The Economy Did Not Recover From the Cold

Several years back, the United States established a new economic framework aimed at reshaping the world. This was born out of the remnants of World War II, designed to counter communism. For four decades, this system was effective. Germany and Japan, devastated by war, were rebuilt with American help. In exchange, the U.S. accepted ongoing trade deficits and an eventual decline in its manufacturing sector. The reasoning was quite clear: we needed the security and prosperity that came from these alliances.

However, that logic lost its validity in 1989, yet we’ve stuck to the same policies for the past thirty years for… well, no apparent reason. This feels off.

Economists frequently argue about the reasons behind the U.S. trade deficit, but their explanations often miss the mark. Some claim it’s because Americans favor consumption over production, while others point fingers at the reserve currency system, as if it fell from the sky like a natural law. The most insightful economists skirt around the core issues. In essence, we constructed this system, upheld it through policy decisions, and created an elite class reliant on its persistence. Even though the geopolitical reasons for this framework have faded, it remains intact, which is why we might need a change, perhaps like Trump’s proposals.

Let’s ponder a question that isn’t asked enough: why would a foreign nation want to maintain a continuous trade surplus? Well, it’s pretty straightforward. Countries like Germany and Japan aim for full employment because jobs are politically vital, and people desire to save money to secure their futures. These aspirations make sense. But there are limits. If you only sell to your citizens, it becomes impossible to maintain full employment and savings. The output must go somewhere.

After World War II, the U.S. answered this dilemma by saying, “please, sell us your excess.” We took their surplus production while creating a corresponding deficit. The idea was mutual prosperity; we’d do this to connect them with a free world. The prosperity of these nations, in a way, made them dependent on American consumers. It was a geopolitical arrangement. Having bombed Germany and Japan, there was a moral responsibility to help rebuild them. We feared communism, believing that economic stability would be the antidote, so we opened our markets to their exports.

The mechanism was quite clever. Foreign countries sold goods to America, accumulating dollars they then invested in U.S. financial assets. This created a scenario where trade deficits simply reflected capital inflows. Americans typically do not enjoy consuming more than they produce; it was simply a necessity imposed by Cold War foreign policies. To make this sustainable, we couldn’t let wages and employment drop considerably. Thus, our governments ran budget deficits financed by foreign savers and wealthy locals. Additionally, our central banks encouraged credit growth to sustain enough domestic demand and avoid excessive unemployment.

The Real Cause of Trade Imbalance: Domestic Policy

This is where the economists often go wrong. They observe that foreigners are eager buyers of U.S. financial assets and hastily conclude that this attraction is leading to trade deficits. They think that the deep U.S. financial markets draw global capital. The notion is that the appeal of American assets fuels a surplus, generating capital for investments, which creates a trade deficit. But this reasoning is inverted.

Countries like Germany and Japan aimed for full employment and savings while needing trade surpluses to get there. We wanted that for them, and in fact, we pushed for it, seeing it as the best shield against communism. The challenge was how to absorb their surplus without harming our economy. Building a financial system robust enough to properly absorb these capital flows was our answer. We specifically made U.S. assets attractive to make trade deficits a politically viable choice.

This required a whole ecosystem. We needed a financial elite to flow funds, manage debts, and take fees from the ongoing circulation of capital. Asset prices had to rise to bring benefits to owners. Wall Street was included in our strategy to shield the world from Marxism. An enormous federal government was created, generating a substantial amount of secure assets. We also expanded housing credit to help foreign investors find worthwhile destinations for their dollar savings.

For decades, this setup formed its own reality. Institutions adapted, individual preferences shaped around the system, and norms evolved. For instance, Germans built a society based on the belief that full employment and savings were attainable because their system supported this notion. This self-fulfilling prophecy became ingrained within the elite, including financiers, multinationals, and foreign exporters, who all had reasons to defend it. They became convinced supporters because the system rewarded their beliefs.

Then came 1989. With the Cold War over, the geopolitical basis for the entire arrangement essentially vanished. Germany had no plans to go communist, nor did Japan. The moral obligation to rebuild had been fulfilled. We had effectively operated this system for forty years during which our allies became stable and prosperous. Mission accomplished. Yet, the system didn’t stop; instead, we integrated China into it. China’s production capacity far exceeded that of Japan or Germany, wages were lower, and it lacked the legitimacy of a Cold War ally. The justification seemed to be a kind of pre-emptive strategy, hoping to mold China into a reliable economic and political partner.

But therein lies the issue: a system built to accommodate German and Japanese surpluses can’t handle the scale of surplus from China without severely harming American workers. The situation changed entirely. Yet, the machine continued to grind on, and rather than liberalizing through trade as initially intended, China leveraged this system to strengthen its military and economic power against U.S. interests. It led to the looming question: why do we continue this?

The elites had a swift answer: “This is how it is.” The system was deemed eternal, a natural law of global finance where the dollar reigned supreme and everyone coveted our assets. Shifting the system was not in their economic interest, and they had the intellectual resources to silence any dissenting opinions.

Donald Trump’s Victory and Promise

Yet, they couldn’t control one aspect: the redistribution mechanism. What allowed the system to be politically feasible started to fracture. Governments struggled to tax wealth enough to mitigate costs downwards. Working-class Americans began to face the consequences of a system that led to deindustrialization, stagnant wages, and job instability, sans the protective measures that had once sustained this system’s viability. The political coalition supporting free trade crumbled, not because Americans had gone mad, but because the system no longer benefited them. The elite grew richer, while workers saw their fortunes decline, all without a clear explanation. People were told it was simply inevitable—“learn to code,” or “lower your expectations.”

It was around this moment that a real estate investor and builder named Donald Trump entered the scene, raising eyebrow-raising questions. “Why?” Why do we persist with this? What benefits does it hold for America? If China is a rival and not a partner, if the Cold War’s moral duties have been met, then why continue to absorb surpluses? What’s the gain? Intellectuals had no rational answer to counter these queries, so they claimed, “we can’t change that. It’s just the system.” Tariffs will damage consumers, and trade wars are detrimental, or so they say.

But changing the structure could yield better results. If making things in America becomes more profitable than importing from abroad, companies will follow suit. Just as China requires its companies to establish manufacturing in-country for market access, the U.S. structure essentially says, “build where you want, and we’ll buy whatever you send.” This wasn’t fate; it was a conscious choice.

Trump stands out as a figure who challenged thirty years of stagnant policies. Not because he’s right all the time, but because he dares to ask the tough questions that need to be asked. If the justification for the status quo has vanished, why uphold it? If it harms American workers, what’s the point? If we can produce items domestically instead of relying on imports, why not? Trump embodies a willingness to envision a future beyond the current framework and reflect on what the next chapter of the American story might be. This thought seems bold, perhaps indicating how firmly entrenched the older regime’s consensus has become.

It’s time to liberate our economy from a long-standing conflict that concluded four decades ago. We can return to a more balanced approach. After all, we won.