Adam’s international macro framework is powerful precisely because of its historical range. The strongest part of this post is that it breaks a very tempting but dangerous analogy: today’s United States is not Britain before 1914.
And I think Adam's explanation of today’s global imbalances is more insightful than Prof. Pettis’s. Prof. Pettis is not simply wrong. The problem is that his framework tends to explain global imbalances mainly as surplus-country savings spilling into the United States. That risks understating America’s own agency as the global center of profit control, the issuer of dollar assets, and the core of the military-financial order.
Adam’s post provides the historical pivot. The United States does not necessarily need to control the world by investing abroad. It can reorganize the world by making the world hold American assets.
China is powerful, but it is not the incumbent of the present system. It is the challenger. The more interesting comparison today may not be between Britain and the United States, but between Edwardian Britain and contemporary China.
The missing layer, in my view, is this: 21st-century global imbalance cannot be reduced to the idea that “Chinese excess savings are crushing American workers,” nor to the idea that “America is reluctantly forced to serve as the world’s consumer of last resort.” It is a deeper exchange structure. The United States uses dollar assets, Treasury markets, technology stocks, intellectual-property rents, and the military-financial order to obtain the world’s goods, production capacity, savings, and supply-chain labor.
The real question is whether this structure can still work when global competition shifts into electric vehicles, batteries, solar panels, drones, shipbuilding, industrial robots, and grid equipment. Can America continue to substitute asset control and profit control for real industrial capability?
100%, you nailed it with that. The thing I find so strange about Pettis-Klein is the way they combine some insightful analysis of global imbalances with the portrayal of America as a passive recipient of surplus countries' policy choices, or even of America as victim. The interpretation just does not sit at all well with the raw facts of America's overwhelming power and centrality in the world system. America as a whole, and not just its elites, clearly has benefitted very handsomely from the unipolar world order it carved for itself, and I think you articulated very neatly the nature of those benefits that sit alongside a nevertheless real situation of global imbalances within the system.
Prof. Pettis’s framework is useful because it reminds us that global imbalances cannot be understood through trade flows alone. They must also be analyzed through savings, capital flows, and domestic income distribution. But its limitation is that it begins too heavily from the question of “who generates excess savings and who is forced to absorb them,” reducing a dynamic global production-system problem into a relatively static story of savings spillovers. The real question is not whether global imbalances are savings-driven or investment-driven. It is which institutional and industrial system is more capable of converting savings into effective demand, productive investment, and long-term productive capacity.
From this perspective, neither surpluses nor deficits are the final answer. A large surplus may mean that a country has suppressed household income and consumption, thereby becoming dependent on external demand. But it may also mean that it has converted savings into manufacturing expansion, infrastructure, technological learning, and supply-chain density. A large deficit does not automatically imply decline either. If capital inflows are converted into technological innovation, productivity growth, and future cash-flow generation, a deficit can be part of a growth process. The real dividing line is not surplus versus deficit, but productive allocation versus financial absorption.
Prof. Pettis’s problem is that he mainly explains global imbalances as excess savings from surplus countries spilling over into the United States. This underplays America’s own agency as the global center of profit control, the supplier of dollar assets, and the core of a military-financial system. The United States is not merely a passive container absorbing global savings. It actively produces a global asset structure: through fiscal deficits, military spending, the Treasury market, technology monopoly profits, and the depth of its financial markets, it supplies the world with assets to hold and receives in return real goods, labor, and supply-chain capacity.
This is also why traditional trade-deficit statistics can be misleading. Take the iPhone as an example. Customs data may record a phone assembled in China as a Chinese export at its final export price, but the real profit and value control may be concentrated in Apple, chip companies, software ecosystems, and brand distribution. America’s bilateral goods deficit can therefore be overstated. But this does not mean the United States has no real external imbalance. A more accurate description is that America’s external accounts combine goods deficits, services surpluses, overseas profits, intellectual-property rents, global demand for dollar assets, and interest payments on Treasuries. This is not a simple story of “America consumes too much and China saves too much.” It is the operating model of an imperial balance sheet.
America’s real problem is not whether it “really” runs a deficit. It is that it increasingly relies on assets, military power, and intellectual property to exchange for the supply capacity of the physical world. This system looked highly successful in the Apple era, because the United States could offshore low-margin manufacturing while retaining operating systems, brands, distribution channels, financial valuation, and high-margin services. But once global competition moves into electric vehicles, batteries, solar panels, drones, shipbuilding, industrial robots, grid equipment, and advanced manufacturing, the question becomes whether high-margin control rights can still substitute for physical industrial capacity. The real core of global imbalance may not be who saves too much or who runs too large a deficit, but who can convert capital from an accounting balance into future productive power.
Yes, I would largely agree. Americans buy a lot of stuff, a lot of everything - in fact more than they can make or grow in the US. The 300 million plus Americans consume more than they can make. Importing an endless stream of iPhones, laptops, foreign luxury cars, running shoes and household goods - plus enjoying expensive holidays in foreign countries - reflects an exceptionally high standard of living. If Trump was smarter he would express gratitude to China for all their hard work which allows Americans to buy an iPhone for $600…
I have long suspected that Trump’s obsession with trade deficits has nothing to do with economics, or any concern about prosperity for ordinary Americans… instead Trump decided a decade ago that winning the electoral college votes of Michigan and Pennsylvania would hand him the presidency. Long rambling speeches about China and trade deficits, with promises to bring back the car and steel jobs to those 2 states is purely a political strategy, but an economic fantasy.
What is real is a concern about essential manufacturing in defence industries, and a worry that AI and chip technology leadership could pass to China, with implications for national security. Every country wants to ensure it doesn’t lose its leadership in advanced technology. Switching to EVs and building manufacturing in renewables and batteries would be desirable - but Trump’s hatred of clean energy is the block there.
The extent that America buys luxury goods from Europe, or consumer electronics from Asia, or agricultural products from central and S America plainly doesn’t really matter. Americans are rich and want to live well - let them enjoy the finest things wherever they come from. Keynes marvelled at the fact that someone in London 100 years ago could make a phone call and order tea or coffee or other luxury items from around the world to be delivered to his door. Trump’s fixation on trade deficits in goods has never made much sense until you look at Michigan and its electoral college votes IMHO.
What gave Trump the electoral weapon he wielded with his demagoguery was the domestic maldistribution of the benefits of US empire — US elites took too much for themselves, investing neither in domestic industrial capacity nor the socioeconomic wellbeing of the citizenry as a whole. US wastage of its “human resources” has been shocking.
That is exactly the question. The United States still has enormous room to maneuver because of the dollar system, Treasury markets, deep capital markets, and the global demand for American assets. Exorbitant privilege has not disappeared.
But the risk is that this privilege gets used mainly to sustain fiscal deficits, asset inflation, consumption, buybacks, and financial dominance, rather than to rebuild the industrial base beneath the system.
The real test is whether America can convert financial centrality into productive capacity. If the dollar system buys time for semiconductor capacity, grid modernization, advanced manufacturing, energy infrastructure, and critical-minerals resilience, the privilege remains strategic. If it merely allows the United States to keep importing the physical world while exporting assets, then yes, it risks being wasted.
“the risk is that this privilege gets used mainly to sustain fiscal deficits, asset inflation, consumption, buybacks, and financial dominance, rather than to rebuild the industrial base beneath the system.”
That ship sailed the best part of 50 years ago — the risk now is that the squandering will continue.
A really enjoyable post. Lots of interesting ideas that seem very relevant now. Perhaps critical - with wars involving Russia and the US being fought now. Both countries have leaders who seem at a loss to finish a war started for no clear reason. Both Trump and Putin have fired huge amounts of expensive weapons with little to show for it.
The trade imbalances that concern the US President so much confirm one basic idea - manufacturing is very easy to export. The UK in the late 19C saw both America and Germany overtake it in heavy industrial output such as steel. It is very easy for nations with cheaper labour to buy machine tools, or copy manufacturing techniques or steal Intellectual Property. China has certainly done all 3 in the past 2 decades.
The UK saw leadership in heavy industries move to Germany and the US, after WWII liberated Europe and Japan saw manufacturing boom. In the 80s and 90s Asian economies became “Asian Tigers”. Then China started growing through export led growth…
Again and again machines were installed in developing economies that demonstrated how mobile modern manufacturing can be.
What is left? Probably the things that cannot be exported or copied so easily - the rule of law, banks that are trusted, creativity and open economies that avoid cronyism. Switzerland or Norway or even, say it quietly, the UK do rather well because their institutions are trusted and contracts are enforced.
Trump seems so gloomy about America, and obsesses about the production of cars or output of oil, when the US financial services sector, or medical technology, or Silicon Valley are doing so well. Countries like America should try to observe the rule of law and avoid cronyism. The US has tremendous soft power and influences the world through film and tv, there is little wrong with America that couldn’t be fixed by a competent president and more responsible congress.
I don’t underestimate the terrible suffering that Russia has inflicted on Ukraine, my point was that Putin’s gamble has completely failed - he hasn’t captured Kiev or brought Ukraine under Russian control. Putin has inflicted terrible damage on the Russian army and got bogged down in a 4 year quagmire. Putin’s hubris has destroyed Russian living standards and its military reputation.
Absolutely minimizes the elephant in the room: the ruthless extraction of surplus from the Indian empire, as a source of materials and labor, and as a captive market for exports.
Maybe it’s time to retire the borrower/lender dichotomy and start calling trading nations counterparties. The retirement of gold as the settlement factor may help explain that statement. We’ve financed China’s emergence as a dynamic country, rather than create a bitter enemy. There’s value in that. It’s our privilege that we don’t have to earn yuan to buy Chinese goods. Macroeconomics is above my pay grade, however. Polanyi is my seer.
The reference to the Boer War is interesting too - I remember being taught that the British army had to expand rapidly at the start of the war. It was shocked to find that a v high proportion (50%?) of volunteers from Britain’s industrial cities were unfit and failed a medical. Common problems such as lack of strength or height, rickets, bad teeth etc led to the British army becoming concerned about poverty and disease in the working classes.
This formed the background to reforms in better provision of housing, healthcare and the introduction of pensions. In short, the right in politics and the military realised that something needed to be done to raise living standards for the poor - how else can you have a large army in times of war?
A whole essay on imperialism and not one mention of the massive export of U.S. capital from the 1970s on, experienced in the U.S. as deindustrialization and the creation of an import based service economy? Weird.
Thingsachange after 1985 beginning the large loss of US manufacturing jobs but I got an interesting answer from GoogleAI just now. Would value any expert including our host's opinions...
"The balance and or net outflow of US investment creating new industrial production in other countries through the 1980s to early 2000s?"
Investment decisions are not directed by the government but made by private investors; capital flows to the place of best risk/reward balance. Before the Great War, investing in the development of relatively poor parts of the planet was obviously attractive; so money was flowing there. In recent decades however, apparently the US has been considered a better destination for investment. I suspect a main reason is that under colonial rule, investors were confident that their money was safe and contracts would be kept; while after decolonization the "Global South" was seen as suffering from erratic law enforcement, protectionism, arbitrary taxes, and a healthy dose of corruption. Now the MAGA crowd is following the same dubious set of third-world policies; and indeed they may yet succeed to achieve a more balanced flow of money, goods and migrants, by making the US less attractive. But Americans won't enjoy that "success".
You seem to confer the title of hegemon to the US based on its seven-fold higher per capita income when the size of trade flows, which seems more in the spirit of Hobson’s focus on trade balances, would name China. Further, the current accounts chart says we’re a quarter century into China’s hegemony, which it would say it even more loudly if the RMB weren’t so undervalued. Properly focused, the anomaly of uphill flowing investment disappears. The Hobson model is right for the time.
The Hobson frame is illuminating, but the asymmetry runs deeper than trade mechanics. What makes the 21st-century configuration distinct is that the US doesn't just absorb surpluses — it also provides the legal, financial and military architecture within which those surpluses are generated and stored. Dollar hegemony, extraterritorial sanctions, and forward basing aren't just tools of dominance. They're the infrastructure that makes the whole system function. Edwardian Britain exported capital. America exports the rules under which capital moves. That's a different kind of hegemon — and a harder one to displace.
Hi, does anyone know whether the current account surpluses that Britain generated pre WW were really due to exports of goods and services, or were they reserves that India, Malaya and other colonies generated which were transferred to London and counted as payments for British “services” (for administering the colonies!? If Britain really was exporting genuine goods and services that the way China is today, how was it not able to produce its own military hardware? It does seem that Britain had partially deindustrialised, becoming increasingly reliant on “services” (ie exploitation of colonies) to generate the revenues needed for capital outflows. Just asking.
Britain in the late Victorian era was exporting financial capital that financed considerable capital goods exports. So property claims may have been accumulating abroad, but the gold was coming full circle quickly, which served to stabilize the center. British labor aristocracy was building capital goods, especially locomotives and other rail equipment. If you were a British worker in, say, factory shoemaking, you were probably struggling circa 1880. If you made shoemaking machinery, you were OK.
The fall in ocean shipping costs and huge increases in arable farming acreage worldwide drove down food costs in the U.K., but also land rents. It made sense to buy out Ireland’s landed Protestant Ascendancy.
By the 1880s, USA and Germany were discovering they could divert rents from imported British manufactured goods with protectionist tariffs. The inability to capture a rent from their industrial lead contributed to the sense of Britain falling behind.
Great post thank you. It’s been awhile since I read DeCecco’s money and empire, but it seems that some of the evidence provided here comes up against some of the main arguments of his book? Mainly that Britain wrought its way into a CA surplus via captive demand for its manufactures from its colonies mainly India. This post seems to come out against that. Or am misremembering the book:) thanks again.
@LeonLiao's comment "It can reorganize the world by making the world hold American assets" is pertinent. In my view that is what has begun to happen in a more cognisant way, not solely the product of globalisation. I would go as far to say that, an increasing amount of Secretary Bessent's job will be to marshall this, by suasion, by coercion, by quid pro quo. I imagine that his mentor Stanley Druckenmiller provides views and scenarios on all of this, amongst others.
Adam’s international macro framework is powerful precisely because of its historical range. The strongest part of this post is that it breaks a very tempting but dangerous analogy: today’s United States is not Britain before 1914.
And I think Adam's explanation of today’s global imbalances is more insightful than Prof. Pettis’s. Prof. Pettis is not simply wrong. The problem is that his framework tends to explain global imbalances mainly as surplus-country savings spilling into the United States. That risks understating America’s own agency as the global center of profit control, the issuer of dollar assets, and the core of the military-financial order.
Adam’s post provides the historical pivot. The United States does not necessarily need to control the world by investing abroad. It can reorganize the world by making the world hold American assets.
China is powerful, but it is not the incumbent of the present system. It is the challenger. The more interesting comparison today may not be between Britain and the United States, but between Edwardian Britain and contemporary China.
The missing layer, in my view, is this: 21st-century global imbalance cannot be reduced to the idea that “Chinese excess savings are crushing American workers,” nor to the idea that “America is reluctantly forced to serve as the world’s consumer of last resort.” It is a deeper exchange structure. The United States uses dollar assets, Treasury markets, technology stocks, intellectual-property rents, and the military-financial order to obtain the world’s goods, production capacity, savings, and supply-chain labor.
The real question is whether this structure can still work when global competition shifts into electric vehicles, batteries, solar panels, drones, shipbuilding, industrial robots, and grid equipment. Can America continue to substitute asset control and profit control for real industrial capability?
100%, you nailed it with that. The thing I find so strange about Pettis-Klein is the way they combine some insightful analysis of global imbalances with the portrayal of America as a passive recipient of surplus countries' policy choices, or even of America as victim. The interpretation just does not sit at all well with the raw facts of America's overwhelming power and centrality in the world system. America as a whole, and not just its elites, clearly has benefitted very handsomely from the unipolar world order it carved for itself, and I think you articulated very neatly the nature of those benefits that sit alongside a nevertheless real situation of global imbalances within the system.
Actually yesterday I had just publised a short note commenting Prof. Pettis’s framework, as below(https://substack.com/@chinasasystem/note/c-248932049?r=731anr&utm_source=notes-share-action&utm_medium=web):
Prof. Pettis’s framework is useful because it reminds us that global imbalances cannot be understood through trade flows alone. They must also be analyzed through savings, capital flows, and domestic income distribution. But its limitation is that it begins too heavily from the question of “who generates excess savings and who is forced to absorb them,” reducing a dynamic global production-system problem into a relatively static story of savings spillovers. The real question is not whether global imbalances are savings-driven or investment-driven. It is which institutional and industrial system is more capable of converting savings into effective demand, productive investment, and long-term productive capacity.
From this perspective, neither surpluses nor deficits are the final answer. A large surplus may mean that a country has suppressed household income and consumption, thereby becoming dependent on external demand. But it may also mean that it has converted savings into manufacturing expansion, infrastructure, technological learning, and supply-chain density. A large deficit does not automatically imply decline either. If capital inflows are converted into technological innovation, productivity growth, and future cash-flow generation, a deficit can be part of a growth process. The real dividing line is not surplus versus deficit, but productive allocation versus financial absorption.
Prof. Pettis’s problem is that he mainly explains global imbalances as excess savings from surplus countries spilling over into the United States. This underplays America’s own agency as the global center of profit control, the supplier of dollar assets, and the core of a military-financial system. The United States is not merely a passive container absorbing global savings. It actively produces a global asset structure: through fiscal deficits, military spending, the Treasury market, technology monopoly profits, and the depth of its financial markets, it supplies the world with assets to hold and receives in return real goods, labor, and supply-chain capacity.
This is also why traditional trade-deficit statistics can be misleading. Take the iPhone as an example. Customs data may record a phone assembled in China as a Chinese export at its final export price, but the real profit and value control may be concentrated in Apple, chip companies, software ecosystems, and brand distribution. America’s bilateral goods deficit can therefore be overstated. But this does not mean the United States has no real external imbalance. A more accurate description is that America’s external accounts combine goods deficits, services surpluses, overseas profits, intellectual-property rents, global demand for dollar assets, and interest payments on Treasuries. This is not a simple story of “America consumes too much and China saves too much.” It is the operating model of an imperial balance sheet.
America’s real problem is not whether it “really” runs a deficit. It is that it increasingly relies on assets, military power, and intellectual property to exchange for the supply capacity of the physical world. This system looked highly successful in the Apple era, because the United States could offshore low-margin manufacturing while retaining operating systems, brands, distribution channels, financial valuation, and high-margin services. But once global competition moves into electric vehicles, batteries, solar panels, drones, shipbuilding, industrial robots, grid equipment, and advanced manufacturing, the question becomes whether high-margin control rights can still substitute for physical industrial capacity. The real core of global imbalance may not be who saves too much or who runs too large a deficit, but who can convert capital from an accounting balance into future productive power.
Yes, I would largely agree. Americans buy a lot of stuff, a lot of everything - in fact more than they can make or grow in the US. The 300 million plus Americans consume more than they can make. Importing an endless stream of iPhones, laptops, foreign luxury cars, running shoes and household goods - plus enjoying expensive holidays in foreign countries - reflects an exceptionally high standard of living. If Trump was smarter he would express gratitude to China for all their hard work which allows Americans to buy an iPhone for $600…
I have long suspected that Trump’s obsession with trade deficits has nothing to do with economics, or any concern about prosperity for ordinary Americans… instead Trump decided a decade ago that winning the electoral college votes of Michigan and Pennsylvania would hand him the presidency. Long rambling speeches about China and trade deficits, with promises to bring back the car and steel jobs to those 2 states is purely a political strategy, but an economic fantasy.
What is real is a concern about essential manufacturing in defence industries, and a worry that AI and chip technology leadership could pass to China, with implications for national security. Every country wants to ensure it doesn’t lose its leadership in advanced technology. Switching to EVs and building manufacturing in renewables and batteries would be desirable - but Trump’s hatred of clean energy is the block there.
The extent that America buys luxury goods from Europe, or consumer electronics from Asia, or agricultural products from central and S America plainly doesn’t really matter. Americans are rich and want to live well - let them enjoy the finest things wherever they come from. Keynes marvelled at the fact that someone in London 100 years ago could make a phone call and order tea or coffee or other luxury items from around the world to be delivered to his door. Trump’s fixation on trade deficits in goods has never made much sense until you look at Michigan and its electoral college votes IMHO.
What gave Trump the electoral weapon he wielded with his demagoguery was the domestic maldistribution of the benefits of US empire — US elites took too much for themselves, investing neither in domestic industrial capacity nor the socioeconomic wellbeing of the citizenry as a whole. US wastage of its “human resources” has been shocking.
Or will we waste the exorbitant privilege?
That is exactly the question. The United States still has enormous room to maneuver because of the dollar system, Treasury markets, deep capital markets, and the global demand for American assets. Exorbitant privilege has not disappeared.
But the risk is that this privilege gets used mainly to sustain fiscal deficits, asset inflation, consumption, buybacks, and financial dominance, rather than to rebuild the industrial base beneath the system.
The real test is whether America can convert financial centrality into productive capacity. If the dollar system buys time for semiconductor capacity, grid modernization, advanced manufacturing, energy infrastructure, and critical-minerals resilience, the privilege remains strategic. If it merely allows the United States to keep importing the physical world while exporting assets, then yes, it risks being wasted.
“the risk is that this privilege gets used mainly to sustain fiscal deficits, asset inflation, consumption, buybacks, and financial dominance, rather than to rebuild the industrial base beneath the system.”
That ship sailed the best part of 50 years ago — the risk now is that the squandering will continue.
You have been for 50 years already!
A really enjoyable post. Lots of interesting ideas that seem very relevant now. Perhaps critical - with wars involving Russia and the US being fought now. Both countries have leaders who seem at a loss to finish a war started for no clear reason. Both Trump and Putin have fired huge amounts of expensive weapons with little to show for it.
The trade imbalances that concern the US President so much confirm one basic idea - manufacturing is very easy to export. The UK in the late 19C saw both America and Germany overtake it in heavy industrial output such as steel. It is very easy for nations with cheaper labour to buy machine tools, or copy manufacturing techniques or steal Intellectual Property. China has certainly done all 3 in the past 2 decades.
The UK saw leadership in heavy industries move to Germany and the US, after WWII liberated Europe and Japan saw manufacturing boom. In the 80s and 90s Asian economies became “Asian Tigers”. Then China started growing through export led growth…
Again and again machines were installed in developing economies that demonstrated how mobile modern manufacturing can be.
What is left? Probably the things that cannot be exported or copied so easily - the rule of law, banks that are trusted, creativity and open economies that avoid cronyism. Switzerland or Norway or even, say it quietly, the UK do rather well because their institutions are trusted and contracts are enforced.
Trump seems so gloomy about America, and obsesses about the production of cars or output of oil, when the US financial services sector, or medical technology, or Silicon Valley are doing so well. Countries like America should try to observe the rule of law and avoid cronyism. The US has tremendous soft power and influences the world through film and tv, there is little wrong with America that couldn’t be fixed by a competent president and more responsible congress.
Russia has 20% or so of Ukraine “to show for it.”
I don’t underestimate the terrible suffering that Russia has inflicted on Ukraine, my point was that Putin’s gamble has completely failed - he hasn’t captured Kiev or brought Ukraine under Russian control. Putin has inflicted terrible damage on the Russian army and got bogged down in a 4 year quagmire. Putin’s hubris has destroyed Russian living standards and its military reputation.
Absolutely minimizes the elephant in the room: the ruthless extraction of surplus from the Indian empire, as a source of materials and labor, and as a captive market for exports.
Maybe it’s time to retire the borrower/lender dichotomy and start calling trading nations counterparties. The retirement of gold as the settlement factor may help explain that statement. We’ve financed China’s emergence as a dynamic country, rather than create a bitter enemy. There’s value in that. It’s our privilege that we don’t have to earn yuan to buy Chinese goods. Macroeconomics is above my pay grade, however. Polanyi is my seer.
The reference to the Boer War is interesting too - I remember being taught that the British army had to expand rapidly at the start of the war. It was shocked to find that a v high proportion (50%?) of volunteers from Britain’s industrial cities were unfit and failed a medical. Common problems such as lack of strength or height, rickets, bad teeth etc led to the British army becoming concerned about poverty and disease in the working classes.
This formed the background to reforms in better provision of housing, healthcare and the introduction of pensions. In short, the right in politics and the military realised that something needed to be done to raise living standards for the poor - how else can you have a large army in times of war?
A whole essay on imperialism and not one mention of the massive export of U.S. capital from the 1970s on, experienced in the U.S. as deindustrialization and the creation of an import based service economy? Weird.
Doesn’t our foreign debt represent capital that came back to us?
Thingsachange after 1985 beginning the large loss of US manufacturing jobs but I got an interesting answer from GoogleAI just now. Would value any expert including our host's opinions...
"The balance and or net outflow of US investment creating new industrial production in other countries through the 1980s to early 2000s?"
Investment decisions are not directed by the government but made by private investors; capital flows to the place of best risk/reward balance. Before the Great War, investing in the development of relatively poor parts of the planet was obviously attractive; so money was flowing there. In recent decades however, apparently the US has been considered a better destination for investment. I suspect a main reason is that under colonial rule, investors were confident that their money was safe and contracts would be kept; while after decolonization the "Global South" was seen as suffering from erratic law enforcement, protectionism, arbitrary taxes, and a healthy dose of corruption. Now the MAGA crowd is following the same dubious set of third-world policies; and indeed they may yet succeed to achieve a more balanced flow of money, goods and migrants, by making the US less attractive. But Americans won't enjoy that "success".
You seem to confer the title of hegemon to the US based on its seven-fold higher per capita income when the size of trade flows, which seems more in the spirit of Hobson’s focus on trade balances, would name China. Further, the current accounts chart says we’re a quarter century into China’s hegemony, which it would say it even more loudly if the RMB weren’t so undervalued. Properly focused, the anomaly of uphill flowing investment disappears. The Hobson model is right for the time.
Britain went from a creditor nation before the first world war, to a country that defaulted on its debts afterwards. They have never recovered.
The Hobson frame is illuminating, but the asymmetry runs deeper than trade mechanics. What makes the 21st-century configuration distinct is that the US doesn't just absorb surpluses — it also provides the legal, financial and military architecture within which those surpluses are generated and stored. Dollar hegemony, extraterritorial sanctions, and forward basing aren't just tools of dominance. They're the infrastructure that makes the whole system function. Edwardian Britain exported capital. America exports the rules under which capital moves. That's a different kind of hegemon — and a harder one to displace.
Hi, does anyone know whether the current account surpluses that Britain generated pre WW were really due to exports of goods and services, or were they reserves that India, Malaya and other colonies generated which were transferred to London and counted as payments for British “services” (for administering the colonies!? If Britain really was exporting genuine goods and services that the way China is today, how was it not able to produce its own military hardware? It does seem that Britain had partially deindustrialised, becoming increasingly reliant on “services” (ie exploitation of colonies) to generate the revenues needed for capital outflows. Just asking.
Britain in the late Victorian era was exporting financial capital that financed considerable capital goods exports. So property claims may have been accumulating abroad, but the gold was coming full circle quickly, which served to stabilize the center. British labor aristocracy was building capital goods, especially locomotives and other rail equipment. If you were a British worker in, say, factory shoemaking, you were probably struggling circa 1880. If you made shoemaking machinery, you were OK.
The fall in ocean shipping costs and huge increases in arable farming acreage worldwide drove down food costs in the U.K., but also land rents. It made sense to buy out Ireland’s landed Protestant Ascendancy.
By the 1880s, USA and Germany were discovering they could divert rents from imported British manufactured goods with protectionist tariffs. The inability to capture a rent from their industrial lead contributed to the sense of Britain falling behind.
Great post thank you. It’s been awhile since I read DeCecco’s money and empire, but it seems that some of the evidence provided here comes up against some of the main arguments of his book? Mainly that Britain wrought its way into a CA surplus via captive demand for its manufactures from its colonies mainly India. This post seems to come out against that. Or am misremembering the book:) thanks again.
RIP Robert Skidelsky. A hero of mine.
A really fascinating analysis. I would dearly love to see a discussion on this topic between you and Paul Krugman!!
@LeonLiao's comment "It can reorganize the world by making the world hold American assets" is pertinent. In my view that is what has begun to happen in a more cognisant way, not solely the product of globalisation. I would go as far to say that, an increasing amount of Secretary Bessent's job will be to marshall this, by suasion, by coercion, by quid pro quo. I imagine that his mentor Stanley Druckenmiller provides views and scenarios on all of this, amongst others.