Though the origins of the phrase “without fear or favour” are debated, variants are found in many languages and cultures, and in contexts other than the law. In my time, it was often said but not practiced. With the emergence of democracy, however, the gap between the words and the reality narrowed significantly.
But over the past seven months, the President of the United States has embraced a very different approach to the application of the law. Convicted criminals, including every January 6th insurrectionist, and a number of those found guilty of financial crimes, have been pardoned. Companies and individuals have been singled out for favourable, or sometimes more harsh treatment than others on the basis of Presidential whim. Fear of retribution has led to both silence and sycophancy. The National Guard and the Marine Corps have been sent to police protests, or deal with petty crimes, not to mention homelessness. The long-lauded “checks and balances” of American democracy are out of kilter, misaligned, not functioning.
America is no longer a bastion of the rule of law. The Declaration of Independence against the tyranny and oppression of the British Crown did not envisage America being ruled by a one man. Or that “fear and favour” would replace “without fear or favour” as the governing principle of the “land of the free”.
No one should be surprised by all this. Before he was elected, President Trump stated that he would be a “dictator from day one”. He has governed by Executive Orders, many of which legal experts contend to be unconstitutional. Even legal judgments against the Administration have been overruled by appeal courts, including the Supreme Court, where the appointments he made during his first term seem to be taking a very different view of the Constitution compared to past Republican appointees.
For me, the threats to prosecute American citizens for all sorts of petulant reasons, the bullying of other sovereign nations over tariffs, the firing of officials at whim, was déjà vu. A re-run of my time at the French Court, where “fear and favour” had existed for centuries.
While reflecting on the past, something else came to mind. A long forgotten word. A philosophy of statehood, power and global dominance, so deeply flawed that no respectable economist or historian could envisage it returning. Namely, mercantilism.
The intellectual father of the mercantilist movement was Jean-Baptiste Colbert, General Controller of Finances of France, a position I held some decades after his death. While mercantilism took different forms in different countries, most of the variants embraced four related principles:
1. A nations wealth and power was measured by how much Gold and Silver it possessed;
2. Exports should be maximised, and imports minimised;
3. State intervention was essential to protect industries and stimulate trade; and
4. That colonial expansion should be pursued with voracious vigour to provide greater access to raw materials and create captive markets.
Does any of this have a familiar ring? Could the modern mind imagine a unification of the state and commercial interests, where the general public does not matter, only the rich and powerful?
King Donald contends that other nations are not “paying their way”. He is obsessed with trade balances and has imposed arbitrary tariffs on just about every nation. He has decided that the US Government with take a 15 per cent cut of chip exports, allowed the Pentagon to invest taxpayers money in defence equipment suppliers, and decided to acquire a 10 per cent stake in a listed company, Intel, to help it through difficult times.
When he first took office, he suggested that the US should “own” Greenland, and that Canada should be considered as the 51st State. He renamed the Gulf of Mexico, the Gulf of America. More recently, he has sent warships to Venezuela, like the British did in China, when the Emperor objected to the peddling of opium to his people. Trump also keeps threatening to send troops to Mexico to fight the drug cartels, which the Mexican government rightly views as an assault on its sovereignty.
For the time being, the trade war is in ceasefire. The main offensive target, China, has generously been granted another 90-day reprieve. Bessent has puzzlingly said the current tariffs are “working fine”. Perhaps that is code for China having played the rare earths “card”, threatening to cripple the US tech and defence industries but suspending export licences. India has not been so lucky. Nor has Brazil. Trump admires its former leader, currently in jail, and demands he not only be released, but reinstated.
The difficult to answer question in all this bizarre toing and froing, is what the new world order is going to look like. At the moment, all the major economic and military powers are grappling with a US Administration that is breaking all the rules of international engagement.
Are they hanging on and hoping the Congressional elections will end Trump’s despotism? What if all the games around electoral boundaries ensure the GOP remains in control, despite the trend in opinion polls?
Europe and Japan are re-arming. Taiwan is fearing invasion. China is also bullying the Philippines. Russia has stepped up the bombarding of Ukraine after the Alaska Summit. Israel is taking over Gaza City and building bigger settlements on the already illegally occupied West Bank.
Geopolitical turmoil on this scale has not happened for over a century. So, it should not be surprising that currency, bond and stock markets, are confused and divided. Bears point to the history of trade wars, geopolitical conflict, inflation and stretched valuations. Bulls see Trump as a champion of “American Exceptionalism”, slashing the size of government and abolishing all kinds of regulation. He is also a champion of AI and crypto currencies, the obsessions of a new generation of market participants, with no memories of what can go wrong.
In an earlier Musing, “Blowing Bubbles”, I argued that there are a “cacophony of bubbles” reinforcing each other. The only doubt in my mind was whether these bubbles were in the “mania” or “euphoria” stage. Whether there was another major up leg in the “everything rally”, or whether the tipping point was near?
Trump’s mercantilism, coupled with direct investment in US companies, promotion of all things “crypto”, relentless pressure on the Fed, are unquestionably positive for the US equity market, even if the US economy suffers. As the old saying goes, “the stock market is not the economy”.
Against this, China, the EU, India, Japan and other countries could well retaliate against the US, and specifically US companies. US Big Tech has been in the crosshairs of other nations for a long time. The “trigger” might finally be pulled. That is how mercantilism works. The state and business are one.
What is being overlooked in all this, is the dollars’ role in the global financial system. In mercantilist times, it was gold or silver that was the basis of global trade and finance, not one nations’ currency.
Talk of the dollar losing its role as the “reserve currency” is premature. A lot of water needs to flow under the bridge before that happens. But one should be concerned that 70-80 per cent of global leverage is in US dollars. The world has never been as leveraged as it is today. The dollar, and the dollar-denominated collateral which underpins this leverage, has never been as important.
This is why the recent news that US is reviewing dollar swap lines with other central banks is a cause for concern. Bessent vaguely suggested that this was because only Americans should have unfettered access to the dollar, not foreigners. Though not widely understood, the lesson of the GFC, and the mini crises which followed, including COVID, were manageable because all the major central banks were able to quickly provide dollar liquidity to local institutions, particularly to those that were “systemically important”. In other words, panic and contagion could be quickly short-circuited.
With the GENIUS Act providing the green light for the issue of more US dollar stablecoins, it is anyone’s guess how many new tokens backed by US dollar assets will emerge. Without direct access to dollar funding, will foreign central banks have to buy privately issued tokens? Will the stablecoin market be big enough? Will the new issuers have sound business models? Or will they be backed by SPIV’s and SPAC’s?
The answer my friends is blowing in the wind. Mercantilism was a product of different times, where the world was less integrated, rumour spread by print or mouth, transactions took days, weeks even months. Today, everything happens at the speed of light.
Greed and complacency are the fathers of all financial disasters. Failure to recognise the importance of what is happening in the world, ignoring the politics, embracing the euphoria, the “cacophony of bubbles”, will not end well.
Trust me. I have been watching markets for almost three centuries. Everything changes except human behaviour.