This is published by David McWilliams in an Irish broadsheet on Jan 4th 2025:
A country can threaten tariffs and talk tough when it is owed money. When it owes money, that’s a different story.
We are heading into a trade war. That’s what the United States wants and that’s what the world will get.
In 2025 it will become increasingly obvious that you can’t have a trade war without a capital war. A capital war means countries take the decision to bring their money home. A lot of talk now centres around America bringing its money back home but the problem for the US is that it owes far more than it is owed. Other countries might conclude, particularly if the Americans get too cocky, that if America doesn’t want our goods and is about to slap tariffs on them, then America mustn’t want our money either.
What does it all mean? It implies that the countries which finance the huge American budget deficit – mainly European nations, China and Japan – will also take their money home. This means selling American bonds and repatriating their finance.
The flaw in the Maga rhetoric – about how America is going to do this and that to its enemies, both real and imagined – is that America is a debtor. In fact, America is the largest debtor in the world. Not only that, the United States is the largest debtor the world has ever seen at any time in human history.
In Washington, the incoming administration doesn’t seem to get that. The more it lectures and hectors, the more fragile it leaves itself. Once you are a debtor, you are reliant on the kindness of strangers. And for all its evident power, financial acumen and technological innovation, America is a country that depends on other people’s money. And once you are dependent, you are more hostage to the laws of unintended consequences than you imagine.
A recent example of the law of unintended consequences is events in Syria. As his desperate, last-ditch flight out of Damascus took off for Moscow, you might wonder whether Assad considered the law of unintended consequences. To strengthen his regime, Assad joined Iran’s “axis of resistance”, with Russia as the ultimate patron. When Hamas launched its attack on Israel in October 2023, did anyone in Damascus believe that this would lead to the end of Assad’s regime, one that would be toppled by an allegedly reformed jihadi?
Maybe some saw the link, via Hamas, to Hizbullah, Iran and ultimately Syria, but the likelihood is that October 7th was just another moment in the decades-long Palestinian-Israeli conflict, one unlikely to affect the Assad regime. But as the dominoes fell – first Hamas, then Hizbullah, thus weakening Iran – the pathway opened up for Turkish-backed fighters to storm Damascus.
It’s all about the weakest link in the chain.
The feeblest link in the Maga chain is the US budget deficit, the inability of American savings to finance America’s needs, its huge debt burden and ultimately its vulnerability to higher interest rates. If the world sold American bonds, US domestic interest rates would spike upwards, taking some of the bravado off the Maga swagger. Right now, a pumped-up Washington is pointing the finger at everyone from China to Europe, Mexico and Canada, threatening friends and foes alike with tariffs, taxes and tough talk. A country can do that when it is owed money. When it owes money, that’s a different story.
This year, the US budget deficit will be almost $2 trillion, of which more than half is net interest – about as much as America spends on its military. Total government debt stands at $30.2 trillion or 99 per cent of GDP. The Congressional Budget Office estimates that by 2034, US governmental debt will exceed $50 trillion – 122.4 per cent of GDP. The US will be spending $1.7 trillion a year on interest alone.
America’s debt as a percentage of GDP will soon exceed the second World War peak. Foreigners have lent a considerable amount to the US to cover this largesse and, to make matters worse for the Americans, its booming stock market is also being fuelled by foreign money. Taken together, the Bank of International Settlements – the central bankers’ bank – estimates that the United States owes the rest of the world around $14 trillion.
Imagine if the world called Washington’s bluff? It doesn’t bear thinking about. However, we have been here before, so we know the playbook. When Britain regressed from global creditor to global debtor in 1918, it was curtains for the UK as a major player.
The first World War profoundly changed the world’s financial architecture. In 1914, Britain was the world’s banker, controlling around $20 billion of foreign assets. London was the epicentre of global money, accounting for some two-thirds of all trade in international finance.
Like today, due to the unprecedented boom in global trade and investment during the Gold Standard era, all the major countries were indebted to each other. France had overseas assets amounting to $9 billion, of which an extraordinary $5 billion was tied up in imperial Russia. The communist Soviets defaulted on all Russia’s old loans, leaving the French, in particular, out of pocket.
Other European powers sold assets at fire-sale prices to fund the war, borrowing heavily from the one major player that stood aloof until close to the end: the United States. America emerged from the war as the world’s undisputed creditor. Not only was it owed billions, but Americans snapped up European assets at bargain-basement prices as the war progressed. This global shift in the power of money from London to New York would define the world’s monetary relations for the next century.
Could something similar happen again? If the world called in its US debts, of course it could. Is it likely? Not in any logical, reasonable forecast of the future – but that’s where the law of unintended consequences comes in. The more stable the world, the less we need to worry about extreme events.
All we can say with confidence about a Trump presidency is that anything can happen and the range of possibilities will increase. More things are in play and therefore more things can go wrong. And as the world economy is enmeshed, interdependent and interrelated like never before, things that go wrong in some apparently unrelated place can have massive consequences which are rarely predicted.
As fragilities go, America’s indebtedness is a big one.
Interestingly, this might well be the guardrail the world needs. Maybe someone might make it clear to the more revanchist elements in the new administration that they depend on us, more than we depend on them. America needs the world more than it thinks, and that’s no bad thing.
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TheEncogitationer. Reason: Spelling
PopeBeanie. Reason: apologies for fast and frequent edits. i'm done now
