Yves here. Get a cup of coffee. Below is yet another fine talk by Michael Hudson (NYSE:), here on the sweep of his argument in Super Imperialism, starting with the handling of war debts to the US in World War I, and how that series of decisions had ramifications even today.
Even though Hudson explains in detail why the system of the US running current account deficits to finance its overseas military has gone well beyond its sell-by date, the lack of any plausible alternative leaves US counterparties in the position of needing to prop up, or at least accommodate, the current order.
I do have a small quibble. Hudson points out that the US is now in the position of having raised interest rates, yet having the dollar fall, which is the reverse of the relationship everyone has come to expect, of a high yield on a country’s bonds attracting hot money and therefore producing currency appreciation.
First, high interest rates = currency appreciation is not a relationship set in stone. When I was starting out in finance, a high interest rate on government bonds was seen as a sign of weakness, of needing to pay a yield premium to compensate for an expected devaluation in the not-too-distant future.
Second, the “currency depreciation despite an interest rate rise” did not happen until the Trump era, and is a direct response to Trump policies, as opposed to the US’ declining status generally. Mind you, the US likely would have eventually wound up in the “currency depreciation despite an interest rate rise” boat eventually, but Trump greatly accelerated that occurrence.
It was only after Trump took office that he made clear that he intended to make massive tax cuts and would try to fill the gap with spending cuts and tariff proceeds. Pretty much everyone who was not a Trump cheerleader recognized that this program would only widen the government deficit, putting pressure on interest rates and making the dollar less attractive.
In addition, increasingly erratic Trump behavior, particularly his tariff whiplashes, confirmed the worst fears that Trump would be wildly unpredictable, and was also tearing down institutions and norms that somewhat curbed the raw exercise of power. His tariffs, no matter how he implements them, will lower GDP and increase inflation on a sustained basis.
The wild policy swings have a second effect, of increasing investor uncertainty and increasing the risk premium foreign investors require to commit funds to the US. These risk premia can be substantial. I once was asked by a US manufacturer to help evaluate a proposed investment in Mexico. The gap between the seller’s ask and what my buyer wanted to pay was massive, literally a 10x difference.
When you analyzed their situations, the gap was entirely rational. Some big factor were that the American buyer would face higher taxes, labor costs, and tougher regulation. But the biggest was that the American buyer should also assign a Mexican risk premium to the expected cash flows from the investment, which then was 15% to 20%.
See original post for references.