. Another example alas again, if Bilderberg meeting had been as powerful as everybody thinks it would, Trump would never have happened, because that's exactly precisely what Berg was trying to prevent.

about nuclear the US is out of practice that setting aside exchange rates, et cetera, That that institutional muscle to build a new nuclear plant or to build a very you know, productive new Carl ev line, a T shirt factory, given a T shirt factory, we're out of practice. And it makes me wonder like our exchangery is really even an important lever in the modern economy when we think about it, and you know, there's so much about network effects at San Francisco, there's only one San Francisco, and

there's only one Shenzend et cetera. Just putting on your purely economics commentary, hat do you see exchange rates as being particularly important in the modern economy to think about the distribution of production?

And of course Chinese wages are genuinely cheaper, much cheaper because it's much poorer. Do you want to be that poor? So no, of course these are real forces. Of course, the trade service of China is I think a bit of a disruptive factor, and I've argued for twenty years something should be done about it. But the idea that's the principal problem of the US and of de industrialization in the US, it's just.

important in determining the sorts of stuff you make. But as somebody you've said when you talked about T shirt, does the US really want to go back to being the T shirt hob of the world? And I mean, it's just ridiculous, isn't it.

to be a world economy in which things adjust right that. Okay, you export your gold, you have deflation, your competitive your domestic industry is more competitive, you get sales globally, and then you know, you reflate your economy, et cetera. I just do not right now believe the world works like that in such a way that suddenly the US would become a competitive manufacturer of goods simply by dint of having a weaker dollars.

break their relationship with China. And it's interesting that Martin thinks that there could be a number of them who actually would be willing to sign up for that, that the price of free trade with the US is much more restrictive trade with China.

producer Moses Onam, who made this episode happen. More Odd Laws content go to Bloomberg dot com slash odd Lots, where we have a daily newsletter and all of our episodes, and you should add chat the Odd Laws discord with fellow listeners twenty four to seven Discord dot gg slash odd Lots.