New Ways To Lose

Why Trump won't learn from his foreign policy failures; is Bessent's Yen intervention Bretton Woods 2.0; why the US is most exposed to climate risks; and why are pro-Europeans hiding behind the Bin?

Here is this week’s newsletter. A warm welcome to many new subscribers. Thanks as always to the generous paid subscribers whose support makes this worthwhile. If you have been enjoying these posts this year, please do consider joining them. At the very least, do forward it to anyone you think might be interested and hit the like button (which helps with the algorithm). And if you’re reading this via the Substack app, become an email subscriber to make sure you get future editions. As always, I look forward to your comments. And please do email me if you have questions or ideas for future posts.

In today’s newsletter:

• Trump’s Foreign Policy: New Ways to Lose

• Yen Intervention: Weaponised Capital

• Extreme Heat: Extreme Risks

• British Pro-Europeans: Hiding Behind The Bin

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1. New Ways to Lose

It is now over a week since Donald Trump announced that he was pausing plans to unleash “second world war levels of terror” on Iran because Tehran and America’s Gulf allies told him that a deal was imminent. It is four days since Treasury Scott Bessent said that a deal could come in the next 24 hours. Yet a deal looks as far away as ever: the New York Times reports that Iran is insisting on a series of maximalist demands, including a US withdrawal from the region and a lifting of sanctions in return for reopening of the Strait of Hormuz.

Of course, it is possible that Iranian hardliners are over-reaching in their desire to humiliate Trump. There are reports of tensions within the regime over how far to push their advantage, given the strains on the domestic economy. In any case, Wealth of Nations has been sceptical that any deal will be agreed, no matter how desperate Trump may be to extricate himself from this fiasco now that America has burned through its stocks of missiles and interceptors, leaving the US less able to defend itself or its Gulf allies (see Not Another TACO).

What is clear is that any deal at this point would be a humiliating surrender for America that would leave Iran in control of Hormuz. An outline deal being discussed earlier in the week would have restricted shipping to sea lanes designated by Iran and Oman, the only question being how to dress up tolls as payments for administrative services. Indeed, Bessent started rolling the pitch for such a surrender last week by downplaying the importance of Hormuz on the basis that Gulf states are building pipelines to bypass it.

My point here is not to gloat at Trump’s misfortunes. The consequences are too serious. Effectively conceding control of the world’s most important chokepoint will have far-reaching implications for regional security. An early glimpse of those implications became clear last week with the signing of a defence pact between Saudi Arabia, Pakistan and Turkey, building on a previous defence pact earlier this year in which Pakistan agreed to extend its nuclear umbrella to Saudi. This puts Trump’s dream of a new Middle East security order based on an expanded US-led alliance under the Abraham Accords even further away.

The bigger question is where this leaves US power. After all, this is not the first war that America has lost under Trump’s leadership. Last year, Trump was forced into an equally humiliating surrender in its trade war with China (see How the West was Lost). Then too, he went on the offensive despite warnings that China had control of a vital chokepoint, in this case a near global monopoly on the processing of rare earths, without the support of allies who instead found themselves also under attack. The result was that Beijing quickly established escalation dominance, which it is now exploiting in bilateral trade negotiations.

The same missteps were on display in Trump’s Iran strategy, albeit even more serious for being in the military sphere since this will almost certainly leave the US politically and militarily weaker and less trusted as a security partner. Indeed, in an excoriating piece for Foreign Affairs, Kori Shake, a senior fellow at the American Enterprise Institute and former member of the National Security Council in the George W. Bush administration, shows how Trump's Iran campaign violated every one of the so-called "Powell Doctrine" rules for the use of American force:

• There was no vital national interest at stake and no clearly defined objective

• force was the first resort rather than the last

• there was no willingness to commit the resources victory would require

• no backing for the war from Congress or support from the American people

• no exit strategy and no international support.

Warfare is contingent, as Shake concedes, so it is impossible to be certain things would have gone better had the president followed those precepts. What is not contestable, she writes, is that ignoring them left the operation vulnerable to failure on many fronts. “Far from discovering a new way of war, Trump has merely discovered new ways to lose.”

Yet the chances that Trump will draw any lessons from this fiasco, any more than he did from the China trade war, seem close to zero.

Shamelessness has been central to Trump’s business and political success, and his reaction to setbacks is to deny objective facts and construct fantasies of achievement. The rigors of war do not seem to have persuaded him of the need for a more coherent process of policy formulation and assessment; he continues to blurt out his every whim, and a cabinet of sycophants and amplifiers is unlikely to impose discipline on an undisciplined principal.

What’s more, Trump may not be done weakening America and the West yet. In the past couple of weeks, it has become abundantly clear once again that the US president has no intention of helping Ukraine resist Russia’s horrific aggression and remains committed, as he has been from the start, to trying to bring “peace” by forcing Kyiv into a shameful surrender to Moscow. As Phillips O’Brien points out in his latest post, Trump’s supposed willingness to allow Ukraine to build its own patriot missiles to defend itself against devastating onslaughts of ballistic missiles was simply a “con” that helped buy Moscow more time.

Yet the global implications of a Russian victory in Ukraine would be even more consequential than America’s defeat in Iran. It would be far more damaging to US power and prestige than the debacle of the Afghanistan withdrawal on President Biden’s watch, which is why China, Iran and North Korea are pouring aid into Russia’s war effort and Moscow is mulling an attack on a Nato member to test US commitment to the alliance, according to US intelligence assessments. Even the WSJ editorial board, which has had little to say about Trump’s dismantling of the rule of law and his epic corruption, was roused to issue a warning last week:

Ukraine’s survival is more than humanitarian work. It’s a U.S. interest, and Patriots over Kyiv are defending stability and freedom on the European continent. Mr. Trump is busy elsewhere, but Russia’s war is grinding on, and the President will own what happens on his watch.

New ways to lose indeed.

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2. Weaponised Capital

It was not just in the security space that we have seen fresh evidence of how the old global order is crumbling. I wrote last week about the extraordinary US Treasury intervention in the foreign exchange markets to halt the slide in the Yen. I noted then that the most plausible explanation for Treasury Secretary Scott Bessent’s decision to buy Yen was not that he was coming to the aid of an ally facing fiscal challenges, as he claimed, but that he was seeking to prevent the Bank of Japan selling US Treasuries, thereby pushing up yields on longer-dated bonds and adding to America’s own fiscal challenges (see Four Horsemen).

I noted then that one of the most concerning aspects of this operation was that Bessent intervened by selling euros rather than dollars to buy Yen. This story took an even more alarming turn this week when the FT reported that Bessent had not even informed the European Central Bank before he sold the euro, as would be expected under long-standing international conventions, leaving the ECB “blindsided”. According to the FT:

Washington’s sales of euros, carried out by the New York Federal Reserve on behalf of the US Treasury, were “very striking” and “sad”, one person familiar with discussions among European policymakers told the FT.

“This has never happened before,” they added, saying that decades of close co-operation between western central banks that fostered financial stability and economic growth may have come under threat.

In fact, it gets worse. Not only did Bessent not inform the ECB, he (or someone speaking for him) then attacked the ECB for answering truthfully when asked whether it had been consulted. Again from the FT:

A senior Trump administration official noted that “we respect the confidentiality of private discussions with our international counterparts, unlike the ECB”.

This breakdown in international financial diplomacy is deeply troubling - I would argue potentially as consequential as anything happening in the security sphere. The question that some in the markets are asking is whether there was more to Bessent’s intervention than simply a one-off intervention to support an ally as he claimed or whether this might mark another step towards the emergence of a new “Bretton Woods 2.0” international financial system.

There was a lot of chatter at the start of the Trump administration about a possible “Mar-a-Lago Accord” based on a paper by Trump economic adviser Stephen Miran that advocated weaponising access to the US financial system to force the rest of the world, including allies, to cheaply fund the US budget deficit (see The Maddest Idea Yet?). Are we seeing the start of a new regime where the US unilaterally intervenes in markets to serve its own narrow interests, rather than providing a global public good, as it has done more or less for 80 years?

Other aspects of this episode point in a similar direction. The fact that the BOJ intends to raise the dollars it needs to buy Yen by borrowing against its holdings of US Treasuries rather than selling them - and that Bessent has been leaning on the Fed to increase the size of the emergency facility that would allow the BOJ to do this - would seem to reinforce the idea that Bessent’s concern is to keep a lid on US Treasury yields, which recently hit a 19-year high (although it also creates a problem for the Fed since the dollars printed to lend to Japan increase the money supply, potentially adding to inflationary pressures).

Indeed, a further sign that Bessent is rattled was his outrageous attack on WSJ Fed reporter Nick Timiraos for simply doing his job of reporting what Fed officials and market participants have been saying about both Kevin Warsh’s bad start at the US central bank and the Yen operation. It is easy to see why he is rattled. As John Hilsenrath, Timiraos’s predecessor on the Fed beat noted in a brilliant takedown on LinkedIn, Bessent famously set himself a 3-3-3 target for the US economy (3 percent growth, a 3 percent current account deficit, and 3 million more barrels of oil produced per day) and is failing badly on every count.

I think two conclusions emerge from all of this. The first is for governments and central banks, not least in Europe. If we are indeed moving into a world of weaponised capital, in which a militarily and strategically weakened US is willing to use its control of one of its own most important chokepoints, the dollar-based financial system, including against supposed allies, then they need to be rethinking whether it makes sense to be holding so much of their reserves in US Treasuries. At the very least, as Barry Eichengreen noted in the FT, this intervention suggests all is not well with the dollar’s reserve currency status.

Indeed, many central banks in the rest of the world have already drawn this conclusion, with dollars as a share of Chinese reserves having fallen sharply. That is why the second conclusion is for investors: buy gold. No wonder the price of gold just had its best week since January, up almost 7 percent to $4,350 an ounce.

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3. Extreme Risks

In the last couple of editions of Wealth of Nations, I wrote about the economic consequences of the extraordinary extreme weather that Europe has been experiencing this summer, including the longer-term risk of a climate-sovereign doom loop, similar to the bank-sovereign doom loop that lay at the heart of the eurozone debt crisis (see Doom Loop). It comes as no surprise to learn that some of the smartest brains in the City of London have been warning of this for years.

Absolute Strategy Research, for example, the number one ranked macro boutique in London over the last decade, has a long-established team that has been tracking the macro impact of climate change and the energy transition. It warned in a recent note that there is already a clear link both between higher physical climate risk and higher sovereign borrowing costs, and between stronger adaptation capacity and narrower spreads, even after controlling for standard macro-debt variables. Michael Penn, ASR’s climate analyst, estimates that as many as 60 countries could face climate-related downgrades by 2030, with the most vulnerable to default risk including Egypt, Pakistan and Nigeria.

Meanwhile, David Owen of Saltmarsh Economics, notes in his latest post here on Substack that when it comes to climate-related financial risks, America may be even more vulnerable than Europe. The Saltmarsh Economics Climate Index, established over a decade ago, shows the US scoring worse on both emissions and the estimated economic costs of climate-related disasters. Indeed, the latter are currently averaging around 0.5 percent of GDP in the US, more than double that of Europe, with much of that risk concentrated in a handful of states.

At least European regulators, including the ECB and Bank of England, are well aware of the risks and tracking developments closely, particularly with an El Nino in progress that looks certain to break all records for ocean warming (see Be Prepared) - even if European governments are far from rising to the challenge. Yet, US regulators, under pressure from the climate change-denier in the White House seem to be wilfully ignoring the risks. Another new way of losing.

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4. Hiding Behind the Bin

I wrote last week about John Stevens’s heroic efforts to give the citizens of Clacton the chance to cast a meaningful vote in Thursday’s by-election by standing as candidate for the Rejoin EU party (see Not a Joke). He had told me that he had discovered that there was little love for Nigel Farage and his Reform party among conservative-leaning voters in what used to be one of the safest Conservative seats in the country as well as a widespread sense that Brexit had been a terrible mistake. So last Monday, I decided to go and see for myself.

I can certainly confirm based on a day spent following him and his very well organised team of enthusiastic volunteers around the quieter parts of well-heeled Frinton-on-Sea and a couple of smart new-build housing estates in nearby villages that what he said is true. Stevens’ campaign technique was to ask everyone whose door he knocked on: ‘What do you think of Brexit?”. I was astonished to find that I could probably count on the fingers of one hand the number of people who thought it had gone well - a result that the team said was reflective of their experiences over the past couple of weeks.

True, the areas they were canvassing were those that their research said were likely to be receptive territory for an anti-Brexit message. Also true, that not all of those who thought it had gone badly thought it was a bad idea, let alone thought it would be a good idea to reopen the issue by rejoining. But only one very well-inked lady stormed across the street barefoot clutching Stevens’s campaign literature barking that she didn’t want that in her house. I don’t think the response would have been much different in my native West London.

What really shocked me, though, was to learn from Stevens that the most vocal hostility to his campaign has actually come from fellow pro-Europeans. Many are angry with him for, in their view, splitting the anti-Farage vote and have told him so. Indeed, it is clear that almost the entire London pro-European political and media class have thrown their support behind Count Binface. The comedy candidate has been accorded the highest accolades available to any aspiring politician in Britain: a gushing endorsement from a preacher on the Radio 4 Today programme’s Thought for the Day slot and an interview on Alastair Campbell and Rory Stewart’s Rest is Politics Leading podcast.

I think this is ridiculous for two reasons. First, it was clear from what I heard on the doorstep that many respectable folk in Clacton are rather insulted that the London-based media should expect them to treat their vote as a joke. But more importantly, what on earth does it say about the state of pro-European sentiment in Britain that, when given a chance to make their case on the doorstep and deliver a message to the politicians in Westminster that many accuse of timidity over Brexit, they prefer to hide behind the bin?