One thing is certain in social science. In order to survive societies need leadership. Even in the communalistic societies of prehistory and ancient Greece, leadership was decisive. Along with much of the rest of the world I feel a creepy tingle when I hear and see Donald Trump speak. But there can be no doubt he is a highly effective leader.
Yesterday I was distracted by the Address to Congress, and then quite moved by it. It was both human and humane. The contrast of Trump against the pink silliness of the socialists and the memories of twenty years of wokery, greenery and countless colour shades of self-destructive stupidity in the United States and Europe was reassuring.
How the copy writers on the front pages hate what democracy occasionally gives them, a real executive agent of change. Democracy is tough. You have to take the rough with the smooth. Why be so offended when democracy lets you see what usually is hidden behind closed doors? As former insiders now observe, ugly fights between elected world leaders over fundamental policy always took place out of the public eye. In a democracy we should not complain about being allowed to see them in their full. The ugly spat of a few days ago was a wake-up call — total transparency in the world’s largest and best functioning democracy, despite all the left’s attempts to sabotage it.
Today I am filing a few ‘best of’ updates on the transformative Schumpeterian causes and effects of the Trump Experiment. Though the Europeans bad-mouth Trump it is thanks to him that they may be on the verge of a fundamental survival transformation … thanks only to him. The writer below calls it Keynesian. I see it as Schumpeterian. Meanwhile in Germany silly old conservatives refuse to align with new conservatives.
How the ghost of Iraq haunts peace in Ukraine
by Freddy Gray 4 March 2025
… the best means of locking in Uncle Sam’s involvement is by more closely aligning Ukraine to US interests. Zelensky seems to understand that, too, which is why he’s just announced that he’s ready to sign the deal after all; that he’s grateful to America; and that Friday’s fall out was ‘regrettable’. As Trump put it, ‘you don’t have the cards right now. With us, you start having cards.’ Zelensky said he wasn’t playing cards. But he was always going to have to fold.
There’s fighting wars, there’s fighting about wars, and then there’s ending wars and achieving peace. Rather than bleating about how Britain stood side-by-side with America in the disastrous war on terror, a more interesting response to JD Vance today might be to ask: when did the US, with all its awesome power, last win a significant war? Iraq, Afghanistan and Vietnam all turned into operational quagmires. One could argue that, with its ruthless bombing of Bosnia, US air power achieved its aims, or that America successfully crippled Isis in the late 2010s. But these were hardly conventional victories. The truth is that, since the second world war, the US armed forces have specialised in short, stunning displays of ferocious might, followed by strategic muddle and often retreat.
Which brings us back to Vance and the war-wary outlook of the second Trump administration. In Trump’s first term, America’s hard power was still overseen to a large extent by ‘Trump’s generals’ –men such as Jim Mattis and HR McMaster, who served in Afghanistan and Iraq at a high level, but who ended up breaking with the President over his improvisational approach to foreign affairs.
In 2025, Team Trump has Vance, Secretary of Defence Pete Hegseth and Tulsi Gabbard as his director of national intelligence. These three figures all served at comparatively low ranks in Iraq and their worldview is naturally informed by that ill-fated conflict.
They saw the limits of American power first-hand. It’s that experience, the ghost of Iraq, that now haunts the Trump administration’s thinking on Ukraine. And it’s obvious that the war in Ukraine has the potential to put the US into a direct conflict with Russia, a nuclear-armed power far more threatening than the Taliban, the Vietcong, or any force in Mesopotamia.
That’s a fight which no western country is seriously willing to engage in, for all the bluster you hear against ‘appeasement’ in European capitals.
Trump and Vance understand this. That’s why their bust-ups and make-ups with Zelensky and others in the last few days are already proving to be a mere shadowplay to eventual accommodation. What’s really happening is a more fundamental Trump-led resetting of international politics, one based on realpolitik and an understanding that, while America may remain an indispensable nation in terms of military strength, even the greatest powers can’t change the world. That point may offend delicate western feelings about the so-called ‘rules-based’ order. But it’s a truth that all countries, random or not, cannot afford to ignore for much longer.
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European rearmament is going to turn the world upside down. A rapid rise in defence spending is about to unleash a high-octane blast of military Keynesianism.
by Ambrose Evans-Pritchard 4 March 2025
It has taken three years, but Europe is at last putting its collective economy on an industrial war footing. The sums of money are eye-watering.
One leaked plan for German rearmament circulating in Berlin proposes a €400bn (£330bn) blitz of extra spending on national defence, buttressed by another €500bn to rebuild Germany’s infrastructure. Another leaked plan revealed by Corriere della Sera talks of converting Italy’s struggling car industry into a revamped ecosystem of weapons production, with subcontractors across Lombardy and the Veneto supplying the German armaments plants much as they now supply car components for Volkswagen, Mercedes and BMW.
“It is becoming obvious to everybody that defence spending is the way to offset job losses in the car industry,” said Holger Schmieding, the chief economist at Berenberg Bank. Ursula von der Leyen, the president of the European Commission, joined the bidding on Tuesday with an €800bn “Rearm Europe Plan” using emergency powers under Article 122 of the Treaties, the immediate riposte to Trump’s overnight outrage. Funds are to be rushed into air defence, artillery, missiles and drones, with a target of raising average EU military budgets by 1.5 percentage points of GDP over four years. The mechanisms are vague. The direction of travel is clear.
The immense figures under discussion in Berlin would have been politically unthinkable a week ago, before the total loss of faith in US friendship. If enacted on anything close to this scale, such a high-octane blast of military Keynesianism will entirely change the economic and geopolitical shape of the world. It is the coming boom in Europe that we should all be betting on.
Bavaria’s premier Markus Söder is the weather-vane of our times, leading the call for a full-blown revival of German military power along with a joint nuclear deterrent in concert with France and the UK. “We need a drone force of 100,000 drones, 800 new tanks, 2,000 Patriot missiles and 1,000 Taurus just for Germany as a protective shield like the ‘Iron Dome’. Only the strong will be taken seriously,” he said.
Europe is in roughly the same position today as America in 1939, when the US defence budget was 2pc of GDP and the miniscule US army ranked with the Belgian army. Spending rose to 5.6pc of GDP in 1941, 16pc in 1942, 35pc by 1943 and peaked at 41pc in 1945. The surge was led by William Knudsen of General Motors, the corporate titan of the age who took the job at the US war department for a patriotic salary of $1. Tasks were divided up. Ford built the biggest factory the world had ever seen at Willow Run in Michigan, able to produce a four-engine B-24 Liberator bomber every hour by 1944. Chrysler rolled out the M3 medium tank through the freezing winter of 1941 in a factory that still lacked walls. The Chrysler M4 Sherman, with a motor powered by five six-cylinder engines welded together, became the workhorse of allied armour, supplied to the British, Canadians, Poles and Free French.
Technology is more complex today: the idea remains the same. “It won’t be car factories suddenly making tanks, but suppliers have skilled labour that can be switched to defence as the auto industry shrinks,” said Mr Schmieding. It was the war – not the New Deal – that lifted America out of the Great Depression. Military revival could do much the same for a Europe trapped in economic defeatism and learnt helplessness for two decades. It is a way of achieving the turbo-charged growth of the Draghi Plan by other means.
The trade-off between defence and welfare is one of the great fallacies of modern politics. Much of the technology underpinning US economic hegemony has its origins in the Pentagon: the internet was an offshoot of the Advanced Research Projects Agency, initially conceived as a computation network within the US defence complex that could survive a nuclear first strike.
Silicon Valley, once an orchard of apricots and a third of the world’s prunes, began making radars and aerospace for the US government in the 1940s. It turned to integrated circuits needed by Nasa and the Pentagon during the Cold War. Google’s origins lie in grants from US agencies for intelligence surveillance. A study of OECD states published by MIT’s Review of Economics in January found that government spending on defence research drives rapid productivity growth by crowding in higher private investment.
The moral of the story is that Europe can kill two birds with one stone, defeating perma-slump at home and Putin’s predatory imperialism abroad at the same time. The German plan for military and economic rearmament was drawn up by four leading institutes from across the political spectrum, designed to hold the Christian Democrats and Social Democrats together in a grand coalition.
Chancellor-in-waiting Friedrich Merz has jettisoned two of his core political doctrines in a matter of days: a lifelong defender of Atlanticism has all but given up on America; and a champion of ordoliberal fiscal rigour is suddenly searching for ways to amend to the German constitutional debt-brake while there is still a chance in the old Bundestag. Once the new Bundestag takes over late March, Putin-Versteher on the hard Left and the hard Right have the votes to block it.
The EU has a €90bn line of untapped funding from the Covid recovery plan that can and will be used. It is sitting on €200bn of frozen Russian assets likely to be tapped to pay for weapons sent to Ukraine and to beef up the formidable arms industry already created by the Ukrainians themselves, and which must not be allowed to fall into the hands of the Kremlin.
Half the task is to turn Ukraine into “a steel porcupine”, in Von der Leyen’s words. The coalition of the willing will have to rearm mostly outside the EU structure given the vetoes of Hungary and the Russophile bloc. Joint debt issuance is needed to shield high-debt states from a bond market attack but this can be done through a new agency akin to development banks, and should include the UK, Norway and Canada.
The details are fundamentally trivial. Non-US Nato has a combined GDP of $30 trillion (£24 trillion), 14 times the Russian economy. It can bring Putin to the table by hammering him on two fronts at once: a) through an arms race that Russia cannot afford; b) through choking Putin’s oil revenue by paralysing his mercenary “dark fleet” of tankers in the Baltic…
… We are approaching the point of maximum danger.
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What a Fast-Changing World Means for Your Money. The current moment may rank with the fall of the Berlin Wall for global politics and economics..
by James Mackintosh 5 March 2025
This past week may be the start of a shift as important as 1989 delivered—yet it came without the striking images of crowds surging through armed checkpoints, and investors are struggling to price in the new reality.
There are three big questions investors need to grapple with, and none have simple answers. The most important is the remaking of global alliances and the long-term implications. The most immediate is the Federal Reserve’s reaction to tariffs. In between are deglobalization, loss of trust between countries and the potential for financial barriers.
Start with the short term. The tariffs on Canada and Mexico, together with an extra 10% on China, threaten instant price increases and disruption to production across the U.S. as companies try to unwind the integration of their North American supply chains. Goldman Sachs, which expected the tariffs to be delayed again, predicts the Canada/Mexico tariffs will add 0.6 percentage point to core inflation, excluding food and energy, with a little extra from the China tariff. With consumer inflation expectations rising, the Fed is in a difficult position.
Traditionally central banks try to ignore supply shocks such as tariffs, as the price increases that result are a one-off. That would allow them to cut rates to try to support the economy, which would also reduce the damage to stocks. But if consumers and businesses think price increases will be repeated, the Fed will worry that those expectations alone could lead to more inflation and be less willing to cut rates. For now traders are betting the Fed will be more focused on the economy, and cut. The probability priced into futures of at least four cuts this year has soared to 38% from 4% since President Trump took office on Jan. 20, according to CME FedWatch. But will the Fed really be willing to cut even as tariffs push inflation up?
In the long run, new global alliances threaten the post-Soviet order. Trump’s decision to side with Russia and North Korea against Ukraine at the United Nations was a powerful symbol, driven home by the treatment of the Ukrainian president in the Oval Office. Europe got the message, with politicians lining up to warn that the continent needs to be a military power in its own right and can no longer rely on the North Atlantic Treaty Organization. New borrowing under discussion by the European Commission and Germany could raise hundreds of billions of euros for military spending.
Since the Berlin Wall fell, we’ve lived through almost half a century of preferring butter to guns. With the rise of China, and with the U.S. no longer seen as a reliable ally, guns will again take priority. Restructuring the economy, trade and tax systems to replace consumption with defense spending will be politically contentious and expensive. European military contractors are clear winners. Who are the losers?
Coming when global alliances are fluid, this shift could also move us toward a multipolar world for the first time since the World War II. Some friends of America are trying to convince themselves that Trump’s term is only for four years, and the next president will be more willing to stick to promises the country has made. But even some committed Atlanticists, such as incoming German Chancellor Friedrich Merz, recognize that once broken such trust can’t be quickly rebuilt. And this week that trust broke. America’s allies need to be able to stand on their own, even if the U.S.—under Trump or his successor—were to turn friendly again.
Just how much damage will rearmament and the potential for a new multifront cold war do to the global economy? What new alliances will form?
Trump made this mix even more volatile by throwing in tariffs. Investors who thought the president was bluffing were disabused by his willingness to hurt the U.S. economy and relations with its nearest neighbors by imposing hefty import taxes. Global productivity and growth will be lower with more trade barriers, and retaliation—China’s and Canada’s came straight away—means those barriers might keep escalating. Tariffs imposed at the whim of the White House increase the power of the government over business. Companies have to lobby for exemptions for their essential parts and can no longer rely on trade pacts when deciding on factory locations or suppliers—even when the trade deal was struck by the very same president, as with the 2018 U.S.-Mexico-Canada agreement. The uncertainty on its own is bad for business, even without the actual tariffs.
Some are already starting to worry about how bad an economic slowdown could be, and while I think it’s too early to talk about a U.S. recession, the R-word is being bandied about. The yield curve has again inverted, with the 10-year Treasury yield dropping below the three-month yield—although this classic recession warning was flashing red for two years until December without a recession.
In the long run there are bigger problems. Europe’s governments are already heavily indebted before they start piling on military spending. The U.S. is on what’s politely called an “unsustainable fiscal trajectory”—debt rising forever with no prospect of reining it in. Higher taxes are politically challenging everywhere, while lower spending is rarely popular and also hurts growth. Less efficient global trade makes debt even harder to deal with.
When developed-country governments borrow too much, investors flee their bonds and yields rise, as Europe found in the 2010-2012 eurozone crisis and Britain rediscovered in 2022 under here-today-gone-tomorrow Prime Minister Liz Truss. The solution for many countries after the Second World War was financial repression, keeping interest rates artificially low and using capital controls to prevent investors from taking their money out of the country while using inflation to whittle away the value of the debt. We’re a long way from Western capital controls. But things are moving fast. How bad could it get? How to protect against these risks?
And where did I put my piece of the Berlin Wall? It would be great to rediscover the hope its fall brought.
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My thanks to the Wall Street Journal, the Spectator, the Telegraph, and conservative Condorito
Dr Michael G. Heller
