Latest news with #NixonShock
Daily Maverick
21-05-2025
- Business
- Daily Maverick
Back to Economics 101: The US economy and the functions of money
Part 3 in a five-part series. Read Part 1 here, and Part 2 here. It has only recently become clearer as to what probably happened to America in the period since the Gold Standard was suspended in the early 1970s and fiat money came to rule global finance. At the risk of being academic, the unleashing of global capital flows from the 1970s fragmented the functions of money as embodied in the US dollar. In 1875, economist William Stanley Jevons expounded his four functions of money, encapsulated in the 1919 rhyme, 'Money's a matter of functions four, A Medium, a Measure, a Standard, a Store.' Of these four money functions, the two most important are money as a Medium of exchange and money as a Store of value. Money as a Measure is a metric like centimetre, litre or kilogramme: we use it for counting. Money as a Standard of deferred payment deals with the financial denomination of debt to be settled in the future, a function some modern economists subsume within the money as a store of value function. What happened after the Nixon Shock for the US dollar was that the 'medium' and 'store' functions — and more importantly the underlying values they represented — started to diverge. At the risk of overgeneralising, the US dollar's medium of exchange function became more related to trade transactions, while the US dollar's store of value function became more related to capital transactions. The value of money breathes two atmospheres A world of two financial atmospheres began to emerge: an Atmosphere of Capital centred squarely on the US, and the Atmosphere of Trade whose centre of gravity began migrating towards Asia and, in particular, China. The end result today, as Gillian Tett noted in the Financial Times: 'America (has) hegemonic power in finance, via the dollar-based system… China has hegemonic power over global manufacturing, via its dominance of supply chains.' Yes, the 'measure of money' of both these two atmospheres was and is mostly still in US dollars — trade is still overwhelmingly invoiced in US dollars — but the intrinsic value they reflected started to diverge. Today the Atmosphere of Trade largely determines movements on a nation's current account and its value is more akin to (though not precisely measured by) Purchasing Power Parity (PPP). The Atmosphere of Capital is the one with which global financial markets are most familiar: value is reflected by 'free market' exchange rates. The latter's net flows show up mostly on a nation's capital account. Thus, the valuations of each of these two functions of the US dollar — were they able to be separated — would be very different. Bloombergia and CNBC-land think mostly in terms of market values: yet most Chinese exporters effectively invoice (even if most do not realise it) in PPP dollars. China's current GDP — dominated as it is by trade flows reinforced by a closed capital account — is at market rates of about $18-trillion to the US' $30-trillion. But at PPP rates, China's GDP is rather closer to $40-trillion again to the US's $30-trillion. American politicians wearing trade-oriented glasses see China's currency as fundamentally undervalued, its free-market value manipulated lower by the Bank of China. But few have noticed that were a revaluation of the Chinese renminbi to occur (so triggering a relative devaluation of the US dollar to realign cross rates more closely to PPP values), China's economy could become quite a bit larger than the US economy. China wanted 'competitive' renminbi, US wanted 'strong' dollar Even as the exchange rate management behaviour of the Bank of China has been (and still is) aimed at keeping the value of China's renminbi lower than its 'free market' value, thereby allowing China to continue enlarging its global trade footprint, vested interests representing big capital in the US have long had a complementary yet opposite agenda: both US public and US private sector actors mostly wanted to keep the value of the US dollar higher (the 'Strong Dollar Policy') despite the pleadings of US industry (and US agriculture) for a more competitive exchange rate. Even the US Treasury long favoured a strong dollar… until now. Under Donald Trump, this era is over. In the words of US Treasury Secretary Scott Bessent, the US will now put Main Street before Wall Street, thus ending a multi-decade practice where the US capital tail has been wagging the US trade dog. Though not expressed as such, the Trump Administration is trying to narrow the difference of the store of value and medium of exchange rates of the US dollar, bringing its 'capital' value down to a rate closer to what they perceive the 'trade' value of the US dollar should be. The hope is that this will reverse the hollowing out of US industry and — to paraphrase Trump — make US manufacturing great again. How the US economy got tied up in today's Gordian knot In 1959, the Netherlands discovered natural gas in the North Sea. Over the next two decades, gas grew to have an outsized influence on Dutch exports and in the process drove up the value of the Dutch guilder. Most low-value-added manufacturing in the Netherlands simply could not compete at the higher exchange rate, and much of Dutch industry was hollowed out. Thus was born the economic term 'Dutch Disease'. Since then, commodity exporters worldwide have been wary of the fallout that would probably result from a commodity price bonanza that would increase the value of their currency and so in turn boost their terms of trade. When this appreciation was allowed to happen, export-oriented domestic manufacturing industries invariably suffered… and rarely recovered in the aftermath, even when and if commodity prices settled lower again, bringing the exchange rate down as well. Manufacturing export markets once lost were hard to recover. The US has, since the 1970s, experienced its own form of Dutch Disease, albeit driven by a unique 'commodity': the attractiveness of its currency, its capital markets and most especially its government bond market, offering as the latter did a store of value with very little downside currency risk. This was highlighted by Brendan Greeley in a 2019 Financial Times opinion titled 'How to diagnose your own Dutch Disease'. Greeley noted that 'around 1980 the United States discovered that it was the Saudi Arabia of money'. This non-resource 'commodity' supercharged the post-1980 financialisation of the American economy, particularly since the Global Financial Crisis. Since the valuation lows of 2008/2009, the St Louis Fed's broad-based value of the US dollar has risen over 46%. Already 'infected', the US contracted a 'double case' of Dutch Disease, further laying waste what remained of its industrial manufacturing infrastructure. Result? From 2020 to 2024, none of the top 10 industrial export sectors — five of which were energy-related — achieved revenue growth above inflation. [Parenthetically, in 2008 the Shale Revolution began in the US. It has since turned the US from being a net importer of oil and gas (2008: $452-billion) to being a big net exporter (2024: $176-billion). As happened in the Netherlands, carbon played its part in the post-GFC intensification of the US's Dutch Disease. But the true underlying cause of the affliction has been the 'export' of that most unusual of 'commodities': the US Treasury Bill.] What is left of US industry today? Of the top 20 industrial plants by employment in the US today, 11 are in defence and aerospace, four are in autos (of which two are Tesla), four in tech and one in pharma. Given the defence bias of this list, this is hardly what one might call a world-class, globally competitive, broad-based industrial foundation for a modern United States. Economists' defence: US consumers won more than US producers lost Many economists have dismissed the negative consequences of this seismic shift, reasoning the gains to US consumers far outweighed the losses to US producers. Hard evidence to support this cost-benefit analysis however has been sketchy, particularly because the losses to employment — not just the economic ones but the social ones as well — are hard to measure. Besides, many of those gains were in effect only secured by running up the US' national debt, owed to both domestic and foreign investors. Stock and bond market-oriented economists further rationalised the fallout with the offsetting gains from product price deflation (from cheaper imports) and even more so from the gains in stock prices — $10,000 invested in an S&P 500 index fund in 1992 would have risen to $270,000 at the end of 2024: 27 times growth in 33 years, a 10% compound annual growth rate. Bond prices performed well too, rising strongly from 1981 to 2020: over this four-decade period, bond yields fell from just under 16% to just over 2%. Contrast this gain to what happened to GDP: over the same period, it rose from $6.5-trillion to $29.7-trillion: only 4.6 times or a compound annual growth rate of 4.7%. Given these stock and bond market gains, what's not to like? For the captains of capital (including the tech-oriented companies who displaced the industrial titans of 1980 when the top 10 were composed of six oil companies, two car assemblers, GE and the 'old' IBM), capital gains from the stock market have resulted in a massive wealth windfall to both management and shareholders. Federal debt and wealth inequality The undersides to these halcyon days were many, but two need highlighting. Firstly, federal debt rose almost twice as fast as GDP, from $918-billion in 1980 to near $37-trillion today, a compound annual growth rate of 8.6%. Much of this debt went into funding defence, social security and Medicare/Medicaid with — in today's ageing US — an ever-larger share also going into pensions. Expenditure growth (favoured more by Democratic than Republican administrations, unless it was on defence) coupled with tax cuts (often favouring the rich, mostly sponsored by Republican administrations) naturally increased deficits, which thereby rolled into higher aggregate federal debt. With interest rates falling, the carried-forward overall debt resulted in a bearable debt interest burden: in Dick Cheney's words, ' deficits didn't matter '. But not when in 2022 the Fed Fund's rate began rising again: the burden grew quickly to be $881-billion in 2024. (This interest bill was capitalised and added to the outstanding federal debt load.) In 2024, this $881-billion payment overtook the US defence budget for the first time, breaching Niall Ferguson's Law: 'Any great power that spends more on interest payments on the national debt than on defence will not stay great for very long.' (It should also be noted that the US government's off-balance sheet liabilities now top $80-trillion. Entitlement programmes are rapidly approaching bankruptcy: Medicare is forecast to go under before Trump leaves office, Social Security during the tenure of his successor.) Secondly, US wealth inequality has widened, especially benefitting the ultra-rich. In 1980, the top 1% owned 24% of US wealth, the next 9% owned 44% and the bottom 50% only 2.5%. By 2024, the top 1% owned 31% of US wealth, the next 9% owned 36% and the bottom 50% still only 2.4%. The social and political implications of this concentration of wealth at the top and dearth of wealth for the 'Left Behinds' and 'Never Caught Ups' at the bottom needs little elaboration. Suffice it to say, the latter fuelled the rise of the Steve Bannon/MAGA wing of today's Republican Party. DM
Bloomberg
14-05-2025
- Business
- Bloomberg
Odd Lots: Perry Mehrling on Trump's Echoes of the Nixon Shock
There's been a lot of talk recently about parallels between Donald Trump's economic policies and the Nixon Shock of the early 1970s. That was when the former president took the dollar off the gold standard, introduced hefty tariffs, and pressured the Federal Reserve to ease monetary policy. The moves sparked stagflation in the US and shook up the global monetary order. Now, given Trump's determination to rebalance the US relationship with global trading partners and his criticism of the Fed, could history repeat itself? On this episode, we speak with Perry Mehrling, professor of international political economy at Boston University's Pardee School of Global Studies, and the author of the book Money and Empire. We talk to him about similarities and differences between the Trump administration's current economic policies and the Nixon Shock, as well as why he thinks dollar dominance won't be dislodged anytime soon.
Bloomberg
14-05-2025
- Business
- Bloomberg
Perry Mehrling on Trump's Echoes of the Nixon Shock
There's been a lot of talk recently about parallels between Donald Trump's economic policies and the Nixon Shock of the early 1970s. That was when the former president took the dollar off the gold standard, introduced hefty tariffs, and pressured the Federal Reserve to ease monetary policy. The moves sparked stagflation in the US and shook up the global monetary order. Now, given Trump's determination to rebalance the US relationship with global trading partners and his criticism of the Fed, could history repeat itself? On this episode, we speak with Perry Mehrling, professor of international political economy at Boston University's Pardee School of Global Studies, and the author of the book Money and Empire. We talk to him about similarities and differences between the Trump administration's current economic policies and the Nixon Shock, as well as why he thinks dollar dominance won't be dislodged anytime soon.
Yomiuri Shimbun
25-04-2025
- Business
- Yomiuri Shimbun
Japan-U.S. Talks May Foreshadow Global Economic Future; Trump's Views on Tariffs, Trade Seem Stuck in Past
The Yomiuri Shimbun Economic revitalization minister Ryosei Akazawa speaks to media at Haneda Airport on April 18 after returning from the United States. U.S. President Donald Trump is significantly trying to rewrite the rules of postwar international trade and the international order, similar to the 'Nixon Shock' of 1971, when then President Richard Nixon suspended the dollar's convertibility into gold. In both cases, the United States sought to reduce what it considered its excessive burden in maintaining the international order. The key difference lies in the context: Nixon faced a struggling and stagnant U.S. economy burdened by the massive costs of the Vietnam War, while Trump stands at the helm of the sole superpower in the global economy. As the United States attempts to reset the postwar international order for the second time, Japan's position too is very different from what it once was. Japan will need to grasp these changes and forge a new strategy. The 1944 Bretton Woods Agreement, which fixed exchange rates among countries and established the dollar as the reserve currency through its convertibility into gold, stabilized the post-World War II global economy. However, the U.S. economy was exhausted by the costs of the Vietnam War, and as Western Europe and Japan caught up, the United States lost its overwhelming advantage by the 1960s. U.S. gold reserves declined rapidly, the dollar fell, and the United States fell into a dollar crisis. As a result, on Aug. 15, 1971, Nixon announced the suspension of the dollar's convertibility into gold, which was known as the Nixon Shock. The Nixon Shock marked the collapse of the Bretton Woods system. The U.S. State Department released historical documents on the economic diplomacy of the Nixon administration in 2009. The documents from 1972 and 1973 are particularly interesting. The Group of 10 countries, including the United States, Japan and several European nations, signed the Smithsonian Agreement in December 1971. This agreement sought to stabilize the exchange rates. However, the dollar crisis did not subside. Countries began transitioning to a floating exchange rate system in February and March of 1973. The diplomatic documents record Nixon's words during his discussions with Treasury Secretary George Shultz, Under Secretary of the Treasury for Monetary Affairs Paul Volcker and others on March 3, 1973. Nixon's true feelings of irritation toward Europe are interesting. 'Now, the problem with Europe is that Europe today — and we've got to look at their psychology; leave out the economics — the Europeans are frustrated because the Germans can't have an international policy; they can only look outward because they have no power. The French are parochial; after they were kicked out of Algeria and Vietnam, they have nothing,' Nixon said. Shortly after that, he went on: 'I judge the European politicians, except for [U.K. Prime Minister Edward] Heath, every one is a parochial; every damn one. I mean, [West German Chancellor Willy] Brandt doesn't understand anything. He's a nice, pleasant face and all that sort of thing, but he's a dullard. In terms, except just through Berlin and the rest, he doesn't understand the world and never will.' Nixon's relentless criticism of Europe calls to mind Trump's dislike of the European Union. Nixon also took a tough negotiating stance toward Japan. In a diplomatic document dated Feb. 6, 1973, Nixon engaged in tough discussions about how to approach Japan, demanding that it raise the value of its currency and dismissing Japan's views with the remark: 'The Japanese sensitivities — to hell with them. Let's go right ahead.' On Feb. 14, 1973, Japan switched from a fixed exchange rate system to a floating exchange rate system, in which rates are determined by the market. The Nixon Shock did not destroy the international order so much as pave the way for a new international order. What kind of new international order is Trump aiming for? Frequently cited in answer to that question is the 2024 paper 'A User's Guide to Restructuring the Global Trading System' by Stephen Miran, who is now the chairman of Trump's Council of Economic Advisers. According to the paper, the dollar is valued at a higher level than it would otherwise be because most countries hold it as their primary reserve currency. A strong dollar negatively impacts the competitiveness of U.S. exports, leading to the decline of manufacturing and contributing to the trade deficit. The paper argues that other countries should compensate for the U.S. burdens of providing defense and serving as a reserve currency. To address this, the United States may seek international policy coordination, of the kind that produced the 1985 Plaza Accord, to correct the strong dollar. Under the hypothetical 'Mar-a-Lago Accord,' a 2.0 version of the Plaza Accord, the United States would have other countries purchase 100-year U.S. Treasury bonds to transfer interest rate risks. However, it is unlikely that a multilateral framework that imposes disadvantages on China and Europe would be a realistic policy. Instead, the United States may target Japan directly to implement measures to correct the strong dollar because the U.S. nuclear umbrella protects Japan. The Japan-U.S. tariff negotiations will be an acid test of Trump's intention to shape the future international order. On April 16, Trump met with Ryosei Akazawa, Japan's economic revitalization minister, who was visiting the United States, and expressed his dissatisfaction, saying that there were no American cars running on Japanese roads. Upon hearing this remark, I remembered an essay written over 30 years ago by Haruki Murakami. In the early 1990s, Murakami was a visiting scholar at Princeton University. Japan-U.S. trade friction was intense at the time, and anti-Japanese sentiment was strong. At the time, a U.S. columnist wrote that the U.S. government should provide subsidies to U.S. automakers. If it were to do so, the Japanese would park 'two American cars in every Japanese driveway.' Murakami noted the term 'driveway.' He had been struggling with translating it, as there is no equivalent space in Japan's urban areas, and most houses in Japan could not park two large American cars. Murakami reflected that it was unfortunate that Americans did not understand the reality of Japan. Trump's image of Japan is deeply rooted in such an atmosphere. But today's Japan is not the same as in the past. Based on this, we must consider future negotiations between Japan and the United States. I want to point out four things. First and foremost, the economic relationship between Japan and the United States is now vastly different from what it once was. Japan's share of the U.S. trade deficit was high in the 1970s and 1980s, reaching approximately 60% in 1991. Now, it is less than 10%. Among countries with which the United States has trade deficits, Japan ranks only seventh. Instead, China has become the United States' largest trade deficit country, accounting for a quarter of the total. Second, Japan and the United States once engaged in fierce competition in industrial products such as automobiles, but they have successfully established a mutually complementary relationship. Japan still maintains strong competitiveness in industrial products, but the United States is strong in IT, finance, energy, food and pharmaceuticals. There are fewer areas of direct competition. Third, the United States views China as its sole competitor. China constantly combines economic, diplomatic, military and technological power to challenge the international order. From a geopolitical perspective in East Asia, strengthening its alliance with Japan is the best way for the United States to confront China. Fourth, while considering the importance of the Japan-U.S. relationship, it is essential to explore ways to align Trump's political agenda with the national interests of both countries. The gap between the reality of Japan-U.S. relations and Trump's outdated image of Japan could make negotiations between the two countries difficult for Japan. 'The Japanese sensitivities — to hell with them.' If Trump is truly a dealmaker who values practical benefits, he will not kick over the negotiating table with such a dismissive remark. I want to be able to bet on a Trump like that. Political Pulse appears every Saturday. Akihiro Okada Akihiro Okada is a vice chairman of the editorial board for The Yomiuri Shimbun.
Asharq Al-Awsat
07-04-2025
- Business
- Asharq Al-Awsat
The Theories Behind the Trump Shock
There are two related theories of what Donald Trump's dramatic revision of the global trade system is intended to accomplish. First, the goal is to revitalize American manufacturing, our capacity to build at home and export to the world. The global free trade system that took shape in the late 20th century served the American empire and American G.D.P. but at the expense of America's earlier role as a manufacturing powerhouse — and because manufacturing jobs were such an important source of blue-collar male employment, at the expense of the working-class social fabric. Meanwhile, over time, our manufacturing base didn't just move overseas, it moved into the territory of our greatest rival, the People's Republic of China. So rebuilding industry in America has two potential benefits even if it sacrifices some of the efficiencies offered by global trade. Factory jobs fill a particular socioeconomic niche that's been filled instead by drugs, decline, despair. And having a real manufacturing base is essential if we're going to be locked into great power competition for decades to come. Under this theory, though, it would seem like tariffs would be most effectively deployed against China, countries in China's immediate economic orbit, and developing countries that are natural zones for outsourcing. But the Trump administration has deployed them generally, against peer economies and allies. The policy seems much more sweeping than the goal, the potential damage to both growth and basic international comity too large to justify the upside. Which is where the second argument comes in — that this policy is about fiscal deficits, not just trade deficits and manufacturing. The same global system that made America a net importer also enabled us to borrow immense sums, but we are reaching the point where that borrowing cannot be sustained, where interest rates on the debt will crush our policymaking capacities even if there isn't an overall flight from the dollar. Here tariffs serve several purposes. Most straightforwardly they generate revenue without striking the kind of grand bargain on Medicare and taxes that the two parties are just too polarized to make. Secondarily, if they reduce growth, they also encourage a flight to safety in Treasury bills, which reduces the interest rate on government debt (something that's happening already). Finally, the trade war creates an opportunity for a larger revision of the global economic system, in which other countries agree to renegotiate the terms of US debt in exchange for more favorable trading terms. (The often-invoked antecedent is the 'Nixon Shock,' Richard Nixon's decision to put an end to the Bretton Woods financial system in 1971 and forge a new financial order.) You can find a version of this program in a paper from late 2024, 'A User's Guide to Restructuring the Global Trading System,' by the economist Stephen Miran, who not coincidentally now chairs Donald Trump's Council of Economic Advisers. Miran's arguments are not the source of Trump's longstanding tariff fascination, obviously — but they are a useful road map to understanding what the people around the president think they're doing by putting Trumpism into practice. Now for my own view. I think trying to reshore some manufacturing and decouple more from China makes sense from a national security standpoint, even if it costs something to G.D.P. and the stock market. Using revenue from such a limited, China-focused tariff regime to pay down the deficit seems entirely reasonable. I am more skeptical that such reshoring will alleviate specific male blue-collar social ills, because automation has changed the industries so much that I suspect you would need some sort of social restoration first to make the current millions of male work force dropouts more employable. And I am extremely skeptical of any plan that treats pre-emptive global disruption as the key to avoiding a deficit crisis down the road. The 'instigate a crisis now before our position weakens' has a poor track record in real wars — I don't think trade wars are necessarily different. The 'Nixon shock' was forced upon his presidency to a degree that this shock is not being forced on Trump — and it took a very difficult decade, not just a difficult few months, before the US economy began to clearly rise again. In the current environment, a Trump presidency that produces recession or stagflation is very unlikely to have a successor eager to see Trump's trade policy through. And meanwhile China stands ready to welcome nations that prefer to bandwagon against us rather than coming to terms. Miran, in his crucial paper, seemed to partially agree with my aversion to crisis, suggesting that any sweeping tariff system be phased in gradually, with steps to 'mitigate any adverse consequences' and potential 'impacts of such a system on global markets.' But the choice has been made, as once before by a Republican administration, for shock and awe instead. I hope this gamble has a better end. The New York Times
