Some Initial Thoughts on the Macroeconomics of Trumpism

Now that we have all realized this is not a dream, it’s almost time to give some thought to the macroeconomic consequences of Trumpism. While none of this is going to be fun for the humans involved, as someone interested in deeply understanding our capitalist mode of production, and with a unique perspective on the subject, I delight at the opportunity to analyze the situation.

That’s because there are so many new possibilities ranging from hyperinflation of the dollar to a raging stock market boom to ongoing stagnation. War or environmental collapse which leads to destruction of our ability to produce real wealth is something students of capitalism have barely begun to study. I think about these scenarios all the time but when you talk about them in public people think you are crazy. It’s like people don’t understand the concept of a thought experiment.

But these aren’t mere thought experiments anymore, they are real possibilities for which we need to become prepared. While there are a number of new possibilities, they are not infinite. In my view the space of possible outcomes is constrained by the fundamentals of accounting logic, which demonstrate that transactions between balance sheets create networks. This accounting framework enables me to analyze our new situation without relying on historical data which came out of situations which were fundamentally different from the one we are currently in.

From this perspective, one of the biggest questions is what happens to all of the US Dollar assets on foreign balance sheets. This is because the US Dollar is the world’s dominant “reserve currency.”

My view, for a few years now, has been that the hegemony of the US Dollar is a reflection of the hegemony of US military power. Around the world, people choose to hold their money in US Dollars, not out of love for the US, but as a cold-blooded, rational calculation that the US government is most likely to remain standing after any conflict, and therefore to preserve the value of its currency.

If this is the case, and if the US relinquishes its status as chief military power, as in the vision promoted by both Trump and Strategist Steve Bannon, then those dollars will begin their journey home.

There are two closely related forces here. The first is that our allies will lose confidence in our willingness and/or ability to protect them. The second is the pragmatic need for these allies to take up their own defense. For this they need weapons, and the US is still the strongest arms dealer globally, in spite of the rhetoric which says we have lost our edge in manufacturing.

This is likely to create significant economic growth at home lead by sales of weapons abroad. This should reduce the trade deficit as well as the portion of US “debt” held by foreigners. Because the money to buy the guns would come from outside the country, we can have a boom even under a fiscally conservative government. In this environment we are likely to suffer devastating cuts to public education, infrastructure and “entitlements,” but the pain of these cuts will not be fully felt until after the foreign money has finished coming home which could be a couple years from now.

To people who don’t understand balance-sheet macro (pretty much everyone) it will feel like the Trump regime has created an economic miracle. This could go on for years. But one day our former allies will be armed to the teeth and with no more money to buy more guns and we will still not have learned how to provide infrastructure, education and reasonable defense capabilities in the context of a steady-growth capitalism.

At this point, the architecture of deeply integrated global trade and manufacturing which was so effective at preventing war within the rich world will have been undone and replaced with a new one where nations put their own interests first. At this point the world will be perfectly poised for a new global war, likely fought along religious lines as Bannon envisions in the interview I recently posted.

This was precisely the scenario that neoliberal globalization was conceived to prevent. Neoliberal globalization was based on a trade. The US held the guns. Foreigners held the money which owned the guns. And they trusted us to use that power responsibly. That trust is now gone and I doubt there is anything that can be done to recreate it.

Neoliberal globalization wasn’t right either but it was protecting us from certain risks to which we are now exposed.