The Trump Administration's Agenda and the likely Economic and Financial Consequences

Wednesday, January 8, 2025

Dr. Rodrigue Tremblay, Professor Emeritus at the Université de Montréal, former Minister and author of the book 'The Code for Global Ethics', Prometheus, 2010.

"When plunder becomes a way of life for a group of men living together in society, they create for themselves, in the course of time, a legal system that authorizes it and a moral code that glorifies it." Frédéric Bastiat (1801-1850), French economist.

"The government, which was designed for the people, has got into the hands of the bosses and their employees—the special interests. An invisible empire has been set up above the forms of democracy." Woodrow Wilson (1856-1924), American professor and the 28th President of the Unites States, (1913-1921).

"When every country turned to protect its own private interest, the world public interest went down the drain, and with it the private interests of all." Charles Kindleberger (1910-2003), American economic historian.

"Near as I can tell, this president [Donald Trump] only has one reference point and it is internal. That's very similar to a Cosa Nostra boss." James B. Comey (1960- ), former Director of the F.B.I. (2013-2017)

In the conflictual context of American politics, the political pendulum seems to swing from one extreme chaos to another, from an interventionist, war-mongering and spendthrift government led by the outgoing Democratic President Joe Biden and his "neoconservative" advisers, to an isolationist, imperialist and protectionist government under the leadership of Republican President-elect Donald Trump, with his ultra-nationalist slogan of "America First".

Indeed, Donald Trump's political agenda is radical, isolationist and protectionist, even mercantilist. In this, the latter professes to want to pursue a most cavalier foreign policy with a mix of provocation, insults, blackmail, coercive threats and hegemonic intimidation towards other countries and their leaders.

That is why the coming months and years risk being politically and economically tumultuous and possibly chaotic, not only in the United States but also around the world, as President Donald Trump and his administration proceed to forcefully implement the numerous promises he made during the 2024 U.S. presidential election campaign.

President-elect Donald Trump has pretty much completed the composition of his administration with loyal supporters and political allies, some of them being clones of himself and some being even more hawkish and militarist than himself. His political agenda and his numerous promises are partly inspired by the Heritage Foundation's far right Project 2025.

Therefore, it is now somewhat clearer in which direction the new administration intends to move the United States government in the coming months and years. It is also easier to analyze the economic and financial consequences this is likely to produce.

Indeed, with a psychopath as president, as of Jan. 20, 2025, a new era of 'Plutocrat Bullies' may be emerging in the United States that could parallel the "Robber Barons" era of 1861-1901.

In fact, this new political era really began on January 21, 2010, when the U.S. Supreme Court, under the principle that "money is speech", allowed electoral groups to accept massive financial donations and to spend practically unlimited sums of money during elections, (so long as they do not directly coordinate their actions with candidates of political parties).

1- The Trump administration plans to reduce American imports through high tariffs, besides better controlling the borders

Among its first proposals, the Trump administration intends to raise tariffs on products from different countries, from a 10% tariff on imports from most countries to a 60% tariff on Chinese imports, besides encouraging domestic oil and gas production. [N.B.: President Trump has even dreamed about replacing the US income tax with tariffs, although the numbers do not add up for such a radical switch!]

It also plans to strengthen border security and to deport a large number of undocumented immigrants, besides severely cutting 'wasteful' public outlays, deregulating some business practices and adopting more lenient anti-trust regulation laws. Moreover, it can be expected to extend previous tax cuts for individuals and to drop corporate tax rates from 21% to 15% for businesses, financed by a drastic compression planned in federal bureaucracy.

Some measures will undoubtedly stimulate domestic capital spending, production and employment, at least in some sectors and for a while—the result of new tax cuts, import substitution and deregulation. However, other measures, such as severe government spending cuts and looming trade wars will have the contrary effect.

Indeed, the Trump administration's fiscal policy will be a balancing act between lowering taxes and reducing public expenditures, within a global budget of $6.3 trillion in 2024.

In the short-run, however, the already high U.S. federal budget deficit ($2.1 trillion or 7.4% of GDP) and the enormous federal public debt ($36.2 trillion or 127% of GDP) are bound to rise even further.

This will be the case as the debt service alone (payments of loans at maturity and on-going interests on the outstanding public debt) is more than $1.0 trillion a year. Making past corporate and personal income tax cuts permanent is also likely to raise deficits and public debt.

This would mean more bonds issued by the U.S. Treasury and upward pressures on nominal and real (inflation-adjusted) long-term interest rates and on borrowing costs in the coming years. This could also mean more pressure on the Fed to purchase Treasury bonds at the risk of creating more inflation.

However, this would not be the end, since the expected rise in import taxes will likely also push import prices up, while large deportation of workers illegally in the U.S. would result in higher wages in some economic sectors. This could persuade the Fed to slow down for good its on-going program of lowering interest rates for fear of rekindling inflation.

2- In the short-run, some boost of domestic output and a rise of inflation can be expected in the United States

The overall initial impact of protectionist measures to be adopted during the first 100 days of the new administration is likely, on the whole, to be inflationary.

The prices of many imported goods and materials are bound to go up. Some estimates of the annual cost of Trump's new tariffs for an average American household could be between $1,700 and $2,350.

Also, wages in some sectors would rise when many foreign workers are subjected to deportation. A rush to replace imports would also require new investments, thus placing added demand pressure on prices and costs.

For a while, the US dollar would appreciate vis-à-vis other currencies, thus tempering somewhat the rise in import prices. Also, attempts to boost domestic oil and gas production would lower energy prices. Over time, as domestic production of import-substituting goods gears up, such an increased domestic supply would also tend to slowdown domestic inflation in the U.S.

3- In the medium term, higher import taxes are bound to reduce consumer spending, while trade retaliations from other countries would hurt American exports

Indeed, higher import taxes would lower real disposable income for American households and this would hurt consumer spending.

Similarly, trade wars are going to damage the world economy and this, in turn, will hurt American exports. —All countries lose in trade wars. —A worldwide economic slowdown is not in the interest of the American economy, nor of the world economy.

The experience of the Great Depression (1929-1939) is a serious reminder. The 1930 American Smoot-Hawley Act, which raised American import taxes by some 20%, provoked an international trade war. Many countries followed the United States in adopting "beggar-thy-neighbor" trade policies. World trade contracted and so also did the entire world economy.

Could a mercantilist trade policy succeed nowadays ? In other words, could the net result of such one-sided stimulative policies be expansionary in the U.S., initially, and then be very contradictory later on for the world economy and for US exports?

4. The errors in Trump's economic reasoning

Donald Trump seems to have insufficient knowledge of international finance. He falsely maintains, for example, that a country is necessarily a 'loser' when its net external trade in goods and services with other countries is in deficit. This is a misconception of the real world, especially when there are movements of financial capital between countries.

Indeed, one country may have a net inflow of foreign financial capital. Such a net inflow of financial capital will appreciate its currency, and its imports will necessarily tend to exceed its exports. A country will then have a surplus on its capital account but a deficit in its current account (trade balance, transfer payments, etc.). This is how real capital is transferred (in the form of machinery, technology or other goods) to a recipient country.

The reverse is also true.

When a country has a net outflow of financial capital, its currency will tend to depreciate and such a country will tend to have a trade surplus, i.e. more exports than its imports of goods and services. Its trade balance becomes positive to transfer real capital abroad.

Each country's global balance of payments is constantly kept in equilibrium by the play of prices and exchange rates, and that is the way real capital is transferred from one country to the other. This is an elementary fact of balance of payments accounting.

5. The special role of the US dollar in the international monetary and financial system

But there is more in the case of the United States, whose currency is used in international transactions.

Indeed, the US dollar being the main international currency creates a structural international demand for that currency. Foreign holdings of US dollars and of US dollars assets (bonds, shares, etc.) translate into a capital inflow into the USA, making for a strong dollar in foreign exchange markets. This allows the United States to import and spend more abroad as it imports more than it exports. The net result is a deficit in its trade balance. (N. B.: For example, the U.S. government spends enormous amounts of money each year in maintaining some 800 military bases abroad, which is partly financed by foreigners holding US dollar assets.)

It is therefore somewhat ironic that Trump wants to impose 100% tariffs on the BRICKS countries if they try to replace the US$ as the world's reserve currency!

If the United States wanted to have a permanent trade surplus, it should prevent residents of other countries from investing in the United States. Specifically, the United States would have to discourage foreigners from holding US dollars and from investing in bonds and stocks of American companies.

Foreign central banks should not also hold large amounts of US dollars in their official reserves. Such a foreign investment in US dollars appears as s surplus in the capital account of the US balance of payments.

6- Trade protectionism and trade wars in a context of high public indebtedness

Public debts are currently at record levels in many countries. This is the consequence of years of fiscal and financial excesses—the result of a 'spend-borrow-print' approach to fiscal and monetary policies. Therefore, after a few months of expected economic and financial exuberance in the United States, a serious economic recession could take hold in several western economies, sometime in the coming years.

Indeed, a likely contraction in American exports resulting from the expected trade war and other countries' retaliatory tariffs, would exceed any expansion in the American import-substitution sector. This, plus a contraction in public expenditures, could also contribute to slowing down economic growth.

7- The on-going cryptocurrency speculative craze

It is also worth mentioning the current speculative cryptocurrency craze, a potentially inflationary phenomenon.

Cryptocurrencies are private digital currencies, which are based on an electronic encryption technology and a decentralized network of computers using a great amount of energy, which control and secure their production. [In 2008, an anonymous entity known under the pseudonym Satoshi Nakamoto invented a software program for the artificial creation of digital wealth. This was the first and best-known digital currency based on blockchain technology and secured by cryptography, the bitcoin.]

There are numerous so-called cryptocurrencies and they are not backed by any government, are not regulated by any central bank and are not based on any physical asset, such as gold. Their existence is essentially virtual and their intrinsic value is based on speculative appeal, due to the high volatility of prices, and the secrecy conferred on those who use them to make anonymous transactions. However, their market is on track to reach a total value close to $2 trillion!

Such artificially created and risky private digital 'assets' are currently supported by president-elect Donal Trump and by a few of his pro-crypto appointments. They are very lightly regulated. Former Securities and Exchange Commission Chairman Gary Gensler has testified to Congress that the entire crypto asset class is "rife with fraud, scams, and abuse."

8- Uncertain financial and economic outlook

All of the above factors could be a source of economic difficulties in the years to come. Indeed, all the elements are present for a perfect economic and financial storm, especially if we add the possible convergence of a monetary crisis, a fiscal crisis and a financial crisis. There are currently too many exuberant speculative bubbles for this not to be a cause for concern.

Their combined effect could lead to a period of stagflation, that is, a period of slow, zero or negative economic growth in the context of rising prices.

If such a situation were to arise, it is not impossible that it could morph into a severe cyclical economic recession, and even possibly into a longer term structural economic depression.

For its part, the Organisation for Economic Co-operation and Development (OECD) forecasts global economic growth to be 3.3% in 2025. However, there is a great risk of deterioration over the coming years if important trade wars and other crises were to occur.

Conclusions

The world is economically more multilateral and interdependent than ever. Attempting to go back to unilateral thinking and isolationism, as president-elect Donald Trump demagogically promised to receptive American voters, could be a dangerous experiment.

Internationally, a second presidential term by American business mogul Donald Trump risks being very disturbing, as it may severely destabilize and upend international economic and financial relations, particularly as far as international trade and capital movements are concerned.

Indeed, if president-elect Trump were to go ahead and rely on strong-armed tactics to obtain unilateral concessions in trade and other matters with other countries, this could unravel the intricate network of international commercial and financial relations between countries that has been built since WWII.

Domestically, if the Trump administration were to enforce its radical economic agenda, the U.S. economy could possibly benefit in the short term at the expense of other economies. However, this would carry heavy economic, financial and political costs in the medium and longer term for the world economy, but also for the U.S. economy.

It may look relatively easy to launch trade wars for domestic political reasons, but the net economic, financial, monetary and productivity consequences over time can be very disruptive. As the mercantilist experience of the 1930s indicates, such inward-looking trade policies could transform a standard economic recession into a full-fledged economic depression.

As we approach the 100th anniversary of the great financial crash of 1929, it may be prudent to learn from past mistakes and errors. For instance, it was only a quarter of a century later, in 1954, that the U.S. stock market returned to its pre-crisis level.

In between, the Great Depression of 1929-1939 paved the way for World War II (1939-1945) and its disasters.

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International economist Dr. Rodrigue Tremblay is the author of the book about morals "The code for Global Ethics, Ten Humanist Principles" of the book about geopolitics "The New American Empire", and the recent book, in French, "La régression tranquille du Québec, 1980-2018". He holds a Ph.D. in international finance from Stanford University.

Please visit Dr. Tremblay's site or email to a friend here.

Posted Wednesday, January 8, 2025/edited Jan. 12, 2025.

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Western Democracies and the Threat of Social Disintegration

Wednesday, October 30, 2024

Dr. Rodrigue Tremblay, Professor Emeritus at the  Université de Montréal, former Minister and author of the book 'The Code for Global Ethics', Prometheus, 2010.

"Millions of men will leave the Southern Hemisphere to go to the Northern Hemisphere. They will not go as friends. They will go to win, and they will by populating it with their sons. The fertile wombs of our women will allow us to conquer Europe and the world." Houari Boumedienne (1932-1978), Algerian military man and president of Algeria, (in a speech at the United Nations, in Sept 1974, advocating the Ummah, i.e. a global Islamic nation.)

"The mosques [in Western countries] are our barracks, the domes are our helmets, the minarets are our swords, and the faithful are our army" Recep Tayyip Erdogan (1954- ), Turkish Prime Minister, (comment made in Dec. 1997, when he was Mayor of Istanbul.)

"Seeking proof [about religion] misses the point of religion. It is what it does that matters." Hilary Putnam (1926-2016), American philosopher, (as quoted in The Economist, March 26, 2016

"Islamist movements, supported by Western courts, try to prevent any criticism of Islam. We should resist this wind of inquisition in the interest of humanity. Western judges who support this inquisition are real useful idiots who expose their own countries to the worst dangers." Sami Aldeeb (1949- ), Palestinian-born Swiss university professor, and Director of the Center of Arab and Muslin Law, Switzerland, 2014

"This is, in theory, still a free country [the U.K.], but our politically correct, censorious times are such that many of us tremble to give vent to perfectly acceptable views for fear of condemnation. Freedom os speech is thereby imperiled, big questions go undebated, and great lies become accepted, unequivocally as great truths." Simon Heffer (1960- ), British journalist, (in The Daily Mail, June 7, 2000)

Established religions have always had problems coexisting with governments and especially, in modern times, with democracy and the secular nature of societies. In the West, in fact, over time, a more or less hermetic separation has developed between religions and democratically elected political power.

This is because, in addition to maintaining places of worship, religions are social forces. They are competing organizations of power over people and society, with a structured system of beliefs, mysteries, 'revealed' truths, doctrines, dogmas, rules and laws, symbols, texts and images, rites and practices. Religious authorities often base their power over people on concepts of the supremacy of abstract divine powers.

While some established religions are highly centralized, others are much less so, and they reflect a plurality of views and types of operation.

I- Politically structured religions and spiritual and personal religions, in a democracy

Many people think that all religions are equal.

This is only partly true. On the one hand, there are greatly politicized religions, based on sacred principles. They are highly institutionalized, centralized and omnipresent in terms of political influence in countries where they operate. On the other hand, there are also more philosophical and spiritual religions, mainly focused on the destiny of an individual's soul and the transcendence of human existence, and they rely mainly on personal life practices.

In the first group, among Abrahamic-type religions, there are Christianity and Christendom and Islam and Islamism, the latter dating from the 7th century. These are religions that can be classified as political. In a second group, there are more philosophical religions whose historical source is mainly Asia, such as Buddhism, Taoism, Hinduism, etc.

There are of course exclusively secular and lay political religions, which have nothing religious about them, from a transcendental point of view, such as communism or fascism, but which are totalitarian ideologies, seeking absolute power over a given population.

II- Politicized religions and democracy

However, Christianity and Christendom have undergone transformations and reforms since the time when it was a dominant political religion in some parts of the world. They were even the source of holy wars.

In recent centuries, Christianity has become more of an individual and personal religion rather than a fundamentally political religion. It has gradually adapted to the advent of democracy in most Western societies and to more secular democratic states.

In this context, the ultimate and legitimate power in a democratic society emanates directly or indirectly from the people, and not from abstract divinities and their spokesmen on earth. In the formula of American President Abraham Lincoln, democracy is a "government of the people, by the people, and for the people." It is also, in many instances, the principle of a more secular state.

The special case of political Islam in the West

In contrast, Islam (the word means 'submission' or 'surrender' in Arabic) and Islamism, that is political Islam in action, have remained more or less frozen in their founding dogmatism of the 7th century, and remain an eminently political and social religion. In countries where it is the majority, it often imposes itself as the only compulsory state religion, excluding all others. These countries could then become "Islamic republics", some of them being openly theocracies, with very little separation between religion and politics.

The best known examples are Saudi Arabia (Sunni branch) and the Islamic Republic of Iran (Shiite branch), which are countries where religious leaders act as "supreme guides" and who play a determining role in the behavior of citizens as individuals, in politics and in social affairs, and in the overall running of society.

Some religions even rely on a religious police to make sure that revealed religious precepts are well observed by members and even by the entire population.

This is why, among all established religions, the case of Islam can be considered special.

Its principles are based on four main components:

- the Ummah is the global Islamic community or nation to which every believer must belong, with the common goal to advance the cause of Islam;

- jihad or 'effort' can refer, among other things, to an obligation of 'holy war' in order to propagate and, if necessary, impose Islamic principles by 'the heart, by the tongue, by the hand and by the sword' against the infidels;

- the Quran is the sacred book of Islam, much as the Bible is for Judaism and Christianity. It is supposed to bring together revelations from Allah transmitted orally by the archangel Gabriel and compiled by different authors, before being transmitted to the prophet Muhammad, in the 7th century;

- Sharia (Islamic law), like jihad, is taken from the Quran. Sharia represents the various doctrinal, social, cultural and relational laws, norms and rules that are addressed to believers.

The traditional reading of the Quran divides the world and humanity into two areas: the House of Islam, Dar al-Islam or "the world of submission to Allah" where Sharia applies and where Muslims live, and Dar al-Harb, "the world of war" against non-Muslims.

III- Unselective Immigration and the Clash of Civilizations between Democratically Elected Western Governments and political Islamism

By their history, laws and rules, Islam and Islamism constitute an  imminently political, proselytizing and conquering religion. It is a serious error to confuse them with reformed religions such as Christianity and other essentially personal and individual religions such as Buddhism.

If there are clashes between a political religion and politics, it is not only because there is competition for power but also because the foundations of a political religion often enter into a subversive conflict with the practice of democracy.

Indeed, when a political religion carries within itself a global political project, we can then speak of a 'civilization' with a common ideology, which creates, by extension, a predictable opposition between different civilizations—or even a Clash of Civilizations, according to the title of a book on the subject by American scientist Samuel Huntington (1927-2008), and published in 1996.

This is an expression suggested by the author to demonstrate how conflicts of civilization can arise when different political views or cultures find themselves juxtaposed on the same territory. Indeed, Huntington refers not only to a clash of religions but also to a clash between cultures.

IV-Factors of social and political disintegration in Western democracies

It is by no means unavoidable that Western democracies must disintegrate under the pressure of politicized religious cultures, especially when they are imported from elsewhere. Already, in France since 1905, in Italy since 1947 and in Spain since 1978, but also in Nordic countries such as Norway, Sweden, Denmark, and also in Switzerland, among others, concrete steps have been taken to adopt the principle of state secularism.

Indeed, if nothing is done and if governments let things happen, or worse, if they consider that their country is a kind of experimental social laboratory and promote the creation of diverse cultural areas, serious problems of integration are bound to arise.

In fact, in certain neighborhoods in France and in some other countries, there has been an emergence of so-called "No-Go zones", where laws are hardly respected, and where the police dare to venture only with special reinforcement, under the threat of being attacked or worse. This could even deteriorate into a form of domestic terrorism.

The need to take action would seem urgent before the gangrene of social anarchy takes hold. This would require on the part of governments, political elites and the population in general, a serious awareness, a clear vision of the situation, courage and firmness, and the adoption of concrete masures to correct a phenomenon in evolution, before it deteriorates even further.

In the case of France, but also in some other Western countries, this stage is progressing after decades of carelessness, complacency, laxity, negligence, weakness and abdication of responsibilities on the part of public leaders. In many instances, the latter have placed short term partisan political interests above the long term interest of their nation in allowing communitarianism and ethnic ghettos to take hold.

It is not normal for a democracy to let its institutions wither away under the threat of totalitarian ideologies imported from elsewhere (see the frightening quotes from Boumedienne and Erdogan above).

V- There are a number of ways to prevent and counter social and political disintegration in the face of an uncontrolled migratory invasion

Here are a few policies to be considered:

1- A first type of intervention consists in denouncing as unacceptable and a threat to security the leaving of national borders unattended, in the face of un-welcomed and illegal immigration. A government that does not protect national borders is failing in its primary duties. —Peoples and nations, like individuals, have a natural right to protect their survival, their legitimate interests and their values, in the face of transgressions, from within or from outside.

2- A second form of intervention consists in adopting a responsible immigration policy, one that respects the receptive capacity of a population. —This is the principle that immigration must make a net positive and not negative contribution to a host country.

3- Thirdly, reinforcing laws of public education in order to protect children against exactions and intimidations on the part of proselytizing religious predators in public schools, particularly with regard to the democratic principle of equality between men and women.

4- Fourth, governments may want to make the granting of citizenship to new immigrants conditional on a contract of citizenship and integration into the host society. —No country and no government is under the obligation of accepting an influx of foreign individuals who have no intention of integrating into the host country.

Conclusions

The West (European and North American countries) is currently confronted, from within and from without, with a migratory wave of cultures and ideologies that in some cases are strongly opposed to Western democratic values; such is the case with political Islamism.

In the medium and longer term, such a phenomenon is a serious hindrance to the social integration of new immigrants, and it can represent a real danger for the cohesion, freedom, security and prosperity of citizens in the host countries.

On this issue, it may be a quarter to midnight in some countries. One day, it could be too late to act.

Some Western democracies are already threatened in their basic democratic nature. They must adopt integration measures in order to strengthen national laws and regulations and adapt them to new realities. 

The primary objective should be nothing less than preserving the Western democratic system, which is based on the power of the people, against growing and corrosive encroachments from ideologies that are hostile to democracy and fundamental freedoms.

__________________________________________________

International economist Dr. Rodrigue Tremblay is the author of the book about morals "The code for Global Ethics, Ten Humanist Principles" of the book about geopolitics "The New American Empire", and the recent book, in French, "La régression tranquille du Québec, 1980-2018". He holds a Ph.D. in international finance from Stanford University.

Please visit Dr. Tremblay's site or email to a friend here.

Posted Wednesday, October 30, 2024

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Is the World Walking Blindfolded toward a Nuclear War?

Thursday, September 5, 2024

Dr. Rodrigue Tremblay, Emeritus professor of economics and international finance, Université de Montréal

"Through the release of atomic energy, our generation has brought into the world the most revolutionary force since prehistoric man's discovery of fire. This basic power of the universe cannot be fitted into the outmoded concept of narrow nationalisms."  Statement by the Emergency Committee of Atomic Scientists, presided by Albert Einstein, January 22, 1947.

"I know not with what weapons World War III will be fought, but World War IV will be fought with sticks and stones." Albert Einstein (1879-1955), German-born theoretical physicist, (in an interview in 'Liberal Judaism', April-May, 1949)

"While defending our own vital interests, nuclear powers must avert those confrontations, which bring an adversary to a choice of either a humiliating retreat or a nuclear war. To adopt that kind of course in the nuclear age would be evidence only of the bankruptcy of our policy—or of a collective death-wish for the world." John F. Kennedy (1917-1963), 35th U.S. President, 1961-1963, (in his commencement address titled "A Strategy of Peace" delivered at the American University in Washington, D.C., on Monday, June 10, 1963 

During the fatidic year of 2024, the world's attention was distracted, first by the on-going and expanding US-NATO provoked Ukraine war against Russia, "to weaken Russia" dixit Secretary of Defense, General Lloyd Austin, a proxy war planned a long time ago, in 1991, after the collapse of the Soviet Union.

As a matter of fact, this has been a proxy war from the start between the United States and Russia, promoted by American neocons. It is a war that officially started with the U.S. government financing the violent overthrow of the elected pro-Russian government of President Viktor Yanukovych, in February 2014.

Secondly, there is the on-going conflict between Israel and the Palestinians in Gaza, which began with an attack by Hamas in October 2023. This was followed by the killing of more than 40,000 Palestinians by the Israeli Netanyahu government. Such widespread massacre of civilians and destruction have left thousands of children orphaned, shocked genocide historians and shamed the world's conscience. Nevertheless, the modern-day massacre of the Palestinian people seems to have no end in sight.

On the other hand, we have also witnessed this year the holding of the grandiose Paris Summer Olympics. That great peace celebration among nations was followed by a political saga in the American presidential election campaign, when the incumbent Democratic President Joe Biden was pressured to withdraw his candidacy in favor of Vice President Kamala Harris.

However, other more scary developments have been taking place in the shadow. Indeed, the New York Times revealed on Tuesday, August 20, that last March, President Joe Biden, in a dangerous display of brinkmanship, secretly approved a new coordinated American nuclear strategy. It is about a plan for simultaneous nuclear confrontations of the United States with Russia, China and North Korea.

That there exists such a plan is not very reassuring, considering that the United States was the first and only country to have dropped nuclear bombs on cities, those of Hiroshima and Nagasaki, in August 1945, resulting in hundreds of thousands of deaths.

That a world nuclear war in this day and age could be viewed as possible, even likely, is mind-boggling. As the quote above from President John F. Kennedy in his June 1963 speech illustrates, "to adopt that kind of course in the  nuclear age would be evidence only of the bankruptcy or our policy—or of a collective death-wish for the world."

The dire consequences of countries preparing for a nuclear war

Nuclear spending programs in the three largest nuclear powers—China, Russia, and the United States—threaten to trigger a three-way nuclear arms race, as the world's arms control architecture collapses. Russia and China are expanding their nuclear capabilities, and pressure mounts in Washington, especially among supporters of the U.S. military-industrial complex (MIC), for the United States to respond in kind.

The lack of trust and willingness to control and limit the production of nuclear weapons may herald a new era of development of new nuclear weapons, including the deployment of offensive intercontinental-range nuclear weapons. This means that the main nuclear powers could expand the development of new nuclear weapons just as geopolitical tensions keep increasing. This is bound to place the security of all nations in jeopardy.

Humanity's Doomsday Click is getting closer and closer to midnight

According to the Bulletin of the Atomic Scientists, its metaphor or symbol of the Doomsday Clock, created in 1947, was set to 90 seconds to midnight in January 2023. It was kept at that high point in January 2024, because humanity continues to face a high level of danger in three main areas: the greatest risk of nuclear warfare, the ongoing negative consequences of climate change and the new threat of Artificial Intelligence.

In July of 1991, at the end of the Cold War, the United States (Pres. George H. W. Bush) and the Soviet Union/Russia (Pres. Mikail S. Gorbatchev) signed the bilateral Strategic Arms Reduction Treaty (START I), designed to promote nuclear disarmament. 

It mandated both sides to reduce their strategic offensive nuclear weapons arsenals. The Atomic Scientists' Doomsday Clock was then set at 17 minutes to midnight. (N.B.: START I was a success. It had the effect of removing about 80% of all strategic nuclear weapons then in existence, when its final implementation was completed, in late 2001.)

Today, however, with the world thrown into a new Cold War II, with heightened geopolitical tensions between US-EU-NATO, on one side and Russia-China-North Korea-Iran, on the other, the risks of a major global nuclear cataclysm are very high.

Since START I, most arms control agreements have failed

After the success of the START I treaty, there were two additional treaties signed between the U.S. and Russia to further reduce the stocks of nuclear armaments. Both failed.

First, in January 1993, American president George H. W. Bush and Russian president Boris Yeltsin signed a new Strategic Arms Reduction Treaty called START II, to expand what the START I treaty had accomplished. However, this new treaty never entered into effect.

This is because the George W. Bush administration decided, in June 2002, to withdraw from the Anti-ballistic Missile treaty (ABM) that had been in existence between the U.S. and the USSR since 1972, and which was one of the conditions for START II to go ahead.

Many observers considered the American withdrawal of the ABM treaty as the first step toward abandoning effective legal constraints on nuclear proliferation.

Second, President Barack Obama did attempt to revive the mutual reduction of offensive nuclear weapons for ensuring a safer world, when he signed a New START treaty, in April 2010, with then President Dmitry Medvedev of the Russian Federation. However, there was mounting skepticism over nuclear arms reductions among some U.S. Republican senators and from Washington DC think tanks, such as the Heritage Foundation.

The New START treaty was intended to last ten years, with an option to renew it for up to five years upon the agreement of both parties.

However, on February 2017, then President Donald Trump told Russian president Vladimir Putin that he was withdrawing from the New START treaty, expressing the view that it was too favorable to Russia and that this was a "bad deal negotiated by the Obama administration."

All attempts between Trump and Putin to draft a replacement to the New START treaty before it expired in 2021 failed. Russia went as far as accusing the Trump administration of "deliberately and intentionally" dismantling international arms control agreements and referred to its "counterproductive and openly aggressive" approach in talks.

Nevertheless, in January 2021, the newly-elected Biden administration did accept a Russian proposal to extend the New START treaty of nuclear arms reduction for five years, i.e. until 2026.

That was the last attempt by the United States and Russia to increase their mutual nuclear safety through bilateral negotiations.

An historical precedent

Political relations between the United States and Russia have become increasingly strained, especially after Russia invaded neighboring Ukraine in February 2022.

The Russian government evoked two main reasons for its move: to protect the Ukrainian russophone minority from Kiev's exactions, and to prevent the latter country from joining NATO, which would mean the deployment of American nuclear-armed missiles at Russia's border.

This war has resulted in tremendous amounts of destruction, sufferings and numerous deaths. It is a war that could have been avoided with a minimum of good faith, diplomacy and a few concessions.

The conflict is reminiscent of the 1962 Cuban missile crisis. The Soviet Union had placed nuclear-armed missiles in Cuba, 90 miles from the U.S. coastline, in a response to American deployments of nuclear-armed missiles in Italy and Turkey. A compromise was eventually reached between President Kennedy and President Khrushchev: the Soviet government would dismantle their offensive weapons in Cuba and the U.S. government agreed, secretly, to dismantle all of the offensive weapons it had deployed in Turkey.

Conclusions

The world has increasingly become a more chaotic and dangerous place. This has a lot to do with the current lack of nuclear deterrence agreements between major nuclear powers. If one nuclear country were to launch an attack with a nuclear weapon in such a climate of mistrust, this could create an existential threat for hundreds of millions of inhabitants of the Planet.

A devastating nuclear war would not only have tragic human consequences, but also economic ones. It would be a huge waste of resources, but it could also create a nuclear winter with damaging fallouts on crops leading to famine, besides being a major source of air pollution.

A nuclear war could profit the military nuclear industry in some countries, but it would create chaos in the global economy, causing inflation in the countries involved and creating stagflation in the private sector of national economies.

If leaders of nations with nuclear weapons continue to trivialize the threat of a full-scale nuclear war and to fantasize the demential idea that they can 'win' a nuclear war, the world may be heading straight towards an existential catastrophe.

Therefore, it is incumbent upon all, leaders and citizens, to work towards the abolition of wars, which do not advance humanity, but rather set it back.

______________________

International economist Dr. Rodrigue Tremblay is the author of the book about morals "The code for Global Ethics, Ten Humanist Principles" of the book about geopolitics "The New American Empire", and the recent book, in French, "La régression tranquille du Québec, 1980-2018". He holds a Ph.D. in international finance from Stanford University.

Please visit Dr. Tremblay's site or email to a friend here.

Posted Thursday, September 5, 2024

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The Rise of Protectionism among American politicians

Wednesday, June 26, 2024

Dr. Rodrigue Tremblay, Emeritus professor of economics and international finance, Université de Montréal

"Under a system of perfectly free commerce, each country naturally devotes its capital and labour to such employments as are most beneficial to each... By increasing the general mass of productions, it diffuses general benefit, and binds together... the universal society of nations throughout the civilized world."  David Ricardo (1772-1823). British political economist, (in 'On the Principles of Political Economy and Taxation', 1817).

"Trade wars are good and easy to win." Donald Trump (1946- ), 45th American president (2017-2021), (comment on Twitter (X), March 2, 2024).

[Donald] "Trump doesn't get the basics. He thinks his tariffs are being paid by China. Any freshman Econ student could tell you that the American people are paying his tariffs." Joe Biden (1942- ), American politician and 46th president of the United States (2021- ), (statement made by then candidate Joe Biden, on Twitter, June 11, 2019).

"When every country turned to protect its own private interest, the world public interest went down the drain, and with it the private interests of all." Charles Kindleberger (1910-2003). American economic historian, (in his book 'The World Depression 1929-1939', 1973).

Unpopular politicians in power are currently floating old economic ideas, which have proven in the past to be disastrous to their own economies and to the world economy.

Indeed, a leading cause of the Great Depression of 1929-1939 was the implementation of severe protectionist trade policies by industrial economies, which turned the financial crises and subsequent economic recession of the early 1930's into a full-fledged economic depression. For example, protectionist members of the U.S. Congress enacted the Smoot-Hawley Act of 1930 in June of that year.

That measure raised American import taxes by some 20 percent. The goal initially was to help American agricultural producers, but other industries requested the same protection from competition for their own products and asked that goods imported from other countries be heavily taxed.

That induced other industrial countries to retaliate by raising their own barriers to trade to protect their industries. They ended up adopting similar—what was called "beggar-thy-neighbor"—protectionist trade policies, thus contributing to unravelling the entire international network of world trade. For example, U.S. imports from and exports to Europe fell by some two-thirds between 1929 and 1932. World trade contracted and so also did the entire world economy.

In other words, governments of the time threw gazoline on the fire. They made the early financial and economic situation much worse by raising import barriers that led to sever contraction of worldwide economic activity. Could history repeat itself today?

Trade wars are likely to lead to net economic losses for every country

Trade wars amount to imposing heavy taxes on imports of goods and services from other countries, which in the end are paid by domestic consumers and local companies. The latter need cheaper imported parts and raw materials to remain efficient and competitive in domestic and world markets. Such an economic process is profitable on a net basis for a national economy, because it leads to higher standards of living. It is the result of a profitable but complex process of international division of labor.

Domestic and highly efficient exporting industries also suffer from such artificially increased costs of their imports and from retaliations by other countries to their exportations, and they see a decline in their productions, their employment and their earnings.

The issue of employment in the economy is important. High tariffs and other protectionist measures may artificially increase employment in a few particularly less competitive industries, but this is not the end of the story. Ripple effects can be expected in other industries, especially in the export sector of the economy.

For the United States, for example, the rising costs of imports through high import taxes, and from reprisals from other countries against American exports of goods and services, hurt production and employment in the most efficient domestic exporting industries. This is likely, for instance, to damage the comparative advantage that the U.S. has in producing and exporting technological products and other services.

Therefore, when world trade contracts and even collapses, the net effect of such trade wars has a good chance of being net negative for all economies and for workers in general, as labor productivity and the productivity of capital decline in the whole economy. A trade war is likely to end up hurting all economies on a net economic basis.

Benefits and adjustments to international trade

In everyday reality, job losses are inevitable in certain economic sectors and in certain regions, due either to competition from imports and technological developments.

It is then important that governments actively help workers and affected regional economies to share in the overall national economic benefits arising from international trade and technological progress, preferably within an overall national industrial strategy.

This means adopting special public programs, such as a targeted increase in unemployment insurance benefits, special training programs for displaced workers and special employment and investment subsidies at the regional level.

The special place of the U.S. dollar in the international monetary system

A major preoccupation nowadays comes from the fact that just as the 1930's saw the U.S. dollar replace the British pound, the place of the U.S. dollar in international affairs is contested. In July 1944, the Bretton Woods conference officially established the U.S. dollar along with gold as the foundation of the postwar international monetary system. From then on, the currencies of many countries were fixed to the U.S. dollar, the latter being the only currency convertible into gold at $35 an ounce.

However, the international role of the dollar was substantially reinforced on August 15, 1971, when the Nixon administration unilaterally ended the official international convertibility between U.S. dollars and gold, thus making the American currency a completely fiat means of payment.

Today, for different reasons, attempts are being made by some important countries, the BRICS countries, to replace the American dollar as the principal means of payments for international transactions. If such a process of dedollarization were to expand and succeed,  important geopolitical, financial and economic tensions between countries could ensue.

The United States reaps important economic and financial benefits when other countries hold dollars in their central banks' reserves or use it as the main trading currency in their international trading and financial transactions. This amounts to zero or low-interest rate loans being made to the U.S. economy by other countries, thus generating an important so-called seigniorage gain for the USA.

Therefore, such an inflow of foreign capital into the U.S. economy, firstly, helps the American central bank, the Fed, to support the U.S. dollar in foreign exchange markets. Second, it helps finance the U.S. government fiscal deficits and American trade deficits. And, thirdly, it increases the liquidity and profitability of American money and financial markets. That is why some consider such advantages to be an immense privilege granted to the United States by countries that use the American dollar.

An increasingly protectionist Biden administration

As a sign of the times, when candidate Joe Biden was running for office in 2020, he was a sharp critic of the Trump administration's imposed barriers on trade with China. However, once elected, he maintained the tariffs previously decided by Trump.

On Friday, May 14 of this year, President Biden went a step further. In the middle of his current presidential campaign, and having to prepare for a public debate on CNN, on Thursday, June 27, with his main opponent, Donald Trump, he announced the imposition of a series of new tariffs on several American imports from China.

The new customs tariffs range from 100 percent on imports of electric vehicles (EVs) to 25 percent for imports of electric vehicle parts. Tariffs of 50 percent will also be imposed on the import from China of solar modules or cells, as well as on imports of semiconductors. Tariffs of 25 percent will also be levied on steel and aluminum imports from the Asian country.

Such import taxes are likely to raise domestic prices of the targeted products and parts, generating more domestic inflation. These new taxes are also likely to hurt American consumers and American-based industries, when the latter use imports as inputs in their own production.

In fact, the Biden administration is increasing jobs in some industries among the weakest, and situated in some key states important for his reelection, but in so doing, he risks destroying jobs in other industries among the most efficient, in other states.

Moreover, U.S. tariffs as high as 100% are bound to intensify the US-China trade war, since the expected Chinese reprisals will most likely lower American exports to China. One might wonder whether these new import taxes by the Biden administration are not more the result of a short-term partisan political calculation rather than the product of a well-thought-out industrial policy.

It remains also to be seen whether such a shift toward protectionism by the United States is compatible with the trading rules of the World Trade Organization and its 166 members.

A likely even more protectionist Trump Administration

If former president Donald Trump is elected next November 5, it can be expected that his administration would pursue a very protectionist foreign trade policy.

Indeed, on Thursday, June 13, candidate Trump already told a group of Congressional Republicans that he was juggling with the idea of replacing U.S. federal income taxes [$2,176 billion in fiscal year 2023] with high import taxes [U.S. imports in 2023: $3,112 billion]. Since such a policy would drastically contract imports, it would necessitate very high import taxes.

During his first term (2017-2021), Republican president Donald Trump slapped steep tariffs on billions of dollars' worth of goods from neighboring countries Canada and Mexico, and also from the European Union (EU) and China. All countries have retaliated by imposing their own tariffs on imports of U.S. goods and services.

Likewise, during his first term, the Trump administration significantly amended the North American Free Trade Agreement (NAFTA), which came into force on January 1, 1994, between the United States, Mexico and Canada.

That historic treaty was replaced, at the insistence of Donald Trump and his protectionist advisers, by the United States-Mexico-Canada Agreement (USMCA), as revised in its ratified 2020 version, largely to the advantage of the United States. Additionally, it is important to point out that the 2020 USMCA treaty is subject to renegotiations every six years, and that it could expire after just 16 years, if  not renewed (depending on the so-called clause extinction of 16 years).

Conclusion

If unilateral barriers to international trade were to keep increasing in the coming years, this could undermine the influence of the World Trade Organization (WTO), as the only organization designed to regulate and facilitate international trade.

Possibly the WTO, as an inter-state organization, could follow in the footsteps of the United Nations (UN) and become less able to prevent trade disruptions and trade wars. This could have disastrous economic and political consequences on the standards of living of people in many parts of the world. Taken to the extreme, unbridled protectionism could push the global economy into an economic depression.

Indeed, repeated destructive wars, whether they are military or commercial, make the world economy less stable and less peaceful, and, ultimately, less prosperous for the large majority of people.

_____________________________

International economist Dr. Rodrigue Tremblay is the author of the book about morals "The code for Global Ethics, Ten Humanist Principles" of the book about geopolitics "The New American Empire", and the recent book, in French, "La régression tranquille du Québec, 1980-2018". He holds a Ph.D. in international finance from Stanford University.

Please visit Dr. Tremblay's site or email to a friend here.

Posted Wednesday, June 26, 2024/ modified on Thursday, June 27, 2024

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Two Economic and Financial Periods with Similarities, but with Different International Monetary Systems: 1920-1929 and 2008-2024

Friday, May 17, 2004, 2024

By Dr. Rodrigue Tremblay, 

Emeritus professor of economics and international finance, Université de Montréal

"There is no subtler, no surer means  of  overturning the existing basis of society than to debauch the currency... The process engages all the hidden forces of economic law on the side of destruction, and does it in a manner, which not one man in a million is able to diagnose."  John Maynard Keynes (1883-1946). British economist, (in 'The Economic Consequences of the Peace', 1919, Ch. VI, pp. 235-236).

"The survivors of a generation that has been of military age during a bout of war will be shy, for the rest of their lives, of bringing a repetition of this tragic experience either upon themselves or upon their children, and... therefore the psychological resistance of any move towards the breaking of a peace... is likely to be prohibitively strong until a new generation ... has had time to grow up and to come into power." Arnold J. Toynbee (1889-1975), British historian, (in 'A Study of History', vol. 9, 1954).

"When every country turned to protect its own private interest, the world public interest went down the drain, and with it the private interests of all." Charles Kindleberger (1910-2003). American economic historian, (in his book 'The World Depression 129-1939', 1973).

Next year will be the 80th anniversary of the end of the Second World War (1939-1945). It is therefore likely that the world is approaching the end of the long post-war period, which has spanned three generations.

Likewise, in just a few years, it will be the 100th anniversary of the massive stock market crash in the autumn of 1929, which preceded the advent of the Great Depression (1929-1939).

Even though economic history does not necessarily repeat itself in every detail, there are long economic cycles in capitalist economies, which tend to repeat themselves at various intervals, provided that the economic imbalances and financial excesses which activate them are strong enough. Indeed, there are presently economic, financial and geopolitical circumstances that have some similarities with those that prevailed in the past, especially during the decade of the Roaring Twenties in the 1920's, and even later during the 1930's.

I- The economic and financial situations in the United States during the 1920's

The end of WWI in 1918 was followed by the influenza pandemic of 1918-1919, (it was called the Spanish flu pandemic because the press in Spain was the first to report it). It was a severely contagious viral disease that created numerous social and economic problems worldwide. Schools were closed, public gatherings prohibited and mortality rates rose.

However, after the pandemic and the brief but deep economic recession that followed, in 1920-1921, the American economy embarked upon a period of strong economic growth and widespread prosperity. It strongly benefited from the postwar reconstruction boom and from the emergence of many industrial innovations in the automobile, airline, telephone, radio, cinema and electric appliances industries, etc.

Manufactured consumer goods became more widely available to households through mass production. The US economy grew by 42 percent during the rest of the decade, from 1922 to 1929, as the building of roads, airports, gas stations, etc. progressed to meet the new needs in infrastructures. Unemployment was falling sharply and there was great optimism. However, this led to an overheated economy and to asset bubbles, especially in the stock market.

Indeed, the main reason the decade of 1920-1929 is so well remembered is because it led to the Great Depression of 1929-1939. The economy collapsed, deflation prevailed and unemployment reached a record high of 24.7 percent, in 1933.

During the 1920's, behind the façade of prosperity, there were major economic imbalances and financial excesses that developed, not only in the United States, but worldwide. The first consequences of these drawbacks were the Wall Street stock market crash of 1929 and the economic recession, which rapidly morphed into an economic depression that lasted a decade. Also, an important international bank, the Austrian Creditanstalt bank, failed in May 1931. This led to other bank failures and created banking panics in the U.K., in the USA and in other countries.

And when later on, countries began to adopt inward-looking protectionist trade policies, international trade contracted and the global economy as a whole collapsed.

• Declining interest rates and stock market speculation in the 1920's

To counteract a mild economic recession in 1927, the Fed lowered its discount rate in September of that year, from 4% to 3.5%.

Nevertheless, even though short-term interest rates were still low, they were higher than longer-term rates, and this was the case in 1927, 1928, and 1929. That translated into an inverted yield curve, as opposed to a normal situation when longer rates are higher than shorter rates, since longer loans are riskier than shorter ones. Usually, this indicates a situation of tight banking credit lending conditions.

An inverted yield curve is one of a the most accurate predictors of a future economic slowdown or a recession, since nearly all economic recessions since the 1920's, including the onset of the Great Depression in 1929, have taken place after such a warning that an economic slowdown was unfolding.

During the years of 1927-1929, the financial warning sign of the inverted yield curve was ignored and speculation in the stock market only got worse. At the time, speculators big or small could buy shares in companies by investing on margin, with as little down as 10 percent of the value, while borrowing the rest from banks or brokers. This led, from 1923 to 1929, to a six-year stock market bull run, when stock prices kept rising on average by 20 percent, each year. This was clearly an unsustainable pace.  

After having vainly admonished banks and brokers to restrict their loans to speculators, the Fed finally decided to raise its discount rate three times, (the rate the Fed charges member banks for loans), between January and July 1928, from 3.5% to 5%. However, this turned out to be insufficient, because stock market speculation didn't slow down. The Fed again raised its discount rate in August 1929, from 5 percent to 6 percent. That's what broke the camel's back!

The rest is history. The economic recession began in the United States in August 1929, as the economy started to shrink. However, the stock market only peaked on Tuesday, September 3, 1929, one day after Labor Day, but it began crashing for good on Black Thursday, Oct. 24, 1929.

II- The Subprime Mortgage Crisis of 2007-2008 and the Great Recession of 2008-2009

Let's see how things stack up nowadays, financially and economically.

In the aftermath of the Subprime Mortgage Crisis of 2007-2008, and during the Great Recession of 2008-2009, governments and central banks of a number of countries changed profoundly their fiscal and monetary policies, especially in the United States.

Indeed, there was a real fear among government officials, during the fateful years of 2007-2008, that the entire American financial system could collapse and bring down the economy. The American banking system was already severely weakened by the collapse of the large investment bank Lehman Brothers, and by the rescue in panic of the investment banks Bears Stearns and Merrill Lynch. It was then judged necessary to adopt extreme measures to bail out the system.

That is when the Fed adopted a novel form of monetary policy of extraordinary accommodation called "Quantitative Easing" (QE). The idea was that in such a time of financial trouble, it was not sufficient to lower interest rates and to advance loans to banks in trouble.

What was required was to flood financial markets with huge amounts of newly created liquidity, which is accomplished when a central bank purchases for its own account large quantities of Treasury bonds or private securities on the secondary market. If necessary, such a practice can push nominal interest rates to zero or to close to zero. This was the case in the United States when the federal funds rate (rate at which private banks borrow from each other for very short periods) was kept by the Fed close to zero, from 2008 to 2016, and again, from 2020 to 2022.

• The economic consequences of Quantitative Easing on debtors

A Quantitative Easing monetary policy risks creating two problems. First, it tends to create important price bubbles in the stock and bond markets. Secondly, artificially low interest rates run the risk of encouraging consumers, businesses and governments alike to go deeper into debt. This raises the question of moral hazard when public policies encourage people to alter their normal prudent behavior and take bigger risks.

This is an important consideration nowadays, since the sum of all consumer, business and government debts in the world, the global debt, reached the record high level of $307 trillion in 2023, according to the Institute of International Finance. This has pushed the global debt-to GDP ratio to 336 percent.

In the event of a rise in inflation, accompanied by an increase in interest rates and mortgage rates, debtors in general who have become heavily indebted while interest rates were ultra low, may find themselves caught in a dangerous debt trap. Households and consumers, for example, who are saddled with high mortgage debts and credit debts, may have to renew their loans at much higher interest rates, thereby facing the unattractive prospect of making monthly payments that are inflated relative to their incomes.

III- The major differences between the 1920-1929 period and the 2008-2024 period

The main difference between the 1920-1929 economic decade and the current economic and financial period since 2008 is the fact that the international monetary systems were different during these two periods.

The gold standard (1879-1933) had been suspended at the start of WWI, in 1914, but it had been reinstated in most major economies, including the United States, by 1925. It was an international monetary system in which the value of a standard unit of a currency was based on a fixed quantity of gold. For instance, if the official price of one ounce of gold was set at $20, that meant the one US dollar was worth 1/20 ounce of gold and could be exchanged at that price.

The Gold Standard had the advantage of imposing a strict discipline on governments regarding spending and borrowing and thus to prevent inflation. Indeed, with such a system, a government was less able to run large fiscal deficits, because the central bank could not print money at will to accommodate its need of funds. The government had to sell Treasury bonds to the  public to cover its excess spending over its tax revenues.

For example, countries running an external deficit in their balance of payments ran the risk of losing gold, while those countries with an external surplus stood to gain gold. The consequence was that central banks could not increase their country's money supply at will, for fear of creating an external deficit and of losing gold. In the latter case, the domestic money supply would contract and this would place a deflationary burden on the economy. That is why the Gold Standard had, in general, a deflationary bias.

• The Bretton Woods monetary system of 1944

After WWII, the Gold Standard monetary system, which had been suspended in 1933, was replaced by the Bretton Woods monetary system. It was called a Gold Exchange Standard system, which meant that only the American dollar remained freely convertible into gold, at an official price of $35 an ounce, while other countries' currencies had an exchange rate pegged to the US dollar.

However, the US dollar became officially a genuine fiat currency on August 15, 1971, when the Nixon administration cancelled the official convertibility of the dollar into gold. This meant the end of the fixed exchange rate system. Shortly after, in fact, most other countries adopted a floating exchange-rate system for their fiat currencies. This is the international payment and exchange system that exists today. Contrary to the Gold Standard, the system of floating exchange rates for fiat currencies tends to be inflationary.

• Digital cryptocurrencies and geopolitical risks

To add to the overall speculative nature of our era, one must also mention the rise of the internet-based digital cryptocurrencies phenomenon, which began in 2009. with the creation of the Bitcoin. This is a system of digital assets with widely fluctuating prices. It is somewhat reminiscent of the exotic Tulip bubble, which took place in the Netherlands in the early part of the 17th century.

Also, it is important to note that geopolitical tensions between great powers are much more prevalent today than they were in the 1920's. This is reflected in the current turmoil in international relations. It is a state of affairs somewhat similar to the one prevailing during the later part of the 1930 decade.

At the time, the League of Nations was incapable of preventing or of ending regional military conflicts, just as the United Nations nowadays is unable to maintain world peace. Therefore, in the coming years, serious military confrontations between great powers cannot be excluded, and this could be an additional cause of financial and economic dislocations, as it could mean higher oil prices and higher inflation.

Conclusions

There are similarities but also important differences between the economic and financial situations prevailing in the 1920's and those unfolding int the current 2008-2024 period.

Both periods saw changing economic times, characterized by major economic imbalances and speculative excesses in financial markets.

The main financial similarity between the two periods is the prevalence of an inverted yield curve in both cases, which could hint at future financial and economic troubles. It remains to be seen whether financial and economic difficulties will unfold in the coming months or years, as it was the case in 1929.

On the other hand, the international monetary system in force during each period was completely different. In the first case, it was the Gold Standard system that prevailed. Currently, the world economy is under a system of floating exchange rates of fiat national currencies, with the US dollar serving as the main currency of exchange and for most of the official reserves of central banks.

However, such a system is presently in a flux, as many countries, especially those of the BRICS (Brazil, Russia, India, China, South Africa and others), are trying to escape the arbitrary financial sanctions that the US government imposes sometimes on some countries, for political reasons. This would explain the efforts of the latter countries to develop other means of payments to conduct their international trade and financial transactions.

If and when a financial crisis or a severe economic downturn were to unfold in the future, triggered by some unforeseen event, it is likely that governments and central banks would respond by adopting the same policies as they did at the onset of the Covid-related economic lockdowns in 2020.

First, the governments of major advanced economies would be expected to increase their fiscal deficits, already very high. Secondly, central banks would try to accommodate governments and financial markets alike, by injecting large amounts of liquidity into the economy, through a policy of 'Quantitative Easing'.

However, such extraordinary interventions are not without risk. Indeed, after the initial deflationary shock of a financial crisis, which would be followed by a recession, overly expansionary budgetary and monetary policies, possibly associated with protectionist trade policies similar to those adopted in the 1930's, could result in a period of widespread stagflation, that is a period of slow economic growth and of persistent inflation.

_________________________________________________

International economist Dr. Rodrigue Tremblay is the author of the book about morals "The code for Global Ethics, Ten Humanist Principles" of the book about geopolitics "The New American Empire", and the recent book, in French, "La régression tranquille du Québec, 1980-2018". He holds a Ph.D. in international finance from Stanford University.

Please visit Dr. Tremblay's site or email to a friend here.

Posted Friday, May 17, 2024.

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