Will Trump shatter the Dark Deal? (Jeenah Moon/Bloomberg via Getty Images)
While Donald Trump told Americans they were right to feel angry about their economic woes, the Democrats told them they were wrong to feel that way. The election result shows which message voters appreciated most.
A road trip across the United States reveals how much of its heartland is now desolate. Once-proud towns struggle to keep their post offices, and shopping malls open amid rising homelessness and an epidemic of deaths of despair. Trailer parks, Amazon warehouses and the odd giant prison occupy vast tracts of once-happier vistas. Meanwhile, prosperous city dwellers fly over these wastelands as they commute from one ultra-rich, usually coastal, city to another. How did America get into this sorry state?
It’s a far cry from the Golden Age of American capitalism. In the two decades after the Second World War, the United States was a surplus country. As Europe and Japan lay in ruins, US authorities not only fixed exchange rates between the dollar and the currencies of its allies, but also sent huge quantities of dollars to them (both as aid and loans) so that friendly foreigners could afford to buy American goods. With these two bold moves, America dollarised Europe and Japan.
The Bretton Woods system worked because the US surplus meant that, with every Cadillac, every Westinghouse fridge, every Boeing jet that European and Japanese customers imported from America, the dollars sent to Europe and to Japan were being repatriated. It was a mutually advantageous global recycling process.
But then, at the height of the Vietnam War, two developments changed everything. Firstly, the productivity of American factories fell behind those of Germany and Japan, causing the US trade balance to slip into the red. America was now importing more than it was exporting. Secondly, a large amount of the dollars the Pentagon was spending on the Vietnam war ended up in European and Japanese banks. A constant flood of dollars was therefore leaving America’s shores to form dollar lakes in Europe and Japan.
This money ended up in foreign central banks. For a while, America’s trading partners took advantage of the fixed exchange rate of their currency to swap their dollars for their own currency or to buy gold at a fixed exchange rate. But, in August 1971, President Nixon blew this system up.
The Deutschmark and the yen, along with many foreign currencies, skyrocketed. Foreign central banks did not know what to do with the dollars in their vaults. If, for example, the Bundesbank were to use these dollars to buy Deutschmark, the demand for the German currency would increase, damaging Germany’s exports. So, foreign central banks decided to use their dollars to buy US government debt.
Thus it began. The US trade deficit financed, indirectly, the US government, while providing foreign capitalists with the demand they needed for net exports to America. In turn, the Germans, Japanese, Saudis and the like took their dollars to the US to buy government debt, real estate in New York, California and Miami, as well as shares in the very few companies that Washington allowed them to purchase.
And this is why, a decade later, Ronald Reagan’s unfunded tax cuts did not cause inflation or a dollar crisis. The increase in the US government deficit boosted world demand and oiled the wheels of financialisation. Foreign capitalists bought more debt and more real estate. Asset prices rose across America. While Reagan basked in the glory, America was becoming an expensive place to do business in.
Around the time of American financialisation, Deng Xiaoping was opening up China, a move Washington welcomed. As China entered this strange global dollar-recycling mechanism — one driven by US trade and government deficits — Chinese development both benefitted from and turbocharged it. But that’s when US conglomerates had an epiphany: with America becoming an expensive place for business, why not send their production lines to China in search of much cheaper land and labour? Even the dollars that Chinese business collected eventually returned to America, bolstering the US government budget, the Wall Street banks, and the realtors on America’s East and West Coasts.
A Chinese official once, unofficially, described all this to me as a lucrative Dark Deal between US rentiers, US conglomerates, the US government and Chinese capitalists. And the losers? Mainly, the American working and middle classes. Not to mention global stability. For as the tsunami of debt-dollars swamped Wall Street, its bankers discovered fiendishly complicated ways to bet on asset prices and, catastrophically, on each other’s bets. These debt-fuelled bets eventually caved, yielding the Great Financial Crisis in 2008.
Barack Obama became president by promising voters to come to the aid of the many victims of the crisis while punishing the few who had caused it. Tragically, he did the exact opposite. In the swiftest political betrayal in American history, Obama appointed to the Treasury the very men (Tim Geithner and Larry Summers) who had allowed Wall Street to go berserk. Their remit was to bail out the criminal bankers and impose austerity on most Americans. In this light, Mr Trump owes his political career to Mr Obama.
Taking a longer view from the Seventies to today, who lost the most from the aforementioned Dark Deal? The answer is: the majority of Americans, 60% of whom live paycheck-to-paycheck and can barely afford a house or even the bare necessities.
So Trump is not wrong to decry the way America’s ruling class trapped the American people into the indignity of being fundamentally poor in a ridiculously rich country. He is also not wrong in his hunch that America’s wars are a distraction from what kept America powerful after it lost its surplus in the late Sixties: the control of the global dollar-debt recycling system.
But he is spectacularly wrong if he thinks that he can stop Middle America’s “carnage” by means of sky-high tariffs for Chinese and European exports into the US, all while keeping in rude health his beloved real estate sector and the stock exchange. If tariffs undermine the Dark Deal which returns to the US debt-dollars funding foreign capitalists’ net exports to America, the dizzying wealth of America’s rentiers and financiers will evaporate instantly. To help the majority whose vote he just secured, Trump will have to turn on his own class of rentiers and financiers.
In conclusion, Trump can choose one of two options. He can shatter the Dark Deal so as to be true to the majority and risk the wrath of the real estate and the financial markets he so reveres. Or he can maintain the US financial and real estate markets in rude health, thus betraying the majority who returned him to the White House. He can never achieve both. No prizes, dear reader, for guessing which of the two he will choose.
Yanis Varoufakis is an economist and former Greek Minister of Finance. He is the author of several best-selling books, most recently Another Now: Dispatches from an Alternative Present.
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Subscribe“other NATO operations around the globe”?
NATO was formed as a defensive alliance for Western Europe against the USSR. That was it’s sole purpose. It should never be involved in “operations around the globe”. That it has been is entirely wrong and a result of its actual purpose vanishing with the end of the Cold War when its bureaucracy sought a different reason to survive.
Europe will never be capable of its own defence until it grows some b*lls.
….and realises who its enemy is (Spoiler Alert: Russia).
‘Swedish Defence University?’ Now there’s the perfect definition of oxymoron. Mind you, Sweden did very well out of its close economic ties with Germany during WW2 so it does have form for looking after itself.
Hasn’t been doing too well looking after itself against crime just recently. Probably that’s where effort should be expended, not on a dying NATO.
What I find amazing is that they’re unironically calling themselves “the coalition of the willing”, either thinking most people are too stupid to remember what a disaster the last “coalition of the willing” led to, or being too stupid themselves to think of something original (and not associated with a fairly recent western foreign policy debacle).
Article 5 bears reading carefully. While NATO Secretaries-General like to trumpet the phrase “an attack on one is an attack on all”, they are much more reluctant to spell out the consequence: According to Article 5, each NATO member then autonomously decides the scope of its reaction. It may well deem a démarche (with exceptionally strong wording) to be appropriate.
Yes, Europe needs a new architecture for its defence – even if the label is “NATO”, it will have to be something completely re-thought from first principles. And the key principle will have to be defence, something current NATO has sloughed off.
The US’ current role in NATO is so crucial that there is no NATO without the US, which of course was always deliberate. The US brings not only the nuclear shield, but also intelligence, the command-and-control structures, and probably most importantly the undisputed leadership that precludes squabbles among the Europeans. Without the US, who will take that leadership role? France? Germany? The UK? A council? Even just asking the question shouts out the problem.
First and foremost, the defence architecture must not be linked to the EU, for the sake of everyone.
“According to the Financial Times, Europe’s biggest military powers and the Nordic states are discussing a plan to “replace the US in Nato”, with a view to guaranteeing the continent’s security”
….but they can’t even secure their borders.
Personally I’m finding it quite tedious having military defence and border control/immigration conflated all the time. The two things are not at all related.
Really? The inability to control borders most certainly calls into question the competence of those who are now proposing to involve their countries in expanding their militaries and getting involved in a “peacekeeper” role in Ukraine.
Peacekeeping can quickly become “hot” and I for one have no faith in any of the leaders to handle the situation.
You could say their inability to run the economy calls into question their competence, or the rise in shoplifting, or how well they can cook.
Migration is too high. This does not say anything about replacing the US in NATO.
The keyword is “border”. They are proposing to police someone else’s but cannot do so for ours.
Replacing the US in NATO, as the OP was talking about, involves buying weapons, boosting the size of the military etc.
Reducing immigration requires processes to prevent/deport illegal migrants, enacting policies to reduce legal migration etc
They are not the same, and people putting them together are just parroting something they’ve heard elsewhere.
What’s the point of national defence if your borders are open?
There will soon be no nation to defend.
Not “can’t”
Won’t.
After reading this article, I’m at a loss what the author is proposing. What is a more native NATO? How would this be practically implemented? It all seems so abstract when the real world is anything but abstract and needs to be dealt with in a concrete way.
One thinks of Turkey, not mentioned here.
I’m still unclear, as an American, as to what NATO is supposed to do any more? Russia is not the Soviet Union in scale or capability. Europe has 3 times larger economy and population than Russia. The EU together spends as much or more on defence than Russia with capacity to spend more on defence. France and the UK have nukes so what is NATO’s purpose at this stage?
The Russians are still “the Enemy”. That isn’t going to change any time soon.
A millennium of violent European history prior to Pax Americana casts a long shadow of doubt on the success of a NATO sans the U.S. All of the many divisive elements–economic, cultural, and political–that continue to plague Europe will soon escalate to more profound significance absent the heavy hand of American hegemony.
Consider the historic European experience of conflict deriving from simply the division of Christianity into Catholic and Protestant and then add to that the two additional modern polarities of Secularism and Islam. The adversarial nature of the current milieu will lose its latency when all the separate European nations and factions within them are left to their own devices.
Pure fantasy. There are only three countries in the world that can actually affect change. They are the U.S. China, and to a lesser extent Russia. Germany, up to 2010, could make that list but they are a broken country. France has always wanted to have that capability but has never had the capacity. England is also out for the same reason.
The EU is nothing but a bureaucrat’s wet dream. It has no purpose except to further their careers. They are amoral, occasionally immoral, and wouldn’t risk a broken fingernail to actually do the right thing. There will be a lot of eloquent soliloquies but no real action. As always. But they will still be building their careers and wealth.
Europe has no guts. It won’t do a damn thing for the Ukrainians.
If that it true, then it will need to accept continual Russian invasions of its borders.
Only complete utter morons argue that Russia is a threat to Western Europe. Not only are they morons but they have the moral compass of a rabid sewer rat.
“The only way, arguably, to keep the Americans in Europe”
Why would we want this?
Watching NATO die is not, I suppose, a very edifying business but what we are currently witnessing (I’ve seen it described as a “coalition of the killing”) is rather pathetic.
The Cold War is over. It’s become obvious that Russia (or China) has no wish or capability of invading the West. The West should turn its efforts to friendly trade with the East, and minimize effort wasted on weapons.
Ukraine is “the West”. Russia has invaded it.
Russia IS a threat to all members. The sooner they all realise it, the better.
What is happening is the return to the default condition of Europe in which nations decide what is best for them. The EU like the earlier UN and League of Nation talking shops is doomed to splinter apart. People reject supranational organizations in principle on the reasonable grounds they are unnatural. Tribalism is deep in our DNA.