The Trump Shock: A Lehman’s moment

How should governments react?

With acknowledgement and thanks to the Hinrich Foundation

Do not underestimate the gravity of the Trump Shock of 2nd April, 2025. Above all, do not underestimate the impact it will have on your pension, your investments, possibly your job, and your economy - wherever you may be.

The President of the United States has ignited a fuse under the global trading system and is sitting back, reportedly relaxed about the international economic fireworks he has exploded. He has not fully grasped how dangerous is his attempt to alter the world order. As Machiavelli once remarked:

‘There is nothing more difficult to carry out nor more doubtful of success, nor more dangerous to handle than to initiate a new order of things.’

Trump thinks that all it takes is the crude methodology and calculations of a chart on “reciprocal” global tariffs imposed by his administration.

How should governments react to the irresponsibility of the Trump administration?

The first requirement is realism. Above all, suspension of the widespread dogma that governments should retreat, and allow private markets to stabilise economies.

For largely ideological reasons, governments have delegated their power over both the domestic and international economy to the ‘invisible hands’ of private markets in capital, currencies and trade. In one crass and ill-thought out announcement, Trump has exploded that myth. Big Government - in the shape of the U.S. administration - can, and last week did, blow up markets in goods and services, and will likely blow up markets in currencies, equities and debt tomorrow.

To respond to this calamity, governments need first, to grasp the full gravity of the situation. It is not clear that all do. The British government is holding out for a ‘deal’ with Trump negotiators. That implies a degree of naivetè about a) the motives of the Trump administration and b) the possibility of a bilateral solution to this crisis.

That is delusional. The Trump administration will not negotiate in good faith. It is too attached to the ideology of ‘America First’. It has deliberately made enemies of allies. It is isolationist and will not entertain an international solution to the crisis of global trade imbalances.

Worse, the Trump administration is a nationalist, proto fascist government, and does not understand that this crisis cannot be resolved through a series of bilateral deals with trade partners. Why so? Because this crisis is an inter-national crisis that has blown up between all countries engaged in the global trading system. It is not a one-to-one crisis between the U.S. and say, Mexico or China. It is much bigger than that - because the United States is a fully open economy, trading globally with a wide range of countries, and in deficit to most.

Globalisation and trade

Thanks to the ideology of ‘globalisation’, world trade is wholly integrated - by design. That is what ‘free markets’ in trade have achieved over the last thirty to forty years. Unpick one thread - the thread that includes a country with the biggest deficit and another with the biggest surplus - and the international, and multilateral trading system can unravel.

Donald Trump thinks he can unpick individual threads in a series of bilateral deals, and thereby restore balance to US trade.

He is wrong. To understand why, here’s another analogy: think of global trade as a single giant balloon with the air therein made up of countries with surpluses and deficits. Squeeze a deficit in one part of the ‘balloon’ and the balloon expands elsewhere. Squeeze a Chinese surplus in one part of the system - the United States - and the balloon blows up when China’s surplus is dumped on, say, the European Union.

Too much squeezing of both deficits and surpluses will puncture the balloon and cause it to spiral out of control.

What can be done?

There are two pathways to global stability. The first is an internationalist path; the second is a domestic path.

The internationalist response to this crisis will require both cooperation and coordination between all states, to stabilise their trading and financial relationships. Above all it will require cooperation to manage capital flows between countries.

Bilateral solutions will not fix the system. Bilateral solutions will not lower surpluses, or correct deficits. Instead the task of cutting both surpluses and deficits requires a different focus: one that majors on, and permits changes to the domestic economies of surplus and deficit countries.

The United States under its present regime, cannot lead that internationalist response. And pulling together internationally is hard for the rest of the world’s leaders, committed as they are to a global economic system designed to resist international coordination by states. One that prefers governments to remain aloof from market forces. Above all a global economy that has granted supreme power to capital to move across borders without friction.

That political and leadership vacuum has to be filled.

The domestic pathway

For a government to take the domestic pathway, requires an understanding of how we got here.

Trade imbalances, are a consequence of inequality in the domestic economy. Trade wars, as Klein and Pettis famously argued, are class wars.

A trade war is a conflict within a country, transposed, wrongly, as a conflict between countries.

With the rise of the ideology of ‘globalisation’ countries were encouraged to orient their economies towards exports. Poor countries were persuaded they could only ‘grow’ by supporting and subsidising the export sector. Countries that turned to exporting commodities found themselves competing with other poor countries exporting similar commodities…as prices fell, and their currencies fell relative to those of OECD countries - in particular the always-strong US dollar. As they were denied the right to purchase energy or pharmaceuticals in anything other than the US dollar, a strong dollar constantly caused real economic pain and failure in low income countries.

In Anglo-American countries public subsidies for exporters (think EXIM bank and the UK’s Export Credit Guarantee Dept) plus cheap credit and tax breaks favoured those corporations active in the export sector. That included the financial institutions that managed the financing of trade - Wall St and City of London - and, of course, the super-rich.

Public financial support and resources generated surplus savings and ‘excess consumption’ for these sectors, and for the rich – who in the words of the economist J. A. Hobson, were as a result, in possession of incomes and wealth far in excess of “the demands of any craving known to them.”

In contrast, workers in those countries received a low share of what they produced, shrinking their ability to consume & import what was produced by the global trading system. Some workers had their incomes deliberately repressed.

That led to the under-consumption of all the goods and services produced by the global economy, and to gluts - that worsened ecological imbalances. .

The problem was that the rich do not, and cannot spend - consume - all they earn. In contrast, the 99% spend all they earn on food, rent, health and education. Their falling real incomes meant even those were becoming unaffordable.

In any case, the 99% could not, as a result of falling real incomes, consume all that was produced…

So, far from society’s purchasing power chasing too few goods and services, as many mainstream economists argued, too many goods and services chased shrinking purchasing power.

These internal imbalances caused tensions over inequality to rise…And at that point, populist parties like the Trump bandwagon shifted the blame away from the increasingly globalised system, and from the injustice of domestic inequality, to - wait for it - foreigners..immigrants, the Chinese, Mexicans etc.

All the while, from the 1970s and early 1980s, the United States and countries like Britain had chosen for geopolitical and ideological reasons to eliminate most restrictions on their capital accounts, letting foreign investors have unfettered access to open financial markets.

Surplus countries did not spend the money earned from exports in buying US products, for example. Instead they used their capital to purchase US financial assets - Treasury bills (bonds), equities, derivatives, mutual funds etc. Wall St and the City of London obliged.

(The world’s central banks had no choice: the US dollar is the world’s reserve currency, and they are obliged to hold reserves.)

The mighty US dollar

In the US this influx of money into financial markets led to the strengthening of the US dollar…which while it increased the value of financial assets, and made the rich richer, led to US manufactured goods becoming uncompetitive. That caused factories to close and jobs to be lost, and Labour’s share of the US economy to shrink.

To restore balance to the international trading and financial system requires first increased management of both trade and capital flows. Above all it requires the re-orientation of economies away from the global system and towards boosting the incomes of the 99% in the domestic economy.

In Britain and Europe that requires the abandonment of austerity, and of increasingly ridiculous ‘fiscal rules’. The state must act to raise the incomes in real terms, of the majority.

Second, it requires a move way from hegemonic reserve currencies. As I have argued in earlier posts, this could begin with the establishment of regional clearing unions…here - and here. Ultimately, the world has to come together to co-ordinate and cooperate around an international clearing union….

In other words, today’s global crisis requires the leadership and vision of a John Maynard Keynes.

Economists of that calibre, and politicians wise enough to heed advice, are in short supply these days.

So hang on in there. We’re in for a turbulent time.

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