Hello and welcome to These Times. I'm Tom McTague. And I'm Helen Thompson. This week we're turning to one of the most important but underappreciated stories in world affairs today, the extraordinary scale of American borrowing. And the question we're asking is, can Trump's new shock and awe approach be explained by an American debt crisis?
as you know the administration has been pressed repeatedly on the prospects of a recession the messaging has been a little mixed let's look at some of what we've heard i hate to predict things like that There is a period of transition. There's going to be no recession in America. Well, look, you never can predict the future. Mr. Secretary, can you guarantee the American people here and now that there will be no recession on President Trump's watch? Chris, you know that there are no guarantees.
So, Helen, over the past few weeks, we've talked a lot about Donald Trump, obviously, the Ukraine situation, tariffs, Canada, Greenland, but we haven't properly looked at the underlying driver of American domestic politics. the more you can see one uniting factor, I think, and that is the scale of the debt crisis, as we mentioned at the beginning there. I mean, just to put it into perspective for listeners, the US debt now amounts to more than 120% of its GDP.
And the cost of servicing this debt last year was more than $1 trillion, which is more than its defense expenditure, which I just think that is extraordinary. Now, one idea from those really quite close to Trump for dealing with... this debt crisis is something that has become known as the Mar-a-Lago Accord. Big idea behind which is to enforce a devaluation of the dollar.
and to reduce the costs of servicing American debt in one fell swoop. Now, we'll come to the extraordinary nature of this plan, how they plan to do this a little bit later in this half. But suffice to say, it is potentially seismic, certainly historic. if it comes about. The thing I think that we want to focus on is that it's also a deliberate echo of the 1985 Plaza Hotel Accord under Ronald Reagan, in which the US successfully persuaded its allies into a coordinated action to drive down.
So there are these sort of historic echoes. And we're going to turn to those historic accounts of how the US has successfully managed to devalue the dollar under not just Reagan, but Nixon in the second half. But in this first half...
Before we get to that, we're going to look at the scale of the US debt, Helen, and its deficit position, as well as something that Trump himself likes to focus on, which is the US trade position. And then towards the end of this half, Helen, we're going to turn to the... of the Mar-a-Lago Accord as it has become known. Because I think...
For listeners, once you understand what is being discussed, you really start to see how the debt and the deficit in the United States is connected to world affairs, not just for the US position, but its position in relation to...
to Europe, and of course, China. I think let's start with the debt position. Can you just set out like how extraordinary the position is at the moment? Well, I think there's several things that we can... see here the first of them is comparative if we just look at other countries and look at the scale of their debt the borrowing requirement and compare it to the united states we can see that the united states has moved
into being one of the higher debt states in the world. I mean, it's not at the level of Japan, where Japan's debt to GDP is around the 200% level, but it's worse than France, which we spend quite a bit of time on talking as having a debt. crisis of kinds during the course of this year and it's not far behind Italy's position.
Now, clearly, the United States is in a different position than everybody else as a debtor state because it has the world's reserve currency. And there isn't any sense in which the United States can quite literally not be able to service. its debt because the Federal Reserve could print money in order to make the required interest payments. But nonetheless, the fact that
the most important state financially in the world is in this kind of fiscal position clearly has considerable consequences. If you then look at...
What's been going on in terms of the fiscal politics domestically of the debt in the United States? I think that two things stand out in terms of immediate politics. The first is... that the tax cuts, or at least a significant proportion of the tax cuts that Trump passed, through congress in 2017 so when he was president the first time are due to expire at the end of this year and that means that unless congress legislates to renew those
tax cuts then they are going to end as i say at the end of this year and trump and the people around him are absolutely determined that these tax cuts are going to be It should be said that the tax cuts that were passed for corporations in 2017 are permanent, but the tax cuts that are passed on federal income tax and estates, which very disproportionately benefit the richest in the United States.
will finish at the end of the year unless Congress acts. So this is an absolute priority for the Trump administration to allow these tax cuts to lapse would be...
to negate what Trump regarded as one of his signature achievements from last time. And then I think the appointment of every kind of appointment it is of Elon Musk to head the... new department of government efficiency and to try to slash federal expenditure, talk from what Trump said in the campaign about trying to take out a trillion dollars worth of expenditure has to be seen in this context because unless Musk...
succeeds in reducing federal expenditure by a very large amount, then it seems inconceivable how the tax cuts can be renewed in the context of the United States making more than... a trillion dollars worth of payments on interest last year now this project the efficiency project turns out to be pretty difficult if you look at what the website for the department of government efficiency says has been cut so far it's around 115 billion but most people think that's way more than
actually been cut in practice. And some of the high profile targets like the US Agency for International Development, the Department of Education, when you look at the amount of money that they actually represent as a proportion of the US budget, it's pretty small.
And across the board, quite a lot of what Musk has been doing, or Musk's people have been doing at the Department of Government Efficiency, is being challenged successfully in the courts. So this is not a way in which... the US federal expenditure is going to come down. in ways that would allow the tax cuts to be renewed. If you go on and then look what the biggest outlays in the federal budget are, they are social security and health. They come above interest payments for 2024.
These are entitlements. They're congressionally authorised. They both can't be changed without congressional action. And this is, I think, crucial to understand. Trump himself has been adamant that Social Security will not be cut. unless that there is fraud there. And indeed, you could say that's the kind of thing that commitment is what has made Trump different from all kinds of Republicans that have come before him who have been much more interested in reforming Social Security to reduce...
entitlements there so it's very difficult to see how the different commitments that trump has which is reduce the deficit reduce the debt don't touch social security do government efficiency successfully despite the political problems in in doing that how that all adds up And if you want to have some sense of like where the Trump administration wants to be, I think you can see it in the Treasury Secretary Scott Besant's remarks, which is that he wants what he calls a 3-3-3 approach, which is...
3% real GDP growth, only 3% budget deficit, which is less than half of what it is now and wants domestic oil production to be 3 million barrels per day higher. So there's a sense, I think, in which the debt... problem, both in terms of the sense that there's an underlying crisis to it and the other economic objectives of the Trump administration kind of...
both go together even before we get to the trade position, but also are quite conflictual with each other. The last thing I just want to stress at this point is that... The concern about the debt is not just coming from the Trump administration itself. It's coming from within the Federal Reserve Board. So the chairman of the Federal Reserve, Jay Powell, said on the 4th of December...
2024. The US federal budget is on an unsustainable path. The debt is not at an unsustainable level but the path is unsustainable and we know that we have to change that.
Helen, I think the question for me, in a sense then, is why is this crisis more than an American domestic story? And it perhaps lies in what you were saying there about the fact that the cuts that Musk is... pursuing are not going to be enough and that they are they just they don't square the circle and so the U.S. is looking for other sources of revenue and is that where sort of tariffs come in because that is
something that Trump has raised as another revenue raising measure. Because in one sense, I could think, well, OK, this is a story, a classic story that we understand in Europe.
you know, perfectly well that you have a fiscal crisis and you have a move to cut entitlements to try and get the deficit and the debt under control. But this seems actually to be something far bigger than... that because the scale of the debt the scale of the deficit and the scale of the cuts that are required to get things under control they're just they're not in sync and so they're looking elsewhere yeah i think that it's absolutely a context for trump's near obsession with tariffs
as a means of raising revenue it's not the only reason why he's obsessed with tariffs as we're going to come to and indeed as we've talked about in previous episodes but i don't think there's any doubt that in his mind you could say right we need to do these tax cuts
or we need to renew these tax cuts. And the means by which we will do it is to make foreigners pay for it. Yes, exactly. Through tariffs. I think if you go a bit further underneath that, you can see that one of the reasons why the...
United States is in this position and one of the reasons why people are worried is if you look over the period going back to well really this century you can say that the story of US debt and the US ability to borrow, is that in the first decade or so of the century, so to the immediate years after the crash, so I don't know, till 2011-12 maybe,
that the story was that China was acting as what might be called a structural creditor to the United States. And I think it was actually in 2011 where the US Treasury set up special arrangements for China to lend to... the united states that was then complemented in the post crash part of that so after 2008 by quantitative easing so there you have u.s debt being supported both by quantitative easing by the fed and by china's lending
What you get from 2013, 14 through to just before the pandemic is a period in which China... is much less willing to lend to the United States than it had been. So if you look at the official holdings of China treasury bonds, US treasury bonds, they're in decline from 2013. And indeed now Japan... has gone back to being the largest creditor to the United States, which it was before China came along. And then between 2014 and early 2020, the Federal Reserve wasn't doing quantitative easing.
The really then big turning point is the pandemic, because what happened in the pandemic was that the Federal Reserve went back to quantitative easing at a scale far beyond what it had done before. So what came to be called quantitative easing infinity and the effect then of inflation. driven by energy inflation in the second half of 2021, then Russia's invasion of Ukraine, was to put the Federal Reserve in a position where it not only ended quantitative easing,
but it went back to raising interest rates. So in that period of the 2010s, as the debt was getting very much rapidly rising and then still growing, at least that was happening in an environment of either zero interest rates or near. zero interest rates. What has happened since 2022 is that the fiscal position has deteriorated in an environment in which interest rates are now above.
And that is why there's been such a significant increase in the cost of servicing this debt over the last couple of years. So the other way out of the situation would be for the Federal Reserve to be able to... lower interest rates quite quickly but it's in a difficult position to do that because there's still some inflationary pressure at least according to the norms of inflation with which the federal reserve is working hence the interest in trying to find ways in which
Other states would be willing, or other foreign actors, because they're not just states but private investors too, would be willing to receive less interest for the US debt that they're holding. There's one way to think about this, Helen, is to think that... This is where sort of US domestic politics runs up against US global power. To some extent, whatever happens here, the domestic...
problems that the United States has in terms of its debt and the cost of servicing it is always going to be felt outside of America's borders, whatever it decides to do. Because in one sense, as I understand it, the traditional way of dealing with
a debt problem would be to inflate it away so that you could allow inflation to run at a higher level, reducing the value for other countries of holding American debt. But because of the problems associated with... domestic inflation in the United States and the role of the Fed in
keeping inflation under control. It has to increase interest rates in the way that we've seen in the United States, but also obviously in Europe as well. And that's leading to this other crunch. And so then the domestic options for Trump become... more limited and so the traditional method would be
to make further cuts, as you say, into things like Social Security, which he has vowed not to. So then you're running up against the fact that he's like this different type of Republican, and he is saying America first. So one way of protecting America... Yeah, and I think it's at this point that the... The trade dimensions of it really come into focus too, beyond the fact that Trump likes the idea of getting tariffs to do fiscal work so that Americans aren't paying taxes, so to speak.
And that is because when Trump and his advisers look at the overall economic picture, what they see is not just a US budget deficit, but a not insignificant US trade. And obviously there are certain individual countries that have rather large trade surpluses with the United States, not least China. And Trump, as we know, we've talked about it in previous episodes.
regards the consequences of this trade deficit or, if you like, the domestic corollary of this trade deficit as hollowing out the American industrial economy. And he looks at... other countries trading practices and crucially in his mind their exchange rate policies and he says look you are exporting your domestic problems to us and we're not going to tolerate it any longer and we're not going to tolerate it particularly in a
context in which we are engaged in geopolitical competition with China and then we need an industrial economy in order to continue to be a military. And one of the things that Trump really focuses on here is the strength of the dollar. And then what you can see is that period in the... build up to the 2008 crash where the dollar was actually pretty steadily depreciating since around, I don't know, 2012.
It's really, in a way, since the US's resurgence as an energy producer, though it's not the only explanation of it. The dollar has generally been rising. I mean, not in any sort of systematic way in the sense it's come down at times as well. I think it's really noticeable if you look at what's been happening to Asian currencies.
particularly the Chinese yuan, but not only that, since 2001, probably since 2022, that there's quite a strong downward trend. So actually the upward pressure... on the dollar has been quite significant over the last two or three years and as Some central banks and other parts of the world loosen interest rates because they think the inflationary threat has gone away and the Fed's remained with a bit higher interest rates. That has only amplified the upward effects.
or the upward strength of the dollar. How much of this is just the fact that the dollar is the global currency? Because I suppose in some senses, I look at the fundamentals, and you would think that a country running large... deficits and an increasingly unsustainable
debt, as well as running a very large trade deficit, would find naturally that its currency would weaken. Wouldn't that be the expectation of a currency like the pound, something like that you might expect? Whereas they are facing all of that. And a sort of de-industrialization of its domestic economy, certainly in certain important regions at least. And yet the currency is strengthening. So they find themselves in this bind.
in which it is hard to get back to the kind of export-led economy that Trump wants because they don't have the conditions to do so. in a way, the fundamental diagnosis of those who have pushed the Mar-a-Lago accord idea. Perhaps we should say here that the first systematic articulation of this came from...
an advisor of Trump's who's now chair of the Council of Economic Advisers called Stephen Miran, who published a paper in November of last year. I think it's worth quoting some of what he wrote here in order to... to explain the thinking at the centre of this.
And it goes exactly to the point that you've just been articulating, Tom. Miran wrote, the root of the economic imbalances lies in persistent dollar overvaluation that prevents the balancing of international trade. And this overvaluation is driven... by inelastic demand for reserve assets as global GDP grows it becomes increasingly burdensome for the United States to finance the provision of reserve assets and the defence umbrella
as the manufacturing and tradable sectors bear the brunt of the costs. And I think all these sentences really get to the crux of it. this diagnosis says look one of the reasons why the dollar is overvalued is despite the fact that we've got a trade deficit is because other states and investors foreign investors want to hold our currency because it is the
international reserve asset. Obviously, it's the dominant international currency because private investors aren't holding it as a reserve asset. And there's some recognition that the US gets benefits from having the world's international reserve currency. And indeed, Trump himself has... very much said he does not want to lose that for the united states but what miran is saying is that there's a big cost to the united states in the present like status quote and that
As far as he's concerned, the people around Trump are concerned that this persistent overvaluation of the dollar that comes out of these structural conditions, it cannot continue and that there must be a reset to get.
beyond it and it's really noticeable if you read the paper that arguments that can seem like quite technical about the dollars in overvaluation and its relationship to being the international reserve currency go hand in hand with arguments about opioids and the declining infrastructure. significant parts of the United States. It's a way of tying the whole Trump critique of what's gone wrong in the United States in terms of de-industrialisation to this problem of the dollar.
Yeah, and its position in the world and that it's being ripped off by others. I mean, I think it's a fascinating moment because, in a sense, Trump is raging against the cost of being the superpower. And yet at the same time, he's very clear that he wants to maintain America's position as being the superpower. He doesn't want to lose. the dollar status as the global reserve currency, but he is opposed to the costs of being the reserve currency. And maybe here, Helen, it's worth...
just getting into the details of what Mirren and others are suggesting as a sort of way out of what looks like a bind that's sort of impossible to get out of. And I think this is where listeners... I think can appreciate the scale of what they're talking about. And the idea in a sense is to use the power. of America, both the dollar, its economic power and its military power, all connected together to use that to force down the value of the dollar.
And I think crucially, the cost of servicing its debts. And that is to say to countries to engage with them in this effort to drive down the dollar or face punitive tariffs on. trade between europe and the united states or whoever and the united states and to swap the treasuries that they currently hold that's the debt that they hold the american debt and the the interest that they are getting on that and to swap it for 100 year bonds with a zero percent
Or near zero, at least. Or near zero. Now, I think we should just sort of stress how radical this is. This is for... a country like britain or germany or japan who currently hold billions and billions of dollars in american debt paying interest to basically be forced to take a hit on that and to go down to receiving near zero interest. So to take a massive...
hit in our own fiscal positions on the holdings to take a haircut. I mean, effectively, I think in the private sector, that would be called... defaulting on your debt, going bankrupt effectively, for the rest of the world to take a hit on that. And if they don't, to face massive tariffs, or the most radical element of this plan is to lose the American security guarantee.
And so they're potentially hitting the rest of the world with two big sticks. One is trade and tariffs, the tariff issues that we know Trump is willing to use. and American protection. So in effect, you take a massive hit. You have to pay a lot more money essentially directly to the United States by taking a massive cut in what you're owed at the moment in order to continue with the American security protection or effectively be left without it.
of the Mirren plan. I don't think, you know, you have to be an economics expert to understand that is an extraordinary, this is an extraordinary moment. if it actually comes to pass. Yeah, I think that it's really important to see how the Miran plan or the Largo Accord plan ties together these issues and it does it by
treating the issues of trade, security and finance and geopolitical competition for the United States as completely inseparable from each other. If we think about... world of the first decade of this century, the idea in a way was, or it was not an idea so much, an assumption that economic questions were detached.
from geopolitical questions or that the international economic order was largely detached from geopolitical questions. No one then would have thought that what the size of the US trade deficit was really a matter of concern in security.
terms for a European state that's gone and indeed I think that's gone regardless of what the fate of the Mar-a-Lago Accord is and what this plant is saying is look the world is effectively being divided up into blocks that if you are in the american block then you have to be aligned with us you have to be aligned in terms of your trade policies
being supportive of our economy and not the chinese economy you have to pay to be the recipient of an american security guarantee the carrot bit if you like that's still sort of there is look if you are in our block then the Federal Reserve, through its dollar swaps, will help at moments of crisis. Perhaps. Well, I think that he's quite illicit, Miran, in saying, in making that argument, that that's more offer than it is threat.
tariffs and the threat of withdrawal of the security guarantee. And if you get into trouble because of the consequences for you of exchanging into these 100-year bonds, then the Fed will. help and in one sense then that you don't want to lose access to that Fed dollar support system that's been in place for you since the crash and was crucial, should be said, for European states and probably Japan as well, or at least many European states in the 2020.
pandemic financial crisis. Now, we're going to have to come to this, I think, in the second half when we get on to the parallels with what was happening in the 1980s. But I think it is important for now just to stress that in these terms, the Mar-a-Lago Accord... can only be a way for the United States to deal with those states that in principle it has...
still has a security alliance with it. This is not a way of dealing with China's currency weakness against the dollar because the security part of it can't come into it. The tariff bit can come into it, the threat of tariffs. But the threat of tariffs won't be articulated in a way in which is you are receiving this tariff threat against you because we want you in our economic block. That's not the message that's going to China. That's just straight, almost like mercantile.
trade competition, the crucial bit of the Mar-a-Lago Accord is that it's been... directed against or to the United States NATO allies and Japan. There's so much in that, Helen, isn't there? We'll have to turn to most of it in the second half. I mean, my initial reaction is just... One that for the Mirren case to work, its allies, the America's allies, have to trust that the carrot that you set out, that it would still act as the backstop, both in security terms.
And the Fed, in terms of the lender of last resort in this world, will still survive in a post-Trump world. It's all right for Mirren and others to say that, but do European allies really believe that anymore? I think that is completely open to question. And whether America's NATO allies will decide to continue with the American security guarantee at a much increased cost or whether they just pay for their own security guarantee themselves.
You know, that's fundamentally going to be a question for America's allies. Because in a sense, Helen, to me... What the United States is trying to do with this plan is to sort of bust out of the position that it's found itself in, where it's kind of trapped by the logic of its own power, in a sense. But Europe faces a similar dilemma.
as I've just said, in how do you bust out of your own weakness when your own weakness is going to be used against you in such a way and it's become so painfully obvious. You can't hide it any longer if you're having to go along with such a plan. And I think this is where... I mean, Scott Bessent, Donald Trump's Treasury Secretary, put it like this when he said that dollar devaluation...
and global dominance are not mutually exclusive goals. And I think that kind of gets at it. What they're trying to do is they're trying to have their cake and eat it. They're trying to have both. They're trying to maintain both their own dominance and the fruits of American power. And at the same time, try to ensure that benefits American voters themselves dealing with all of these questions that you set out.
earlier, you know, re-industrialise the American economy so you don't have these kind of problems of opioids and all the rest. It's all kind of tied together in one, isn't it? I think that's absolutely right, Tom, is that all these questions, the American domestic...
the American geopolitical questions and the American financial questions are all being brought together in this idea. And I think you can say that Miran is aware... that the European states have got some pretty strong incentives not to play ball with this to regard effectively imposing a default on them as unacceptable.
But, and I think that this is important to see, because I think it explains some of what's going on at the moment, is Miran's argued, even if that they don't... do what is required if their response is to say well we can no longer trust the american security guarantee so we will spend more money on defense which as we know has something seismic has happened in germany in response to that dilemma
then in marriage terms, well, that's a win. Because something has shifted in the way in which all the questions fit together, which is, OK, the European government's come to the conclusion that they can't, in their minds, free ride. on the Americans for security in the way in which that they have. So if the Europeans spend more money on defence, then the Americans can spend less money on defence, at least on the defence of Europe.
That's a win on the fiscal side for the US. Because I think what Scott Besson brings out on this subject is also very interesting because in his words, you can see that the shock or disruptive aspects of it are not just down to Trump and his... personality if you take something that besant said earlier in the year i think it's quite revealing this these are his words more clearly segmenting the international economy into zones based on common security and economic systems would help
Highlight the persistence of imbalances. And this bit's crucial, I think, introduce more friction points to deal with them. So actually forcing the disruption, forcing the crisis, forcing your... allies to face hard questions by bringing about crisis moments is actually in this approach the point and in that sense i think it does explain quite a bit
of the Trump administration's approach to a whole range of issues, whether it's Canada, threatening Canada's sovereignty, whether it's the insults to European leaders, is that it has an economic point in... these people's mind listening to that Helen so much of it seems completely unprecedented to me and I think in the second half
I'll certainly try to make a case that in some senses I think it is. But there are at least two other moments that I think we're going to try and turn to before we look at why it's unprecedented, which suggests actually there have been moments both under Reagan. and Nixon, where the US has tried to do something at least similar to this. So let's turn to that after the break. Readly is perfect for you, with unlimited access to over 8,000 newspapers and magazines. A big...
part of why people love Readly is discovering new magazines and interests, whether it's food, design, film, news, politics, crafts, or thousands of niche interests. Readly has it covered and in one easy to use app. I've been using Readly to keep up with the latest
news and discoveries and it's been a game changer whether i want to dive into deep discoveries from the bbc science focus or just unwind with my favorite sports magazine readly has it all right now you can get an exclusive three month free trial just go to readly That's R-E-A-D-L-Y dot com forward slash times. T-I-M-E-S. Enjoy unlimited reading with Readly and discover more of what you love.
Welcome back, everybody. So we had a bit of an extraordinary first half there where we tried to deal with the extent of the radicalism, in a way, of this Mar-a-Lago Accord. As we discussed, there are precedents for something like this. And I think the most obvious one, the place where we want to start... is with the final few years of the Bretton Woods system, which was brought to an end unilaterally.
by an American president, Richard Nixon. And so there are obvious parallels here because what we're talking about essentially is an American president unilaterally bringing to a close one international economic system. and creating another in its own benefit, which the rest of the world then has to kind of follow behind. Let's start then, Helen, with this moment and why you think there are some real similarities between the two events.
We talked a bit about Nixon's devaluation of the dollar and his use of tariff threats in order to bring that about a few episodes ago when we were talking about tariffs generally. I think there is another aspect of what happened in those last years leading up to the end of dollar gold convertibility that are worth bringing out, Tom. That is that...
American presidents then, and it wasn't actually just Nixon, it was Lyndon Johnson as well, had a sense in which the questions of the growing US trade deficit, much more obviously than it is now, the dollar. The American provision of security guarantees and defence commitments to its allies were interconnected issues. So if you look at...
Lyndon Johnson's administration so this is at the point in which the American fiscal position was deteriorating again not like now but deteriorating to what compared to what it had been because of the Vietnam War, the trade deficit was beginning to creep up, that Lyndon Johnson sought what were called offset payments from West Germany, in which West Germany would have to cover.
US military expenses in Germany itself. And then the US not spending that money abroad would be positive where the balance of payments were concerned. And at various points in those negotiations, the Johnson administration either... explicitly or tacitly made it clear that if the West Germans weren't obliging, then there would be a reduction in US troops in West Germany. And then if you go on a little bit later to when Nixon had become president, so that was January 69.
is that the Nixon administration, probably with the Fed's help, were pressurising the West Germans to purchase US Treasury bonds and US military equipment. So there, even before we get to August 1971 and the direct tying of the tariff question with the dollar question, we can see all these issues, the debt, trade, the dollar, military security tied. together then nixon in august 71 says we're any dollar gold convertibility and
unless you all agree to revalue your currencies against the dollar, these tariffs I'm just put on are staying in place. He succeeds in getting the devaluation for the dollar he wants in the Smithsonian conference in December 1971. And again, as we said before,
is if you look at the next couple of years of the Nixon presidency in Congress, so not really even coming out of Nixon himself, you're getting senior senators who are putting forward legislation or amendments to legislation to halve US troops in. I think I'm right in saying that Nixon does cut the US forces in South Korea during this period, but he doesn't do elsewhere. I don't think there's any doubt.
that this is a period in which all these questions are lined up in the same way in which they are today, albeit a context in which US debt is much less and the US trade deficit is much smaller. It feels in a way, Helen, like sort of imperial maintenance, the kind of constantly having to balance all of these questions of the projection of... power in terms of military power and economic power and actually the idea that these were ever completely separate.
It's kind of odd in a way to think of them separately. There is something clearly true about this notion that from the end of the Cold War, there was a kind of holiday from history and that we weren't thinking about these issues properly. But the connections between... the account that you've just set out and now do seem quite real beyond even what you're saying in the sort of grand bigger picture way and that you have
problems in the United States that come about through its commitments abroad. And it's the wars that it is being, that it is waging. And the fact that it is kind of furious as well with Britain at the time for not joining in the war in Vietnam. But you have this kind of increased debt as a result of...
Imperial overstretch in the way that you might say that the Americans have got themselves into that position through Afghanistan, Iraq, and then these sort of twin crises of the great financial crisis and then the pandemic. It's all building to this moment of...
kind of this crunch moment that we see today but also that kind of threat towards Germany to pay for American troops that are based in Germany kind of reminds me a little bit of the position that Britain finds itself in today with the Chagos Islands you know that actually you have to pay somebody else to lease an asset that you're actually then giving to the United States to project its power in the world. You can see these echoes through recent history.
So I suppose if you're going to give the benefit of the doubt to Trump in this respect, you might think of this as just another iteration of an American president who's found the situation that they find themselves in. difficult and then they use the power of the United States to achieve something and actually let's sort of think this through and say well should we conclude
definitely that Trump is not going to succeed in this. Because actually, if you go back and look at Richard Nixon, he took a unilateral decision. And he did bring about an end to an economic order and create a new economic order that created the dollar as the global reserve currency. And he did so in a way that did benefit the United States. If we think about...
The Nixon administration is trying to bring about a reset of the international monetary and financial order. Then that's exactly what it did, is that although that the Bretton Woods fixed exchange rate system lasted for a little bit longer until March. 1973, after those actions of Nixon in 1971, that that was really the death knell for the Bretton Woods system. And the international monetary order, or some might say the international monetary disorder, because it hasn't been a system.
since was the one which one could argue either we still live with today or that we live with till the 2008 crash. And then what came out of the crash was a strengthening of American financial power in relation to it. There is one thing I think that we should bring out, and that is that... If there was an attempt in any way to bring about a security reset, which I don't think actually was so strong in the Nixon administration, at least when it came to Europe, then that doesn't come out.
of that so if this was reset it was monetary and financial It was to move to an international monetary and financial world in which it would be significantly easier for the United States to borrow abroad to finance both its trade deficit, which was now going to be... much larger in the decades to come because the US was going to become the world's largest oil importer and to finance its budget deficit and to do so without the dollar losing its position.
as the most important currency in the world. And it gave the United States a latitude through the rest of the 70s that the European governments, not least the West German government, really hated, which was persistently... to allow the dollar to drift downwards and it's in that context and we can come to the ramifications of this I think for European Union later is that the first serious attempts to
have a European monetary framework. So use the European community as a monetary vehicle came about the snake and then particularly the European monetary system and the exchange rate mechanism. I think we should see those as a response to dollar weakness, to the success of the Nixon administration, followed through by the Carter administration in resetting the international monetary system.
What then changed, though, and this is interesting in terms of where things are now, is that inside the United States, particularly after Paul Volcker became chair of the Federal Reserve, there was a concern that dollar weakness, particularly... in the context of the energy-driven inflation that came in the aftermath of the Iranian revolution was a problem, and that actually the United States needed to be much tougher about.
and the consequences of Volcker's reign, if you like, at the Federal Reserve, drive interest rates very high. That sent the dollar soaring. This is under Ronald Reagan in the 80s. Yeah, so the first part of... really the first term of the Reagan administration leads to a very strong dollar that has
some devastating consequences for the US industrial economy, particularly in the Rust Belt states, and you start to get, and it's interesting given where things have gone now, in terms of the partisan nature of American politics, Democrats, certain Democrats.
pushing in Congress legislation for tariffs, America's economic competitors, particularly West Germany and Japan. So the context in which Reagan wants to bring about a depreciation of... the dollar, what is going to culminate in the Platzer Accord of 1985 from which the Mar-a-Lago Accord is taking its...
name is one in which the Americans themselves have wanted to push a strong dollar policy. And then there's been a domestic political reaction against that. And Reagan doesn't want to go down the systematic terrorist route.
alternative is to try to get other states to agree to change their macroeconomic policies in ways that would allow the dollar to come down and then once it come down to stabilize it which was the purpose of the second of the exchange rate accords of the the Louvre Accord of 1987, which ultimately didn't succeed.
It's not a coincidence, is it, that this is the same period as well where you could say that American deficits and debt are starting to increase quite rapidly. So I think in 1980, the American... deficit was $60 billion and debt amounted to around $900 billion. By 1985, so five years of Reagan, The deficit has gone up to $200 billion and debt has doubled to $1,800 billion, so $1.8 trillion. So this is...
An interesting parallel with today as well, that you have the increase in... deficits and debt under a Republican tax cutting administration that then tries to deal with the consequences of its economic policy, which is a combination of that and high interest rates, which creates the...
Soaring dollar, it tries to deal with that by imposing costs on other countries, principally its allies. And I guess the interesting thing for us when we're trying to analyze the... differences between then and now is that back then they could assemble a coalition of their allies including the uk germany france and japan i think other canada was there
And that was enough in terms of the power of those countries globally to be able to succeed in what the Reagan administration wanted. And it did succeed. They did drive down the value of the dollar. And I think even today...
This moment is seen as a particularly important moment in China, for instance, because they look at the consequences to the Japanese economy from that moment, which effectively goes into a... decades-long slowdown declined really certainly a relative decline against other economies and they say we cannot allow ourselves to be put into this position and of course
The difference is that China is not part of the American imperium. It's not an American ally. So in a sense, it can't be forced into that position. But Japan was forced into that position. And, you know, I think there was some figures. out last week that said that Japanese GDP per capita is going to be overtaken by Poland next year. Now, this was completely unthinkable in 1985. So I think the sort of interplay, isn't it, between American domestic...
politics and the world is just so interconnected because of the scale of American power. I think we need a breakdown for those reasons, Tom, what you're saying. into the two different episodes, because I think they're revealing in different ways. So the Platzer Accord of 1985, which was an agreement, which I think you could say was successful. to bring the value of the dollar down. And then the Louvre Accord in 1987, and it's the Louvre Accord in 1987,
which turned out to be so lethal for Japan. We just stick with the Platzer Accord for a moment. I think it's really important to stress that at that point, then a weaker dollar was something that... the states that were i think it was a five of them it was a g5 i think for parts they wanted that too we've talked about this in the context of some earlier episodes because
In terms of the first part of the 1980s, this was a really difficult time for European economies. I mean, the whole French crisis. under Metron, before Metron did his U-turn in March 1983, occurs under the context of very high American interest rates and a soaring US dollar. That was what...
Jack Delors, that then the French finance minister described as the third oil price shock. So the other Britain, France, Germany, West Germany, Italy, Canada, Japan, they had some interest in the dollar coming down.
in 1985 it brought to an end a period that for different reasons had been difficult and for them particularly for some of them I mean just take like Britain, I mean, the pound had been so weak in January of 1985, so that's before the agreement had taken place, it had been nearly parity, and the Thatcher government had to raise interest rates by 4.5% in a month to try and stabilise sterling against...
So they had a mutual interest in dollar depreciation at that time. And I think that that means that it is quite different than the situation now. And then if we move on to the... countries that have these large trade surpluses with the United States. You look at the figures for 2024 through November, in order, they are China, 295.
A billion. Mexico, Vietnam, Ireland and Germany. And Ireland and Germany, you should say, are significantly lower than the others, particularly than China and Mexico. China, as you said... is the united states geopolitical rival mexico doesn't have a security relationship with the United States. Neither does Vietnam and quite a bit of that Vietnam surplus is tied to China using Vietnam for exports. And so the way in which that the United States could use its power...
to pressurise states when it comes to that bit of it, which is more, I think, really than the Louvre Accord bit of it and the Platts Accord bit of it. It's just not there in the same way. And then you're absolutely right about the Japan. point because what had happened by 1987 was the american perception was the dollar was now falling like too fast they did not want to take responsibility or bear the burden would be a better way of putting it to
stopped the dollar's decline by having the Fed raise interest rates. They wanted others to do the adjustment. So the effective agreement in the Louvre Accord is you will lower interest rates, you will loosen monetary.
Now, Japan could be pressurised into doing that. And I think although there were not explicit security threats, there's an implicit understanding or tacit understanding that Japan was a security client of... the United States and had to do the American bidding and the effect of that then on the Japanese economy which was in a bubble at the time
of having very low interest rates was to intensify that bubble. And then when it crashed, you could argue that Japan macroeconomically hasn't recovered since. The other side of it, though, was the West Germans. And the difficulty for the Reagan administration there was they could get coal, Chancellor Helmut Kohl, to make an agreement. But he didn't decide West German monetary policy. The Bundesbank did. And the Bundesbank was, well, we're not doing this.
So in that sense is that, at that moment anyway, the capacity for the most powerful European state... to resist what the Americans wanted from the strength of its monetary position was quite considerable. Now you could argue that, well, this is where the world is like radically different. And this is where the fact that the...
International monetary system perhaps already changed in 2008 when the Federal Reserve started acting as an international lender of last resort, a provider of dollar swaps, to countries' central banks or the Eurozone. the European Central Bank, where their banks were running systemic risks, really does change things because actually maybe it is the fear of losing dollar swaps that now can do the intimidating work that couldn't be done to West Germany in 1980.
Couldn't be done to the Bundesbank more particularly in 87. There are a few paradoxes here, Helen, I'm trying to sort of work through in my mind, but I'll give it a go. But one, it seems to me that... In a sense, if you compare then and now, you would say that the American and the Western position was more powerful and that they could bring about something like what we've just discussed. And the very fact that the United States is turning...
east and away from Europe is because of Europe's relative weakness and China's relative strength. But that then makes it more difficult to achieve. what it wants, what the United States wants, because in relative terms, the powers that it needs to do something on a global scale, it doesn't control. And so it's left turning. back to Europe and its old allies, the ones that it used in the Plaza Accord of 1985, to attempt to bully them into a position to support America's economic strategy.
against China and so Europe finds itself in this position where it is fundamentally I think in a sense weaker than it was in 1985 it is a weaker part of a bigger global economy i mean if you think I think it even was in 97 under Tony Blair, where the UK economy is bigger than China and India. In 1985, it's much bigger. By today, of course, the world has completely shifted. And so we're talking really about what you...
said in the first half which is the creation of economic blocks what we're talking about is a kind of a much more obvious imperial maneuver in which Europe, at least according to this kind of Mar-a-Lago accord, which we should say that Trump is not publicly endorsed, but it is there. lying dormant there as part of the US administration. It is an official paper by somebody very close to Donald Trump and it is all the talk.
in Washington and on Wall Street. But it's Europe being co-opted into this wider attempt to deal with China. It's the attempt for America to deal with both its imperial strength. and its new relative weakness. Yeah, I think if you make a comparison back to the middle of the 1980s, there's something really revealing here, which is there isn't actually any pressure at that point.
at the time of Plaza, being put on the Europeans about their trade policies. There is trade policies in relation maybe to the United States, but not in relation to others. And it comes after a point in which the Reagan administration has dropped the pressure. including the extraterritorial sanctions that was put on the European countries, European states, about their energy trade with the Soviet Union. That phases...
ended. The issue of who's doing what trade with China's not come into play. So the who of trade is not a geopolitical question that's been pushed by the Americans in 1985. It very much is now because I think that If you read the Miron paper, that one of the things that is going on amongst all the others is a demand to the European states that they align their trade policies with...
The US against China and that if they don't, that will be another thing where they will be threatened with the withdrawal of security guarantees. And they're actually saying, well, if that they are willing. to accept the payment, if you like, that is demanded for that. That's sort of OK, because at least that means they'll be paying higher tariffs effectively to the American government, because the mindset of the Mar-a-Lago thinking is that tariffs ultimately get paid.
by exporters. So it's kind of an approach which says look the European states have got some choices here and whichever that they do we can gain some benefit from it and that it will strengthen position. I think though The difficulty with the whole thing, which is just again not there like in the 1980s, it so obviously looks like a threat to...
imposed default on the holders of US Treasuries and we should say is that most of them or many of them in terms of who foreign holdings of US Treasuries particularly in Europe are not held by
like central banks, they're held by private investors. So the mechanism by which, say, the Americans are saying to the British and UK holdings of US Treasury third after Japan and China is to... do what is being asked of them, or could be being asked of them under this plan, is that the British government would actually have to force the acceptance of these new terms.
on to institutional and private investors. And the idea then that there wouldn't be a bond market-like reaction to that, I think it's quite hard to imagine. There's this kind of idea that... the bond markets can be protected from the disruptive consequences of this. But the irony is that if you go back to the last point in which the bond markets...
really feared about US Treasuries, which was March 2020, so the pandemic crisis. As I said in the first half, the response of the Fed to that was QE infinity. And this is what the Americans are supposed to be getting away from, not what they're supposed to be going back to.
idea that this wouldn't cause an absolutely fundamental crisis outside of the united states seems to me to be completely for the birds i mean if you think about the tiny scale of what is really causing serious concerns in Whitehall today, you know, about increase from 2.5% to 2.7% of GDP on defence spending or the problems with the welfare.
budget or the fact that the economy is not growing enough, which is, you know, crunching, making the fiscal squeeze even more difficult for Rachel Reeves. If you to think about. what we're talking about here the sort of a default effectively from the united states i mean just i casting my mind back to the idea of a default from greece you know in the eurozone crisis being effectively The idea that the United States, the sole superpower in the world, the holder of the reserve currency.
with the level of debt that we have discussed, you know, where the interest alone that it is spending on its debt is a trillion dollars in one year. The idea that you could... default on that and it not cause absolute carnage in europe in particular i think is just obviously it seems to me not true it would be catastrophic and so for me helen it kind of comes back to this sort of fundamental
question i suppose which is the united states powerful enough itself to pull off a maneuver like this which reminds me of some kind of daring military maneuver to bust out of an encirclement or something that you found yourself in that you have to do something absolutely dramatic to recover your position because that is what is essentially an attempt to do it is it
It is talking about something dramatic because of a weakness that it's got itself into in terms of its spending position. It's in terms of its debt position. And it is seeking to bust out of this in a way that protects. its global power. That is the goal of this manoeuvre. And I think it is very difficult, personally, to see how they can do that. Whether you can do something this radical and ever maintain your position.
at the level of American power that we have come to take for granted. I don't see it personally, politically, it is possible for Europe to accept zero... percent or close to zero percent 100 year american bonds i just can't see how that is certainly not in the european union perhaps britain has found itself in a position where it's too fundamentally weak to be able to resist something like this i don't know but Certainly, I think that would be...
Extremely difficult for Europe to take. I can't see how Germany or the French would allow, the French public would allow a position like that to come about. The Americans, obviously, we discussed this, can't impose that on countries outside of their dependence. But even Canada now, and you look at Canadian domestic politics, that seems very difficult to get itself into that position. And so I suppose you've got questions here of...
fundamentally, even if they try to get into this position, a little bit like what you're seeing now in terms of the belief in America's commitment to Article 5 of NATO. What does this do to...
trust in the American guarantee on any of these questions, whether it's security questions or the Fed being the lender of last resort? Are European countries in a position where that they can trust that in the long term? And I mean, something that's been playing on my mind as we've been discussing discussing this, Helen, is the case, oddly, I suppose, of Harold Wilson, where he attempted
to bust out of a position that he found himself in the 60s where he believed that to recover Britain's economic vitality he had to devalue the pound but to do so would have weakened Britain's position globally and in the end he tried to find a way through. that but couldn't he ended up devaluing and then he undermined Britain's
global position. And I do wonder whether fundamentally it is possible for the Americans to bust out of this in a way if they're going to impose such costs on their allies, whether they can maintain their global power. Yeah, I think that this, Tom, is like where it really... is a singular moment and it is quite hard to reach for the historical comparisons because at that moment that you're describing when Wilson is making choices and obviously part of those choices are bound up with
Britain's military commitments abroad acting as a guarantor not just of its own energy security but Western European energy security as an imperial military power. in the Middle East, something that would come to an end pretty much at the same time as Sterling was devalued, or at least the intention to bring it to an end at the same time. Sterling was at that time very much second tier.
to the dollar. So this is like the last throes, if you like, of Britain working out what the relationship is between your currency, your trade position and your security commitments. If you look at what the United States is... And this is where I think that the dollar swaps aspect of it is quite important, is that the United States is in an odd position where aspects of its power are in very clear decline.
including its ability to project military power. The world is more multipolar than it was, and that's to the United States' disadvantage. But since... since the Federal Reserve started acting as an international lender of last resort, the United States has been able to use the power of the dollar much more dramatically.
much more coercively in a number of ways than was the case in the period between the end of Bretton Woods, the immediate years before the crash. So the question then becomes, in a way, is... If the difficulty for everybody else is the financial market turbulence that would be created out of pursuing the Mar-a-Lago idea, has the United States got the financial power via dollar swaps?
both to induce cooperation and to threaten, because the consequences of not doing what the Americans want would be, in the end, more severe for everybody else. than for the Americans. I think that's an unknown. I mean, I think this is where we're into unprecedented territory, not just in terms of not being able to reach for historical comparisons, but actually being almost like in a black hole.
of how to think about what's going on here. It's not difficult to work out the diagnosis in Trump circles of the problem and how it all... joins up but to try to understand what their understanding of the risks in play for using American power and how they think about American power and how long that they think, in a sense, the window of opportunity for it to be exercised before the world in multipolar terms decisively turns against them. That's a whole other question and much, much harder.
This is where and I feel like we keep getting back to this point over the last month in particular where actually the mental gymnastics are required. to try to understand what's going on here with this presidency just get harder and harder. Yeah, because I think in one sense, I think one question that's kind of run through the Trump administrations, you know, one and two, is, you know, the notion...
of American withdrawal or American isolationism and that just really not being a good frame for thinking about Donald Trump, the idea of isolation. It just doesn't work. It's not the correct way of thinking about him. But I think what...
I've found interesting is this question of Trump's relationship to American global power and it's the kind of responsibilities or commitments that come with maintaining that power and whether in some senses he feels that America would thrive more comfortably or just it would be wealthier if it was in some sense it's like a normal power not a sole superpower it was one of a number of great powers and it didn't it just kind of got rid of its obligations but I think there's something in
that but i think that the one area where trump clearly doesn't want that to be the case is the dollar position because he's also at various times threatened action coercive action against any state that tries to de-dollarize Which obviously doesn't mean the European states, it's China, Russia, Brazil. So in that sense is that, I mean, this goes a bit against what I just said about the difficulty of understanding this, but what's going on is you could say, well, the Trump hubris.
is to think that the situation doesn't impose really hard choices on the United States and that Trump wants it both ways. He wants to say we have to re-industrialise the United States, both for domestic reasons. and for geopolitical competition with China, but we're simply not prepared to give up the dollars position in order to do that. That still has to be part.
And it may be that these are the things that are actually going to crash into each other. I think that does emphasise your point, because ultimately then, if we sort of... focus in on the paradoxes of his position, then we're left sort of relying on instincts and things like that, that are going to guide his ultimate decision making on these questions, because he thinks he can have it all, you know, and who knows, maybe he can maybe this kind of maneuver.
will work and he can bust out of the position he's found himself. I found myself over the weekend, not for the first time, thinking about Donald Trump, the Paul Kennedy book published in 1988, The Rise and Fall of Great Powers. Reading the conclusion, I would urge listeners actually to pick the book up and at least just sort of turn to the conclusion because in some senses, it gets at this difficulty that you and I are talking about because...
Kennedy's diagnosis seems very good and in some senses, you know, hard to argue with. I mean, he says the argument of this book has been that there exists a dynamic for change driven chiefly by economic and technological developments. which then impact upon social structures, political systems, military power, and the position of individual states and empires. I mean, ultimately, he argues that military power rests upon the adequate supplies of wealth, which derive from a...
flourishing, productive base from healthy finances and from superior technology. And therein lies a lot of what we've discussed. The challenge for the United States of trying to recover.
a flourishing manufacturing base while at the same time having healthy finances which it clearly doesn't but it does have that other element of that you know the superior technology or at least it has superior technology to Europe it's unclear at the moment what its position is in relation to China And I think I'll maybe just bring the episode to a close with Kennedy's final observation in the book, in which he says, for all its economic and perhaps military decline, he's writing here in 1988.
It remains the decisive actor in every type of balance and issue. Because it has so much power for good or evil, because it is the linchpin of the Western alliance system and the center of the existing global economy. What it does or does not do is so much more important than what any of the other powers decide to do. And that basically remains the case today.
It's interesting to note, though, that Kennedy was perhaps correct in his diagnosis of the American crisis at that time. But in projecting forward, essentially much of the world that he thought was coming to be and did not come into being an American power. increased.
virtually from the moment he published the book going forward. So it's very hard for us to sit here and know what is going to happen. But at least I think discussing these issues brings some clarity to diagnosis at least. So on that, I'll bring this episode to a close. Thank you so much for listening and please do tune in again next week.