If the intent is to reshore American industry, normalizing domestic consumer prices completely negates the capital formation effects of tariffs. Tariffs primarily alter the consumption incentive structure domestically. By restricting the flow of import, the perceived value proposition of national production grows.

For example:

1. Before Tariff:

   1. US good = $5

      1. Does not acquire market share in US territories

   2. Chinese good = $4

      1. Acquires market share in US territories

2. After a 50% tariff on Chinese goods:

   1. US good = $5

      1. Acquires market share in US territories

   2. Chinese good = $6

      1. Does not acquire market share in US territories

The consumer landscape changes such that an American good—that would ordinarily be outcompeted by a Chinese import—can find a foothold in the domestic market given an import tax. However, the game plan under the Trump administration is to erase this effect at the very same moment that it is put to paper. The policy doesn’t do anything if there are no pricing effects felt by the domestic consumer. Ultimately, Trump is doing what every American president has done since Nixon: selling out trading partners to skimp on national economy.

However, as a political read, confused policy is actually perfect policy. The populace doesn’t really know what’s going on. I truly doubt that Trump’s base has a good idea of what coherent tariff policy looks like, how painful it would be to undergo, and what kinds of things it would be mutually exclusive with. Voters are simpler than that. They don’t like losing purchasing power and they respond to shibboleths. After that, all bets are off.

Not to the surprise of anyone, Trump’s political crowd-work is more reliable than his political theory. It actually does make a sick sort of sense, it’s just about what feature is being optimized: electoral optics. Here’s the basic paradox it needs to solve:

How do you sell a polity on the efficacy of your platform when the only measurable effect in your term would be a >70% drawdown in the global economy?

Answer: You can’t.

The populace will not track the efficacy of Trump’s policy in the relevant terms. Short-term market fluctuations are not a relevant gauge for decades-long capital formation processes. Spot prices for commodities and consumer baskets have nothing to do with the time horizons of nationalist policy. Conventional preferences on what trends you would want to observe are pretty much antithetical to what you would want to happen in a reshoring context. Yet, you can’t really expect the voting body to react to the policy they want with anything but the standard ways and means.

It doesn’t really matter how tariffs would be expected to feel because they will feel so intolerable to the people who wanted them in the first place. People are already check to check, meaning that shrinking their purchasing power means shrinking their plates. No one votes to be existentially poorer. Does the populace have the grit and awareness to not complain about this? Does Trump have the power and discipline to weather that inevitable storm? Is the Trump platform—in voter composition, talent, optics, and political savvy—capable of durable policy that honors its stated aims?

On all counts… probably not.

The personality-splitting of the Trump platform reflects the fracturing of the core lie of the United States: the dollar. It is non-negotiable to the survival of the United States that its constituency of citizens and trading partners must agree experience exponential decay in purchasing power through the dollar. Everyone needs to be on it for forever, and it always grows to be a shittier, more extractive arrangement. It’s an intractable problem, and one that is growing quite terminal. And why would you agree to that in any other context than deceit or duress?

You wouldn’t.

Trump has to appease his voters with deceit, quell dissenters with a different, mutually-exclusive deceit, and hold trading partners under duress by force—all while losing power on all fronts. If you lose the capitulation of any party, your whole game falls apart. It’s an impossible task, and always has been. The natural, emergent strategy would be to steal under increasingly complicated fraud, while speaking out of either side of your lips to confuse and disorient observers. Hence, Mar-a-Lago Accord.

It’s an indirect restatement of my basic thesis for the past 5 years. The US dollar has been the global political consensus for the past half-century, and was formed on political lines—not economic ones. While both essential for the function of global trade and detrimental to the sound accounting of it, it will be held roughly up until the world breaks. Because accounting becomes worse and worse, so too will its essential function be degraded. In order to maintain the concessions people will make to this irrational system, the lies will have to complexify to support the increasingly bizarre stories that the numbers tell. Observers will grow to find more and more dissonance with the fiction. With its actors growing in discontent, confusion and disillusion, the system will lose its capacity to animate the world by narrative until—like a house of cards—the world comes tumbling down.

The list of ingredients are as follows:

• Carl Schmitt’s Concept of the Political

• Friedrich List’s National System of Political Economy

• The Austrian Theory of Money, and Price Discovery

• Adam Smith’s Division of Labor

• David Ricardo’s Equilibrium and Comparative Advantage

• Thomas Mathus’ Principle of Population

The upshot of this essay is that dedollarization will be the story of the century, it will be a globally painful story, and it will likely be written in Chinese. The theory is attempting to describe the grammar that this proposition will be animated by. It’s not finished, but it has worked so far.

It may read better as a book in a few years, but for now…

Money Talks

The libertarians make a crude, instrumental argument that money is a form of speech. They use it to argue about campaign funding rights, and it bites them in the ass when the indomitable central bank prints checks to both parties, guaranteeing policy exactly to the contrary of libertarian theory. The optics are ugly and transparently plutocratic, and the outcomes are counter-productive. It might be speech, but it’s also bad communication.

But I digress.

Ultimately—despite their crummy framing—I actually agree with them. Money talks. Trade is negotiated. “Making the sale” is virtually synonymous with effective communication. My issue is that they do not take their claim nearly far enough. There is something about money that is inherently attached to negotiation, and it goes to the root of all economics: the barter system.

The basic game theory of a trade is this:

1. An exchange requires two actors.

2. An actor will only participate in an activity if they regard it as beneficial.

3. An exchange will only occur if both actors regard the exchange as gainful.

In the barter system, this is pretty hard to achieve. If I have bone meal and I’m looking for sassafras, who do I talk to? Well… kinda everyone and maybe no one. The whole point is that you have to talk it out. Before you know who to trade with, you’ll need to know what they have, and they’ll need to know what you have. If either of you can’t find what you want, on to the next. If you’re real lucky, maybe you’ll find an agreeable exchange.

Probably not, though—it’s pretty clunky.

The current complexity of our economy would not be sustainable if it required that much talking. Imagine if McDonald’s had to pay out to bakeries with Big Macs. Or if bakeries had to pay out to wheat farms in loaves of bread. If the McDonald’s bought an appropriate amount of bread, the bakery would have about 30 workers with a stomach ache and about 200 or so Big Macs that will go bad. If the wheat farm bought the bread, they would have tens of thousands of loaves that would stale before the next harvest. If they wanted to capture value in their exchanges more efficiently, they would have to do so much trading that they would not be able to sustain their original business. It all only works because we invented a substitute for speech.

Money.

Money is basically a general purpose IOU. It works on anybody, for anything, at any time. You might not have the cash for what you want, but if it exists, it has been said that everybody has their price. The idea is something like this: if we can agree on an arbitrary object to be the system by which we denote the value of everything else in the world, it will be easier to find agreeable exchanges.

Money decouples the need to fit the satisfaction of the qualitative desires of the two parties involved. When an actor receives money in a trade, it is accepted on the promise that it can be exchanged for something of intrinsic value in the future. This gives us the vendor-purchaser distinction. With money, only the vendor has to offer something of qualitative value. The purchaser only needs to address quantitative value. This cuts negotiation time considerably, as parties no longer have to match inventories of desirable qualities.

Instead, the vendor will later act as a purchaser with the quantitative value received in the sale. The knock-on effects of this are substantial when production cycles are taken into consideration. As alluded to in the Big Mac analogy, time-scales in production are incredibly varied, and the goods can spoil between production and sale. By decoupling exchange from the qualitative factors of production, money makes it easier for operations with disparate timescales to do business with each other. In this way, the adoption of money has enabled economic complexity that was otherwise unachievable with the barter system.

The efficiency gains in communication are observable in many commonplace conventions, chief of all being the price-tag. The price-tag allows the vendor to decide the exchange value of their goods independently, and display it as a fixed linguistic expression. Instead of having to discuss inventories with every trading partner, all the customer has to do is read the price tags, and decide if they want to pay for the products. This means less time at the point-of-sale because the money does the talking.

The price tag enables another layer of complexity with indexing. With values quantized, they can also be listed. Early on, this might look as simple as the signage in your local deli. But things start to get complicated really fast. With the introduction of the joint-stock corporation, entire organizations can be priced in numbers. Later, the telegraph allows purchases to be made across international distances. Tabulation machines are invented to assist in actuarial processes, which allows for a growth in complexity of administrative models. Digitization expands upon the advances, bringing international stock exchanges, foreign exchange markets, and enterprise software that does automated inventory management, international supply chain oversight, statistical portfolio allocation, etc., etc..

In other words, having a unified standard of account… counts for a lot. The value of a currency is derived from the economy it presides over, and all of that overwhelming complexity is condensed into and enabled by the price tag. The abstraction we have made of value has allowed for the development of an incredibly intricate ecology of processes that—to most of history—would basically amount to sorcery. To demonstrate, imagine describing the phrase “shorting a wheat ETF” to Aristotle:

So, somebody took the 7 largest wheat producers in the Mediterranean, and bought one tenth of the ownership of each of their businesses. They are selling their combined ownership of all the wheat business of the Mediterranean as a combined package, partitioned in 150 equal pieces. We’ve made an agreement with yet another party to purchase one of these pieces on their behalf, with an obligation to sell it back to them at an agreed upon date in the future. If the harvest is good, and the business booms, we will have to pay for the growth in business. If the harvest is bad, they will have to pay us for the decline in business. Basically, if Hellas, Egypt, and Phoenicia have a famine in the next year, I will be rich because I made a bet with some guy.

As though a Lovecraftian demon had come to him to speak of incomprehensible horrors, I believe that Aristotle would be confused and frightened beyond his imagination upon legitimate consideration of this proposition.

Money is a notation system, making it linguistic, which also makes it inherently cultural. Embedded in our adoption and usage of money are a set of cultural assumptions about what our economy is allowed to do, presumed to contain, and expected to be capable of. Aristotle would have had no idea what I was talking about. He never got the requisite language or cultural experience. But on top of the US dollar, we have developed a dizzying catalogue of financial instruments, administrative tools, computationally-dependent business models, and a sprawling international supply network. All of these tools orchestrate a sophistication of economy that can hardly be pictured—much less imagined. With the sheer scale of all these instruments, it would be easy for us to lose the essential picture of what markets are all about.

But don’t forget: the basis of all trade is language.

The Dollar as a Dying Language

In the wake WWII, the technological development of naval supply chains and global communications gave birth to a new order. Being the least war-ravaged industrial power, the US assumed control of the seas by default. With a hitherto unseen naval dominance, the US became the first country capable of globally policing naval trade.

Gold had long been an internationally recognized store of value, but transacting in it was getting clunky. Trade volumes had gotten so large, transactions became so fast and the cost of doing business became so low that labor associated with handling gold transactions (verification, storage, transport and security) became impractical. In order to administrate this trade network, the US dollar was pegged to gold, and assumed the role of global reserve currency.

This was called the Bretton-Woods system.

This system allowed the US dollar to become the global lingua franca. Using dollars as the global accounting standard made it easier to oversee the administration of international trade. Rather than incurring the costs of transporting, verifying, and securing gold, dollars could be exchanged—promising the same value-storing properties as gold—but could be accounted for and moved swiftly in checks, bills, and spreadsheets. This enables a complex, evolving suite of financialization opportunities, and so long as the Treasury’s exchange rates track the market value of gold adequately, the dollar should be just as secure as gold.

Let’s see how we’re doing on that:

1. Breton-Woods exchange rate: $35/oz. Gold

2. Spot price of Gold (April 6, 2025): $3,052.75/oz. Gold

Yikes… not doing so hot.

I’ve written at length about the history of the dollar here, so I’ll just do a limited summary:

1. The US has a downturn in economic activity.

2. Central banks issue more money, but economic performance is still stagnant.

3. The Treasury doesn’t have enough gold for the dollars in circulation.

4. Nixon ends Bretton-Woods to allow for economic stimulus policy.

5. Nixon signs a contract for Saudi Oil to be purchased exclusively in US dollars.

6. US foreign policy orients itself around knocking oil exporters off the market

7. Military sanctions insure the use of the US dollar by artificially imposing a Saudi energy monopoly (to be purchased in US dollars).

The point of this story is outline how the global use of the dollar went from a functional political agreement (about how language should express market activity) to a dysfunctional political concession. The language of the dollar was agreed upon under the trust that it would hold value reliably against the gold reserves that insured it.

That trust was broken. Since the end of Bretton-Woods in 1971, the dollar has represented a fundamentally unfair, monetary game theory. At this point, the formal issuance policy of this currency is such that the US State is granted unlimited financial power, at the detriment of the savings literally everyone else. It’s a crappy accounting standard.

The language of the dollar has only been maintained as a political concession because of the threat the US Navy and US trade influence can impose on a country. By being able to block trade either by military blockade or political sanction, the US has been in a position to bring most countries to their knees with the motion of a pen. Because of the degree of interdependence that had been established under the dollar, the cost of acquiescing to bad monetary policy has long been outweighed by the existential threat of punitive trade and military policy for not acquiescing (see Iraqi Medicine Embargo, Venezuelan Presidential Crisis, and Yemeni Famine).

In other words, smaller states continued to participate in dollarization because the network effects of US trade were necessary for survival. However, if the organization trade network were to blow up irreparably for other reasons, what purpose would the faulty dollar serve in administrating it?

The Iron Curtain

When global collaboration is available, the laissez-faire theorists are correct. Free trade would increase the general welfare of the world. But how about this:

I don’t like _____ and I have no desire to speak to them.

Hmm… kinda hard to negotiate with that tone, let alone collaborate. Yet, you recognize it—don’t you? It’s the basic wisdom of a four-year old: There are people you won’t talk to and there are people who won’t talk to you.

And what are countries made of again?

Sovereigns, like people, can have a communication breakdown. Take the Iron Curtain: a clear example of a geopolitical silent treatment. The Soviets were not talking to the West. Save for spies, state media and pirate back-channels—no info got in, and no info got out. Borders were tightly regulated, and trade was limited. In the American and Soviet Empires, the world had two mutually-exclusive trade networks.

The consequence of having these parallel trade networks was that every sector in the global economy was split in two. Rather than achieving the full gains of specialization, comparative advantage, competition, and intellectual collaboration, the (arguably) arbitrary gating of economic interaction between the two networks imposed a political boundary on the complexity the two economies can achieve.

Where one network had prowess over the other in a school of thought, the other network was left to flounder in the dark. Take genetics as an example: While Watson and Crick were discovering the structure of DNA, Lysenko’s theories about agricultural breeding were animating the worst famine in all of history. The ideas necessary to stop that famine could have been transmitted with the technology available at the time, but the politics were in the way.

Communications broke down.

Since the fall of the Iron Curtain, we’ve largely been able to live without such horrible miseries. Thanks to trade liberalization processes in Russia (started by Gorbachev) and in China (started by Xiaoping), we’ve lived for four decades in a global economy that largely shares in science and technology, collaborates in allocation of production, and negotiates trade regularly. My generation has seen nothing like an Iron Curtain, and the bounty of this world order has been immense. In optimizing production for a single global market, we’re able to achieve an efficiency that would be unheard of in a fractured global politic.

Musical Chairs!

The problem with sophisticated financialization is that it tricks people into thinking that everything is immediately fungible and internationally liquid. It’s hardly so neat. Underneath the numerical overlay, you have the global arrangement of capital goods, including their geographical distribution, the depth of infrastructural investment, the inflows and outflows of each good from each locale, and the political context that shaped the trade network. If you remember from the Big Mac analogy, the timescales of these are anything but instant, much less synced.

The current trade network is shaped by the aforementioned acquiescence to the dollar, which has organized capital for high trade dependency. The strength of the dollar comes predominantly from the network effect that it’s achieved: the countries that trade in dollars and are collaborative with US foreign policy directives. However the network effect has come to be nominally accounted for on the global ledger, it ultimately represents sum economic strength that sits under the dollar’s umbrella. It’s still pretty strong. Globally, we do a lot, and we do it for more people than ever. If we were only to consider this layer of the economy, and how it’s currently functioning, we might say it’s actually quite strong. But unfortunately, your nominal overlay is a necessary organizing technology for all of this economic activity, and right now, your financial technology is fragile.

I know this essay is long and dense, so before we proceed, a quick recap on the current state of the dollar:

1. It is an inflationary currency, which incurs compounding depreciation of purchasing power for the vast majority of holders, including many sovereign wealth funds. This means that in a free-market rationale, there are many reasons why the US dollar would make for a poor reserve currency. It predicts that in an anarchic market, a medium of exchange with better properties for accounting would rise in capitalization, assuming the role of the global reserve currency.

2. It currently stewards over the largest volume of economic activity that has ever been captured and facilitated by a currency. This means that its network effect has achieved the most positive-sum gains in organizational structure out of any financial ecosystem. That also means that were it to break down, it would stand to lose the most out of any ecosystem in negative-sum recoil.

3. It maintains the size of its network effect by political means rather than free market forces. The two primary incentives here are both existential. The first is being cut off from trade as a trade dependent locale. The second is the overwhelming weight of the US military industrial complex.

4. It oversees the accounting of a capital goods network which has been crippled with core infrastructural damage. The minimum time to repair this flaw in the network would be on the scale of decades, and that’s assuming an instantaneous world peace and perfect allocation of global capital expenditure.

The inflationary properties of the dollar make any sort of time-series accounting on it absolutely harebrained and inscrutable, and it becomes exponentially worse as a store of value as time goes on. Additionally, the arbitrary influence that fiscal stimulus has imposed on the nominal accounts makes the ledgers progressively more delusional as time goes on. As the accounts get more delusional, the liquidity offered by the financial markets becomes less effective at administrating the underlying capital goods of the economy.

This delusion, unfairly slanting perceptions towards America, propagates a discontent in effectively all standing members of the trade network, that is only quelled by the threat of being excluded from the remaining functional benefits of the network effect. With the foundation of the network jeopardized, the commitment to the network no longer provides the insurance that once incentivized participation, and participation only stands to depreciate the immediate nominal values of non-US sovereign actors during the window where markets still accept the dollar.

Reductio ad absurdum: If the dollar is held as the reserve currency for forever, US State purchasing power will asymptotically approach 100% of the global economy, while every other sovereign wealth fund will approach 0%.

• The US State would necessarily assume a Soviet style command economy as the single purchaser for the world.

  • We have yet to discover the theory that enables the administration of such an economy.

• Meanwhile, a majority of capital goods will be outside of US geographies, and as such, outside of US military range for long-term sovereign dominance (see Afghani cave insurgents).

  • We also have yet to discover any reason why a local geography would not rebel against a deeply dysfunctional administration such as the one described, and establish their own system of account, with a competing game theory, and an competitive arrangement and structure of the world.

Yeah… I don’t think the dollar is going to last, and consequently, neither will the globalized order. Which means a painful and precipitous descaling event.

I want to illustrate an analogy that can help explain the game theory of economic partitioning/deglobalization. To me, the most elementary way to think of our problem would be the game of musical chairs.

The Rules of Musical Chairs

Setup:

1. Given N number of players, place N-1 chairs in a circle, with the seats facing out.

Rules:

1. Each round begins when the music starts, and ends when the music stops.

2. When the music is playing, the players are to move around the chairs in an orbital motion.

3. When the music stops, the players are to find a chair. The player that does not find a chair is eliminated from the next round.

4. A chair is to be removed before the next round can proceed.

5. Repeat this process until there is only one person left.

6. Declare the winner.

There are only a few words to replace before this can semi-accurately describe the game theory of economic descaling.

• The “players” can be replaced with either “economic actors,” “sovereign powers,” or “currencies,” with slightly different, but related proportions in modeling.

• The “chairs” basically represent the shrinking global market capitalization. Depending on the model you select for the “players,” the “chairs” will either represent “the global economy’s load-bearing capacity [for either population or luxury consumer interest],” “the share of global power in deciding the shape of global trade and production,” or “the remaining volume of the global economy to be captured and facilitated by a non-dollar unit of account”

• The “rounds” represent the scramble to get into a yet to be determined “safe position in the new global trade order.”

• The scaling effect between the rounds (“A chair is to be removed”) basically represents a compound effect of descaling in inflation-derived accounting distortions and the actual descaling in capital markets. You could translate these respectively as “declining influence of fiscal stimulus in nominal amounts of value” and “decreasing global production volume.”

• The “last chair” represents the size the world economy will descale to and remain at, whatever the volume of that capitalization may be.

• “The winner” may be seen as either “the final, agreed upon distribution of buying power amongst the remaining polity,” “the new center of Empire,” or “the new global standard of account.”

Allowing for some introduction of calculus, I’m pretty sure these three interrelated models can give a convincing description how the economy will have to restructure itself should the dollar breakdown. Essays can be made to expound upon this analogy, with more depth given to the definitions, offering better descriptive and predictive clarity.

Still, I’ll tell you that clarity doesn’t promise anything pretty.

In both the Late Roman Empire and the Bronze Age Collapse, the “last chair” was a near empire-wide erasure of economy, state, literacy, civility, and population. We don’t want that, but nothing in this game theory can guarantee that. It’s possible that current trade dependencies and production distribution is far too hard to adapt to a stable state at the same time that political stability is achieved. It’s possible that the global depreciation of human economic actions starts a vicious cycle, where the fruits of production are only enough to malnourish your productive population. The people may get sicker and sicker and the economy may become less and less able to stop it.

It’s possible that we only bottom out by total disintegration, so we had better hope and pray that we are not in this scenario.

The Forex Shuffle and the Tariff Tumble

It seems as though we shall not be so lucky.

Trump has just launched the most aggressive tariff policy we’ve seen in American political history, most notably slapping a whopping 54% tax on China. If ever there was a policy action that could indicate America’s observation of the Great Chimerican Reversal, it would look something like a 54% import tax on Chinese goods.

China responded in kind, offering a reciprocal 34% import tax on American goods. If ever there was a policy action that could indicate China’s confirmation of the Great Chimerican reversal, it would look like a reciprocal 34% import tax on American goods.

I’ll translate.

Uncle Sam, just barely sober from decades of booze haze and pressed Oxys, pores over a glut of past-due rent notices, overdraft fees, and all the fixings of a drug-fueled financial annihilation, viewing them for the first time with a hint of emotional clarity. In the wake of his own mess, Uncle Sam looks upon his half-trusted, Chinese mail-order bride with contempt, wondering how she could let him drive himself into such a horrendous ditch.

“I cannot believe you let me get like this. I am done with you!”

Never sold on the marriage in anything but an instrumental capacity, and presently fed up with the arrangement, the bride looks back in contempt. She was always looking for an exit. Spending most of the marriage financially providing for Sam, and calling off the debt collectors, the bride had finally reached a professional security that would allow her to leave the marriage. Perhaps that may be why Sam sobered up.

“I am not ‘Mindy.’ My name is Min Dong!”

She throws back her ring, walking out with 40 years of repressed rage, muttering angrily in Mandarin. Sam can’t understand her, and doesn’t particularly care to. Min Dong is quite happy to finally outgrow Sam, and cares little to hear his voice again.

They aren’t talking.

Uh-oh world: mommy and daddy are having a divorce!

So who are the winners and losers in a breakdown of Chimerica? Well, broadly speaking, everyone is going to be a loser. The entire market is in the shitter, and predictably so. China might be the only one that’s spared in the end, but on a decade long time horizon, it’s likely to suck for the whole world.

However, if the past 80 years has been played by the United States’ house rules, and China is the usurper and inheritor of the board, it would stand to reason that an effective Chinese policy would be designed to position China to weather this divorce. Assuming that China knows what they are doing, we can potentially extract a viable strategy for getting through deglobalization. Bear with me, as there will be some speculation to be taken with a grain of salt. The read here is based—like much of the essay—on circumstantial evidence.

Throughout the liberalization of trade in China, there are a few telling constancies:

1. Maintenance of a well-diversified foreign exchange reserve, with deep savings (6% of GDP compared to the US’s 0.1%).

2. High degree of state ownership in the domestic economy, particularly in capital-intensive infrastructure projects.

3. High outward foreign direct investment, particularly in the United States’ economy.

4. Strong capital controls in developed industries, human travel, and currency.

5. Loose capital controls in speculative industries.

The diversified foreign exchange reserve represents something like “liquidity in international markets.” In a stable international monetary order, there would be little utility in being diversified. The US has historically played that way. For the past 5 decades, the working assumption of the United States has been that the dollar will be the eternal global account of exchange, and that we can print it asymmetrically at will. Hence the US’s skinny reserves.

China’s playing differently.

By saving in such large amounts, we could say that they are betting on the future utility of their savings. By saving in diversified units of account, we can assume that their investments are to be played in financial markets that may or may not remain in contact with each other in the future. The composition of this liquidity portfolio would suggest that it is to be employed at a time when monetary markets are uncertain, or otherwise, when sections of the markets stop talking to each other.

Regarding their domestic economy, the controls they have put on expatriation, domestic purchasing power flight, and infrastructural ownership suggests that the Chinese state is very intent on maintaining the sovereign control, demography, labor organization and industrial dominance they’ve achieved in this world order. Considering that they have the most favorable odds for assuming the new center of empire, the intent to sustain that gravitational potential in a changing world order would be pretty reasonable.

The loose financial sectors in Hong Kong and Macau—particularly as maintained under stricter state jurisdiction—suggest that China remains interested in speculating in emerging international industries.

This evidence (circumstantially) supports the idea that China has maintained a bimodal strategy for interacting with international markets. Access the good parts of global markets with liberal trade policy, and clarify them of poor accounting and external agency by pressurizing the development of the sector into the borders of the domestic economy with state investment.

Taken all together, a plausible read might of Chinese policy come to look something like this:

1. China holds the core productive infrastructure of global economy within its domestic territory.

2. The global standard of account has become exorbitantly distorted (partially by China’s design), and has nominally mispriced the Chinese economy.

3. A repricing of the Chinese economy is imminent, and will find the Chinese economy to be the center of the world.

4. In order to reprice the Chinese economy, the dollar will have to go away as a global standard, meaning the repricing of the rest of the world.

5. If the dollar goes away, international price discovery will also necessarily break down, following with trade and precipitous collapse of economy and production.

6. When the US financial system ceases to be an agreed upon unit of account, its newly scattered territories will start to wither and deindustrialize due to acute-onset starvation of long-standing trade dependencies.

7. The change in financial structures will most likely not look like a deliberate actuarial science, but rather as if the financial energy contained in the dollar and the old world order was being evacuated like a bank-run. The flows will go into a new standard of account and a new world order, to be determined by emergent market forces.

8. The best way to prevent global deindustrialization for the future empire is to maintain a strong industrial core that’s been proven as a base, and to reattach capital goods to the network as fast as possible, before the local geographies and their respective demographies stagnate beyond repair.

9. Financialization can migrate, but capital ownership will likely be pretty static once a new global standard of account is selected. Ownership will come to be denominated in this medium or that medium, but the sovereign will remain the owner in any nominal system.

10. In order to preserve as much of the global productive capacity as possible, Chinese reserves should be structured such that they are liquid in all available markets when the dollar goes bust. As long as control and trade integration can be notarized, effectuated, and solidified, the purchase should happen as soon as possible with any currency that will still be accepted.

With many words down and many more to go, I do think I’ve put down my basic skeleton for a general theory of political economy that would explain our current moment. There are many points in this essay to be expounded upon, many arguments to make more robust, and many interesting implications that I wish I had the time to cover in this essay. As articulated so far, I’m not sure that I gave each individual phenomenon appropriate length to be clearly understood, let alone the bridges between them or the emergent effects of their interplay.

The intent is to work all of this out with time.

This essay will serve as my working interpretive framework for the emerging discussion about tariffs and China. My reporting on the developments in international trade will be framed in terms of this theory. So far, both the back testing and forward prediction on this theory has worked well. Where empirical observation breaks the theory, essays will be rewritten in the context of such, with aims to amend the theory to accuracy. Assistance in this regard is welcomed, so please send your most contentious case studies to miloyue1@gmail.com.

But for now, enjoy this half-court shot: it might lead you to the next regime.

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In lieu of functioning national economies, China and the US have spent the last 47 years in an informal pact, colloquially dubbed Chimerica. The basic conceit was this: the Chinese had a functioning labor force, but no commercial demand, and the Americans had commercial demand, but no functioning labor force.

So why not just be one economy?

China would take care of producing stuff cheap enough to satisfy Americans, and Americans would make sure there was a consumer for Chinese industry to make a sale. China got to develop its economy, raising QoL, growing the middle class, and advancing on the geopolitical stage. In turn, America got to keep its standard of living, while decreasing its labor inputs. And for almost 50 years of golden “Made in China” stickers, the agreement has worked like a charm.

But what happens when China doesn’t need us anymore?

Runaway Ricardo and the Banana Plague

There’s nothing wrong with free trade theory if you ignore that people have to live with the consequences of it. Then again, that’s like saying there’s nothing wrong with slavery, but for the slaves. So how does free trade come to make people miserable, if at all?

The answer lies in the banana republic.

banana republic (noun) (derogatory) - a small nation, especially in Central America, dependent on one crop or the influx of foreign capital.

We find the origin of the banana republic in the history of the United Fruit Company.

The United Fruit Company, later Chiquita, started in 1870 when ship captain Lorenzo Baker bought some bananas in Jamaica and sold them in Jersey City. They sold well. He tried other places and other tropical fruit, and that sold well too. Since the optimal place to grow the new fruits was in the tropics, where they were found, a few capitalists got together and made a Joint-Stock Corporation. They had a winning business model: “Get the Anglos some cool fruit.” Just look at the import numbers over the years:

6.5 million pre-depression dollars in bananas alone! What a marvel of free trade. Who could deny the growth in market capitalization? I certainly cannot.

The success of the United Fruit Company’s model influenced a wave of interest of much the same character. Latin America received a massive headwind in foreign direct investment, and their economies were restructured by Western commercial interests towards plantation-export models. Ansell Hart reports that by 1927, bananas alone came to represent over 49% of Jamaica’s export dominated economy. By his account, that’s a whopping 21 million dollars in bananas for just one country.

The trade was fruitful, inspiring the U.S. to launch what would later be dubbed the “banana wars,” turning much of Latin America into plantation states. They made a lot of bananas, which apparently counts for some good money in New Jersey. For the Americans, it just seemed like the best thing to do with the land and money.

However, what if all the bananas got sick?

The United Fruit Company had bred their banana cultivar so narrowly (for long distance transport), and planted it so widely (for yield) that one virus came to threaten all of banana-kind. Starting in Panama, then gradually infecting other banana producing countries, the banana virus came in like the grim reaper, slashing Panamanian banana production to shreds. Panama got cranky. Something, something, something…

Oh no! It’s another nationalist coup! (many such cases)

The Panamanians got pissed that their economy was all about Americans eating bananas. Plus, all the bananas were dead, so their economy was pretty dead too. They wanted their canal back so they could tax trade, much to the chagrin of the fruit traders. Ever defensive of their market, the United Fruit Company pleaded once more with the United States to sure up the defense of the Panama Canal. Or twice?

How many times, again?

Well, over the past 100 years, this tension between the interest of American importers and Latin America has been a perennially defining feature. The people don’t want to be defined by American banana demand, and consequently have been in constant struggle with the US over the control of the Panama Canal. And who could blame them? Don’t you feel like I’ve said “banana” too many times? Now, imagine if someone—who doesn’t speak your language—invaded your country, made “bananas" your entire life, and then you had a bout of civil unrest because all the bananas died. And then imagine they killed you some more after you decided to do something other than make bananas because of the civil unrest.

You probably would not respect their advisory too much.

Even after choosing a new, plague-resistant banana cultivar, the fruit trading companies repeated their mistake. It’s been over 70 years since the banana plague became a problem, and still, the Americans failed to diversify from their cultivar, it got compromised by the banana virus, and the global banana trade has again found itself in a threatened position.

Though Latin America has grown to be more endogenously defined over the years, the same political disjoint between them and the American trading interests can be observed. For the Americans, the extinction of the banana means the loss of a defendable, but also replaceable funding stream. The fragility of the banana trade incurs no losses that can’t be contained. For the Latin American producers, the fragility of the banana trade can mean as much as the fragility of their national economy and state.

The nature of free trade is that it organizes around the largest powers. This creates prioritization of the stability of the more developed geographies at the expense of such in the smaller territories. So while it is true that free trade “maximizes efficiency,” the real question is efficiency to what aim? The political center of empire will have distinctly different goals than the territories it extracts tribute from.

“With Chinese Characteristics”

What is “Communism with Chinese Characteristics?” Well, it’s Chinese Nationalism! The wacky thing about communism is that it’s always nationalism in practice. Or mercantilism. Or fascism. Or populism. Not sure what you guys are calling it these days. I just know the modern economist is allergic to capital control.

The vast majority of Communist revolutions started in pre-industrial geographies, and nationalist economic theory is all about developing industrial capacity. From FDR’s seizure of gold and Hitler’s public works programs, to Stalinist and Maoist trade restrictions, the 20th century observes states (of all proclaimed persuasions) using state power to artificially shape domestic capital formation to the favor of their nation. That’s not free trade, nor is it international Communist revolution… so it’s gotta be something else.

In other words, we’re all nationalists in practice.

The argument of nationalist economic theory is that it’s not so simple as “let the free market run wild because it’s efficient.” Pure libertarianism subjects most of the globe to the banana republic problem. However, planned economies ARE inefficient, and you do need price and competition to make good products. If the state makes everything without price discovery, the economy is liable to have wild mismatches in production and demand.

So how do we walk the line?

Nationalism proposes that the solution is to selectively restrict trade across the borders, or incentivize commerce within the border, to protect the profit models of domestic industry from being outcompeted by foreign interests. At the point that the industry has gotten enough of a foothold to compete on the international stage, trade restrictions and subsidies are lifted.

The complication with nationalist economic practice is that its prescriptions are contextual. If you have global dominance, there would be no real reason to restrict trade. However, if you aren’t the industrial superpower, the way you interact with the industrial superpower would be defined by your geography’s population, skills, resource endowment, capital development, educational infrastructure, trade dependencies, etc., etc.. If the prescriptions all basically amount to temporary, targeted subsidies, then the prescription could be absolutely anything without a context. It’s all about how national industrialization stacks up against the global market.

We can follow Chinese industrialization and policy from Mao to now, and it should give us a good picture of how their aims and capacities evolved in relation to each other. There are two major periods to cover. After that, it’s speculation on what’s to come.

Pigsteel Pigsty (1953-1978)

The China that Mao was born to was a China behind the world. The past century had mostly been spent dealing with the imperialism of other nations, and getting trounced because they lacked the industrial capacity to defend themselves. China was relatively resource poor and predominantly agrarian. The main thing they had was a large population (which made them poor).

For Mao to do anything, he had to industrialize.

The first five year plan was about developing the agrarian landscape for capitalist relations. Nothing about China was competitive in markets, so to form capital goods, policy had to be real artificial. The one valuable input they had was cheap human labor, which they put under strict control. Peasant land was seized. Inter-provincial travel was restricted. Labor was collectivized and mobilized towards the development of state-owned enterprises.

By 1956, 67.5% of the industrial enterprises were state owned, and the rest were public-private co-ops. Capital investment increased 70%. Total value of industrial products more than doubled, while coal and steel production more than doubled their planned growth. Urban populations grew by 30%. Through total economic control, the Chinese state effectively mobilized its population to industrialize. Euphoric from the scaling effect of capital formation, Mao doubled down on state control with the Great Leap Forward.

Mao’s ambitions were large, intending, in the next 5 years, to scale steel production by a factor of 20. He had hit a wall though. The agricultural yields were too small and inefficient to support the scale of refinery labor he needed. The industrial techniques of capital did not fit Mao’s ambition, so he instead looked to the countryside and his own imagination. Mao started by seizing the rural co-ops, leading to the deaths of many small agricultural landowners. He established communes on the rural land, with the hopes that he would expand on the agricultural gains of the past half decade. In addition, he commissioned the mass-implementation of the backyard furnace, which he had hoped would make the rural land a major contributor to steel production.

Without losing the intent of this essay—which is not to detail the sufferings of the Cultural Revolution—this strategy failed and resulted in mass famine. The communes mismanaged their food distribution. The steel that was made was unusable, wasting the capital, metal and labor inputs for the project. The command economy policy, instead of yielding the success it showed in the first five year plan, proved deeply counter-productive.

For the future of its state, it was incumbent upon the PRC to find out why.

The Nationalist Rationale

In nationalist economic theory, the implementation of capital controls and trade restriction is intended to be a temporary measure for countries unable to trade on the global stage. The short-term consequences of this type of policy would be a raised cost of goods, and a narrower selection of them, both of which were experienced by Mao’s first five year plan. The capitalists correctly identify this as a decrease in quality of life.

However, however, however….

The free traders pose an incomplete analysis of trade. For underdeveloped nations, free trade sacrifices long-term growth for short term profits. The rationale goes like this: If the nation is at a level of development where their immediate-best market strategy would be to sell raw resources and cheap labor, the nation will be extracted from before the domestic economy can be developed (like a banana plantation). By restricting trade, and subsidizing capital formation, you can force domestic market forces inward, developing domestic production against the immediate cost-efficiencies that the international market would afford. At the point where the capital formation reaches maturity for the domestic market, trade can be gradually opened to the international market.

This is where Mao went wrong. By the time the first five year plan had matured, China was already seeing the limits of their domestic industrial capacity under trade restriction. The desire to grow their steel capacity was hampered by the limits of their agriculture. With their current population and land, they couldn’t make enough food to allocate more workers into steel. They were already using their most efficient allocation of workers, processes, and developed land under the command economy, so there were only two options:

1. Liberalize trade

2. Force a policy towards a less efficient allocation of capital

When Mao doubled down on the command economy, he committed the country to the latter option. It would take them nearly two decades to learn the lesson.

The Reform Era (1978-Present)

The failures of Mao through the Great Famine and the Cultural Revolution had exhausted the nation’s patience with him. The new leadership, headed by Deng Xiaoping, had given way to a PRC with a more practical approach to international trade. Rather than shun the global markets, Xiaoping intended to use the technology and demand of the international market to further develop Chinese industry.

The basic strengths of the Chinese economy were the same as when Mao started: they could force national mobilizations to develop burgeoning markets quickly, and they had a lot of cheap labor to do it. To utilize these features on the global market, China did the dirty work of making base industrial goods.

At the time, high-tech, Western economies were moving away from industrial production to focus on services, intellectual goods, and higher-value labor that came into play at the later stages of production. China positioned itself to capture the old industrial markets that the West was losing patience for.

The PRC underwent sweeping reforms to adapt their nationalist strategy for the global market. The party liberalized the markets where they had been previously unsuccessful; de-collectivizing agriculture, legalizing entrepreneurship, and opening up foreign direct investment. For the markets they were keen on controlling, they implemented a central bank to better allocate subsidization for their state projects, and audited their SOEs to make them profitable.

Since then, the PRC has maintained this bimodal regulation strategy to great effect, having grown to be the largest trading economy in the world in 2019. While the deregulated commercial side can loosely siphon talent, IP, consumers and financial capital from the Western economies, the state-controlled side can force the capture of the bone-marrow of the global economy. The deliberate of this strategy can be seen in the loose financial regulation of Hong Kong and Taiwan, against the tightly controlled industrial projects of Mainland China.

Deng Xiaoping’s strategy has really proven to be quite brilliant. While the SOEs hold all of the predictable, base industrial markets that China has captured, the commercial side keeps an eye on the global tech. By keeping a large cash reserve, the PRC can force their SOEs to scale without market signals. Since they already have the best unit economics—instead of overproducing—they force others out of the market. Over time, they’ve been able to transition more and more of the global economy into state control, while their commerce has gradually come to meet the technological development of the West.

The Great Chimerican Reversal (Present-Future)

The end is probably somewhere between nigh and the next 20 years. Still, though:

Behold!

Deepseek has ended the fiction that China is intellectually incapable of competition. In our major growth industry, they’ve thoroughly whooped us. They already control the global basis of industrial production, they have a functioning nuclear engineering program, their proficiency in core infrastructural development is by far the greatest in the world, and their service economy is growing to meet their domestic consumer demands.

So what’s left?

The question is no longer “How will China catch up to American talent?” America has to ask why its talent will stay. Because of Chinese production, American finance has been able to project power that it doesn’t really have. Without it, America has a debt problem, a 50 year freeze on capital intensive projects, and a bunch of advanced talent for whom it has neither the industry to staff, nor the finances to afford.

Unless American science has a rabbit it can pull out of its ass, it has two options:

1. Reshore industry by going through the pain of tariffs and capital controls.

2. Become a banana republic to China.

The major resource the United States stands to lose is its highly trained talent and the only way to prevent that is to restrict travel.

I’ll let you decide what that may mean for American Freedom.