If you wanted to construct a scenario that was damaging to American claims to economic leadership in the world, it would look like the Trump administration.
I see the possibility of a new understanding dawning here. I would go a little bit further. None of the nations in question are themselves monoliths -- the "trade wars are class wars" logic of Pettis and Klein are happening inside all of them: a comprador elite in every nation of the periphery is complicit with, and benefits from, American empire. To say that it is "by invitation" is partly correct -- the comprador elites are invited, while their fellow citizens are merely exploited. To characterize the latter as having been "invited" is grotesque. As for the concentration of the $USD asset holdings in the wealthier enclaves of Europe and Asia, this comes as no surprise -- it's where the comprador elites of the truly exploited "Global South" (Global Majority?) stash their flight capital.
And this is no less true of America itself. The benefits of "exorbitant privilege" are, as William Gibson wryly notes about the future, "unequally distributed" within the metropole. Just as the periphery has its comprador elites and immiserated masses, so too the US has its domestic elites, a shrinking middle class, and a restive, growing underclass.
If America's misleadership class had been just a little bit more careful, and a good deal less grasping, they might have invested the windfall of Empire more broadly among the American people in such a way which would cement their own legitimacy and improve the well-being and productivity of the citizenry. But you will find no wisdom among them -- only hubris. Hence, nemesis is warming up in the wings ...
In addition to benefitting from enhanced profitability, American equity assets have benefitted from higher valuations. As well, a big share of increased profitability has come from a decline in rates and taxes.
Glad to hear you cite the drop in interest rates in the 2010s. I write about the life/annuity industry, which was crushed (and bought-into/rescued by Wall Street's Apollo, KKR, Blackstone) by the lower-for-longer rate policy.
Lots of questions.
- Under the gold standard, didn't money flood to a country when its rates were higher, not lower?
- Is the U.S one country or two? There's a minority that accumulated substantial financial assets (like freezers full of sirloin; running on Freon and electricity) during the long equity boom. Then there's a majority who live paycheck to paycheck (MacDonald's hamburgers every day for lunch).
- Will the BBB help prolong the boom in U.S. financial assets (meta-dollars) by increasing the primary dollar supply? Will the hand-to-mouth majority participate in that?
Thanks for posting the link. Apologies for posting before reading the whole paper (trying to respond in a timely manner, the algorithm waits for no man). To my quick scan the paper concludes the market multiple expansion is based on changes in the risk free rate. It probably won’t continue but, (this is my take) it also means fears of a stock market bubble are over stated by market commentators.
Historically, I have a background in economics and financial markets. I found the discussion very interesting and thought-provoking but will have to reread this several times to get the full impact of it. What would be helpful if you follow up with a discussion of the implications of this analysis for what the Trump administration and Treasury/Bessent are doing now and their faulty (?) assumptions.
I have read numerous analyses (a bit ad nauseum, in fact!) but don’t think I know Varoufakis. Where can I find his analysis? Frankly, I am still waiting for an announcement of demands for investors to “convert” to the alleged century bonds since the many contradictory fiscal and financial policies being espoused and implemented are extremely high risk and frequently contradictory.
I read it, and thanks for the link. I am 76 and of an age that I lived through that period. Personally, there have also been political, economic and financial machinations but in my estimation, nothing to match what Trump and his toadies are doing. This is on an unimaginable scale both domestically and internationally. Also, my husband and I lived and worked in the financial industry in New York from the late 1970s to when we retired in the late 2010s. Trump's corruption, grifting, poor and incompetent business practices, nastiness, you name it, were and continue to be off the charts. It is dumbfounding that after ten years, this country and its voters are reaping what they sowed by voting for Trump not once, but twice, in spite of all of the evidence to the contrary. The society's moral collapse is complete, something I thought I would never say in my lifetime.
It is unfathomable. It is totally out in the open and accepted as normal. I have spent so much time and energy reading articles about why people voted for Trump in 2024 in spite of all of the in-the-open corruption, grifting, lying, obvious personalty pathology, you name it. The conclusion I reach is that we are the point of total moral collapse as a country and culture, which I never thought would happen at the speed it is happening. It's only 6 months; just think of the damage that will be done in the next 6 months, much less after. Why do people think this group of individuals, including Trump, are leaving? Are they behaving that they care what voters think? The voter-suppression machine is in full bore, and there is no stopping it. What is astounding to me is how many people think elections are business as usual. I never thought I would say this but 2026 is going to be very, very bad news. I don't know why it isn't front and center the data Democracy Docket/Marc Elias puts together on what is happening on a state-by-state basis, with DOJ's explicit support. It is frightening.
This is very good as far as it goes, but it stops short. Why was there a sudden upsurge in US monopoly profits post 2010? As most of us know, the driver is a small number of tech stocks, the mag 7. This is truly the biggest political economy event of recent times. It is reflected in the immense hubristic power of the people sitting on top of this sector, and its economic ramifications are enormous for not only the US net investment position but domestic outcomes like income distribution.
This in turn raises the question of why this sector and why now. There is lots of room for speculation, and no doubt the character of current technological change has something to do with it. But the monopoly tie-in is crucial. The recent book "The World Eaters" by Catherine Bracy points to the blitzscaling impulse emanating from VC, but is this cause, consequence or both? We need research on this topic, but my hunch is that the technologies behind metastasizing valuation are subject to powerful network effects, such that they are natural monopolies in the economic sense. Imagine if the electrical generation companies crucial to 20th c. industrialization had never been regulated much less sometimes municipalized -- if they could just charge what the traffic would bear. That would be a different world, right? Well, aren't we entering this world with the new wave of tech monopolies? And what are we going to do about it?
“my hunch is that the technologies behind metastasizing valuation are subject to powerful network effects, such that they are natural monopolies in the economic sense.”
Correct.
These are economic rents, full stop. Unfortunately the old classical economic distinction between “earned” (from labour and employment of industrial capital) and “unearned” income (economic rents) has almost entirely been lost, no thanks to a neoclassical economic orthodox priesthood which has banished the history of economic thought from its undergraduate programs.
Yes I think you are both completely correct here, the brilliance of the technology company business model being that they are utterly borderless, unless you actively prohibit them a la China or Russia.
We managed to destroy vast segments of our own domestic creative and information based industries, and we allowed all the profits and benefits from this to be effectively transferred to a small number of super profitable technology companies.
Then they let us invest in those companies as a salve to the wounds inflicted, but this is a moronic trade off which has destroyed large chunks of our societal infrastructure.
Now we are doing the same thing again with all this AI technology, we are going to entirely hollow out our societies and give all the data and intellectual property to a small group of companies in a country which is becoming increasingly hostile to all of us. I don't understand why there is not more outcry against this, we are sleep walking into total ignorance and dependency, moaning about Chinese Steel while we outsource our intellectual capacity to a country which increasingly acts as a hostile counterpart and dictates to us what we should do.
Sorry but this is a single sided analysis of the situation which is far more complex than the irritating, Central Bankesque policy poetry which you reference in the piece belies. Central Bank economist analysis so often ignores the political economy manifest in how so much of the world works.
The counterbalance to the European and Asian investment into the US equities markets has been that these "US" equities are typically companies which derive a great deal of their profit from outside the United States. The hegemonic pact has required these countries to open up their economies to US firms as part of the deal with the global hegemon.
For the Middle Eastern states (and Norway), given the denuded state of their own economies which are mainly focused on fossil fuel extraction, the situation is different, their investment is the quid pro quo of their ongoing protection by the US and their cooperation in the pricing of global commodities.
In the meantime, the states I reference above have destroyed their own internal reproductive and investment capacity by becoming entirely reliant on the United States and it's financial system for new investment in their own economies.
Whoever blinks first and sells out of the US en masse could bring the whole thing crashing down as they preempt others rush for the exits. But the US won't tolerate that for the aforementioned reasons (global hegemon) so we will carry on in this bizarre dance until whatever breaks breaks. In a way your analysis is correct but the allies are not tied in because of the returns on offer, they are tied in because if they sell they will be punished. It's part of the deal.
All this suggests a world where out right lying about reality becomes the norm.
So a wag the dog war in say Afghanistan would last 18 years before the US dare admit that it still did not have control. A war with Russia would be promoted as a success with Russia suffering 4-5 times the casualties of Ukraine and anyone pointing out a casualty rate of 10:1 to other way would get nowhere near TV. A genocide might be promoted as a justified action and protesters arrested.
One could easily imagine the obsession about controlling the narrative, not the reality affecting other areas. Follow the Science would be a Marketing plan to control the population, nothing to do with Science. Median earnings might barely change in 40 years while Economists celebrate how the Economy rose 150% in that time. The impact of Massive poverty could be ignored and instead media would mostly discuss the OverProduction of Elites (Peter Turchin's idea) where too many billionaires all want too much influence over governments.
Fortunately this world is only seen in films like the Matrix or 1984.
Afraid so. Lying or ignorance or a combination. On the one hand, we consume Downton Abbey and Versailles. Flipside, the Heart of Darkness financed it all. Downton Abbey gets better ratings than Joseph Conrad.
Starting with the first principles of politics as described by Aristotle: Monarchy/Tyrany, Aristocracy/Oligarchy, Polity/Democracy.
The US has been from the start, set up as a Oligarchical Republicthat tried and persevered in minimizing/erasing/killing any meaningful democratic elements.
And its system has encouraged similar systems, but in a vassalized position, promoting compradror elites, all over the world. Which prefer or are induced to invest in the US than in their own economies.
Imagine all that money invested in productive or social endeavours in the countries of origin. It ultimately shows the criminality of the entire system.
As China continues to expand and deepen its own economy, it is also gradually expanding its bond system, possibly preparing for a grand nonviolent coup of the current global reserve system (likely by a PRC-administered hybrid of UST and "panda bonds"). This will fulfill the ultimate strategic goal of dismantling US global hegemony without totaling the global economy.
However, PRC may wait for a real systemic shock to the UST system before swooping in to save the day, like Japan et al. following through on threats.
Interesting analysis with good sources. But I struggle with the concept of "foreign financing to enable trade deficits" because it gets the causation wrong and attributes blame for US debt to exporting countries. The US doesn't need financing to afford its trade deficits, the negative net investments position is just the inevitable consequence of the US paying for exports in US dollar and those have to find their way back into the country in the form of investments in debt or equity or real estate or whatever. One could imagine a situation where the dollars get hidden under German or Chinese mattresses and the US could continue to import from those countries. This works as long as the US dollar is an accepted currency for trade. Only when that changes, the US would have to stop importing. Admittedly, even a dollar note is a liability of the US to other countries, but that's a different, technical argument.
You're right about the cliche of foreigners financing our trade deficit... as if they were doing vendor financing, or as if we had to borrow in yuan or earn yuan in order to finance our purchases from China. Our politics is breaking down, I think, in part because the American public (and even a slew of policymakers) thinks the U.S. is comparable to a household, money-wise. Last night on the news, I heard Senator Slotkin of Michigan say that the American public understands that, just like a household, the government can't afford to spend beyond its means. Obama said the same thing. W. said the country was "broke." The interest on the debt terrifies a lot of people who can't see that it's keeping $30+ trillion in credit-money afloat (and in support of equity and real estate values.) So lots of chimerical boulders block our way forward in terms of economic/political policy. I expect many people to disagree with this view, which is not original to me.
In my opinion, the American public is not worried enough of federal deficits and debt. Otherwise, there would be a willingness to compromise on taxes and benefits. Neither does the government act like they are concerned.
I counted around $14trn in cumulative current account deficits since 2000 (https://fred.stlouisfed.org/series/IEABC), so there is a correlation, at least. But you are probably right about other investments. The US used to be an attractive country to invest in.
US corporations benefit from extremely lax implementation of anti-trust laws, and environmental and other regulations. As well as having a political system in which buying politicians is legal. As well as the sick care system, the military industrial complex and the DHS being largely profiteering troughs for corporations. "Obamacare" was a massive profit boon for the sick care industry. Keeping tax rates for corporations low, with the facilitation of massive tax avoidance, also increases corporate profitability. The BBB continues with this, as does the gutting of the regulatory state.
Profitability in China has been much lower, even though China's economy has massively outperformed the US one due to the enforcement of actual competitive markets and the much stronger walls of the Party-state against corruption (especially under Xi). The current dynamism of Chinese corporations is much greater than US ones in field after field, because a more competitive economy is inherently more dynamic than an oligopolistic corrupt one. Of course, Chinese industrial policy (that does not pick winners but industries) and long-term stable planning play a very large part.
In addition, the US has gone out of its way to encourage flows of dirty money into the US, including drug money and the proceeds of corrupt extraction from around the world. Now Trump is hawking the US around with his promise of purchased citizenship. The slashing of foreign aid also stems a source of dollar outflow.
The US historically benefitted from its foreign investments having much greater returns than foreign investments in the US (much of it parked in low yielding US Treasuries), so it still ran a surplus on investment returns even though it had a growing negative on its net foreign assets. That ended in 2024, so now US investments abroad earn less than foreigner investments in the US. How long can this state of affairs continue while the US runs 7% budget deficits and 4% current account deficits? Who knows, but at some point some group or groups will try to front run the exits.
Any stock market large fall may also drive investors to the exits, maybe that's why Trump is so hyper-focused on US stock market movements, especially at such high P/E multiples.
yeah, they basically set up something in the mold of the late pre-Treaties of Westphalia Holy Roman Empire, but this time it had a Super Power at its core, but while its voluntary, its also that the planetary network of networks wont take too kindly to big sub-nets or nodes leaving it, its basically a planetary network of public corruption. But like like the pre TWs HRE, it has variability within it, including in form, so thats why you have many cases of just flagrant kleptocrats and their area Big Biz partners and an assortment of others, all of which is almost just entirely fake and dirty, but then you have China where its more of a "legitimate" (but just form their internal pov, their big role has been very bad for many other countries and played a part in those aforementioned sub-nets staying in power). Just in my personal opinion, this version greatly boosted some of the staying power strengths of the old HRE but at the cost of making it actually more brittle, if and when the time comes it ma fail far more spectacularly and drag many of its sub-nets into the abyss with it
This analysis helps explain the astonishing speed with which the social democratic (not!) leadership of EU nations have adjusted themselves to the new regime in Washington — they know where their profits come from. No biting the hand that feeds and so on. They make noises about taxing the monopoly profits of the Mag 7 but it’s only for leverage.
If any other country had a rapidly deteriorating Net Foreign Asset position and a negative NFA of 90 percent of GDP it would be heading for a massive debt crisis. Does the fact that a large part of the US negative NFA position is in equities save it from this? Does it mean the crisis will not come? Or does this mean that the crisis when it comes will be in the form of a stock market collapse with collateral damage elsewhere in the economy (eg household wealth, pensions and insurance).
Well broken down. The distinct phases are real. The GFC played a huge role in this phase break, followed by the EMU crisis. The US was the engine of growth & innovation coming out of the GFC/EMU malaise, drawing in investment from Europe. Japan's extreme monetary easing as part of the Three Arrows brought a weaker Yen and greater AA shift offshore. China was leading the EM to try and escape the dollar trap. The causality for dollar buying has changed over time, but always an empire by invitation. The hegemonic dominance camp continue to miss this point.
Minor point: the standard identities on which the Pettis/Klein and other analyses depend, apply to flows only, not stocks. Capital gains and losses are outside them. Most readers of this blog know this, but it bears repeating.
I see the possibility of a new understanding dawning here. I would go a little bit further. None of the nations in question are themselves monoliths -- the "trade wars are class wars" logic of Pettis and Klein are happening inside all of them: a comprador elite in every nation of the periphery is complicit with, and benefits from, American empire. To say that it is "by invitation" is partly correct -- the comprador elites are invited, while their fellow citizens are merely exploited. To characterize the latter as having been "invited" is grotesque. As for the concentration of the $USD asset holdings in the wealthier enclaves of Europe and Asia, this comes as no surprise -- it's where the comprador elites of the truly exploited "Global South" (Global Majority?) stash their flight capital.
And this is no less true of America itself. The benefits of "exorbitant privilege" are, as William Gibson wryly notes about the future, "unequally distributed" within the metropole. Just as the periphery has its comprador elites and immiserated masses, so too the US has its domestic elites, a shrinking middle class, and a restive, growing underclass.
If America's misleadership class had been just a little bit more careful, and a good deal less grasping, they might have invested the windfall of Empire more broadly among the American people in such a way which would cement their own legitimacy and improve the well-being and productivity of the citizenry. But you will find no wisdom among them -- only hubris. Hence, nemesis is warming up in the wings ...
In addition to benefitting from enhanced profitability, American equity assets have benefitted from higher valuations. As well, a big share of increased profitability has come from a decline in rates and taxes.
See this paper from the Fed.
https://www.federalreserve.gov/econres/feds/files/2023041pap.pdf
Glad to hear you cite the drop in interest rates in the 2010s. I write about the life/annuity industry, which was crushed (and bought-into/rescued by Wall Street's Apollo, KKR, Blackstone) by the lower-for-longer rate policy.
Lots of questions.
- Under the gold standard, didn't money flood to a country when its rates were higher, not lower?
- Is the U.S one country or two? There's a minority that accumulated substantial financial assets (like freezers full of sirloin; running on Freon and electricity) during the long equity boom. Then there's a majority who live paycheck to paycheck (MacDonald's hamburgers every day for lunch).
- Will the BBB help prolong the boom in U.S. financial assets (meta-dollars) by increasing the primary dollar supply? Will the hand-to-mouth majority participate in that?
Thanks, Tooze, for your deep dive.
Thanks for posting the link. Apologies for posting before reading the whole paper (trying to respond in a timely manner, the algorithm waits for no man). To my quick scan the paper concludes the market multiple expansion is based on changes in the risk free rate. It probably won’t continue but, (this is my take) it also means fears of a stock market bubble are over stated by market commentators.
“Rest of the world” elites “on the hook” a disposable commodity.
Historically, I have a background in economics and financial markets. I found the discussion very interesting and thought-provoking but will have to reread this several times to get the full impact of it. What would be helpful if you follow up with a discussion of the implications of this analysis for what the Trump administration and Treasury/Bessent are doing now and their faulty (?) assumptions.
I have read numerous analyses (a bit ad nauseum, in fact!) but don’t think I know Varoufakis. Where can I find his analysis? Frankly, I am still waiting for an announcement of demands for investors to “convert” to the alleged century bonds since the many contradictory fiscal and financial policies being espoused and implemented are extremely high risk and frequently contradictory.
I read it, and thanks for the link. I am 76 and of an age that I lived through that period. Personally, there have also been political, economic and financial machinations but in my estimation, nothing to match what Trump and his toadies are doing. This is on an unimaginable scale both domestically and internationally. Also, my husband and I lived and worked in the financial industry in New York from the late 1970s to when we retired in the late 2010s. Trump's corruption, grifting, poor and incompetent business practices, nastiness, you name it, were and continue to be off the charts. It is dumbfounding that after ten years, this country and its voters are reaping what they sowed by voting for Trump not once, but twice, in spite of all of the evidence to the contrary. The society's moral collapse is complete, something I thought I would never say in my lifetime.
It is unfathomable. It is totally out in the open and accepted as normal. I have spent so much time and energy reading articles about why people voted for Trump in 2024 in spite of all of the in-the-open corruption, grifting, lying, obvious personalty pathology, you name it. The conclusion I reach is that we are the point of total moral collapse as a country and culture, which I never thought would happen at the speed it is happening. It's only 6 months; just think of the damage that will be done in the next 6 months, much less after. Why do people think this group of individuals, including Trump, are leaving? Are they behaving that they care what voters think? The voter-suppression machine is in full bore, and there is no stopping it. What is astounding to me is how many people think elections are business as usual. I never thought I would say this but 2026 is going to be very, very bad news. I don't know why it isn't front and center the data Democracy Docket/Marc Elias puts together on what is happening on a state-by-state basis, with DOJ's explicit support. It is frightening.
This is very good as far as it goes, but it stops short. Why was there a sudden upsurge in US monopoly profits post 2010? As most of us know, the driver is a small number of tech stocks, the mag 7. This is truly the biggest political economy event of recent times. It is reflected in the immense hubristic power of the people sitting on top of this sector, and its economic ramifications are enormous for not only the US net investment position but domestic outcomes like income distribution.
This in turn raises the question of why this sector and why now. There is lots of room for speculation, and no doubt the character of current technological change has something to do with it. But the monopoly tie-in is crucial. The recent book "The World Eaters" by Catherine Bracy points to the blitzscaling impulse emanating from VC, but is this cause, consequence or both? We need research on this topic, but my hunch is that the technologies behind metastasizing valuation are subject to powerful network effects, such that they are natural monopolies in the economic sense. Imagine if the electrical generation companies crucial to 20th c. industrialization had never been regulated much less sometimes municipalized -- if they could just charge what the traffic would bear. That would be a different world, right? Well, aren't we entering this world with the new wave of tech monopolies? And what are we going to do about it?
“my hunch is that the technologies behind metastasizing valuation are subject to powerful network effects, such that they are natural monopolies in the economic sense.”
Correct.
These are economic rents, full stop. Unfortunately the old classical economic distinction between “earned” (from labour and employment of industrial capital) and “unearned” income (economic rents) has almost entirely been lost, no thanks to a neoclassical economic orthodox priesthood which has banished the history of economic thought from its undergraduate programs.
Cui bono?
Yes I think you are both completely correct here, the brilliance of the technology company business model being that they are utterly borderless, unless you actively prohibit them a la China or Russia.
We managed to destroy vast segments of our own domestic creative and information based industries, and we allowed all the profits and benefits from this to be effectively transferred to a small number of super profitable technology companies.
Then they let us invest in those companies as a salve to the wounds inflicted, but this is a moronic trade off which has destroyed large chunks of our societal infrastructure.
Now we are doing the same thing again with all this AI technology, we are going to entirely hollow out our societies and give all the data and intellectual property to a small group of companies in a country which is becoming increasingly hostile to all of us. I don't understand why there is not more outcry against this, we are sleep walking into total ignorance and dependency, moaning about Chinese Steel while we outsource our intellectual capacity to a country which increasingly acts as a hostile counterpart and dictates to us what we should do.
What we here in the US have done is exchange, as you note, bond portfolio inflows for corporate debt and, especially, equity inflows.
Using just released TIC data (with the usual caveats), UST holding $7.6T, Corporate Bonds $4.8T, Corporate equity $18.6T.
Guesstimating from valuation changes, a fair chunk of the $18.6T is in the Mag 7, which pays almost no dividends.
That's a lot of hot money betting on further gains from very high p/e ratios.
AI better produce some ROI soon or things could get grim.
Sorry but this is a single sided analysis of the situation which is far more complex than the irritating, Central Bankesque policy poetry which you reference in the piece belies. Central Bank economist analysis so often ignores the political economy manifest in how so much of the world works.
The counterbalance to the European and Asian investment into the US equities markets has been that these "US" equities are typically companies which derive a great deal of their profit from outside the United States. The hegemonic pact has required these countries to open up their economies to US firms as part of the deal with the global hegemon.
For the Middle Eastern states (and Norway), given the denuded state of their own economies which are mainly focused on fossil fuel extraction, the situation is different, their investment is the quid pro quo of their ongoing protection by the US and their cooperation in the pricing of global commodities.
In the meantime, the states I reference above have destroyed their own internal reproductive and investment capacity by becoming entirely reliant on the United States and it's financial system for new investment in their own economies.
Whoever blinks first and sells out of the US en masse could bring the whole thing crashing down as they preempt others rush for the exits. But the US won't tolerate that for the aforementioned reasons (global hegemon) so we will carry on in this bizarre dance until whatever breaks breaks. In a way your analysis is correct but the allies are not tied in because of the returns on offer, they are tied in because if they sell they will be punished. It's part of the deal.
All this suggests a world where out right lying about reality becomes the norm.
So a wag the dog war in say Afghanistan would last 18 years before the US dare admit that it still did not have control. A war with Russia would be promoted as a success with Russia suffering 4-5 times the casualties of Ukraine and anyone pointing out a casualty rate of 10:1 to other way would get nowhere near TV. A genocide might be promoted as a justified action and protesters arrested.
One could easily imagine the obsession about controlling the narrative, not the reality affecting other areas. Follow the Science would be a Marketing plan to control the population, nothing to do with Science. Median earnings might barely change in 40 years while Economists celebrate how the Economy rose 150% in that time. The impact of Massive poverty could be ignored and instead media would mostly discuss the OverProduction of Elites (Peter Turchin's idea) where too many billionaires all want too much influence over governments.
Fortunately this world is only seen in films like the Matrix or 1984.
Couldn't possibly happen here.
Afraid so. Lying or ignorance or a combination. On the one hand, we consume Downton Abbey and Versailles. Flipside, the Heart of Darkness financed it all. Downton Abbey gets better ratings than Joseph Conrad.
Indeed.
Starting with the first principles of politics as described by Aristotle: Monarchy/Tyrany, Aristocracy/Oligarchy, Polity/Democracy.
The US has been from the start, set up as a Oligarchical Republicthat tried and persevered in minimizing/erasing/killing any meaningful democratic elements.
And its system has encouraged similar systems, but in a vassalized position, promoting compradror elites, all over the world. Which prefer or are induced to invest in the US than in their own economies.
Imagine all that money invested in productive or social endeavours in the countries of origin. It ultimately shows the criminality of the entire system.
> they are tied in because if they sell they will be punished. It's part of the deal.
And Trump-USA is testing that tension.
Axios from May: "Japanese finance minister says selling U.S. bonds a 'card on the table'": https://www.axios.com/2025/05/02/japan-trump-bonds-tariffs-trade-deal
As China continues to expand and deepen its own economy, it is also gradually expanding its bond system, possibly preparing for a grand nonviolent coup of the current global reserve system (likely by a PRC-administered hybrid of UST and "panda bonds"). This will fulfill the ultimate strategic goal of dismantling US global hegemony without totaling the global economy.
However, PRC may wait for a real systemic shock to the UST system before swooping in to save the day, like Japan et al. following through on threats.
I hear you calling out economic "sanewashing."
Interesting analysis with good sources. But I struggle with the concept of "foreign financing to enable trade deficits" because it gets the causation wrong and attributes blame for US debt to exporting countries. The US doesn't need financing to afford its trade deficits, the negative net investments position is just the inevitable consequence of the US paying for exports in US dollar and those have to find their way back into the country in the form of investments in debt or equity or real estate or whatever. One could imagine a situation where the dollars get hidden under German or Chinese mattresses and the US could continue to import from those countries. This works as long as the US dollar is an accepted currency for trade. Only when that changes, the US would have to stop importing. Admittedly, even a dollar note is a liability of the US to other countries, but that's a different, technical argument.
You're right about the cliche of foreigners financing our trade deficit... as if they were doing vendor financing, or as if we had to borrow in yuan or earn yuan in order to finance our purchases from China. Our politics is breaking down, I think, in part because the American public (and even a slew of policymakers) thinks the U.S. is comparable to a household, money-wise. Last night on the news, I heard Senator Slotkin of Michigan say that the American public understands that, just like a household, the government can't afford to spend beyond its means. Obama said the same thing. W. said the country was "broke." The interest on the debt terrifies a lot of people who can't see that it's keeping $30+ trillion in credit-money afloat (and in support of equity and real estate values.) So lots of chimerical boulders block our way forward in terms of economic/political policy. I expect many people to disagree with this view, which is not original to me.
In my opinion, the American public is not worried enough of federal deficits and debt. Otherwise, there would be a willingness to compromise on taxes and benefits. Neither does the government act like they are concerned.
I think the overall trade with commodities and goods is dwarfed by the money funneled in various "investments".
I counted around $14trn in cumulative current account deficits since 2000 (https://fred.stlouisfed.org/series/IEABC), so there is a correlation, at least. But you are probably right about other investments. The US used to be an attractive country to invest in.
US corporations benefit from extremely lax implementation of anti-trust laws, and environmental and other regulations. As well as having a political system in which buying politicians is legal. As well as the sick care system, the military industrial complex and the DHS being largely profiteering troughs for corporations. "Obamacare" was a massive profit boon for the sick care industry. Keeping tax rates for corporations low, with the facilitation of massive tax avoidance, also increases corporate profitability. The BBB continues with this, as does the gutting of the regulatory state.
Profitability in China has been much lower, even though China's economy has massively outperformed the US one due to the enforcement of actual competitive markets and the much stronger walls of the Party-state against corruption (especially under Xi). The current dynamism of Chinese corporations is much greater than US ones in field after field, because a more competitive economy is inherently more dynamic than an oligopolistic corrupt one. Of course, Chinese industrial policy (that does not pick winners but industries) and long-term stable planning play a very large part.
In addition, the US has gone out of its way to encourage flows of dirty money into the US, including drug money and the proceeds of corrupt extraction from around the world. Now Trump is hawking the US around with his promise of purchased citizenship. The slashing of foreign aid also stems a source of dollar outflow.
The US historically benefitted from its foreign investments having much greater returns than foreign investments in the US (much of it parked in low yielding US Treasuries), so it still ran a surplus on investment returns even though it had a growing negative on its net foreign assets. That ended in 2024, so now US investments abroad earn less than foreigner investments in the US. How long can this state of affairs continue while the US runs 7% budget deficits and 4% current account deficits? Who knows, but at some point some group or groups will try to front run the exits.
Any stock market large fall may also drive investors to the exits, maybe that's why Trump is so hyper-focused on US stock market movements, especially at such high P/E multiples.
yeah, they basically set up something in the mold of the late pre-Treaties of Westphalia Holy Roman Empire, but this time it had a Super Power at its core, but while its voluntary, its also that the planetary network of networks wont take too kindly to big sub-nets or nodes leaving it, its basically a planetary network of public corruption. But like like the pre TWs HRE, it has variability within it, including in form, so thats why you have many cases of just flagrant kleptocrats and their area Big Biz partners and an assortment of others, all of which is almost just entirely fake and dirty, but then you have China where its more of a "legitimate" (but just form their internal pov, their big role has been very bad for many other countries and played a part in those aforementioned sub-nets staying in power). Just in my personal opinion, this version greatly boosted some of the staying power strengths of the old HRE but at the cost of making it actually more brittle, if and when the time comes it ma fail far more spectacularly and drag many of its sub-nets into the abyss with it
This analysis helps explain the astonishing speed with which the social democratic (not!) leadership of EU nations have adjusted themselves to the new regime in Washington — they know where their profits come from. No biting the hand that feeds and so on. They make noises about taxing the monopoly profits of the Mag 7 but it’s only for leverage.
There are traps in which there is no impulse to escape. The liquidity trap, the middle income trap.
If any other country had a rapidly deteriorating Net Foreign Asset position and a negative NFA of 90 percent of GDP it would be heading for a massive debt crisis. Does the fact that a large part of the US negative NFA position is in equities save it from this? Does it mean the crisis will not come? Or does this mean that the crisis when it comes will be in the form of a stock market collapse with collateral damage elsewhere in the economy (eg household wealth, pensions and insurance).
Well broken down. The distinct phases are real. The GFC played a huge role in this phase break, followed by the EMU crisis. The US was the engine of growth & innovation coming out of the GFC/EMU malaise, drawing in investment from Europe. Japan's extreme monetary easing as part of the Three Arrows brought a weaker Yen and greater AA shift offshore. China was leading the EM to try and escape the dollar trap. The causality for dollar buying has changed over time, but always an empire by invitation. The hegemonic dominance camp continue to miss this point.
As I wrote below, invitation for whom?
Minor point: the standard identities on which the Pettis/Klein and other analyses depend, apply to flows only, not stocks. Capital gains and losses are outside them. Most readers of this blog know this, but it bears repeating.