Introduction Under the impact of Trump’s rounds of tariffs, the U.S. stock market finally gave a response Technology and financial stocks fell sharply, market panic rose and the risk of recession intensified. The same panic is spreading in Europe. Trump’s America First strategy has pressured allies to raise NATO military spending and shift the industry to the United States, thereby destroying the balance of payments. This is the inherent contradiction of Trump’s America First strategy: short-term trade protection may exacerbate inflation and market disruptions, while in the long term, it will promote the restructuring of the global economic order, weakening the economic and moral dominance of the United States, and ultimately triggering a systemic crisis.
Introduction Under the impact of Trump’s rounds of tariffs, the U.S. stock market finally gave a response Technology and financial stocks fell sharply, market panic rose, and the risk of recession intensified.
The same panic is spreading in Europe. Trump’s America First strategy has pressured allies to raise NATO military spending and shift the industry to the United States, thereby destroying the balance of payments. This is the inherent contradiction of Trump’s America First strategy: short-term trade protection may exacerbate inflation and market disruptions, while in the long term, it will promote the restructuring of the global economic order, weakening the economic and moral dominance of the United States, and ultimately triggering a systemic crisis.
Michael Hudson, economist, super-imperialism Translated by Tang Xiaofu
Michael Hudson, Economist, Super Imperialism
Translated by Xiaofu Tang
In the 1940s, Ping Krausber and Bob Hope starred in a series of movies called The Road to Singapore. The plots were usually similar, with Ping and Bob, two articulate con men or singing and dancing partners, always getting into trouble with some country, and Ping getting out of it by selling Bob into slavery, for example, in Morocco in 1942, with the promise of buying Bob back or sending him to be sacrificed in some pagan ritual. Bob always agrees to the plan, and the ending is usually a typical Hollywood happy ending where they escape together and Ping always wins the girl over.
In recent years we have seen a series of similar diplomatic farces with similar episodes in the relationship between the United States and Germany on behalf of all of Europe in what we might call the Road to Chaos . The U.S. sold out Germany by destroying the Nord Stream gas pipeline, and German Chancellor Olaf Scholz, an unlucky character like Bob Hope, went along for the ride.
The Nord Stream pipeline was bombed.
EU President Von der Leyen, in turn, played the role of Dorothy Lamour in Road to Singapore Playing the role of the flat winning schoolgirl in the movie , demanded that all of Europe raise its NATO military spending from Biden’s demand of 2 to Trump’s 5. To make matters worse, Europe is also imposing sanctions on trade with Russia and China, forcing Europe to relocate its leading industries to the United States.
So, unlike the movie, this story won’t end with the U.S. rushing to the rescue of gullible Germany. Instead, Germany and all of Europe will be sacrificed in our desperate and futile effort to save the American empire. Germany may not immediately experience emigration and population shrinkage like Ukraine, but the decline of its industries has already begun.
Trump said at the World Economic Forum in Davos on January 23 My message to every business in the world is very simple Come to the United States and make your products and we’ll give you one of the lowest tax rates in the world. But if they continue to be made domestically or in other countries, Trump has threatened to impose tariffs on products from those countries of 20.
For Germany, that means, in my opinion, sorry, your energy prices have quadrupled. Come to the US, energy prices here are almost as low as what you were buying from Russia before the Nord Stream pipeline was cut off by your elected leaders.
But the central question is how many countries will suffer the game changer that is Trump’s change to an order based on American rules as Germany has done in silence. When will the globe reach a tipping point that will revolutionize the entire world order?
Will the coming chaos have a Hollywood ending? The answer is no, and the key lies in the break-even effect of Trump’s threatened tariffs and trade sanctions. Neither Trump nor his economic advisors understand the damage their policies are causing by drastically disrupting the global balance of payments and exchange rates, which will make a breakdown of the financial system an inevitable outcome.
Balance of Payments and Exchange Rates Binding Trump’s Tariff Aggression Policy
The two countries that Trump initially threatened were Mexico and Canada, the United States’ North American Free Trade Agreement NAFTA partners. Trump threatened that if Mexico and Canada did not comply with his policy demands, the United States would impose tariffs of 20 percent on imports from these two countries.
He has threatened Mexico on two fronts, first with an immigration policy aimed at deporting illegal immigrants and allowing Mexican seasonal laborers to obtain short-term work permits in agriculture and domestic service.
He has proposed deporting waves of immigrants from Latin America to Mexico on the grounds that most enter the United States through the Mexican border along the Rio Grande. But such a deportation would impose a huge social welfare burden on Mexico, considering that there is no border wall in southern Mexico to stop illegal immigrants from the south.
In addition, it would set up a huge balance of payments cost on Mexico, as well as citizens of other countries seeking job opportunities in the United States. Traditionally, citizens of these countries traveling to the U.S. to work and then sending remittances back home have been a major source of foreign exchange earnings for these countries. Deportation of immigrants would deprive these countries of an important source of foreign exchange earnings that has supported the exchange rate of their currencies against the United States dollar.
The imposition of tariffs20 or other trade barriers on Mexico and other countries would deal a fatal blow to the exchange rates of these countries, as it would reduce their exports to the United States. Since President Carter, the United States has promoted a policy of outsourcing United States jobs by advocating that countries strengthen their exports to the United States in order to realize the use of Mexican labour to lower United States wage costs.
Bill Clinton’s push to implement NAFTA has resulted in a long line of assembly plants on the south side of the U.S.-Mexico border. These factories save on labor costs by using cheap Mexican labor to work on assembly lines set up by U.S. companies. If tariffs were imposed, Mexico would suddenly lose the dollars it needs to prop up the peso that would have been used to pay these laborers’ wages, while trade barriers would also raise the costs for these U.S. parent companies.
Both of Trump’s policies will cause Mexico’s dollar revenues to plummet. It will also force Mexico to make a choice If it passively accepts these terms, the peso’s exchange rate depreciates, imports of dollar-denominated goods become more expensive in terms of Mexican pesos, and drive up domestic inflation dramatically.
Or Mexico could put its own economy first, stating that the disruption in trade and payments caused by Trump’s tariff policies is forcing it to fail to make timely payments on its dollar-denominated debt to bondholders.
Mexican peso
In 1982, Mexico defaulted on its dollar-denominated Tesobono bonds, triggering a Latin American debt crisis. Trump’s behavior looks like he is forcing a repeat of that situation. If so, Mexico may choose to suspend payments on its dollar-denominated bonds.
This could have far-reaching consequences, as many other Latin American and Global South countries are facing similar pressures on their international trade and payment balances. The dollar has soared against the currencies of these countries as the Federal Reserve has raised interest rates to attract investment funds from Europe and other countries. The appreciation of the dollar has meant higher import prices for dollar-denominated oil and raw materials.
Canada faces similar balance-of-payments pressures. Similar to the assembly plants along the northern Mexican border, Canada’s auto parts plant is located in Windsor, across the Detroit River from the United States. In the 1970s, the two countries reached the Automotive Agreement, which allocated operations between the two countries for joint production of U.S. automobiles and trucks for assembly plants.
Of course, the word “agreement” may not be the most appropriate description. I was in Ottawa at the time and learned that Canadian government officials were very unhappy about being at a disadvantage in the auto deal. But that agreement still exists today, 50 years later, as an important part of Canada’s trade balance, as well as an important part of the exchange rate of the Canadian dollar, which has weakened against the U.S. dollar.
Canada is different from Mexico. The idea of giving Canada a moratorium on payments on its dollar debt is unthinkable – after all, the country is largely dominated by its banking and financial interests. But the political consequences would be felt throughout Canadian politics, hence the festering anti-American sentiment that has been latent in Canada should end Trump’s fantasy of making Canada the 51st state.
The Hidden Moral Foundations of the International Economic Order
There is a fundamental illusory moral principle behind Trump’s tariffs and trade threats, a principle that provides a broad narrative basis for rationalizing America’s unipolar dominance in the global economy. This principle is that reciprocity will favor distributional benefits and economic growth. In the U.S. context, this principle is closely tied to democratic values and its carefully prepared rhetoric of selling free markets and promising self-stabilizing mechanisms under a U.S.-dominated international system.
In that important Keynesian debate in the late 1920s, the principles of reciprocity and stability were at the heart of his argument. At that time, the United States insisted that its European wartime allies pay a heavy debt to reimburse them for their purchases of American weapons before the United States formally entered into World War I.
The Allies agreed to pay by collecting war reparations from Germany, attempting to shift the costs to the defeated country. But what the U.S. demanded of its European allies, and what they demanded of Germany, was far beyond what those countries could afford.
Representatives of the nations sign the Younger Plan at the Hotel George V in Paris on June 7, 1929
Keynes explained that the fundamental problem was that the United States raised tariffs on Germany because of the devaluation of the German currency and then imposed the Smoot Hawley Tariff Act on the rest of the world . This made it impossible for Germany to earn hard currency to make payments to the Allies, resulting in the Allies not being able to pay the United States.
Keynes pointed out that for the international debt servicing financial system to work, it was the responsibility of creditor countries to provide debtor countries with the opportunity to raise funds by earning foreign exchange through exports. Otherwise, debtor countries will face currency collapse and severe monetary contraction. This basic principle should be at the core of any international economic organization designed to prevent the collapse of similar organizations through checks and balances.
Opponents of Keynes such as the French anti-German monetarist Jacques Rueff and the neoclassical trade advocate Bertil Olin repeated the arguments made by David Ricardo in his 1809 1810 testimony before Britain s Bullion Committee. He claimed that paying foreign debt automatically creates equilibrium in international payments. This junk economics theory provides the logical basis for today s IMF austerity model.
According to the fantasies of this theory, debt repayment would cause prices and wages to fall in debtor countries, which would lower the cost of their exports to foreign countries and drive up exports. And they believe that repaid debt will be monetized in the creditor country and increase the domestic prices of its products, which, according to the quantity theory of money, reduces its exports.
This price change would continue until the outflow and tightening of the currency of the indebted country was sufficient to allow exports to support its debt payments to foreign debt holders and a new equilibrium was reached.
However, the United States does not allow foreign importers to compete with domestic producers. For debtor countries, monetary tightening does not lead to more competitive export production, but rather to economic destruction and dislocation.
Ricardo’s model and the neoclassical theory of the United States were nothing more than excuses to implement tough debt policies. Structural adjustment or austerity policies have had disastrous effects on the economies and Governments that have adopted them. Austerity has undoubtedly reduced productivity and output.
In 1944, when Keynes attempted to resist the U.S. demand at the Bretton Woods Conference that foreign trade and currencies be subordinated to the U.S. dollar standard, he proposed a super-sovereign currency, the Bancor Bancor, and its accompanying multilateral clearing system. This system would require countries that had long been creditors, namely the United States, to lose the financial claims they had accumulated against debtors, such as the United Kingdom, which was then on the verge of becoming such a player.
This was the price that had to be paid to prevent the international financial order from becoming too polarized between creditor and debtor countries Creditors had to ensure that debtors were able to pay their debts or lose their financial claims.
Keynes also emphasized that if creditors wished to be repaid, they had to import goods from debtor countries, allowing them to earn profits in order to repay their debts.
This is a profoundly moral policy and has more than a little economic justification. It will allow both sides to prosper, not just the creditor countries. If the debtor country is left in austerity, it will not be able to invest in modernizing and developing its economy by raising social spending and living standards.
Keynes
Under Trump, the United States is violating this principle. Instead of a balance-of-payments arrangement like Keynes’s Bancor Bancor, the world now has the harsh reality of America First under a unipolar foreign policy.
If Mexico wants to save its economy from austerity, price inflation, unemployment and social dislocation, it will have to suspend payments on its dollar-denominated foreign debt. The same principle applies to the other countries of the global South. If they join together, they have the moral stance to create a realistic, if not inevitable, narrative that articulates that the functioning of any stable international economic order is a necessary precondition for the system to work.
Thus, the current situation forces the world to move away from a U.S.-centered financial order. As Trump blocks imports through tariffs and trade sanctions, the dollar’s exchange rate will soar in the short term.
This shift in the exchange rate will pressure foreign countries that are in debt to the dollar in the same way that Mexico and Canada will face In order to protect themselves, a moratorium on dollar-denominated debt must be put in place.
This reaction to today’s debt buildup is not because they are odious debts. Malignant debt is judged by the fact that the debt and the terms of its repayment are not in the interest of the countries that are forced to take it on, because the lenders have to assess the debtor’s ability to repay and take some responsibility for the potential loss of the debt. The current situation is even worse than that of odious debt.
The central political problem with the world’s dollar-denominated debt glut is that the United States is acting in a way that prevents debtor countries from earning enough money to service their dollar-denominated foreign debt. As a result, United States policy poses a threat to all dollar-denominated creditors, as these debts are virtually impossible to repay without destroying their own economies.
The United States assumes that other countries will not respond to its policy of economic aggression
Does Trump really know what he’s doing? Or are his volatile policies simply causing collateral damage to other countries?
I argue that there is, in fact, a deep and fundamental inherent contradiction in U.S. policy that is analogous to U.S. foreign policy in the 1920s. When Trump promised voters that the U.S. must be a winner in any international trade or financial agreement, he was actually declaring war on the rest of the world.
Trump is telling the rest of the world that they must be the losers and accept that fact happily. In return for America’s victory, countries will need to accept military protection from the U.S. in case Russia invades Europe, or mainland China sends troops into Taiwan Japan or elsewhere.
And it corresponds to the fantasy that Russia will reap something from supporting Europe’s economic collapse, or that China will decide to compete with the U.S. militarily rather than economically.
There is an arrogance behind this utopian fantasy. As the world’s hegemon, U.S. foreign policy takes little account of how other countries will respond, and the essence of its arrogance is the simple assumption that other countries will passively submit to U.S. behavior with no opposition. This assumption is realistically feasible for countries like Germany, or those other countries that have similar proxy politicians as the United States.
However, what happens today happens that year with similar systemic characteristics. in 1931, German reparations and debt repayment among the Allies finally came to an end. But that was two years after the stock market crash of 1929 and the earlier German-French hyperinflation.
Similarly, Latin American debt was relieved through Brady bonds in the late 1980s. In both cases, international finance became a key factor in the overall political and military collapse of the system, as the world economy became self-destructively financialized. A similar scenario seems inevitable today. Any viable alternative involves the creation of a new world economic system.
Domestic politics in the United States are equally unstable. Trump’s use of the America First political playbook got him elected, but his team was replaced as the contradictions and policy consequences of his operating philosophy were gradually recognized.
His tariff policies will exacerbate U.S. price inflation and, more fatally, cause chaos in U.S. and global financial markets. Supply chains would be disrupted, leading to the disruption of U.S. exports of airplanes, information technology, and more. And other countries would find themselves in the position of having to make their economies less dependent on U.S. exports or dollar credit.
Perhaps this is not a bad thing in the long run. The problem is that in the short term, U.S. policy is forcing other countries to develop a set of supply chain trade patterns and dependencies based on a new geopolitical order to replace previous relationships.
Trump is trying to tear down existing international trade and financial ties and reciprocity. And he’s doing it all on the assumption that in this mess, the U.S. will ultimately win.
This confidence is the theoretical basis for his willingness to tear down today’s geopolitical interconnections. He sees the U.S. economy as a black hole, a gravitational center capable of attracting all the world’s money and economic surpluses to the United States. This is the explicit goal of America First. That’s why Trump’s plan is an economic declaration of war on the rest of the world.
Trump, Musk.
The economic order championed by U.S. diplomacy no longer promises to make other countries prosperous. Trump wants the proceeds of trade and foreign investment to flow to and be concentrated in the United States. This problem is not only on Trump’s part. He is simply following a part of the path that has been shaped, but hidden, in U.S. policy since 1945.
The United States considers itself to be the only economy in the world that can be completely self-sufficient. It can produce its own energy, or it can meet its own food needs and supply those basic needs to other countries, or it has the ability to close the supply valves.
Most importantly, the U.S. is the only economy without the financial constraints that other countries face. U.S. debt is denominated in its own currency, and it has no constraints on being able to overspend by flooding the world with excess dollars, which are accepted by other countries as foreign exchange reserves, as if the dollar were still as reliable as gold.
Behind all this is the assumption that, almost as if by flicking a switch, the United States can return to the industrial self-sufficiency it had then in 1945. America is like Blanche DuBois in Tennessee Williams’ A Streetcar Named Desire, living in the past but unable to age well.
The Liberal Narrative of American Imperial Self-Interest
For other nations to acquiesce and accept that the empire lives peacefully within it, a pacifying narrative is needed that paints a picture of the empire driving everyone forward. The goal is to distract other nations from rebelling against a de facto exploitative system. First Britain, then the United States, promoted the ideology of free trade imperialism, in which their mercantilist and protectionist policies gave them a cost advantage, and in turn turned other countries into their commercial and financial satellites.
Trump has unmasked this ideology. Partly because of US foreign policy with NATO, its military and economic war against Russia, and trade sanctions against China Russia Iran and other BRICS countries have made this narrative untenable.
Its narrative for control has been seen through by everyone and now it would be madness for other countries not to reject the system. The question is, how will these countries put themselves in a position where they can create an alternative world order? What trajectory might it follow?
Countries like Mexico have virtually no choice but to act independently. Canada might give in and allow its exchange rate to fall and domestic prices to rise because its imports are denominated in the hard currency, the U.S. dollar.
But many countries in the global South are facing balance-of-payments pressures similar to those of Mexico. Unless they have an elite clientele, as Argentina does, and Argentina’s elite is itself a major holder of Argentine dollar bonds, their political leaders will have to suspend debt payments or face domestic austerity deflation in their own economies and, at the same time, inflation in imported prices as the exchange rate collapses under the pressure of an ever-appreciating U.S. dollar. They will have to suspend debt payments or be ousted from power by the electorate.
Argentina had previously experienced a long cycle of price increases
Not many leaders are in a position to say that the Green Party, to which she belongs, does not have to listen to German voters, as Germany’s Foreign Minister Belbeck is entitled to do. Oligarchic regimes in the global South may depend on U.S. support, but Germany is certainly an outlier when it comes to willingness to bottomlessly self-destruct economically for the sake of loyalty to U.S. foreign policy.
Suspending debt payments would be less destructive than continuing to succumb to Trump’s America First order. But what stands in the way of such a policy are political issues, particularly centrist fears of making the major policy changes that are necessary to avoid economic polarization and austerity.
Despite the fact that Trump’s threats are effectively hollow and would be blocked by vested interests within America’s own donor class, Europe appears to be afraid of directly debunking Trump’s bluster. Trump has said he will impose tariffs on other NATO members if they do not agree to spend five percent of their GDP on military expenditures, primarily buying U.S. weapons and purchasing more U.S. liquefied natural gas LNG.20 Trump has also said that he will not allow the U.S. to spend more on military expenditures than the United States.
However, if the European leaders do not resist, the euro could be devalued by 10 to 20 percent. Domestic prices will rise and national budgets will have to cut social spending programs, such as supporting families to buy more expensive gas or electricity for home heating and electricity.
The neoliberal leadership in the United States would welcome such demands from the United States on foreign governments that only occur during the phase of class warfare, where U.S. diplomacy has been so thoroughly weakening the political leadership of the Workers’ Party and the Social Democrats in Europe and elsewhere, that the needs of the electorate no longer seem to matter. And that’s where the National Endowment for Democracy NED and its mainstream media come in.
However, it is not only the unipolar dominance of the US over the West and its sphere of influence that is being shaken, but also the structure of global international trade and financial relations, as well as the global system of military relations and alliances that are inevitably at stake.
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