Musk & Debt

Why Elon Might Be Right But Crash The System In Being So

Well, we got one thing very wrong last week – we thought that the crisis between Trump and Musk was settling down if only because of the pressures on Musk to attend to his business interests. However, Musk continued to mull the possibility of a third party – a disruptive phenomenon that happens periodically in American history. A test of the water on his platform X resulted in roughly 650,000 people calling for him to proceed. This, of course, does not mean mass support for Musk at a national level but it does indicate a very high level of discontent out there. Even a cursory reading of posts on X in the UK indicates a similar high level of discontent with the Labour Government where polling indicates that this is not just a social media phenomenon. Whatever is happening in Europe, Anglo-Saxon electorates have had enough even if the solutions are confused, stretching from the Far Left to the Far Right. Most simply want the existing system to become competent and perhaps just ‘decent’.

Musk & the Global Ponzi Scheme

Musk’s billions will now pour into the challenge he has set himself. He has crossed the rubicon like Caesar before him. We have little idea of what his platform will be. His monstrous autistic ego may yet get in the way of building a democratic voting coalition but we can pinpoint one critical issue that triggered the breach with Trump – Trump’s failure to deal with the issue that most concerns Musk strategically, the massive and compounding American National Debt. One of the problems here is that Trump is increasing national indebtedness (in good part because of tax cuts and militarism) but is cutting medical and food support for the vulnerable on the assumption that economic growth will pick up the pieces. Musk’s problem here is that his strategy of cuts (almost certainly through de-militarisation) would have no place for ‘buying’ the votes that he could use from disillusioned Democrat progressives. Third parties need to pull from both major parties. He may also be assuming a high degree of general rationality in a population of self interests, weak education and irrational ideological commitments.

There is no point in speculating too much on the precise programme Musk will develop or how he will build a coalition of resistance to what he is terming the Uniparty (a term already used by dissidents like George Galloway in British contexts) but we can say that his challenge, if successful, could be existential to existing structures of global capitalism. That sounds dramatic but, while Trump is trying to reconfigure trade terms and while the ‘resistance’ is in the very early stages of building alternative systems under cover of the BRICS (see below), these reconfigurations are still taking place within a system that sustains the global economy on the same fiction that sustains money in general – confidence. The reality is that the global capitalist system has become a debt-based Ponzi scheme over recent decades (since 2008 but more so since COVID) that may be reaching a critical point – where no one wants to be left out just as the clever money is cashing in its chips and gambling on gold and crypto. Germany under Merz is particularly vulnerable to seduction.

This is where militant liberalism and the Ponzi scheme threaten to get into a death spiral. Paying for guns without being able to stop paying for butter! The central point about global debt is that it circulates at phenomenal speed. No one can answer the central question of who actually is there at base to pay it off if the music stops. The answer is – no one. Once debt matures, the money goes back into the pool to buy more debt. The assumption is that those who take on debt can borrow or grow to pay off the interest on debt. Growth is now the problem. The deeper assumption is that high debt enforced on States by circumstances (such as 2008 or COVID) will be moderated later and paid off so that interest payments will eventually fall especially if economic conditions can be managed to bring down interest rates and stimulate growth. But something else has started to happen – worried by low growth, Governments are trying to drive it forward by borrowing ever increasing amounts for new ideological purposes (notably Net Zero and militarism). We may be reaching the point where it is only inflation that can credibly destroy this debt mountain. Yet inflation (if central banks have their way) generally means higher interest rates which generally increases the debt problem. An otherwise historically finely tuned system is in danger of running out of control. Musk observes this.

I am not an economist. I am only interested in the politics here but what we seem to be seeing are higher and higher risk strategies (like Trump’s but not only Trump’s) being deployed in the belief that debt mountains are going to be no problem in the long run. The growth strategies are now starting to operate against welfare strategies (only this week, we saw a disastrous attempt to cut various benefits that widely discredited the Starmer Government). The Government committed to 12 nuclear capacity F35s while trying to deal with a rebellion over welfare cuts. Trying to placate the US by buying its armament while treating militarisation as a means of creating growth and innovation companies within a total military-industrial system is also a major gamble on there being a sustained but often manufactured threat. This creates an economic machinery subservient to the US under current conditions because the bulk of high value weaponry fit for existential defence is produced by Americans. Dealing with de-industrialisation by, for example, turning car manufacturers into armoured car manufacturers (as in Germany) through subsidy is certainly not decreasing debt, merely rearranging its purposes.

High Risk Strategies

Whereas the US is piling on debt in the belief that it is just part of a re-orientation of strategic and trade power that will force the rest of the world into a submissive relationship to its economic requirements, other countries are either trying to balance the books and finding it close to impossible to achieve politically (UK and France) or are deciding to reverse old monetary and fiscal conservatisms to build their own debt mountain (Germany). In this context, Musk is a potentially very threatening figure because his policies, designed to control the Ponzi scheme in the national interest, is in danger of crashing the scheme globally simply by pointing out the nudity of the Emperor. This is an unenviable position for the global system to be in – either it maintains the total debt system and hopes that ‘it will all work out in the end’ (because hope is all that is left) or someone calls it out [Musk] but can do nothing until, in an even more developed state in the future, corrective action causes a collapse. Trump thinks he has some kind of third way based on American resilience and the rest of the world can go hang.

This raises the stakes on the alternative BRICS strategy and on the political survival of liberal centrism across the West. Trump’s aggressive tariff stance towards countries that engage in the BRICS alternative project (with a 10% additional tariff for non-compliant BRICS countries now threatened) is not strength but weakness. He knows that the BRICS project is a project of attempted insulation against his high risk strategy going horribly wrong. It is more likely to go horribly wrong if confidence in American hegemony drifts and other nations have somewhere else to go. Russia and China could be badly hurt by a collapse but they do have mechanisms for resilience and survival. Most liberal democracies do not. BRICS can still choose whether to accept what is more openly than ever a neo-colonialist subservience or to build their own national resilience strategies. Attempts in the West to put in mechanisms of political surveillance and control (which are definitely under way) to deal with consequences are alienating enough people to create powerful networks of resistance (more Right than Left) in the event of a breakdown. Arresting an 83 year old for use of language at a demonstration does not help acceptance of the extension of terror legislation under a blundering Labour Government.

The Trump national economic strategy is heavily dependent on his tariff strategy bringing allies to heel and forcing rivals to stay contained in their trading boxes. It is a scary strategy but we cannot say yet that it is going to fail only that, if it does fail, we are all collectively stuffed. His classic error, of course, may be not to understand that every action results in a reaction. Opponents are generally as intelligent and adaptive as you are at this strategic level. We saw this quickly with rapid Russian adaptation to NATO supply of armament to Ukraine – NATO clearly had not studied Russian military history. Russians learn slowly but steadily. Operation Bagration demonstrated what a mass defence becoming a mass offence can do against a poorly co-ordinated enemy led by strategic amateurs and with insufficient materiel of the right sort to reach its goals. Familiar? China too has adapted quietly and surely to changing trade environments which have been well flagged up.

So where are we on tariffs as we get closer to deadlines that will dictate who is inside the ‘system’ and who is outside and on what terms? The deadline here is Wednesday with the Administration talking tough about tariffs ‘boomeranging’¹. After the initial shock and posturing, the 90 day delay has allowed every player targeted by Washington to start thinking about its response in a much broader context. This context is not only that of immediate economic effects on a nation but political effects on a regime. Objectively speaking, despite a targeted bombardment, the Iranian regime is stronger for its resistance from weakness. On the other hand the ‘Starmer regime’ in London is weaker for its compliance. Whether Europe will be stronger or weaker from compliance is the question of the moment. That question is how to take a position that will recognise the reality of American military and economic hegemony and yet not see oneself become a vassal state with a population itching for confrontation with its own regime at the consequences of that vassaldom.

Global Responses To Date

This week the key decisions will be made. A still fragmented EU has to decide whether to agree to Trump’s tariff increases or impose retaliatory measures and so get involved in a trade war that might result in Washington withdrawing security support especially in the context of the Ukraine War. A lot of the shenanigans over weaponry to be supplied to Ukraine this past week must be understood as indirect pressure on the pro-NATO machinery to concede ground on tariffs. Naturally those economies most dependent on US exports (Ireland, Netherlands and Germany) also want a swift deal. Those economies that want a stronger and self-reliant Europe (such as France and Spain) tend to want to push negotiations further into retaliation-negotiation mode if necessary. In other words, this is becoming a debate over the type of Europe people want – an independent superpower prepared to make short term sacrifices for long term benefit or something that is part of a Western system that accepts US governance. Within that is a debate between those who think Europe can one day take on Russia, those who think Europe needs the US to defend itself from Russia and those who wonder what the fuss is about and think Europe can come to terms with Russia (and, indeed, China). There is, in short, an economic dimension to that latter debate involving the political costs of militarisation, energy costs and the future of the federal project and so much more.

The issue for Europe is that defiance of Washington might get a better deal (which is unlikely) but equally it might mean trying to cope with not only tariffs and a degree of imported inflation - it would set up another debate about security. If Trump starts withdrawing from security commitments, it is the ones who want a quick and easy deal who also tend to want increased defence expenditures (in the German and Dutch cases) and it is the ones happy with managed defiance (such as Spain) who will be reluctant to give up welfare for warfare. Trump’s open irritation with Macron is part of this picture because the latter thinks he can have his cake and eat it - European military and economic independence. Without the US, the European Union will have to decide whether it is prepared to fund NATO to the levels demanded by the US (meaning debt, cuts, tax rises and possibly inflation) or commit to investing in a new European Federal Army (cue debt, cuts, tax rises and possibly inflation) or consider whether such expenditures are honestly necessary for all the nations of Europe. Von Der Leyen has stated that a deal is impossible on Trump’s deadline so we can reasonably expect a trade war that no one wants if Trump refuses to climb down. He may, of course (see Note 1).

As to the BRICS, this is not yet looking like the alternative it likes to present itself. This is largely because, ironically, it has grown too large, becoming a huge network of the ‘south’ but where (as the Financial Times pointed out) every member is more concerned with managing and relating to American unilateralism than to building an alternative. The Chinese are clearly frustrated at this but there is little they can do for the moment. The recent BRICS Summit achieved little substantive and was unlikely to do so until it became clear how the post-Trump tariffs world would shape up. Rumours of difficulties for Xi at home in Beijing may relate to concerns and doubts in an export-led economy over whether the rest of the world will simply roll into the American project or not. There may be dispute also about the value of Russia to China. From this perspective, Trump’s high risk approach appears to be ahead of the game with every part of a fragmented global economy directing itself towards adaptation rather than defiance.

On the other hand, things are not necessarily going Trump’s way by any means. With July 9^th loomimg, only two trade deals have actually been signed – a rather weak one with the UK (where there was a reasonable balance of trade in any case) and a more important one with Vietnam which has upset China. What is probably but not certainly going to happen is that Trump will eventually put up tariffs regardless. Negotiations may take place in an atmosphere of retaliation². Apart from the EU, the most important is probably that with Japan which is slow to come to an agreement and is now being threatened with a 30-35% across the board tariff. South Korea is unlikely to agree on time The reality is that most countries are not fitted bureaucratically or politically to make such complex decisions in 90-day windows (certainly not the EU). It is interesting that Vietnam is able to do so because it is not a democracy but a ‘party state’ led from the top. One state likely to seal a deal is India which suggests something about BRICS ambiguities

Conclusions

There is certainly some hedging of bets going on. Brazil and Mexico appear to be looking at a defensive economic alliance. And how much does it matter if the tariffs go up? Of course, it does a great deal to global exporters and trade in general. There are countries it could put back developmentally by decades. On the other hand, the news that the US received in $24.2bn in tariff revenues in May brings us fall circle around to the debt issue. This sum is minuscule in relation to the vast total debt of the US but if it rises substantially to at least cover interest payments and then growth and moderate inflation do the rest, then perhaps the Trump gamble may yet work. However if it does work, it works for the US and not for the world. The assumption inside American populism is that the US can be insulated from distress outside its sphere of influence. The worst case scenario has desperation resulting in the cataclysmic decision by another nuclear player to solve internal problems through external warfare. This is unlikely but desperation is, well, desperation and small wars and civil strife may become more likely.

The long term issue is that almost certainly the massive debt piles in the Anglo-Saxon world in particular are going to have to be brought down somehow. It may be just a case of Trump saying that the American people should trust him and that a short term increase is just temporary payment for re-engineering the economy towards domestically-generated growth that filters outwards. The alternative, if growth and moderate inflation (2-3%) does not slowly deal with such mountains under a regime of eventual tax increases and immediate budgetary cuts, is that it gets dealt with through hyper-inflation. Remembering what happened to Germany in the 1920s, such an outcome could be devastating at a global level and would certainly wipe out the accumulated wealth of the global middle classes and cause panic. That is unlikely to happen at that level for a whole series of technical reasons – more likely is an eventual crisis of confidence as markets themselves start to lose confidence in particular States that spend on current welfare rather than production. States will have to make tough choices then and may not have the internal legitimacy to make them safely.

The unspoken question is whether nationalism or socialism or national socialism can insulate a nation against such a crisis. In fact, the entire world is now effectively trapped in the Ponzi Scheme. Even the outliers with tiny exceptions do not have economies insulated from the global market economy. On the contrary, Russia and China operate hybrid economies with sufficient resilience to operate outside the system but where future growth still requires integration into the wider global system. Even Germany in the 1930s largely maintained ‘monetary responsibility’ until war broke out and notionally even after that. 53% of Bundesbank Board members in 1968 were ex-Nazis. Nevertheless, Trumpian national populism directed solely at making America great is self-evidently disruptive. Non-American liberal democracies could be placed under ferocious strain as they scrabble for growth strategies that can no longer rely on ‘dumping’ exports at preferential rates and where pleasing financial markets necessarily unravels internal consensus.

1. In the event it was Trump who blinked even before the final deadline. There was a further delay in imposition of higher tariffs announced on Tuesday with a set of threatening letters to try to show that the Administration was still on track to his domestic audience. As we suggested above, trade negotiations are complex beasts. ‘Bullying’ can only go so far if there are many technical and political issues to resolve. The deadline has, however, only shifted to August 1st and yet it is clear that Trump is expanding his own wiggle room. First, the deadline is for framework agreements rather than final treaties and, second, Trump has already given himself the space for further country by country extensions if a particular country shows the willingness to understand America’s position. Trump’s credibility is at stake. Every time he pushes the date forward as a negotiating tactic as if he was undertaking a real estate deal in New York, he makes the US look a little weaker and gives more time for the other side to start considering alternative strategies and even retaliation measures. Imagine the effect if a targeted country decides to stand firm and negotiate by putting in train the expulsion of American military from a key overseas base? In fact, the markets are driving this adaptation. They are making it clear that they do not like tariffs and are giving Trump the benefit of the doubt as tough negotiator rather than ideological populist. A failure to deliver could have significant negative effects for the US as much as for the rest of the world and markets seem on the verge of responding accordingly.

2. This ‘tariffs regardless’ judgment stands if agreements do not come in as ‘frameworks’ within months or if a party such as the EU decides to challenge Washington with pre-emptive retaliation. This is where Trump’s credibility comes into play against the negative economic effects of brinkmanship negotiations and failure. A crisis could lead to the markets and Trump falling out quite seriously if the former lose their nerve and Trump maintains his.