Love, Fear And Respect

Calogero: “Is it better to be loved or feared?”

Sonny: “That’s a good question. It’s nice to be both, but it’s very difficult. If I had my choice, I’d rather be feared. Fear lasts longer than love. Friendships that are bought with money mean nothing. You see how it is around here, I make a joke, everybody laughs. I know I’m funny, but I’m not that funny. It’s fear that keeps them loyal to me.”

— A Bronx Tale, 1993

Not to spoil the ending of what, in my out-of-consensus view, is a poorly-acted, wildly-overrated film, Sonny ends up dead. And not of natural causes.

As discussed in the April 12 Weekly (shoot me an email if you need a resend), the US is in the process of dismantling the pillars of American soft power. Put differently, the White House is doing away with the programs and initiatives that endeared the US to the rest of the world, favoring instead primitive displays of hard power.

That effort’s a fool’s errand. American empire’s based primarily on various manifestations of soft power, including the dollar project, broadly conceived. As I put it last month, “every, single day for seven decades, a labyrinthine network of overlapping institutions (both formal and informal) and soft power arrangements, operated in concert to perpetuate and sustain US hegemony, none more important than the dollar.”

The dollar can, of course, be leveraged crudely, which is to say used as a blunt object. I’ll quote from the same early-April Weekly:

As a source of soft power, the dollar’s unique in that it can be weaponized and employed almost as though it were a bomb or some other sort of hard power. The beauty of the system is that there’s a built-in check on that weaponization: To weaponize the dollar is to diminish its standing and so, like other forms of hard power, it should only be deployed in that fashion in the most exigent of circumstances.

It’s not obvious that trade deficits constitute exigent circumstances. As a group of small US businesses, including a Pennsylvania tackle shop, a Utah-based plastic pipe company and a Vermont-owned cycling apparel retailer, put it, in a lawsuit last month, “[Trump’s] claimed emergency is a figment of his own imagination.”

Agree or disagree, it’s fair to suggest Trump’s overstating the case when it comes to the threat posed by trade deficits. After all, Trump overstates every case. On purpose. That’s his shtick.

To be sure, you don’t want to completely de-industrialize as a nation. But the developmental trajectory of modern economies in a textbook sense typically traces a transition from smokestack-based growth to a consumption-led model. That’s why China sometimes expresses puzzlement at Trump’s fascination with a factory-centric economic plan.

It’s important to delineate between wholesale re-industrialization and industrial policy in pursuit of a carefully considered strategic national agenda. The latter makes all the sense in the world. The US needs the capacity to produce cutting-edge semiconductors domestically, for example. The US would likewise do well to reclaim some domestic ship-building wherewithal. I could go on.

But to re-industrialize for the sake of it — to build factories for factories’ sake, and to create hard manual labor jobs just to say you did it — represents deliberate developmental backsliding. Just because there’s something undeniably depressing about a nation of baristas and Walmart shelve-stockers doesn’t thereby mean America should move heaven and Earth to recreate a US economy that hasn’t existed in three quarters of a century.

Would you rather be a steelworker or a Walmart cashier? A steelworker maybe… right up until you have to spend one day as a steelworker.

To weaponize the dollar in pursuit of re-industrialization for the sake of it is bad policy. Trump’s gambling the exorbitant privilege on a long-shot bid to achieve something Americans don’t even want, even if he’s convinced some voters they do.

Assuming what happened with the Taiwan dollar over the past two business days is in fact a proof of concept for Trump’s plan to strong-arm America’s allies into facilitating a weaker dollar and eliminating trade deficits, it’s a bad omen.

You want allies to want to cooperate. If you instead force them to do so — by, for example, demanding they engineer an overnight, 10% revaluation of their currency, consequences be damned, or else risk losing an implicit US security guarantee — you might get what you want in the near-term, but any nation which submits to such an arrangement in the interest of expediency will start the process of reducing its dependence. In other words, they’re going to try to reduce your leverage, which in this context means getting out of USD assets.

Consider the following passage from a 35-page special report attributed to Deutsche Bank’s FX team, but which includes contributions from the bank’s economists and generalists:

Strikingly, public officials have started to question their dependencies on the US financial system. In recent weeks Japan, one of America’s staunches allies, has seen the topic of reserve ownership of US Treasurys referenced in public official commentary. In Switzerland, one US bank narrowly retained its place as custodian of canton assets after a parliamentary vote due to fears of US financial leverage. In Germany, some public officials have openly questioned the wisdom of retaining the country’s gold holdings with the Federal Reserve of New York. The hard version of [a so-called] Mar-A-Lago Accord would be the restructuring, voluntary or otherwise, of foreign holdings of US assets, perhaps via a ‘user fee’ on US Treasurys or maturity transformation. A softer version of such an agreement might be for an explicit FX target (to engineer dollar depreciation) to be part of bilateral trade agreements. The latter is still functionally equivalent to the former, as it would involve lowering demand for US assets. The recent willingness to weaponize economic power against US allies is a defining difference under the present administration. Although the US has occasionally used its economic power to achieve objectives even against friendly states, the breadth and intensity of [current] weaponization are unprecedented in the post-War era.

It’s fair, I think, to say most analysts and strategists at most major financial institutions see this effort of Trump’s for the folly that it probably is. The excerpted passage above’s indicative in that regard.

However, some observers don’t seem to appreciate the extent to which America’s allies, and investors outside the US in general, are righteously indignant at the prospect of being coerced by someone they don’t respect, in Trump.

As Lorenzo, Calogero’s father, tries desperately to explain while exhorting his son to stay away from Sonny, the neighborhood gangster, “People don’t respect him, they fear him. There’s a big difference.”

Trump, if he continues to deliberately create ill-will among America’s allies around the world, won’t precipitate “a further leg higher in the US exceptionalism trade,” as Jefferies’ David Zervos insisted this week, while chiding “haters” for warning on the perils of treating the world like a protection racket. Rather, Trump’s going to incentivize everyone — from allies to adversaries — to lessen America’s leverage by cutting exposure to USD assets, particularly Treasurys.

What folks like Zervos don’t seem to fully grasp is that this isn’t just about Trump. It’s about the Pandora’s box he’s opened, and not just as it relates to the ad hoc rewriting of global trade norms. If Trump can repudiate US debt (e.g., force a restructuring to advance an agenda) so can the next US president. If Trump can ignore the Supreme Court, so can the next US president. And on and on.

That’s the crux of the issue. And that’s why I said, last month, that Trump’s “done more to advance ‘de-dollarization’ in 100 days than Washington’s strategic adversaries have done in 10 years.”

Michael Scott: “Would I rather be feared or loved? Easy. Both. I want people to be afraid of how much they love me.”

— The Office, 2005