Is Trump FDR, or Gorbachev?

Notes on controlled disintegration

As the American president continues to tug on load-bearing institutional jenga pieces seemingly at random, it brings to mind a previous juncture when the United States upended the international system, and how the consequences of those decisions have led us to where we are now. Paul Volcker, chairman of the Federal Reserve from 1979-1987, famously said that a “controlled disintegration of the world economy is a legitimate objective for the 1980s”, by which he meant disintegration of the old system for the purpose of a radical restructuring to reflect new economic and geostrategic realities. By all indications, Trump 2.0 is attempting another controlled disintegration, but it’s unclear whether new realities are being taken into consideration, or whether the ploy to preserve American centrality in the world will ultimately hasten the very process it aims to arrest. Two figures who perfectly exemplify these two possibilities are FDR in the case of the former, and Mikhail Gorbachev in the latter.

A theme uniting each leader’s tenure is the problem of overcoming entrenched political constraints. Like Trump, FDR had to contend with the institutional stasis of a political system designed to suffocate radical change in its cradle, and also like Trump, he acted imperiously to overcome these impediments. While Gorbachev’s constraints were entirely different in nature, he too was compelled to subvert political norms to advance his agenda, making moves that appeared to undermine the forces he officially represented. We often write Trump off as a moron who doesn’t know what he’s doing, but both FDR and Gorbachev also improvised in carrying out their programs, with one historian remarking that only someone genuinely extemporizing could have collapsed the USSR with such surgical precision. Imprudence, if camouflaged by good intentions, can actually be more destructive than outright malevolence. While a cataclysm of equivalent proportions to the fall of the Soviet Union seems remote in Trump’s case, the various systems he aims to disintegrate by improvisational fiat were deliberate constructions - products of the cumulative foresight of men far wiser than he - and an account those systems (why they’re there, what they do), may help clarify Trump’s reasoning in wanting to demolish them, and also show why the likely outcome runs counter to his purposes.

Let’s begin with the global economy. Trump wants the United States to return to its previous role of manufacturing superpower. But that can’t happen if it’s to maintain its current position as the centre of global finance; the suite of policies required to foster one inevitably stymie the other. The current neoliberal order demands highly liberated capital markets, low taxes and broad financialization of the economy, allowing for dubious schemes like private equity firms buying healthy companies, saddling them with debt, paying themselves huge dividends, then allowing the companies to go bankrupt. These features help explain how the U.S. is able to attract capital from all over the world (more on that in a moment). Manufacturing, on the other hand, is healthier in a regulated, high tax environment, especially when complemented by some form of industrial policy that fosters internal supply-chain integration. This is because, when implemented correctly, high corporate taxes encourage companies to invest in R&D and pay better wages, and regulation limits the volatility of the business environment, further protecting against the irrational plunder of healthy enterprises by private equity. It should also be noted that, when we say “we need to bring back manufacturing”, we implicitly accord it a value that transcends commercial considerations. It’s not just about “jobs”, it’s about a way of life and a particular status conferred by being an industrial powerhouse. China is the world’s leading industrial power, but to maintain this status, its companies frequently operate at a loss, a sacrifice its leaders tolerate because they view heavy industry as instrinsically valuable. But this heresy of ignoring profitability and assigning non-monetary value to certain industries can’t be fathomed in a highly financialized economy. American strategists have long been aware of this dilemma. They had the option of reinvesting in industry while stepping back from global dominance, or maintaining dominance at the expense of industry, and chose the latter.

Let’s briefly recap the history of American global strategy. The quarter century or so after World War II - Les Trente Glorieuses, as it’s called in France - were defined by the Bretton Woods system. This system reflected a reality in which U.S. economic power was far superior to anyone else, but was also an expression of the enlightened self-interest of U.S. strategists. Every global system needs a mechanism to recycle surpluses from the surplus generating regions to deficits regions; even the most exploitative colonial relationships include some form of surplus redistribution. Without such mechanisms, trade eventually collapses, deficit regions are driven into debt, and political instability ensues, inevitably reverberating back to the surplus regions. In designing the Bretton Woods agreements, American strategists had two objectives: prosecute the Cold War, and recycle its surpluses rationally to stimulate a market for its own exports. This resulted in a system that tied all the major world economies together by pegging their currencies to the dollar. In exchange for this loss of sovereignty, the United States agreed to distribute its surpluses benevolently in the form of loans and cash injections to its new client states, especially West Germany and Japan, both of whom would be groomed into becoming regional powerhouses in recognition of their importance to U.S. strategy. To sweeten the deal and assuage fears of total American domination, provisions were included that dollars could still be converted to gold at $35 an ounce.

The system had one major flaw: it depended on the United States generating surpluses in perpetuity, and for a litany of reasons way beyond the scope of this topic, by the early 1970s, the United States shocked the world by becoming a deficit country. When Britain and France requested gold for their dollars, as was their prerogative under the Bretton Woods agreement, the United States didn’t have enough bullion to satisfy the request, leading Nixon to end Bretton Woods in 1971 by unpegging the dollar from gold. What happened next is a matter of some debate. The official narrative is that OPEC, in response to American support for Israel in the 1973 Yom Kippur War, instituted a total oil embargo on the United States and its allies, driving up the price of oil fourfold, “forcing” American strategists into making “tough” decisions and improvising a set solutions to these new “incontrovertible” economic realities. To believe this, you would have to believe that a small group of weak countries somehow had the power to hold the U.S. hostage and force it to restructure its economy and alter its grand strategy as if their balls were in a vice. Subsequent developments would suggests that the oil price hike was in fact part of a broad plan - not deliberately incited, but readily accepted by U.S. strategists - for controlled disintegration and restructuring of the world economic system, a plan in which the American industrial base was a kind of sacrificial lamb.

The end of Bretton Woods didn’t mean the end of dollar dominance, of course; on the contrary, it meant there were fewer safeguards than ever to curtail its supremacy. Key to this is the fact that oil was (and is) still denominated in dollars, which means that the value of the dollar is - uniquely among the world’s currencies - not explicitly tied to the value of goods and services in the American economy. Therefore, all else being equal, high oil prices entail a strong dollar. The price of oil jumping from $3 in the early 70s to $30 and beyond in the 80s helped facilitate two important trends: it created trillions of petrodollars that would need to be reinvested somewhere, and it made the world’s products inordinately cheap for Americans. But wait, wouldn’t high oil prices harm America’s industrial rivals more than itself, because they have less oil? Not really. All it did was stimulate innovation in Japanese and German production practices, making their firms even more dominant in the long term.

Through a series of strategic decisions, the United States engineered a transition from being the world’s factory to becoming its marketplace. It financialized its economy so that international investors would feel welcome, which ultimately fuelled the credit boom of the 80s, since banks needed to concoct new ways to earn returns on the deluge of capital slushing through Wall St. It’s only a slight simplification to say that international investors were lending Americans money to live outside their means and buy largely foreign-made products - exactly the reverse of the Bretton Woods system, where Americans lent Europeans money to buy U.S. made products. American manufacturing was essentially kneecapped in this process. The strong dollar, in conjunction with outmoded production practices, made American products increasingly uncompetitive, even after unions had been virtually deregulated out of existence. Globally, however, the United States retained its preeminent status, not by running perpetual surpluses as in the Bretton Woods system, but by running perpetual deficits and absorbing the surpluses of the rest of the world.

This brings us back to Trump. As we’ve seen, American strategists decided long ago that the U.S. could no longer be the world’s factory while retaining the privileges of the dollar. The only thing could trigger such a scenario would be a significant drop in the American standard of living, or some kind of currency adjustment. Interestingly, early signals from the administration suggest that they’re actively exploring both possibilities. The gutting of federal departments and agencies is telling, because one of the key functions of the federal government is to redistribute money from rich states to poor ones. Removing this mechanism - especially if paired with a final annihilation of worker’s rights and organized labour - is bound to drive already struggling states deeper into desperation, theoretically making them more ripe for the reindustrialization drive that Trump seems to have in mind. The logic is clear: the only way to prosecute the national mission of competing with China is to drastically drive down the standard of living for the poorest third of the country; a kind of reverse New Deal for the American people.

Then there’s the mysterious circumstances of Trump’s recent embrace of cryptocurrencies. The executive order on establishing a digital assets basket and regulatory framework for crypto explicitly rejects the creation of a “digital dollar”. What’s interesting about this move is that it’s the opposite of what China, the EU, and a host of other countries are doing, each of whom view digital versions of their currencies as a means of simplifying cross-border transactions, thus making them more competitive. Why would the Trump administration be deliberately veering down a path that ostensibly weakens the dollar in the long term? One explanation is that a large section of his donor base and administration are crypto zealots, and a digital dollar would have the potential to render other crypto assets even less functionally useful than they already are. But another explanation is that he wants to weaken the dollar. Weakening the dollar tackles each of Trump’s economic objectives simultaneously; it makes American exports more competitive, foreign made products more expensive, and also lowers production costs, potentially enough to repatriate offshored manufacturing jobs.

The public capitulation to Russia is another case of Trump wiping his ass with decades of strategic thinking, but here again we see the faint outlines of something resembling rational statesmanship. On its face, it doesn’t make sense to concede so much, so willingly, for so little, especially after having spent billions over the past decade peeling away a key client state from a strategic rival. But that position makes sense only if you continue to view Russia as a strategic rival, rather than a potential partner to counter China’s growing influence. Trump’s readiness to concede to Putin on Ukraine may in reality be the opening gesture of a strategic realignment that aims to woo Russia from its partnership with China. One of the surest ways of counteracting China’s influence would be to interfere with its energy supply, and the best way to accomplish that would be to reintegrate Russia into the Western fold as an equal partner in exchange for Russian assistance to manipulate energy prices and supply in order to stymie Chinese productive potential. This strategy is in all likelihood a wild goose chase that - even were it possible - could take a generation to come to fruition. But as a gambit it nonetheless has a certain logic to it that also aligns with the broad goals of the administration.

Does Trump’s plan for disintegrating and restructuring the world system have any chance of success? That depends on how one judges success. His proposal to make the already precarious even more so seems propitious, but the odds of this lumpenproletariat becoming the backbone of a revitalized American manufacturing sector are slim. The likeliest outcome is that this disintegration looks much similar to the last, wherein a symbolic kernel of bygone grandeur is retained, but grip of the imperial scepter becomes increasingly tenuous and unconvincing. It’s a tragic irony that the very thing preventing national rejuvenation is the overriding imperative to cling desperately to the last vestiges of hegemony. While ladders can be kicked away, hierarchies entrenched, and the great American experiment stripped for copper wiring, the secular headwinds blow ever more boldly towards decline.