The March of the Businessmen Dealmakers …

Alastair Crooke, Comment, Conflicts Forum, 23 Dec 2016

Seemingly long ago, (as far back as 2000), when Mr Tump first toyed with running for President, the then putative candidate co-authored a now long-forgotten campaign pamphlet, which Uri Friedman now has unearthed. In it Trump wrote:

“During the Cold War, foreign policy was a big chess game” between the Soviet Union and the United States and its allies, with every other country a “bystander.” But the fall of the U.S.S.R. had changed the game, he argued: “We deal with all the other nations of the world on a case-by-case basis. And a lot of those bystanders don’t look so innocent.” As Trump saw it, “the day of the chess player is over …  American foreign policy has to be put in the hands of a dealmaker.” There was precedent for this, he asserted [pointing to Roosevelt and Nixon].”

“A true dealmaker,” Trump wrote, “can keep many balls in the air, weigh the competing interests of other nations, and, above all, constantly put America’s best interests first. The true dealmaker knows when to be tough and when to back off. He knows when to bluff and he knows when to threaten, understanding that you threaten only when prepared to carry out the threat. The dealmaker is cunning, secretive, focused, and never settles for less than he wants. It’s been a long time since America had a president like that.”

There is a vein of consistency that runs through from 2000 to 2016 in terms of Trump’s zeitgeist – and its themes are familiar to us, from the recent campaign.  Trump is pretty clear in this pamphlet that his intentions were (and are) indeed radical: the country is looking for an outsider who comes from outside politics, and he goes on to warn Americans what to expect: “I am definitely a different look. I’m not plastic. I’m not scripted. And I’m not ‘handled’. I tell you what I think. It’s quite a departure from the usual office-seeking ‘pols’. Maybe the voters would find it refreshing. I guarantee you one thing, they’d find it interesting.”

So here we are, in ‘interesting times’.  No one, as yet, really knows what to make of Trump’s team in terms of policy, or in terms of the possible balance between recklessness, versus truly ‘cunning, secretive, focussed’ dealmaking.  Trump tells us that the first quality he looks for in his team is loyalty, but he also prides himself on putting together, quite disparate, contrarian elements, who, when the chemistry is proven, he lets rip: “And when I feel I have the right team, I let them show me what they can do”.

The coming of the phalanx of ‘dealmakers’ might indeed be refreshing: a break with earlier decades – in which an unyielding neo-liberal ideology was imposed – almost regardless. The broken, chaotic, Middle East today, marks a coming home of pigeons to roost, from our highly ideological previous era.  It has been damaging enough. Trump at least – already – has broken that cast.

Again, like in the recent campaign, two overriding themes from Trumps earlier pamphlet stand proud – labelled The Coming Heavy Weather: the first – economic disaster – being the coming ‘crash’ (“worse than ’29”), and the need to manage the ensuing dislocation; and, the second, being: the threat from terrorism –  reflecting his frustration at the prevalence of western ambivalence towards a radical Islamic threat. It is clear that these two themes will play a major part in his Presidency.

Passing over these consistent warnings (repeated again this year) that any incoming US President will face the inexorable prospect of a systemic economic crisis (“the big ugly bubble”), the mood in equity markets in respect to what is now termed ‘Trumponomics’ – after some short initial hesitation – paradoxically, has been one of pure euphoria. Ray Dalio, who runs the world’s largest Hedge Fund,Bridgewater, sums up the market mood by avidly rejoicing in the prospect of dramatic economic change: a change more dramatic even, than shifts from “the socialists to the capitalists” in the U.K., U.S. and Germany from 1979 to 1982. Dalio predicts that “we are about to experience a profound, president-led ideological shift that will have a big impact on both the US and the world.”

“The shift from the past administration to this administration will probably be even more significant than the 1979-82 shift from the socialists to the capitalists in the UK, US, and Germany when Margaret Thatcher, Ronald Reagan, and Helmut Kohl came to power. To understand that ideological shift you also might read Thatcher’s “The Downing Street Years.” Or, you might reflect on China’s political/economic shift as marked by moving from “protecting the iron rice bowl” to believing that “it’s glorious to be rich.”

[The] “shift by the Trump administration could have a much bigger impact on the US economy than one would calculate on the basis of changes in tax and spending policies alone because it could ignite animal spirits and attract productive capital. Regarding igniting animal spirits, if this administration can spark a virtuous cycle in which people can make money, the move out of cash (that pays them virtually nothing) to risk-on investments could be huge.”

[Looking at foreign policy under Trump], “we should expect the Trump administration to be comparably aggressive. Notably, even before assuming the presidency, Trump is questioning the one-China policy which is a shocking move. Policies pertaining to Iran, Mexico, and most other countries will probably also be aggressive.”

“By and large, deal-maker businessmen will be running the government,” said Dalio who runs the world’s largest hedge fund. “Their boldness will almost certainly make the new four years incredibly interesting and will keep us all on our toes.”

Dalio makes his points starkly. His euphoria probably contributes to the current upbeat market ‘mood’ and is shared by others in the market, but then market moods presently are oscillating giddily, unanchored from fundamentals. Dalio’s hype, however, stands in contrast to the repeated warnings of inevitable ‘heavy weather’ coming from Trump himself:  the pendulum is likely to swing again.

And the notion of businessman ‘dealmaking’ in global diplomacy? Yes, it can have merit. The foreign policy establishment tends to sneer at it, but the freewheeling pursuit of deals as a principle of foreign policy, can produce novel solutions to otherwise intractable diplomatic problems.  But it has its drawbacks too: one is that previously unthinkable bargaining chips come into play. The question of what is negotiable, and what isn’t, becomes a persistent source of uncertainty.  Already one can see China hedging against the ‘One China’ policy becoming a chip on the board of US-China economic relations. Iran and Russia too are beginning to search for their ‘previously unthinkable’ bargaining counter chips as a hedge against Trump’s purposeful unpredictability.

Also, ‘businessmen dealmakers’ are prone to viewing their counterparts as similar to themselves — as CEOs driven primarily by economic prospects. But this is a fallacy: their counterparts, for the main part, are not decision-making CEOs. They have emerged as leaders from a particular national, political, cultural, and moral ambient. They reflect these national mores, and are their product.  They can, and do, place these mores ahead of material interest – even at some direct cost to themselves.

Trump – though an avowed risk-taker – seems to have a more guarded outlook than Dalio.  And figures such as Steve Bannon, Trump’s ideological eminence grise, also take the less sanguine view.  Bannon attributes the 2008 Great Financial Crisis precisely to Wall Street businessman, ‘deal-maker’ excesses.  Yes, Bannon is a believer in the entrepreneurial spirit of America’s early years, but he has alsosaid plainly enough that:

“The 2008 crisis, I think the financial crisis — which, by the way, I don’t think we’ve come through — is really driven I believe by the greed, much of it driven by the greed of the investment banks. [Such as my] old firm, Goldman Sachs…And so the crisis of 2008 was, quite frankly, really never recovered from, in the United States. It’s one of the reasons last quarter you saw 2.9% negative growth in a quarter. So the United States economy is in very, very tough shape”.

“And one of the reasons is that we’ve never really gone and dug down and sorted through the problems of 2008. Particularly the fact — think about it — not one criminal charge has ever been brought to any bank executive associated with 2008 crisis. And in fact, it gets worse. No bonuses and none of their equity was taken… and I think that’s one of the fuels of this populist revolt that we’re seeing as the tea party. So I think there are many, many measures, particularly about getting the banks on better footing, making them address all the liquid assets they have. I think you need a real clean-up of the banks’ balance sheets.”

So, Bannon seems to be saying, free-wheeling businessmen ‘deal-makers’ are one leg of the American problem – and not simply its solution. The idea that what was good for business was good for America may have had some validity up until 1929 (at least the profits were re-invested in America); and in the 50s, 60s and 70s American goods still were generally cheaper than those coming from overseas. But beginning with the 1970s, the process reversed. Globalization enriched the capitalists and impoverished the rest of Americans.

Let us recall what bas been the fundamental political insight by Trump: It was his recognition and understanding of the long economic decline of most native-born Americans, and their pain and disillusion that won him the US Presidency.  Wages and salaries’ share of GDP in the US has swooned from 51% in 1970 to 42% today.

“The decades after WWII have seen a slow and steady erosion of American superiority in technology and productivity and slow and steady flight of capital from the USA. Globalization has been undermining America. From the point of view of Global prosperity if it is cheaper to produce in China, production should relocate to China. From the point of view of American worker, this is treason, a policy destroying the United States as an industrial power, as a nation, and as a community of citizens. Donald Trump is the first top ranking politician who has realized this simple fact”, Vladimir Brovkin has written.

This is a major structural problem. Ray Dalio’s supply-side economics of tax cuts and fiscal spending have done nothing at all over the last 45 years to halt the systemic problem of globalisation – except aggravate America’s trade deficit. (And QE, simply, has made it worse, by diluting the real value of what earned income’s purchasing power remained). Possessing the globe’s only reserve currency, QE and the re-cycling of what were then petrodollars as domestic consumer credit, allowed the illusion of prosperity to linger in the US: But no more. Re-igniting ‘animal spirits’, as Dalio contends, is no bad thing, but it does not address any of these structural problem, which have given us a demand deficiency and debt-deflation. Trump’s writings suggest that he does indeed see that there is a deep systemic problem.

And a return to the ‘animal spirits’ (i.e. the greed) that led to the 2008 crisis, certainly is not what Steve Bannon, at least, seems to have in mind.

Globalisation in the wider sense is the crisis of Europe, too.  But the structural rigidity introduced by the fixed exchange Euro, absent of any re-cycling mechanism between Euro states, (unlike deficit America, with its petrodollar recycling gig returning all the deficit dollars to Wall Street), represents the same type of crisis – albeit at the European micro-level. Italy, steadily losing productivity, industry and jobs to Germany (which benefits from an undervalued currency), stands in an analogous relationship to America and China today. Europe’s particular solution to this systemic rigidity has been an austerity that forces an internal, overall cost devaluation on deficit countries.  What a disastrous notion – but then the Euro precluded virtually any other remedy.

Mr Trump’s answer to the structural problem of globalisation is to drop, or re-negotiate, NAFTA and other trade agreements, to build a wall with Mexico and to ‘deal-make’ toughly with China.  He has already been building up his ‘position of strength’ in this regard, with his Taiwan telephone call as an opening shot. He is banging down tariffs and declaring China a currency manipulator onto the dealing table.

Will it work?  Well, one reason why it likely will not is that China itself - paradoxically - is feeling precisely some of same adverse effects of globalisation of which Mr Trump is loudly complaining.  This Wall Street Journal tale of Shenzhen well illustrates why China, struggling with its own potential ‘Tea Party revolt’ of disaffected blue-collar and Middle Class workers, has little comfort to offer the US to sooth America’s own globalisation discontents:

“Once a sleepy village, Shenzhen today is the sprawling epicentre of China’s consumer-electronics industry, the country’s top export. At two Foxconn Technology factories here, some 230,000 workers make gear for Apple and global rivals, including Chinese communications giant Huawei Technologies Co., which has its base in Shenzhen.

Yet many executives here say they aren’t worried by Mr. Trump. The economic forces that transformed this once-poor backwater in Guangdong province into a sea of skyscrapers are too massive to be rolled back, their thinking goes. Even if Mr. Trump imposes tariffs on Chinese-made goods as he has threatened to do, it’s now so efficient to engineer, produce and ship electronics from this region of southern China that it could still outcompete the U.S., they say …

More than Mr. Trump, what worries businesses here is simply surviving the Darwinian competition of global commerce. While Shenzhen is mostly a winner in globalization, it is buffeted by the same competitive forces Mr. Trump is seeking to reverse in the U.S. [which] the president-elect has blamed for hollowing out American industry and jobs [emphasis added].

As wages rose since 2010, many of Shenzhen’s once-thriving clothing and toy factories moved to lower-cost regions of China and countries such as Vietnam. Now, some consumer-electronics makers are moving, too. Others are cutting labor costs by using robots instead of people …

Mr. Trump is using coercion and enticement to get firms to manufacture in the U.S … But it remains unclear what operations or how many jobs such a move would generate. The other trend under way at Foxconn is a shift to more-automated factories using cost-saving robots …“If these jobs come back to the U.S. they are going to be for people who manage 1,000 robots in an automated factory”, said Christopher Balding, a finance professor at Peking University in Shenzhen. “It will be jobs for computer nerds, not the people who voted for Trump.”

The growth rate of Shenzhen’s manufacturing has slowed, while sectors like software and scientific research are surging ahead. Some small manufacturers are shifting to design and branding. In two years, Qiwo Smartlink Technology Ltd. has gone from a maker of cheap cameras and gizmos for others to a design house with $100 million in annual sales. “All the supply chains and related companies are here, I don’t think you can move this to the U.S.”, said James Guo, Qiwo’s head of exports.

If anything, higher U.S. tariffs would accelerate economic trends already under way, Shenzhen business owners say. Shenzhen’s factories may leave but for low-wage provinces in China, not the U.S. Meanwhile, the city will add jobs in design, engineering and marketing. That process is already under way. On a recent Thursday night at the Hax inventors workspace in Shenzhen, 26-year-old Junyi Song was working a robot arm he hopes to sell as cheaply as $7,000 a pop. At that price, even small factories could replace labor with automation.

“It’s the future”, said Mr. Song.”

The message from iconic Shenzhen is clear: that even there, in the global hotspot of the technological economy, manufacturing jobs are disappearing — to other cheaper, globalised parts. And Mr Trump has not just a systemic economic problem to be resolved, but a cultural one too: Shenzhen possesses – almost literally – an army of university trained, enthusiastic engineers, dedicated to China’s economic betterment. Europe, and the US, does not. Trump has a revolution to perform, in draining away the western bitterness, the sense of helplessness and the loss of energy to which the failure of globalisation has given rise.  Mr Dalio may feel his animal spirits already surging, but most Europeans and Americans do not.  They are a long way from that.

That said, Mr Trump seems to be moving in the right direction. Forget David Ricardo and his theories of comparative advantage: Globalisation is undoing itself. The inevitable global correction to this exhausted current is likely to be turbulent (perhaps violent), and quite likely to be accompanied by the crisis that precedes it.  Trump at least seems appropriately sober about the task ahead – even if Dalio and the markets, are not.  That does not mean that his ‘businessman dealmaker’ diplomacy with China will succeed.  It may not.