Talking Tariffs and Trade Wars with Grace Blakeley and Kathryn Edwards

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Two of our most popular guests—economist Kathryn Edwards (aka Keds) and writer Grace Blakeley—return today for a timely conversation about tariffs, trade wars, and damaged trust. See how they weighed in on the big-picture ideas I couldn’t stop thinking about in this expansive roundtable.

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Mentioned in the Episode

• Grace Blakeley’s Substack and Vulture Capitalism

• Kathryn Edwards on TikTok

• Newsletter issue on tariffs

• “The Trump White House Cited My Research to Justify Tariffs. It Got It All Wrong.” (NY Times)

• Joseph Stiglitz’s books

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Transcript

Grace:

Does it benefit the US to have this role at the center of global finance? It’s certainly benefited some Americans. It’s benefited those at the very top, and it’s also benefited to an extent those who have lots of assets and big 401(k)s, and now that imbalance is coming home to roost, because there’s an extent to which people who have been left out of this bargain are rebelling against that.

Katie:

I am Katie Gatti Tassin, and this is The Money with Katie Show. A few weeks ago I shared what I would generously call a meta-analysis of what I was reading about tariffs in the newsletter, and it felt like a necessary precursor for any thoughts that I wanted to share on the financial moves that you might be considering right now. Because there were so many theories about what all of it meant and what was coming next that I realized what your next move was likely to be would depend on a) your current position, and b) which theory you believed to be most faithful to reality. Since we’re at the beginning of a four year term, it feels like this might be our new normal for a while. Yay.

One thing I wrote about was the way in which the US’ economic system relied on its imperial dominance in the world because that dominance is what enables the infinite money spigot that powers the US economy. And this means in essence that a period of decline would probably mean absolutely massive changes in how our country’s financial system works; a tectonic shift.

And as the opinions flew online, I found myself unsatisfied with the most popular explanation that Donald Trump is just dumb and he just loves tariffs. Like nothing to see here. Because okay, while that may be true, I really wanted to know if there were other alternative explanations. Were there people who were writing about or theorizing about our current moment under the assumption that there is an end goal here, or at the very least, what’s happening right now might offer some insight about the precise ways in which this country doesn’t quite see itself clearly anymore, especially with respect to China.

Maybe the most damning response that I came across was from the economist who’s worked was cited as the foundation for the policy. His op-ed’s headline was, “The Trump White House cited my research to justify tariffs. It got it all wrong.” Among other errors, the pass-through rate that the administration is assuming, so that is the portion of the tariff hike that is likely to be passed on to consumers in the form of higher prices, is only 25%. And he asks, “Where does 25% come from? Is it related to our work before answering?” I don’t know. He suggests that the pass through rate that their research found was 95%. That is to say that almost the entirety of a tariff is paid by the end consumer.

So today I wanted to pressure-test some of my thoughts, some of the things that I haven’t been able to stop thinking about with two people, Kathryn Edwards, a fan-favorite economist and Grace Blakeley, the UK’s author of Vulture Capitalism and the prominent anti-capitalist voice who’s produced some of the most clarifying assessments I have read that take a much wider view than most of the voices that we hear from in the American media, mine included. I will tell you that I had a stack of questions prepared for these two, and we recorded for an hour and a half. We made it through approximately two of them.

So here is my conversation with Kathryn Edwards and Grace Blakeley.

Keds, Grace, welcome back to the show. Thank you both for joining me again in this time together. It’s great to be here. Thanks for having us.

Grace:

Yeah, thank you so much for inviting me back.

Katie:

I think you two are probably the most popular guests that we’ve ever had, so I’m actually really interested to see how the dynamic is between the three of us. Okay, let’s dive into it. So Keds, you and I spoke I think two days after the tariffs were announced. I had made a comment to you about how damaging I thought something like this must be to global trust of the United States and of the administration. Because if you are another country and you’re trying to do business with the US, you’re now thinking, okay, this is like an erratic, unstable actor. I don’t really want to entrench my interests or entwine my interest with them anymore than I have to.

And you said something that really, really struck me. You said, well, was it really about trust before? Did they actually trust us, or did we just have more money than them? And I wanted to talk to you about that and what you meant by that comment. I think it might be an interesting and useful entry point for the conversation today.

Kathryn (Keds):

Yeah, I mean I think that for so many people who are listening, they find what’s going on in our country to be so repugnant and so at odds with our values. I mean, everything from how the tariffs are unrolling, to what Musk is doing to the government, to Republicans having gag orders on town halls, they don’t want to hear criticism. I mean, it feels so un-American and we can basically imprint that on how we’re reading the global landscape of “I’m so ashamed of what my country is doing. That must be how they see me.”

And I think it just helps to, they did not lend us money through treasury sales or interact with the US and the global economy because they were our best friend, and we just jolted them and said we were going somewhere to a bar but then didn’t show up. That’s not what just happened. I mean, this has always been like, yes, America has ideals and values and institutions and norms that other people in other countries love and still love, but this was about a pretty complicated financial flows internationally and that has less to do with how much they like us. I mean because bankers, God love them, kind of vicious creatures on certain levels, and they’re not going to be charitable towards a country because they feel like the trust that you feel has been broken in your heart with your country is not what’s going on in the global economy necessarily. I would say even not for the most part. There’s probably a lot of people that are like, oh, dealing with America again, don’t love that they do this but still love their reality shows. In Hollywood. It’s much more complicated, and feelings matter less when money is on the line.

Katie:

Yeah. I want to kick this to Grace in a second because you are not in the United States right now. You are in another country. But I feel like the narrative or the story that I’ve heard is that if the United States has been since the end of World War II, the dominant global economic power, their money is the reserve currency. Everything kind of flows through them. They’re a big decision maker. And so if you are another country in the global economy, you kind of have to work with the US and you kind of have to incorporate their desires, their institutions, their decisions into whatever you’re doing, and that because of these erratic tariff announcements, there may be the risk that these other countries are going to start to look for ways to go around the United States and to not involve the United States as much. Or how can we ally with one another in such a way that we can kind of remove this erratic middleman that we don’t really necessarily feel we can rely on anymore, or that their involvement is complicating things for us in a way that we would rather just avoid if possible.

Does that resonate with either of you and your understanding of what’s going on, or do you think that that’s maybe jumping the shark a little bit?

Grace:

So in some ways, what we’re seeing right now is a bit of a tectonic shift, in the sense that there was a run on US treasuries. That isn’t something that’s happened in a very long time, certainly not during periods outside of very severe financial and economic crisis. It’s not something that you expect during a period of economic volatility in other sectors.

So when investors are expecting a recession as they are today, they tend to put their money into safe havens. So that could be anything from gold to US treasuries and dollars, which are considered to be the world safest assets because nobody expects the US to default on its debt. But even more than that, markets expect the US state and particularly the Fed to act as the kind of guardian of global capitalism. So when the shit hits the fan, the Fed steps up.

We saw this in 2008 with the swap lines that the Fed opened up with other central banks, which are basically facilities that allowed other countries to borrow dollars, which was really important when so much international investment and lending and borrowing was taking place in dollars. So other countries’ banks needed dollars.

You saw the same sort of actions in the wake of the COVID-19 lockdowns in the market panic that took place in March, 2020. The Fed again stepped up, and what people are looking at right now is a United States government that is actually acting to kind of exacerbate volatility in markets rather than stepping in to ride to the rescue.

Now, obviously we first saw that in equities market, so for lots of different reasons, investors already noticing that particularly tech stocks were overvalued. But then looking at the potential for recession across the global economy, the potential impact on of tariffs on inflation, big selloffs inequities across the board, what nobody expected to happen was that then to hit treasuries. So to hit bond markets, what you would usually expect is that money that flowed out of equities to flow into bonds. Investors are thinking the economy’s going to take a hit from tariffs. Companies aren’t going to make as much profit as before, so we’re going to move our money into government bonds which are safe. They provide a steady payment even during times of uncertainty, and you only really see that relationship shift.

So a run on bonds when investors are panicking about the capacity of a government to repay its debts or to back up the financial system that relies on these debt instruments, which is what we saw in the UK with Liz Truss a few years ago. And that usually only happens, as I said, when there’s a potential financial crisis or you expect a government, a poor country, to be unable to repay its debts. So it’s hard to explain this as anything other than a perceived increase in the risk premium of holding what was supposed to be a really safe asset.

So investors are looking at what’s supposed to be the safest asset in the global economy, the underpinning at the plumbing, at the heart of the international financial system, US government bonds, and they’re saying, this is riskier than we thought it was. And the corollary of that is that that asset is no longer going to be thought of uncomplicated as the foundation of the global economy, that the dollar is no longer, again, thought of as necessarily the ongoing reserve currency.

And again, there’s lots of ums and ahs associated with this, but investors are already talking about the dollar losing its safe haven status and the US potentially losing its centrality when it comes to global finance in particular. And that’s huge because if the dollar loses its status as the world’s reserve currency, if it ceases to be as central a part of the architecture of international finance, then suddenly people’s willingness and desire to hold dollars and dollar denominated assets, particularly treasuries is reduced, and that compromises the US’ ability to fund its what’s called the dual deficit.

So the fact that it has a current account deficit, a trade deficit, and a fiscal deficit, so the government borrowing more money than it gets in taxes, that’s when you start to see a real tectonic shift in the way the global economy works. This happened maybe once a century when a great power loses power relative to another rising economy. So that’s big, right? And it’s kind of already happening. To be fair, it’s been happening for a while. Central banks have been holding fewer dollars, but this is a big shift.

Kathryn (Keds):

Yeah. Rest assured for listeners that this is not something that Trump has caused in a week. We are building towards something, the US as the global reserve currency. You can see how many dollars other countries are holding and it’s been declining for, I mean I think two or three decades. It has not been sudden.

Katie:

Oh, really?

Kathryn (Keds):

Yeah. It was like, I think our peak was in the late eighties.

Grace:

I think it was like 70% of central bank reserve assets were held in dollars 20, 30 years ago, and it’s now in the mid-60s. So yeah, it’s been falling for some time.

Kathryn (Keds):

Yeah, they’ve been trying to diversify away from the dollar for a while because it has downsides for them too. I mean, we have a certain amount of power as well as a cost to that power for being the reserve currency, but as my mom would say, no matter how flat the pancake, there’s always another side.

There is a cost to not having your reserve currency be your own currency, and there’s a loss of control to that. And so many other countries have been trying to diversify away from the dollar for a long time. And even in the aftermath of the pandemic, Janet Yellen, who was Biden’s treasury secretary, she had several congressional hearings where she talked about the US was at a precipitous state for being the reserve currency of the world.

And so this is a trend that’s been happening for a while that has accelerated over the course of about two weeks that is really this simmering question underneath, are we putting all of our eggs in the US basket and is this a good idea?

A question that people have had outside of the US for a while that is just very stark and also front and center in news coverage and thinking. So it is very different, but it’s also not out of nowhere. Trump is not single-handedly causing a crisis of the US as a global reserve currency to some degree because there has been rumblings of it for a long time, and I think Yellen had tried to propose that we ought to have a global reserve currency. A lot of liberal macro economists in the US have said we need a global reserve currency that’s not tied to one country to have basically the fed’s de facto role as the world’s defender of capitalism be something that is a global institution as opposed to a US institution. And people for decades have written about this is not sustainable for the US economy. We should have a truly global reserve currency that is not the US dollar.

Katie:

We will get right back to this conversation after a quick break.

It feels like up until this point, maybe the last couple decades, it was everyone else that was asking, are we really sure if we want everything to kind of go through the US? But this decision feels like it’s the US asking, do we really want to be at the center of this? And I’m curious when you say it’s not sustainable for the US economy for this to be the way things are run, tell me more about what that means, and in what ways that becomes unsustainable.

Kathryn (Keds):

It’s just about relative positioning and movement and Grace, I would love to hear your thoughts on this because I’m a labor economist and so I’m just like swimming in different waters right now talking about this.

Katie:

Well, at least I’m a girl with a microphone. You’re definitely both more qualified than I am to talk about this.

Kathryn (Keds):

We had very similar conversations during the 2008 financial crisis of that was such a direct test of the global financial system that had all kinds of failing marks. And even then there were calls to say we have to have a global currency system and a former, an economist in the us, Joseph Stiglitz, who’s a Nobel Prize winner, super lefty, he also writes popular books and if you are interested in economics and want to know more about it, I would recommend Stiglitz’s books. I think he’s a strong writer and he explains things well, but Stiglitz back in the aughts was saying we should have a global reserve currency because again, it’s not about is it sustainable, but is it a role that we want to keep playing with our currency because it makes certain things harder and certain things easier and there’s a tradeoff to both.

And so it’s not about there’s this system that’s going to collapse under our own weight and we’re all going to be crushed. It’s just, you play a role and is this the role that’s the best for our economy anymore? That might not be clear, but it’s a question that’s been around for a while. And sometimes crises force your hand. Sometimes crises are made by one person. A lot of things can happen, but the global financial system is not a fixed point.

Katie:

Okay.

Kathryn (Keds):

I mean, so rest assured at least I think this is me being like, hey, remember that I’m optimist economist and I don’t want you to feel too bad about the world. Yeah, a lot’s on fire, but it’s been dry kindling for a while.

Katie:

Yeah, you’re like, but it’s not just that it’s bad now, it’s that it’s been bad. So rest assured it didn’t just get bad and you didn’t even know it was bad. But this is a question, is the US falling out of the global reserve currency bad? That’s what I’m trying to understand.

Kathryn (Keds):

It’s just a matter of trade-offs. The share of US debt that is held by foreigners has been falling. I mean, it’s been falling a ton, but part of that is also because, as you no doubt know Katie, when you get closer to retirement, you need to ditch equities and pick up some bonds, right? Well, we have a population that is massive. The youngest baby boomer is 61. They are moving their trillions of dollars of retirement wealth into bonds. That’s where most of them are. And so they’ve made a very large competitor for foreign debt holders from American debt holders and their pension funds and their 401(k)s. There’s always shifts happening in this market globally for dollars and safety and what the US’ role should be. It helps to navel gaze.

What I will also add is that we think all the time now about China, but none of us were age in the eighties when the question was like, what are we going to do about Japan? So it’s different villain, different question, different challenge, different answer. But we have been here post-World War II before.

Grace:

I really want to pick up on this question about is the US’ role as the provider of the world’s reserve currency? What does that mean for the US economy? And to understand that, I think we just have to understand a little bit about what that means and about the dynamics of international trade that underpin it. So trade 101. Current accounts, when you have a current account deficit with another country, so when you purchase more goods from that country than they buy from you, you have a current account deficit.

Let’s use the example of the UK and Vietnam. Let’s say if the UK ran a current account deficit with Vietnam, then Vietnam will be selling more to the UK than vice versa. What that means is that for the UK to purchase those imports from Vietnam, the people who are buying those imports have to sell pounds sterling in order to purchase the Vietnamese currency to buy their exports, right?

This is a really important thing to understand the currency dynamics of international because generally speaking, you’re going to have to buy the exports in the country in their domestic currency in one way or another. Effectively that’s going to involve some exchange rate dynamics. So when you run a big current account deficit, you are basically selling a lot of your own currency to buy the currency of other countries. And what that generally means over the long term is that your currency depreciates.

This is supposed to be a kind of self-equilibrating cycle. You lose the value of your currency by running a current account deficit. That then means that your currency devalues, which makes imports more expensive and your exports more competitive, and that then rebalances the current account deficit. So that means that you end up with a trade becoming rebalanced. This has always been the argument about how trade naturally returns to equilibrium through these dynamics of currencies when you allow your currency to float on international markets.

Now, what is interesting about the US, and this has been true of the UK as well for a while, is that it’s had a current account deficit for a very, very long time and it hasn’t suffered the kind of attendant dramatic depreciation in its currency that you would expect alongside that. And that’s because you have to understand the other side of these sets of flows. So when we’re talking about international trade, you can’t just look at goods and services, which is the current account. You have to look at flows of investment as well, which is the capital account.

Now, if there are all these dollars that are being basically gotten rid of or sold on international markets so that the US can purchase all of these imports, what’s happening to those dollars? Other investors, other countries are snapping them up and they’re snapping them up for loads of different reasons. Firstly, oil’s been priced in dollars for a really long time, you need dollars to buy oil. Secondly, international finance runs on dollars. Banks kind of clear loans, all these different sorts of things take place in dollars. They borrow in dollars. So you as a central bank want dollars if you’re going to be able to back up your financial system, you as a bank want dollars to be able to kind of make sure that you have those on your balance sheets.

Equally, a lot of those dollars have flowed into purchases of US government debt, right? We’ve seen this with foreign holdings of US government debt and recently vast amounts of money have flowed into internationally, have flowed into US equity markets. International investors all over the world have been buying equities. This has been the case for loads of different asset classes. This is the way that America’s role as the kind of center of global finance works is that yeah, it has a big card account deficit, but that money ends up coming back as investors plow money into US assets. And this has kind of been the case for the UK as well.

This was the case for the UK in the past. We had a huge, huge financial sector, which meant that even though we had this big current account deficit, loads of money was flown back into the UK, people still wanted pounds to do things like invest in property, invest in finance, and that gave us a really imbalanced economy. This is the crucial thing because on the whole these balances might work out. You might be losing lots of money in terms of the current account deficit that might then be flowing back in in terms of investment, but that’s going to skew your domestic economy because if you haven’t got any production of goods because you are relying on the import of goods from other countries, you have a hollowed out manufacturing base, that’s where a lot of jobs are.

And if you then have a huge amount of economic activity being devoted to basically the management of financial flows, which is what you see in the US, it’s what you saw in the UK in the past, that then pulls jobs into those sectors that tend to exacerbate inequality, have lower levels of employment, often rely on international talent rather than providing opportunities for people in the domestic economy. So you get this kind of skewed domestic picture, which we definitely see in the US with the combination of deindustrialization and the growth of these mega financial hubs.

And in fact, the fact that the largest private banks on the planet are in the US seeing some of the most powerful financial institutions in the world. That’s been an internal rebalancing of the US economy that reflects these international dynamics of trade. So when we ask the question, is it a benefit for the US to act as this kind of guardian of global capitalism, is that benefit for the dollar to be the world to reserve currency? Well, it means that some people get very rich. It also means that the US has a consistent amount of demand for bonds, for government bonds. So it can basically spend as much as it likes, but that doesn’t necessarily benefit ordinary Americans. And I would argue that it tends to create costs for ordinary Americans.

Kathryn (Keds):

I’m going to jump in and say a few things. One, so this is such a mind-blowingly good definition of trade or explanation of trade, but if we had a global reserve currency, basically the current account deficit of dollars would not be matched by people trying to buy it. They would buying the global reserve. And so this idea that trade would balance over time as your dollar, we have to sell a lot of dollars in order to buy something, but then where do those dollars go? That is just supply and demand. If you have more dollars that you’re selling the value of the dollar falls, that’s propped up by people holding it as a reserve and wanting to have US dollars. But if we had a global reserve currency, that wouldn’t be the case. And that amount, the propping up of the dollar would be really different.

So when I said that this is about choices, the question is do we want to keep using this kind of counterbalance to our trade deficits to be the dollar or do we want something like a global reserve currency? The second thing which I thought was really interesting was when you talk about de-industrialization from the trade perspective, absolutely the US and the UK lost manufacturing jobs because the relative value of the export made them very expensive.

But this is kind of, we’re going to get to the dark factories, Katie. It’s also not clear industrialization would mean jobs today. And that we find ourselves with this other challenge of like, well, we would love to rebalance trade and so we can make more things here. But making more things here equals employing more people here in these jobs, that’s not a guarantee anymore. And in fact, if you looked at any type of evidence of manufacturing employment, you should assume it is going to take a nosedive down. We are not going to use many people to build things in the future that puts this hole of like, well, what are we risking and what are we gaining? I mean, if you could flick a switch, snap your fingers, have a less demand for the dollar, and then we get 30 million manufacturing jobs back. Well, yeah, it seems like it’s a win. But you could would be production of 30 million manufacturing jobs done with maybe a half a million people.

It still leaves, I think, the biggest question for post-industrial economies in an era of incredible automation and technology of where are your good jobs going to come from and how are you going to guarantee them? We have had one answer to this question. Good jobs come from manufacturing. We have to come up with a new answer. It’s not going to come from manufacturing anymore. We can bring some jobs back, but you will never have a middle class sustained by manufacturing again. So we either accept that fact and find another way to do it, or we just continue to just nose dive into nostalgia because we want it to come back.

And so when you were talking, I thought this was such a beautiful explanation. It’s such a great way to understand so much of our economy and our place in the world, but also this big challenge and this big unanswered question with all of Trump’s movement of how do you think you’re going to get there?  Because it all comes back to going back in time instead of seeing the future. And so Grace, what I tend to shill is making jobs better in the US that you can’t export.

Grace:

I totally agree with that. What came to mind as you were talking was actually the fact that if you look at the disputes that existed between labor and capital during the seventies and eighties before globalization really took off, and a lot of these jobs were lost to outsourcing, a lot of those disputes were about the automation of the production process. So workers, unionized workers in the US were saying to bosses, we are not going to let you automate our jobs because we want to have jobs in the future.

And then this magical thing of globalization comes in and suddenly all the bosses say, oh, actually, we can’t afford to employ workers here anymore. We’re going to employ workers in China because their way cheaper, and that’s not anything we can help. It’s just globalization. And then eventually labor costs in other countries rise and they go back to the original strategy of automation, but they’ve gone around that confrontation with labor. They’ve avoided the confrontation with labor over automation, which is always so political using outsourcing as a way to discipline workers into accepting job losses. And then they bring those jobs back eventually in the future now without creating any new employment.

Kathryn (Keds):

The discourse of the US economy of every major issue that has ever affected you, has a reason, has an excuse, and has a fall guy. And globalization and trade is such an enormous fall guy for so many people in our economy, this big “get out of jail free card” of, oh, it’s trade. Because no one wants to say, sorry, a robot can do your job, and so I’m going to just have a robot do it. And too bad.

Katie:

Grace, when you mentioned the imbalanced economy that this sort of dynamic creates, it sounds like what you’re saying is that the status quo effectively privileges capital over goods and services. That is kind of the outcome that you get when you structure it this way.

And the finance industry’s share of GDP has more than doubled since 1950. It was around 10%. Now it’s I think around 22% as of 2020. At its peak, in the mid 20th century, the manufacturing sector had 40% of all profits and 29% of the nation’s jobs. So there’s some parity there between the amount of money that’s flowing into it and the jobs. Whereas today, the financial sector has 40% of the nation’s profits. So the same as manufacturing used to, but only 5% of the jobs.

To your point about the imbalanced economy that you get as a result, you have a high employment industry being replaced by a low employment industry, but effectively capturing the same piece of that pie. And I know that the global economy is extremely complex, but it does feel like that little nugget of, oh yeah, well, if almost half of the country’s income is flowing into finance, that kind of does a lot to explain why we might be having a lot of the problems that we’re having in the labor market and why we wealth inequality has gone parabolic particularly since 2008. I think that’s really noteworthy here.

Grace:

The finance sector has grown relative to other sectors. That’s true, but it’s also the logic of finance and financialization has come to dominate the way that a lot of other corporations work. So it’s not just like you’ve had the growth of horrible mean banks at the expense of nice productive manufacturing enterprises. Instead, you’ve got the financialization of all areas of the economy. So what does that mean? Okay. Yeah. So the banks share, and by the way, increasingly now non-bank financial institutions, so the hedge funds, private equity, all those different non-bank financial institutions that by the way, were a big part of the chaos that we saw in the markets the other week.

So finance in general has grown, absolutely. But look at the big tech companies for example. They’re not just companies producing a useful good in exchange for normal profits. They are either monopolists or oligopolies. They are hugely oriented in terms of their day-to-day business operations to managing their share prices, managing their relationships with banks, lenders, investors, thinking about their own investments in financial markets, thinking about mergers, acquisitions, all of these trusses that deeply involve banks and other financial institutions, they’ve become extremely closely lent.

And that’s not even talking about the ownership of the shares in these firms, which are yes, in part owned by foreign investors to a large extent, but also by huge asset managers, which the big three asset managers, the BlackRocks, Vanguards, and State Streets own an astonishing share of the world’s assets. They own trillions in assets and they have this huge amount of authority over what happens in the rest of the economy as a result of their concentrated ownership structures.

Even if you look at manufacturing itself, this is a sector now that has in a way become financialized because it is less about creating good jobs that produce stuff and then selling that on domestic markets are much more about thinking, okay, how do we optimize global supply chains in such a way that allow us to take advantage of the cheapest labor, take advantage of the most tax loopholes, optimize our trading relationships to allow us to exploit arbitrage opportunities and exchange rate hedging and all of these sort of things that again, really significantly involve finance.

So I would say what’s really happened, and this is I think where these questions around who benefits are really important is ever since the 1980s labor has been significantly defeated all over the rich world and big corporations across the board have just succeeded in gaining so much more power over society, over our politics, over international trade, and they’ve used that to suck wealth up towards them, and workers are the ones who’ve been screwed over across the board. I think this question about does it benefit the US to have this role at the center of global finance, it’s certainly benefited some Americans. It’s benefited those at the very top, and it’s also benefited to an extent those who have lots of assets and big 401(k)s and now that imbalance is coming home to roost because there’s an extent to which people who have been left out of this bargain are rebelling against that, although in a way that isn’t necessarily going to be that productive for them.

Kathryn (Keds):

Oh yeah, they did not back a winner on that one, but they are angry. It’s also worth stopping here. I mean, again, what a banger explanation, but it’s helpful to remember that we also made choices to accelerate this wealth accumulation rather than decelerate it.

Grace:

Yeah, a hundred percent.

Kathryn (Keds):

I mean, stock buybacks used to be illegal because it was manipulation of your stock price, so you couldn’t have a stock buyback, not since 1982, and now every year it’s a record number of stock buybacks, which is just reconcentrated wealth. And we have now pretty good evidence that stock buybacks depress wages, but do we let people do it?

And when we had a corporate tax cut, it’s all about making sure that they can pay their workers more. The taxes are keeping them from paying their workers a lot of money. What do they do? It’s the largest year of stock buybacks in US history. That is a problem that has a policy, can turn it on, can turn it off again. I mean, we have monopolistic companies. We also have an antitrust law that could be enforced, which in our antitrust law is actually pretty severe relative to other countries. I mean, the US’ antitrust law is very good. It is not very enforced.

If we were to change that, I mean, why would a company like Amazon own a production studio for movies? No, doesn’t make sense. Split ’em up, right? We can identify market concentration economists. We have four different indices for market concentration. We can tell you exactly how monopolistic all of these companies are. That policy could change that and say, okay, you’re a monopoly. Too bad. I mean, Facebook is in court or Meta is in court right now fighting this as hard as they can because they’re saying, look, it’s a monopoly. You shouldn’t own WhatsApp and Instagram and Meta. You need to spin these off. So before you go into this despair, the little guy has some pretty massive tools that in its toolbox and add our disposal that we are not using.

Katie:

We will continue with this round table after a quick break.

When you say we made the choice, when you say we, are you referring to policymakers, like US policymakers?

Kathryn (Keds):

Yes.

Katie:

Those making these decisions within government decided to accelerate that process. And when you say the little guy has the power, are you referring to the fact that with effective collective action, you can force people’s hand to enforce the laws that are already on the books?

Kathryn (Keds):

It’s bleak out there. I won’t pretend like it’s not bleak out there.

Katie:

She’s like, but I’m optimistic economist. So give me a second. Step back.

Kathryn (Keds):

This is what they don’t pay me for. Sorry.

Katie:

This is what they pay me the medium bucks for.

Kathryn (Keds):

The thing to stress is things cook for a long time in the economy, and even if you see the acute moment like last two weeks, will the US be a global reserve currency and what does that mean for our economy? Sure. Last two weeks, it’s been acute. Last two decades, it’s been a question that has been transforming.

I mean, same thing with the concentration of wealth and the power of the financial sector and the lack of regulation over corporate dollars and corporate concentration and wealth accumulation going to the top. I mean, it’s been cooking for a long time and the breaking points get reached. So…

Have you ever called your member of Congress and said, I’m worried about stock buyback regulations from 1982 and whether or not we should reverse that policy? You probably haven’t. You want them to be better and act better on your behalf, but it’s not like it doesn’t happen overnight. All these things take time. Even the things that feel like they don’t take time took a long time.

And so I think in the eighties there was this, because the economy was so bad, there was this view that we basically have to let these businesses do whatever they want. They’re going to offshore, they’re going to go away. We know now because of the Fed as the global capitalist protector—

Katie:

Capitalism’s policeman.

Kathryn (Keds):

Capitalism’s policeman. There’s a lot of things that aren’t going to leave the US companies benefit from being here, and we don’t force their hand in any way to make it benefit us the way that we could. That can change. I think a lot of aspects of neoliberalism, a lot of aspects of capitalism, first workers last that we have had. We gave them four decades of runway and it hasn’t really worked out in their favor. I mean, that stuff can change and you have to fight for it When the nihilism comes from, well, it didn’t change without me doing anything or just being upset. They’re not acting as my hero. They should be doing better by me. But they’re listening to the people who are talking to them—

Katie:

Paying them.

Kathryn (Keds):

People who are paying them. And I mean y’all a big fight, but that doesn’t mean we’ll lose it. Think of it this way. Imagine how hard this fight was before we had any laws in place protecting us. We have the laws, we have the enforcement. How hard was it to unionize before we had the right to unionize? Pretty hard.

We have it now. We have an antitrust act, we have corporate regulation. We’ve got a lot on our side. We have to exercise this muscle. Don’t give up and know that yes, wealth has gone upward, but that’s not because it’s the only direction it’s capable of going. What I took away from the 2024 election was in some ways this big crucible moment of, all right, this four decade system built on the concentration of wealth at the top and the like. You’ll catch up eventually. It was really starting to break, but at least the anger is there. At least the anger is there.

What they’re not going to get is results focus on that. They have anger, they won’t get results if they won’t get results. And we know how to deliver results, focus on results. So that’s my big don’t despair nihilism speech.

Other thing I want to bring up though is that you have benefited from this system and it’s in a really way that you probably don’t care about, but it’s through interest rates and the US being this bond market in the US in which people make tiny little loans to the federal government at a pretty low rate. That’s actually highly influential of how much you pay in a mortgage. In the mortgage market in the US. It’s the other safe bet. Mortgages, very highly regulated in the US, goes through pretty extensive underwriting 30 year process guaranteed by the federal government. Mortgages are another safe investment bet.

And when mortgage rates are determined by who it’s competing with as the other safe bet, because it’s not as safe as the federal government, but it’s a lot safer than equities and your interest rates that you can get on a mortgage are influenced by what the federal government bond market is doing. And if that market were to become unstable because people aren’t interested in dollars or they just not necessarily even unstable, just less desirable, we aren’t the global reserve currency anymore. You will pay higher for every loan you’ve ever gotten. You’d pay higher for your student loans, you’d pay higher for your mortgage, you’d pay higher for your small business loan for the addition onto your house, the car that you want to buy.

Everything that we borrow in the US is cheaper because of the US dollars, the reserve currency keeping our interest rates relatively low. So I know that having a cheap auto loan or a cheap home loan is not the same as having universal healthcare and a high wage, but it is worth noting we have benefited from this. And when that benefit maybe stops, we would be absolutely catastrophically moved of like, what do you mean mortgage rates now stay at 8% all the time?

Katie:

I guess the translation that I would make there is that yes, there are elements of this global economic order that have been bad for Americans, but in some ways Americans are also the biggest beneficiaries of it. And I think that that’s kind of a contradiction in terms that over the last say hundred years, the United States has really enforced global capitalism. If any country tries to try something different, America’s like boop. Nope.

And so when we talk about capitalism as Americans of this thing that we don’t like, and we should also keep in mind that it’s the best for us. We have these qualms with it, and yet we are the ones at the top of this pyramid. It is interesting to kind of hold those two truths simultaneously.

I do want to talk about the idea that when it comes to the case that we just laid out and this idea that the global economic order has created in the US an imbalanced economy that privileges capital over workers goods services, et cetera, that I think someone could walk away from that going, okay, so it sounds like something did need to change. Okay, so it sounds like there actually was a problem with trade or something that maybe these tariffs are attempting to address.

And Grace you wrote the other day about how part of what this tariffs move indicates or part of what’s happening here, you really can’t understand or interpret through the language of economics that we’ve used for the last 50 years. It doesn’t really make any sense if you try to decode it using that language, that you have to use the language of power to understand what’s happening. And you wrote, “Trump’s tariffs are about defending America’s declining position in the world system and preserving hegemony even if it means sacrificing prosperity at home.” And I wanted to talk about what you meant by that the sacrificing prosperity at home, because it feels in some ways counterintuitive to what we’ve just been talking about with like, well, we’ve been this hegemonic power and these have been the downsides for Americans. I want to spend some time squaring that.

Grace:

Yeah, the way you square it is that there is no “American” national interests. There are class interests within American society, and this is kind of what I’ve been wanting to drive home this entire time. It’s the current order benefits the very wealthy, it benefits the owners of capital, it benefits senior executives, people with very well paid professional jobs within this system. It benefits the politicians who are paid by those same people. And to an extent, it benefits the segment of the population who own assets and therefore some of that well trickles down inverted commerce to them.

So if you look at who the real beneficiaries of this kind of system of American economic dominance has been over the last 40, 50 years, it is the top 1%. The higher you go up, the north point, the 1% of benefit the most, then the 1%, then the 10%, then the 20%, right?

So anyone in American society who basically owns assets and have a stake in American capitalism has benefited from this model. And that’s actually incidentally why in some ways we had the financial crisis. It was an attempt to exploit the fact that as Keds was just saying, interest rates were low, which allowed more workers to be brought into this economic order by offering them cheap mortgages. That meant that they would have a stake in this system, they would own housing, and eventually they would end up having a 401(k) and owning equities and other forms of investments. So the whole economic order of the US, and to an extent the world has rested on encouraging as many Americans as possible to identify with the interests of capital and capitalists by making them owners and by giving them a stake in this growing, expanding system of equity markets and housing markets and bond markets that has thrived as a result of America’s role in the world economy.

The issue is that, as we’ve seen, a lot of people have been left out of that bargain. And if we were to look at, I would say the average American, this is I think what has shifted 30 years ago, I think you would be okay saying the average American has benefited from this because the average American was more likely than not to maybe have some equities or own a home or whatever. That middle ground has shifted so that more and more people are now excluded from the benefits of this system because it was always to an extent unsustainable, but it’s been particularly unsustainable as China has kind of been eroding to some extent. The US is dominance at the heart of this system, but also as growth has adult, this is the kind of crisis that we’ve been seeing all over the world. There’s been less of an issue in the us, but the growth that has existed in the US has been really unequal everywhere else.

You’ve just seen growth really plate plateauing much more than it has done in the past, productivity not growing nearly as much as you would want or expect. And lots of countervailing dynamics that suggest that global capitalism cannot maintain the momentum that we’ve seen in previous decades, which means that you do get this kind of shrinking class of extremely wealthy people who are trying to protect their wealth in a system of decline. And that’s us bumping up against the rails right now, which is that there’s this growing segment of Americans who’ve been left out of the bargain of the last 40, 50 years and there’s no one who is articulating what’s actually happened really other than now I guess Bernie and AOC kind of trying to do this. But for the last 50 years, there hasn’t been anyone saying this because the whole narrative has been free trade and the particular type of free trade that we have right now is good for everyone.

And actually I think it’s interesting that we talk about the kind of system of international flows of trade and investment as the system of free trade when actually most of the changes to international trade in recent years have had very little to do with trade in goods. There’s this saying amongst people in the trade community, like free trade agreements aren’t free, they aren’t about trade and they’re not agreements, right? They’re enforced by a dominant power. They’re generally about investment and intellectual property, and you don’t really get a choice as to whether or not you’re getting involved in this.

So the idea has been this kind of system of the liberalization basically of trade investment flows have benefited. And if you don’t realize that, it’s because you don’t understand that you’ve actually been getting better off this whole time because you’ve been able to buy a really cheap tv, even though your community has been devastated by deindustrialization and you can’t find a job anymore. So I don’t think there’s been enough of a recognition of the domestic distributive implications of the kind of trade liberalization and financial liberalization that we’ve seen over the last 30, 40 years, which is not, by the way, an inevitable result of globalization. It’s a result of the kind of globalization that we and particularly the US has chosen to adopt, which is one that is designed to benefit those at the top.

And it’s so ironic that the backlash now is coming from a president who whose entire modus operandi is benefiting the wealthy. That’s why all these Wall Street guys were so excited when Trump was coming back in because they were like, great, we’re going to get 2017 tax cuts again. Together we’re going to get a stock market boom. And Trump has now got this really difficult project of trying to maintain American dominance in a world where it’s slipping away, meet the interest of his wealthy backers, and then also give some red meat to his base who think that he’s going to get their jobs back when he’s not. For all the reasons that Keds has just said.

Kathryn (Keds):

I agree and also disagree with so much of what you say. Maybe, I do think, that if you look at certain measures, the US has undoubtedly become more wealthy and things like asset purchases of like who owns a car, who owns a house, those are not the same as they were who has investments in the stock market. There was a ton of progress made. I think the problem is less that it’s slipping away and more that it’s stalled. It’s not that the home ownership rate has fallen to 50%, it’s just that it is not moving up.

And even with all the money and even all the wealth, we are not extending home ownership to the bottom third. Same thing with 401(k)s. They’re gate kept by employers. They get to decide which workers are worthy. They’ve had 40 years to show they’re never going to find the bottom half worthy. And so you’ve opened up a lot of wealth to people in the maybe second quarter, not the top quarter, they always had it the second quarter, the top of the middle class, they are getting access to a ton. A lot is failing to translate to the bottom half. And this kind of like just you wait, you’re going to get it too. That has failed. So I don’t know if I would characterize it as a fall so much as a stall and we’re reaching the limits of how much redistributive capitalism is going to work and this is when policy needs to take a really firm hand.

But I thought what you said was such a beautiful way to characterize it in a very on the nose way to characterize the messaging around our economy has been we have all this wealth and you’ll get a piece of it, and so we need to preserve wealth in order to preserve your future access to it. But that is running up against the reality that that wealth has stopped. The amount that’s going to flow downward is not turning on anymore. It’s completely stalled.

Katie:

I don’t think you two to my ear disagree as much as, Keds, I thought you were going to say. I think maybe the critical difference here is that one of you would probably still consider yourself a capitalist and the other would consider yourself a socialist, which I think is that will continue to be an area where we’re going to agree up into a point and then it’s going to dovetail away on the solutions.

But I think that there’s this question that we’ve kind of been circling about global dominance and the role of global dominance, and we’ve brought up China, we’ve brought up manufacturing, so I want to pull all those threads together here. The Americans who are alive today have never known a world without us hegemony. I mean, it’s been basically unthinkable. And there was a recent episode of The Ezra Klein Show in which he spoke to another New York Times columnist named Thomas Friedman, and they talked about China and Friedman gets on and basically says, look, after Covid, all the American business presence that was in China mostly left. It has become a four letter word in American government where that’s like one thing Democrats and Republicans can agree on is you don’t say anything nice about China. And he said, I went back and I was there for a little bit. I went to these factories. Huawei used to make phones, and the Chinese communist party was like, nope, you guys do EVs now you’re going to do electric cars. And how they will just repurpose things and throw money at it until they innovate and until they come up with something that is competitive globally.

And he basically said, Americans have no idea what’s going on over there. The comments that JD Vance has made about the Chinese people being peasants, he’s like, dude, there aren’t even people in those factories anymore. It’s all robots. They don’t even have to turn the lights on. There is a level of advancement that has happened in that manufacturing sector over the last 30 years because they were just so locked in and so focused on becoming a superpower that I got the impression after listening to this interview and after doing some independent digging into like, lemme see these dark factories. Lemme see these robotics. It kind of feels like if we’re just going to tariff the shit out of China, but we are not going to have any of that same sort of investment or interest in modernization or manufacturing advancement. It’s like we kind of have our heads up our asses. You can tariff China a thousand percent. We still can’t make EVs like theirs. That overnight is not going to fix anything.

Grace:

This transition from China as first a manufacturing, then a kind of investment led, and now a technological superpower is I think what’s really at the crux of this trade war. I don’t think Trump has launched this trade war as a way to get back American manufacturing jobs to the extent that that’s even a realistic goal.

I believe that he has started this trade war because there are a lot of people in the US, a lot of very powerful people in the US who are terrified about the fact of China as a technological superpower. China as a manufacturing superpower was always fine because the US companies own the intellectual property. They controlled all of the assets and they basically outsourced the boring stuff to low paid workers in China. China as an investment powerhouse was fine because that manufacturing base created the foundations for the Chinese government to then invest in infrastructure that made production easier.

What is not okay is the idea of Chinese competitors to American companies. That’s really freaking everyone out. How did we get to this point? It was stitched in to the very nature of the globalization model that we’ve had over the last 40 years. What was fascinating about the Chinese approach to industrialization is that it was a long game. So when the Chinese economy started to open up in the 1980s, they allowed all these manufacturing firms to set up that would produce inputs for US capitalists that would produce goods that would be exported around the world. And slowly they started to gain the knowledge that would allow them to creep up the value chain. Eventually, the Chinese government imposed rules that forced US companies to share the technologies that they were producing, their intellectual property with Chinese counterparts. There was the role of what are called joint ventures.

So basically if you were a US company looking to invest in China and set up, let’s say a manufacturing plant, advanced manufacturing, then the Chinese government would demand that you go into a joint venture with a Chinese entrepreneur and share the knowledge that would allow you to undertake this efficient technology with that company. Now, America was really annoyed about this at the time. There were loads of, this is partly why the World Trade Organization broke down when it did because there were all these disputes between the US and China. And a big part of that was the idea that China was forcing America to share its technological innovation. It was kind of stealing American ideas and American intellectual property. And what we’re seeing now is the end point of that very slow process of ideas and technology and IP seeping, viral osmosis from the US to China. And nobody knew, I think until DeepSeek how far it had gone.

Katie:

Ohhh.

Grace:

Then when DeepSeek happened, there was this like, oh shit, these guys have this, not just advanced manufacturing, a technological knowledge base to their economy that we have not got a grip on. And that already spooked equity markets before all this trade stuff. And I think it was probably a big part of why Trump decided to go so hard in the end.

Kathryn (Keds):

So I love history and I’m a massive history buff. And while you were talking, I couldn’t help but think about Khrushchev in the fifties telling the US “we will bury you.” And it’s interpreted a lot of ways. But he was talking about the economy in capitalist systems. And I think another perspective that is lost is that we, you said, Katie, that we were in this world that we’re the dominant country and that we’ve lost this memory of who we were squaring up against. And for a long time, the Soviet economy was outperforming ours. And it is not as if capitalist economy has always been number one, unseated, undefeated. There’s been lots of periods where it’s like, hey, the communists actually were crushing us for a time. And when he said, we will bury you, he was not wrong. They had a moment where they were ahead of us. And it’s interesting to hear this about China to put into perspective what is it that we can do that they can’t?

Katie:

What is it that the United States can do that China cannot?

Grace:

Yeah, there’s lots manufacturing airplanes, for example, the Chinese don’t have their own aerospace sector. That’s a huge thing. There are loads of really complicated forms of production and advanced manufacturing that the US still does better than everyone else.

Kathryn (Keds):

And we focus so much on how to keep China in a box, how to keep our competitors in a box, how to keep Japan in a box, how to keep China in a box, how to keep the Soviets in a box. And I think what makes our economy will out in the end, what makes us victorious in the end to stay dominant is ultimately what we can do that they can’t and not what we prevent them from doing.

Katie:

I feel like we’re striking a tone here that’s reminiscent of something you said a little bit ago, which is basically we need to devote more energy to figuring out how are we going to get better.

Kathryn (Keds):

Yeah. We have some things that China fundamentally doesn’t have free speech, like free and fair elections. We have really good universities that are built on a liberal arts education that is not entirely based on tests that you took your entire life. We have a lot that makes us a very different environment, not just economically, but socially, culturally and politically. I think you have to see that whole board.

And the biggest threat to China is if their people aren’t happy, the biggest threat to any country is dissatisfaction with the people inside it. And we’re at this moment of peak dissatisfaction with the US economy, peak dissatisfaction, nihilism with the US politics. And I think for me, the answer is really obvious of like, well, let’s give people what they want. Childcare and paid family leave and good jobs and health insurance. And I dunno, part of me is like, let’s fuck ‘em up y’all.

The government of China told you how many kids you are allowed to have. We don’t have to dig too deep to think about what will always make the US a more desirable place, and that gets reflected in our economy. I think I am a coldhearted economist. I don’t have blood pumping through my veins. It’s all just money and numbers.

Katie:

It’s just macro data.

Kathryn (Keds):

Just macro data. But I think it shouldn’t be lost on people how much our economy is also an expression of self, of our character as a country of our identity. And I think that as Grace was talking about this transformation that China has undergone, I wanted to have a parallel to say, and then here’s what we did. Here’s how we transformed.

Grace:

In some senses, Trump is sacrificing those things that you are talking about, freedom, the rule of law. I’ve been seeing videos of people being literally just picked up off the streets and deported in the US right now. That’s the type of thing that you would see in China.

Katie:

Yes.

Grace:

There are all of these fundamental norms of American democracy that are being deeply undermined, deeply eroded, and in the case that Trump does actually manage to break the courts, break any form of resistance that he faces, you do get to a point of being like, right, okay, this is getting towards authoritarianism now. And that’s when the real danger starts to come in.

Kathryn (Keds):

That’s when the real danger starts. It’s so funny of the same mind. I’m like, everything that’s going on in the economy, I’m like, it’s okay. Economy takes hits, economy moves forward. We have market drops. We had a 10 year period in which the total return to the US stock market was zero. It was a lost decade. You don’t remember it? I mean, yeah, this was a bad week, but do you remember when we had that bad couple of decade? No, because we moved on and we kept going. We have very short memories sometimes and I, especially when it comes to economic, certain aspects of our economy that we hyperfocus on in the moment.

But yeah, I can’t help but think that the backlash to what’s going on will be our saving grace. This guy’s been in office 84 days, and Marjorie Taylor Greene had to tase a guy at a town hall because he kept on asking her questions. We haven’t been here for 10 years, and we’re finally pushing back. I mean, this is, talk about swift and immediate backlash. Now he’s not responding to it and it’s not exercising control over him, but he is not being paraded around the streets as a hero. Hold onto that anger and that dissatisfaction because that will be our saving grace when we decide we don’t like any of this.

Grace:

I want to highlight an example of that which I wrote about last week, which is federal workers who aren’t allowed to go on strike organizing against Elon Musk coming into their departments for their chainsaw, forming a new union, and encouraging people to get out on the streets and protest and try to build this big coalition with ordinary Americans saying, we do a lot of the work that makes this country go around and we need your help. We need your support and solidarity. And that actually working really well. I think that’s so exciting.

Kathryn (Keds):

Yeah. I mean there’s lots of rays of light that are coming in of people having a backlash, and I think it goes back to the economy in some ways, but then also the economy is more like it’s not the leader, it’s the laggard. I will remain optimist, but I will tell you that the dissatisfaction and nihilism you feel with the political system, I don’t say this to sound harsh, that nihilism is a two-way street. Yes. I don’t have faith that my member of Congress is a freedom fighter out there thinking only of me, but I also don’t have the pessimism to think that all I have to do is be dissatisfied and complain about it to a friend and they’ll pick up on it.

And if we need to have a rebirth of participatory democracy, which we are already seeing, then y’all a good thing. Yeah. I mean, he poked a bear. We’re going to slash his face. We’ve got the claws. We are in a democracy. China is not in a democracy. We are in a democracy. These people have to win a popularity contest for their job, but it still comes down to the ballot box. Are they trying to prevent who gets in the box? Absolutely they do because they know that they’re not popular. So you just have to ride on the fact that the harder they fight to rig democracy, the more it means they know they’re going to lose. You have the upper hand. We are in the right fight back, and nihilism is fine, but do it after the march.

Katie:

You’re always good for a pep talk, which I appreciate.

Kathryn (Keds):

Do it after the protest. Do it after you call congress. Do it after you stand up for someone.

Katie:

Yeah.

Kathryn (Keds):

The backlash to what is happening will be incredible, and there’s a lot that we’ll be able to rebuild from what is happening.

Katie:

Well, thank you both again so much for joining me again this time together. We’ll have to do it again sometime soon.

That is all for this week. We’ll see you next week for an episode about employee ownership and how workers are taking back some power, but with an unlikely advocate, an unlikely guest.

Our show is a production of Morning Brew and is produced by Henah Velez and me, Katie Gatti Tassin with our audio engineering and sound design from Nick Torres. Devin Emery is President of Morning Brew Content and additional fact checking comes from Scott Wilson.