The Garrulous Jay – The Hegemon Paradox

Last week I attended a thought-provoking talk by Dr Gillian Tett, Provost of King’s College Cambridge, and a regular FT contributor.

She argued that we are witnessing a profound change in the prevailing global zeitgeist, in which we move away from the established geopolitical and macroeconomic norms of the last half century, during which time neoliberal thinking has dominated in the West.

She described the new world as one in which nation states are more inwardly focused, nationalistic and interventionist in their political and economic approaches, both domestically and on the international stage.

Drawing, rather pointedly, on her academic background as an anthropologist rather than an economist, she stressed the importance of trying to see the world through other people’s eyes. This, she argued, was particularly important when seeking to understand the actions of both Presidents Trump and Xi.

The context to this is the increasing battle for global influence between the two dominant global hegemons these two individuals lead.

The US exerts its power through the post-WW2 dollar-based global financial system. This is based on, and benefits the US through, what Valery Giscard d’Estaing termed the country’s “exorbitant privilege”. In simple terms the US can borrow more cheaply, run persistent current account deficits and print money in a way no other nation can.

China, meanwhile, exercises its influence through its vast manufacturing power. Its businesses based inside the country dominate a wide range of global sectors from heavy industry to technology. At the same time, it projects its power outwards through the so-called “Belt and Road Initiative”, developing infrastructure across countries and continents.

So here’s the paradox when it comes to the US… Whether by accident or design, it seems that the current economic policy agenda (I use the term loosely) being pursued by The White House is designed to fundamentally weaken the very source of its hegemonic leverage.

Tariffs – or even the threat of tariffs – undermine economic confidence in the US overseas, whilst being inflationary at home…potentially giving rise to a vicious cycle of economic weakening.

Boosting cryptocurrencies as an alternative to fiat currencies through deregulation may serve Trump and the crypto ‘bros’ in the short-term, but it doesn’t help the US dollar longer-term.

And then we have the so-called Big Beautiful Bill: a piece of legislation that will cut taxes (and benefits for some) and potentially raise US debt over the next decade by about $2.3 trillion according to the nonpartisan Congressional Budget Office.

This presents the possibility of investors losing faith in the ability of the US to service its debt, eroding the safe haven status of US Treasuries: the exorbitant privilege would go and the country would become one among many, making it more expensive for the US to borrow.

The implications of the US falling prey to this hegemonic paradox are hard to fathom and may seem both distant and arcane to many people.

But if these foundations of fifty years of economic growth are undermined, the implications for the global financial system which rests upon them could be profound, and not in a good way.

PS – For those who have not seen the ‘live’ version of the US Debt Clock I recommend checking it out.