TL;DR
Analyzing Donald Trump's economic and geopolitical approach compared to his predecessors is challenging because he seems to operate outside the conventional framework that has guided US policy for decades. While past administrations (like Obama's and seemingly Biden's) followed a predictable playbook focused on managing the US dollar's global reserve status – often involving navigating surpluses by acquiring foreign assets or attracting capital inflows, sometimes facilitated by geopolitical instability – Trump's proposed actions (like abrupt tariff hikes, challenging the Federal Reserve, and questioning established alliances/conflicts) appear to disregard this playbook entirely. His strategy seems less like a variation within the system and more like an unpredictable disruption to the system, introducing significant uncertainty and potentially volatile consequences for the global economy.
Deconstructing the Playbook: Predictability vs. Disruption
Recently, someone asked for my take on Donald Trump's potential economic direction compared to the three presidents who came before him. It’s a fascinating question, but analyzing Trump through a standard lens is notoriously difficult. He operates on a different wavelength, often defying the economic and geopolitical principles most global leaders and analysts adhere to. It’s like trying to map a system that suddenly has a major, unpredictable variable introduced.
Analyzing the approaches of Obama or Biden, however, is more straightforward. Their actions generally fit within a recognizable framework governing the US dollar system, a system I became intimately familiar with during the 2008 financial crisis early in my career.
The Conventional US Dollar Strategy
Understanding the established playbook requires grasping the unique position of the US dollar. As the world's primary reserve currency used for global trade (think Japan settling trade with the Middle East in USD), the supply of dollars must necessarily exceed US domestic needs. This reality presents inherent challenges:
- Dollar Scarcity: If there aren't enough dollars globally, the fix is relatively simple – the Federal Reserve can increase the supply.
- Dollar Surplus: If there are too many dollars circulating globally relative to demand, it risks driving up domestic inflation within the US – the key metric the Fed focuses on.
So, what happens when there's a dollar surplus, or when more dollars need to be created (like during quantitative easing) without sparking unacceptable domestic inflation? The conventional strategy involves channeling those excess dollars outside the US domestic consumption cycle, primarily by acquiring foreign assets. This serves two purposes: it parks the surplus dollars abroad and bolsters the dollar's standing by backing it with tangible productive assets globally.
How are these assets acquired? Historically, two routes have been common:
- Debt Leverage: Encouraging or leveraging situations where countries struggle to repay dollar-denominated debt, potentially allowing assets to be claimed.
- Capital Flight: Fostering instability or uncertainty elsewhere, prompting foreign asset holders to sell, convert to dollars, and seek safety in US markets (often bolstering US asset prices without significantly impacting consumer inflation).
The 2008 scenario under Obama provides a clear example. Following the subprime crisis, the US needed liquidity (achieved via QE – printing dollars). Simultaneously, the Euro appeared strong. The subsequent focus on Eurozone sovereign debt issues (the PIIGS crisis) weakened the Euro and spurred significant capital flight from Europe into US markets, helping stabilize the very system that QE was rescuing. It was a strategic execution: rescue the domestic market, manage the dollar surplus, acquire foreign assets (indirectly via capital inflows), and solidify the dollar's dominance.
This playbook, in various forms, has been a recurring theme in US economic strategy. The logic behind Biden's approach seems largely consistent with this framework – maintaining pressure points (like the Russia-Ukraine conflict) to encourage capital flows towards the dollar, while using high interest rates to potentially create leverage opportunities in indebted nations. The intervention by other global players, like China offering alternative financing, has complicated the execution but not necessarily the underlying strategy.
Trump: Ripping Up the Rulebook?
Trump's proposed actions, however, appear to diverge sharply from this established playbook. His objectives, like reshoring manufacturing, might have long-term logic, but the immediate tactics seem counterintuitive within the current economic context.
- Ending Conflicts Abruptly: Consider the stated desire to quickly end the war in Ukraine. From a purely systemic view based on the established playbook, this removes a key driver of European capital flight towards the dollar. Without that inflow mechanism, how is the existing dollar surplus managed without devaluing the currency or triggering other unforeseen consequences?
- Sweeping Tariffs/Trade Wars: Implementing broad tariffs, especially on goods from major partners like China, aims to boost domestic production eventually. But the immediate impact in an inflationary environment could be severe. Restricting the supply of cheaper imported goods risks exacerbating domestic inflation, potentially requiring even higher interest rates – the opposite of what Trump advocates. Who fills the immediate supply gap? Likely other nations acting as intermediaries, potentially profiting while US inflation worsens.
- Challenging the Federal Reserve: Openly demanding lower interest rates while simultaneously pursuing policies that could fuel inflation creates a direct conflict with the Fed's mandate and operational independence.
- Promoting Alternatives (Gold/Crypto): Actively discussing gold or engaging with crypto (like NFTs) seems to undermine the very dollar hegemony previous administrations sought to protect. Historically, US policy aimed to suppress rivals to the dollar.
An Unpredictable Force in an Interconnected System
Viewed through the conventional economic toolkit, Trump's approach is perplexing. It suggests he isn't playing the same game. He appears less influenced by the established economic consensus (often associated with Wall Street, Silicon Valley, and traditional policy circles) and more aligned with a different segment of the populace with different priorities.
This makes him less a predictable 'opponent' within the established system and more a 'variable' – a large, powerful force operating with different rules and objectives. Imagine the global economy as a network of interconnected systems – trade routes, financial flows, supply chains. Trump's approach resembles introducing a highly unpredictable, powerful node whose actions ripple erratically through the entire network, increasing systemic risk, especially in turbulent times.
The frustration of the established players, including former presidents, seems palpable. They appear unable to steer this variable back towards the predictable playbook.
For businesses and nations navigating this landscape, relying on the old assumptions or expecting a return to the previous status quo seems unwise. The focus must shift towards building resilience, diversifying dependencies, and preparing for a period of heightened uncertainty driven by this fundamental disruption to the established global economic and geopolitical operating system. The predictable patterns of the past may no longer be reliable guides for the immediate future.
