Crackpots #5: Schedule Loss (Patreon)

Hello everyone. Typical that I would be tasked with writing the newsletter the week of the election. The boys said "you don't have to write about election" but is there really anything else to talk about? The Warriors beat the Celtics the other night. We could talk about that.

Despite the odds, I will do my best. NBA fans will recognize this as a "schedule loss", when you can predict a team might underperform based on the difficulty of its schedule, a way of understanding how what came before might help determine what comes next. But still, we move. Ok, some scattered thoughts on Trump's win and Kamala's loss:

I mentioned this on the last episode, but I really hate when commenters point at this object they call The Economy and pick and prod and proudly announce, as you can see it is Objectively Good and people who claim otherwise are simply mistaken. A cottage industry of this type of pundit sprung up to defend the Biden administration when others tried to point out Trump's relative strength as early as last year. In lieu of listening or digging a little deeper into things, they doubled down, claiming anyone ringing any alarms was doing so due to misinformation or at the behest of foreign adversaries. People are still doing this!

It's worth going back in the timeline for a second: COVID hit in 2020 and caused massive supply shocks around the world. This was the primary cause of sticky inflation, though there is ample evidence that companies took advantage of the situation and raised prices alongside these shocks, as is their profit-maximizing wont. But it wasn't just COVID. Climate change is increasingly disrupting global supply chains and food prices as floods, droughts, disease and pests from temperature imbalances impact yields everywhere. This will only accelerate. And then there's Russia's invasion of Ukraine. There have been a lot of fits and starts causing weird shit to cascade through the bowels of the global economic system.

Which leads me to the elephant in the room: we are in a moment of global contestation over who gets to set the rules of the game. I've brought it up on the show before but Democrats and Republicans broadly agree on the big story of What Is Wrong With America. The story goes like this: sometime in the 1990s, things went south when we hollowed out the manufacturing core in [insert swing state here]. Offshoring everything was a disaster for Americans and now we need to rebuild the manufacturing base at home for national security reasons because we are locked in an existential battle with China over the future of humanity. More on this in a moment but I'l just say that while this story may be electorally useful, it is insufficient at best.

Deindustrialization in the United States began much earlier, decades in fact, and we were on a trajectory long in the making by the time NAFTA passed let alone when China gained access to the market in 2000. Rather than thinking of globalization as a discrete policy decision cooked up by a cabal of politicians, its helpful to think of it as a condition: this thing we call globalization, that we imagine as a top down process of westernization of the world in the 20th century, actually already happened a really long time ago, in the early modern period when continents were relatively unconnected and trade lines were built up through the silk road, the maritime empires, brutally through the slave trade and so on. By the 19th century, the transport revolution collapsed distances and commodity spreads and the global condition of connectedness was inaugurated with the maturation of industrial capitalism. Everything since then has basically been an intensification of this already entrenched condition: the introduction of aviation, hydrocarbons, gas, nuclear power, information technology and so on, all this only accelerated the integration. That rate of intensification has ebbs and flows. It was during the 1930s when tariffs and protectionism slowed the volume of capital flow and trade, a point unrelated to our current geopolitical situation of course. As Charles Bright and Michael Geyer say, defensive responses like preclusive nationalism and protected industry are still inherently transnational expressions. But when we talk about globalization what we are really talking about is who gets to oversee this entangled arrangement, one that intensifies as we develop new technologies to shore up investment and profitability, and who gets to set the terms.

Right now, we are in an increasingly volatile world as United States power over these decisions is challenged. See, for example, the Houthis' impact on global trade flows or look at the fight over the Zangezur corridor. Prices reflect all of these pressures, and then some. The standard response to inflation is for central banks to raise interest rates. But how would that attend to these deep shocks?

It didn't. But the Fed raising rates did have other consequences. You'll remember that our immediate response to COVID was a round of QE and ultra-low interest rates to shore up the crashing financial markets and boost consumer demand. In the immediate moment this further concentrated wealth as the asset rich got richer and when vaccines opened everything back up again, wealthy consumer spending skyrocketed. But this lopsided concentration made controlling consumption difficult: not only would raising interest rates have disproportionate effects but the sheer volume of consumption by the rich made it seem like spending was still a reliable indicator of the social welfare of the country in total.

It wasn't. Claims of broad wage gains by the Biden admin apparatchiks are specious, at best. Workers at the bottom of the wage distribution did see raises in real terms, but that's not because of any specific policy initiative, but because so many left the workforce as COVID multiplied risks, causing wages to rise to basically subsistence levels as firms were thrown into competition for labor. As Thomas Ferguson and Servaas Storm put it, paradoxically "American workers made their biggest gain in real hourly earnings in recent memory in April 2020, when the pandemic recession was at its worst and the US economy lost 21 million jobs."

This relative progress stands out because most everyone else experienced decreases in real income. Real wages have not kept pace with inflation until basically the last half of this year. This is partly because interest driven growth is extremely regressive: the rise in interest rates has benefited the wealthy as they collect on interest payments and watch their asset prices boom, but for everyone else its only increased expenditures as insurance rates and debt payments go through the roof. How much does the average American finance?

And then there's housing. Mortgage rates have reached their highest level in 20 years while home prices have accelerated to record levels, leaving the housing market stuck in a game of chicken. Over the past couple years, many pundits have pointed to something they call the vibesession to explain away how uninformed Americans could have such funny feelings about an economy whose classic indicators point toward Objective Good. But the economy is not an object anyone stands outside of to point at from afar. It is the underlying structure of our shared social life and so we tend to see traces of it in strange places and unaccounted for feelings that are not so traditionally tracked. This general feeling of stagnation makes sense when the job market is so tight you can't leave a job you don't like. And if you do have a decent job, you can't buy a house to realize that success. And if you do own a house, and you bought prior to the historic rise in prices, you can't realize those gains because the rise in interest rates prevents you from trading up. So, you're stuck. And that feeling of stuckness is real, regardless of whether you think it is good or bad or right or wrong, it just takes time and patience and a willingness to throw out some political priors to understand it. But the idea is that once you understand it, you can speak to it.

I brought up the What's Wrong With America story earlier and now I want to return to it. This story gets trotted out often, usually in election cycles, and it is politically useful as it is both easy to digest and simple enough to propose its own solution: if the problem is there is no more manufacturing why don't we simply just bring back the manufacturing? Can't we just get rid of all the financial crap and make stuff great again?

I don't know. The thing about living in a connected world is that it means every country is affected by policies and conditions initiated in other countries. When one country boosts its domestic manufacturing sector relative to its domestic demand, trading partners step up to absorb the excess production, and to do so they must reduce their manufacturing sector relative to their own domestic demand. This is the balance of trade.

The US plays a central role in the global economy as the consumer of last resort. We've exported our manufacturing base and in return we take on a massive role globally in trade and capital markets, soaking up excess goods and savings while letting foreign investors into our financial markets without restriction. We've done so since the crisis of the 1970s, when technological development stalled leading to a crisis of productivity and falling profits. As investment declined, stagnation hit. The solution was to engineer pain — yes, the Volcker shock — but also to shore up productivity through financialization: cheap production linked up with wealthy consumers as financial investment and easy credit coursed through the veins of the global system. Unrestricted money-capital flow jumpstarted investment in weak economies, disciplined global labor, intensified exploitation all while feeding an insatiable American consumer and enriching stockholders through rising stock prices and dividends. It also cemented the US dollar as the dominant global currency. The relative decline of US manufacturing was a consequence of the special role the US dollar plays in stepping up to absorb global savings balances as much as it followed from global firms restructuring to shore up financial flexibility in the wake of the profitability crisis.

Another way of putting this is that the US industrial base and the financial world are not two separate sectors but fundamentally enmeshed. Massive global financial firms allocate resources for investment. After the 2008 crisis, finance capital was centralized in the hands of a few asset managers and as the state stabilized the system, the banks consolidated: BofA, Citigroup, Wells and JPMorgan were left standing but as the state intervened to stymie risk, asset inflation ballooned as BlackRock, State Street and Vanguard managed the flow of pension funds and institutional investment in their portfolios. The result wasn't simply an "everything bubble" but unprecedented concentration of ownership by these funds. BlackRock is a major owner of almost every publicly traded firm in the US and with $11.5T in assets it is the largest investment company on earth.

This makes Trump's call to boost manufacturing complicated. It's also why BlackRock CEO Larry Fink said, "I'm tired of hearing this is the biggest election of your lifetime. The reality is over time it doesn't matter." Asset managers love to go long. But Trump wasn't the only one promising to boost US domestic manufacturing, it was Kamala and Biden as well. The Biden era embrace of Trump policies, including tariffs on Chinese industries and subsidies in the form of the CHIPS act, supposedly set the tone for the administration's embrace of Industrial Policy as a new strategic weapon. But the $40B the Biden admin rolled out for expanding semiconductor fabs pales in comparison to global competitors who often hit $10B a quarter. Was this really the mighty muscle of the public purse directing strategic investment or slow drip hand-outs to sweeten grapes already dying on the vine?

As Adam Tooze put it, "if your aim is restoring the competitive position of US industry, a large dollar devaluation would do more than a sprinkling of industrial subsidies. But how to engineer one in the face of global demand for US financial assets is anyone's guess." Trump floated heavy tariffs as the solution, think of it as a tax on the dollar as the reserve currency, but, as Tooze continues, "for such a radical policy to see the light of day it would require producer interests to dethrone Wall Street — nothing short of a revolution." Some on the right are certainly taking a revolutionary posture. But I'm not so convinced there are producer interests distinct from financial ones. Setting that aside, Tooze is correct that these are broadly impossibly political problems to navigate regardless of the bluster from Trump and Vance. The tariffs Trump is proposing, coupled with the inevitable tax cuts Republicans will extend, are so obviously inflationary it would make forcing the Fed to cut rates impossible, which is needed to calm consumers, keep the stock market pumping and the tech sector booming. Though, of course, cutting rates would only pump housing prices further and that's not getting into the exploding cost of managing mass deportations and the hit to the labor force and consumption that would inevitably follow. There are too many contradictions within the Trump coalition to reconcile without going radioactive. It is easy to say, well he is just lying on the campaign trail, but the bigger point is that it is one thing to put together a coalition to get to the White House and it is another to deliver on your coalition's demands. The reality of governing in America will hit a second Trump term just as it did the first and just as it did the Biden admin. But like Larry Fink says, in the long run it doesn't matter. Much of what happened under Biden was set in motion under Trump who built off the foundation laid by Obama. Put another way: thanks to the tangled mess of the global economy and the United States unique position within it, coupled with the highly polarized political situation, it is increasingly difficult to be a two term President.

More think pieces will roll in over the next couple weeks so much more to talk about soon. I'm not too bullish on the democrats changing much, despite a lot of viral pleading on X, the everything app. Maybe more on that in another post. Trump's win feels like the culmination of a cultural shift, rather than the beginning of something new. It does sort of feel like we are entering his third term for how much of a dominant figure he's been over basically the last decade. MAGA is mainstream and there is no viable path for the democrats to claim that he is illegitimate, fringe, weird, or unpopular, and now not even in the cultural sphere. Lana's wedding was in the swamp. Trucker hats are so cool they're lame again, already. Twisters was perfectly fine. For those of us old enough to have lived through George W's second term, nothing about this feels too surprising as far as retrograde nostalgia trend cycles go. Which zynternet star will reboot the Man Show? How about a Dark MAGA x Affliction collab? Chappell Roan Arms Wide Open at Primavera? Things move so quickly we might all be woke again by the midterms.

See you next month.

Yours,

Liz.