U.S. Flash PMI

Output growth falters and payrolls decline in February, as optimism slumps and costs rise

US business activity growth came close to stalling in February, according to flash PMI® survey data, as a renewed fall in services output offset faster manufacturing growth. New order growth also weakened sharply and business expectations for the year ahead slumped amid growing concerns and uncertainty related to federal government policies. The upturn in manufacturing output was also in part linked to the front-running of tariffs, hinting at merely a temporary boost.

Input cost pressures meanwhile spiked higher, notably in manufacturing as suppliers passed on tariff-related price hikes and wage pressures persisted. However, intensifying competition helped limit the pass through of selling prices in the services sector, where inflation sank to a near five-year low.

The headline S&P Global US PMI Composite Output Index sank to 50.4 in February from 52.7 in January, according to the preliminary ‘flash’ reading, which is based on approximately 85% of usual survey responses. The drop took the index to its lowest level for 17 months to signal a near-stalling of business activity.

Weakness was centered on the services economy, where output fell slightly in February to signal the first contraction of the sector for 25 months, representing a sharp contrast to the robust expansion seen late last year. New business inflows into the services sector came close to stagnation, showing the smallest rise for ten months to indicate a marked worsening of demand growth in the sector since last year.

Service providers commonly linked the downturn in activity and worsening new orders growth to political uncertainty, notably in relation to federal spending cuts and potential policy impacts on economic growth and inflation outlooks.

Manufacturing output meanwhile rose for a second successive month, rising at the sharpest rate for 11 months, principally buoyed by higher new orders. However, new order growth slowed slightly, caused in part by a steepening loss of export orders. Many manufacturers also reported that the rise in production and demand was in part linked to front-running potential cost increases or supply shortages linked to tariffs.

Optimism about the coming year slumped to its lowest since December 2022, except for last September, when business was unsettled by uncertainty ahead of the Presidential election. The deterioration in February was primarily a reflection of increased uncertainty about the business environment, especially in relation to federal government policies related to domestic spending cuts and tariffs. Worries over higher prices, and broader geopolitical developments were also noted.

Future sentiment remained relatively elevated in manufacturing by recent standards, though fell from January’s 34-month high. Service sector confidence showed a steeper decline, deteriorating further from December’s one-and-a-half year high to sit at its lowest since last September.

Having accelerated to a four-month high in January, selling price inflation cooled to a three-month low in February. However, trends varied markedly by sector. Whereas intensifying competition was often cited as driving service sector price inflation to its lowest in the current period of rising prices (which began in June 2020), manufacturing selling prices showed the largest monthly increase for two years.

Cost pressures meanwhile intensified to the highest since last September. Service sector input cost inflation edged up to a four-month high, with companies citing tariff related price hikes from suppliers alongside rising food prices and upward wage pressures. But it was manufacturing which saw the steepest increase in costs, with raw material prices showing the largest monthly gain since October 2022, with the increase overwhelmingly blamed by purchasing managers on tariffs and related supplier-driven price hikes.

Employment fell slightly amid heightened uncertainty and concerns over rising costs. It was the first decline in employment for three months to represent a marked change in hiring after jobs growth hit a 31-month high in January. Services providers reported renewed job losses after two months of net hiring, while manufacturing payrolls rose only very marginally to contrast with the more-robust gains seen over the prior three months.

The S&P Global Flash US Manufacturing PMI rose from 51.2 in January to 51.6 in February, signaling a second successive monthly improvement in business conditions within the goods-producing sector and the sharpest upturn recorded since last June.
Factory production rose for a second month in February, increasing at the steepest rate for 11 months. The drag from falling input inventories also eased to the lowest since last June, helping to lift the PMI.

New order growth weakened, however, with employment also rising at a reduced – near-stalled – rate. Suppliers’ delivery times meanwhile lengthened for a fifth straight month, adding support to the PMI (longer lead-times often indicate busier supply chains), albeit to the weakest degree since last October.

S&P Global’s PMI surveys don’t get as much media attention as the ISM’s. S&P Global’s earlier Flash PMIs get even less press even though they are a pretty good preview.

This February Flash PMI is particularly troubling:

• A 2.3 points drop in the Composite is not unusual but this one suddenly signals “a near stalling of business activity” after 9 strong months.
• The less cyclical services were particularly weak, falling into contraction from their highest level since 2022.
• New orders stalled, signaling “a marked worsening of demand growth” in services, reducing the probabilities that this is but a one-month thing.
• Manufacturing demand surged due to front-running expected tariff increases that could prove fleeting.
• “Employment fell slightly amid heightened uncertainty and concerns over rising costs.”
• “Cost pressures intensified to the highest since last September”.
• “Manufacturing selling prices showed the largest monthly increase for two years” as everybody is scrambling to secure supplies pre-tariffs.
• “Intensifying competition was often cited as driving service sector price inflation to its lowest” since June 2020, suggesting a protracted demand slowdown and compressed margins.

It may be too early to use the word “stagflation” but it’s fair to say that visibility has declined on both demand and profit margins.

Commenting on the flash PMI data, Chris Williamson, Chief Business Economist at S&P Global Market Intelligence said:

The upbeat mood seen among US businesses at the start of the year has evaporated, replaced with a darkening picture of heightened uncertainty, stalling business activity and rising prices.

Optimism about the year ahead has slumped from the near-three-year highs seen at the turn of the year to one of the gloomiest since the pandemic. Companies report widespread concerns about the impact of federal government policies, ranging from spending cuts to tariffs and geopolitical developments. Sales are reportedly being hit by the uncertainty caused by the changing political landscape, and prices are rising amid tariff-related price hikes from suppliers.

Ed Yardeni remains optimistic:

We also expect that February’s consumer confidence report on Tuesday and Thursday’s weekly jobless claims will confirm that the labor market remains strong. That should relieve some of the concerns about the resilience of the consumer following the weather-related weakness in January’s retail sales and the odd drop into contraction territory in February’s NM-PMI compiled by S&P Global. We expect that the similar index compiled by the Institute for Supply Management will show that services industries are still expanding, when it is reported in early March.

Other recent surveys are also gloomier as Goldman Sachs illustrates:

 

Yardeni blames the January weather but S&P Global sprinkles its February survey report (compiled 10-20 February) with comments reflecting “growing concerns and uncertainty related to federal government policies”.

BTW:

Speaking at a lunch yesterday [Feb. 20] hosted by the Economic Club of New York, St. Louis Fed president Alberto Musalem said a high-inflation, low-growth combination was not his base case, but called it out as “plausible” nonetheless.

“These days, higher tariffs and immigration policies are often discussed and thought likely to increase prices, cool aggregate demand and possibly soften employment,” Musalem said.

“From the standpoint of monetary policy, it could be appropriate to ignore, or ‘look through,’ an increase in the price level if the impact on inflation is expected to be brief and limited,” he added.

But there is an exception where that might not be the case: if consumers expect higher inflation to stick around longer — i.e., inflation expectations becoming unanchored, as was the case in the 1970s.

“In that scenario, a more restrictive path of monetary policy relative to the baseline path might be appropriate,” Musalem added.

“I think there is a potential for inflation to remain high and for activity to slow — I wouldn’t call that stagflation,” Musalem said.

“You could have a situation where inflation is between 2.5%-3% and growth moderates. Would you call that stagflation area?” he added. “Stagflation would be a wider divergence between the two indicators, employment and inflation.” (Axios)

Right on cue:

US Consumer Inflation Expectations Spike to 30-Year High

Their reasons? Growing concern that President Donald Trump’s accumulating number of tariff threats against friend and foe alike will translate into higher prices.

Consumers said they expect prices will climb at an annual rate of 3.5% over the next five to 10 years, according to the final February reading from the University of Michigan. The rate is the highest since 1995, based on data compiled by Bloomberg. ​All five components of the index deteriorated, including a drop in buying conditions for big-ticket items. And more than half of consumers in the survey expect the unemployment rate to rise over the next year, the highest since 2020.

Interestingly enough, and perhaps a sign of how America’s furious polarization may in part tinge economic attitudes, the spike was almost entirely driven by views among survey respondents who identify as Democrats.

• Trump’s 10 per cent oil tariff could cost foreign producers $10-billion annually, Goldman Sachs says The investment bank estimates U.S. consumers would face an annual tariff cost of $22-billion, while the government would generate $20-billion in revenue.

EARNINGS WATCH

From LSEG IBES:

425 companies in the S&P 500 Index have reported earnings for Q4 2024. Of these companies, 75.8% reported earnings above analyst expectations and 16.5% reported earnings below analyst expectations. In a typical quarter (since 1994), 67% of companies beat estimates and 20% miss estimates. Over the past four quarters, 78% of companies beat the estimates and 17% missed estimates.

In aggregate, companies are reporting earnings that are 6.5% above estimates, which compares to a long-term (since 1994) average surprise factor of 4.2% and the average surprise factor over the prior four quarters of 6.6%.

Of these companies, 63.8% reported revenue above analyst expectations and 36.2% reported revenue below analyst expectations. In a typical quarter (since 2002), 62% of companies beat estimates and 38% miss estimates. Over the past four quarters, 62% of companies beat the estimates and 38% missed estimates.

In aggregate, companies are reporting revenues that are 1.0% above estimates, which compares to a long-term (since 2002) average surprise factor of 1.3% and the average surprise factor over the prior four quarters of 1.2%.

The estimated earnings growth rate for the S&P 500 for 24Q4 is 15.7%. If the energy sector is excluded, the growth rate improves to 19.1%.

The estimated revenue growth rate for the S&P 500 for 24Q4 is 4.9%. If the energy sector is excluded, the growth rate improves to 5.5%.

The estimated earnings growth rate for the S&P 500 for 25Q1 is 8.3%. If the energy sector is excluded, the growth rate improves to 9.8%.

Analysts keep revising down:

Note the big slowdown in consumer-centric and financial companies’ earnings growth in Q1:

One of the risks the Trump administration faces by imposing tariffs is the negative impact of tariffs on exports. Tariffs are an additional tax on imported goods, increasing the costs of those products. However, tariffs are never in isolation, as the countries we impose tariffs on will likely impose tariffs back on the U.S. This “tit-for-tat” process threatens to raise costs on exports to countries already impacted by the purchasing power differential caused by a strong dollar. The chart below shows net corporate profit margins during the previous Trump-era tariff policy. Logically, given the high corporate revenue derived from international sales, investors should expect that any cost increase will immediately impact profitability. (Lance Roberts)

Apple, Under Threat from Trump Tariffs, Will Add 20,000 US Jobs $500 billion planned to be invested in US over next four years

Apple Inc., as it seeks relief from US President Donald Trump’s tariffs on goods imported from China, said that it will hire 20,000 new workers and produce AI servers in the US.

The company said Monday that it plans to spend $500 billion domestically over the next four years, which will include work on a new server manufacturing facility in Houston, a supplier academy in Michigan and additional spending with its existing suppliers in the country. The disclosure comes days after Trump and Apple Chief Executive Officer Tim Cook met in the Oval Office.

“He’s investing hundreds of billions of dollars,” Trump said after the meeting last week. He implied that the iPhone maker is investing locally because it does not want to pay tariffs. Trump has threatened an additional 10% tax on items imported from China, where Apple builds the vast majority of iPhones and other products. But he has traded investment in the US for relief in the past.

The $500 billion investment and 20,000 new jobs over the next four years mark Apple’s biggest US commitment to date. Apple said it hired 20,000 research and development workers over the last five years and said in 2021 it would invest $430 billion locally over the next half-decade.

“We are bullish on the future of American innovation, and we’re proud to build on our long-standing US investments with this $500 billion commitment to our country’s future,” Cook said in a statement. “We’ll keep working with people and companies across this country to help write an extraordinary new chapter in the history of American innovation.” (…)

During his first administration, Cook was able to successfully sway Trump into sparing the iPhone from tariffs by arguing that the tax would serve to benefit competitors like South Korea-based Samsung Electronics Co. Apple also made multiple announcements during Trump’s first term about US investments and credited Trump with Mac Pro manufacturing in Texas despite its manufacturing computers there since 2013. (…)

Apple didn’t say whether the new investments were already underway before Trump’s win.

Apple said that it, together with Foxconn Technology Group, will later this year begin producing the servers that power the cloud component of Apple Intelligence — a system called Private Cloud Compute — in Houston. That marks a relocation, at least for some production, from overseas. Next year, it says a 250,000-square-foot facility for such manufacturing will open in the city.

The Private Cloud Compute servers use advanced M-series chips already found in the company’s Mac computers. Those chips themselves, however, continue to be produced in Taiwan.

Apple will also expand data center capacity in Arizona, Oregon, Iowa, Nevada and North Carolina, all states with existing Apple capacity. The company confirmed that mass production of chips started at a Taiwan Semiconductor Manufacturing Co. facility in Arizona last month. Bloomberg News recently reported that plant is building chips for some Apple Watches and iPads.

The 20,000 additional jobs, Apple said, will focus on research and development, silicon engineering and AI. The company is opening up what it calls a manufacturing academy in Detroit, where it will help smaller companies with manufacturing. It already operates an academy for app developers in the city. It’s also doubling its manufacturing fund in the US to $10 billion.

Trump Directs CFIUS to Restrict Chinese Investments in US Energy, agriculture, health care, tech will be off limits. Trump also weighing curbs on US outbound investment to China

Trump laid out the plan in a national security presidential memorandum signed Friday that commits to using “all necessary legal instruments” to bar Chinese affiliates from investing in US technology, critical infrastructure, health care, agriculture, energy, raw materials and other industries.

Trump’s directive sets the stage for a more muscular use of CFIUS, a secretive panel that scrutinizes proposals by foreign entities to buy US companies or property, to thwart Chinese investment.

The People’s Republic of China “does not allow United States companies to take over their critical infrastructure, and the United States should not allow the PRC to take over United States critical infrastructure,” Trump wrote in the memo. “PRC-affiliated investors are targeting the crown jewels of United States technology, food supplies, farm land, minerals, natural resources, ports and shipping terminals.”

The president has also committed to establish new rules meant to curb the exploitation of capital, technology and knowledge by foreign adversaries such as China. At the same time, according to the memo, the administration will consider new or expanded restrictions on outbound investment to Beijing in sectors including semiconductors, artificial intelligence, quantum technology, biotechnology and aerospace.

The administration will also seek to protect US investors by auditing foreign companies on US exchanges and ensuring foreign adversary companies are ineligible for pension plan contributions, Trump added in the memo. (…)

While the president’s action Friday singles out China, he is also trying to spur investment from allied [???] trading partners through a new “fast-track” process to facilitate projects. The US also also will expedite environmental reviews for any investment over $1 billion, Trump said in his memo. (…)

The WSJ:

The memo containing the order to the Committee on Foreign Investment in the US — a secretive panel that scrutinizes proposals by foreign entities to buy US companies or property – seems to be the most impactful of the flurry of moves. Referring to Beijing as a “foreign adversary,” it says the changes are needed to protect “the crown jewels of United States technology, food supplies, farmland, minerals, natural resources, ports, and shipping terminals.” (…)

After the memorandum was released, Beijing urged Washington to stop weaponizing economic and trade issues. The US government’s push to strengthen reviews of business ties on security grounds would seriously undermine the confidence of Chinese companies investing in the US, the Ministry of Commerce said.

The memorandum also says the US government should also review a 1984 tax deal with China that frees individuals and companies from double taxation. “Eliminating these kind of treaties just makes things very uncertain and complicated for investors because they don’t know if they’re going to be taxed,” Chorzempa said. (…)

Also, a call in the memo for new and expanded limits on investment from US pension and endowment funds in high-tech sectors in China could affect companies along the Asian nation’s artificial intelligence supply chains, UBS Group AG said in a note. The rule could impact hardware, software and internet firms, strategists including James Wang wrote.

And the Trump administration called for a review of arrangement known as “variable interest entity” that Chinese firms use to list on American exchanges. It also pledged to look into “allegations of fraudulent behavior by these companies,” without going into details. (…)

FYI, Trump’s memo includes this definition of “foreign adversaries”:

For purposes of this memorandum, the term “foreign adversaries” includes the PRC, including the Hong Kong Special Administrative Region and the Macau Special Administrative Region; the Republic of Cuba; the Islamic Republic of Iran; the Democratic People’s Republic of Korea; the Russian Federation; and the regime of Venezuelan politician Nicolás Maduro.

Trump Proposes New Ship Fees to Challenge China’s Maritime Might

The Office of the US Trade Representative outlined a plan for fees on Chinese-built ships that transport traded goods as well as mandates requiring a portion of US products to be moved on American vessels. (…)

If adopted, however, the proposed fees could translate to additional costs for American consumers, since higher shipping costs could be passed on in the form of higher prices. It’s also not clear that the proposals would be enough to restore American shipbuilding capacity, which has eroded despite century-old protections meant to encourage the use of US-built and -operated vessels.

While the US churns out its own steady supply of warships and Europe leads the world in building cruise ships, global merchant shipbuilding is dominated by three Asian countries: China, South Korea and Japan, which together account for well over 90% of commercial shipbuilding. (…)

China’s market share has grown from less than 5% of global tonnage in 1999 to more than 50% in 2023. China owned 19% of the commercial world fleet as of January last year, and it controls production of 95% of shipping containers, the office said.

Higher costs for shipping on Chinese vessels could present an opportunity for shipbuilders in South Korea and Japan.

Katherine Tai, who served as Joe Biden’s trade representative, last month said the US ranks 19th in the world in commercial shipbuilding, with a volume of less than five ships being built each year. China, in comparison, builds more than 1,700 per year, she added. (…)

The US trade representative is proposing several service fees — including a levy of as much as $1 million — to be charged when Chinese-built vessels enter a US port.

The administration is also proposing steadily escalating restrictions on maritime transport of all US goods. Initially at least 1% of American products exported by maritime vessels would have to be carried on vessels that are both US-flagged and -operated. The requirements would steadily rise, with the threshold climbing to 15% after seven years and eventually encompassing requirements the ships be built in the US too. (…)

German election victor Merz plans pivot from US

Friedrich Merz, set to become Germany’s next chancellor after his opposition conservatives won the national election on Sunday, vowed to help give Europe “real independence” from the U.S. as he prepared to cobble together a government. (…)

Merz took aim at the U.S. in blunt remarks after his victory, criticising the “ultimately outrageous” comments flowing from Washington during the campaign, comparing them to hostile interventions from Russia.

“So we are under such massive pressure from two sides that my absolute priority now is to achieve unity in Europe. It is possible to create unity in Europe,” he told a roundtable with other leaders. (…)

Hitherto seen as an atlanticist, Merz said Trump had shown his administration to be “largely indifferent to the fate of Europe”.

Merz’s “absolute priority will be to strengthen Europe as quickly as possible so that we can achieve real independence from the USA step by step,” he added.

He even ventured to ask whether the next summit of the North Atlantic Treaty Organisation, which has underpinned Europe’s security for decades, would still see “NATO in its current form”.

• The FT:

Merz, who said he was unsure about the future of Nato, also highlighted Washington’s interventions in the German election campaign, and compared it to Russian interference.

The Trump administration has openly courted the AfD and has criticised Germany’s mainstream politicians for refusing to co-operate with a party that has flirted with Nazi-era slogans, urged an end to sanctions on Russia and called for mass deportations of migrants. (…)

Germany hosts the largest contingent of American troops stationed in Europe. (…)

But the AfD and Die Linke won enough seats to block changes to the “debt brake” that limits German government borrowing, making it more difficult for a new government to overhaul crumbling infrastructure and significantly raise defence spending.

• Goldman Sachs:

(…) dramatic changes in fiscal policy still seem unlikely. And while there may be broader agreement on the need for more proactive policy in principle, the outcome helps spotlight still-divergent views on how to deliver it, both within Germany—the clearest case for additional fiscal stimulus, rather than a shift in the mix—and across the EU.

Trump’s Myth of the Trade Deficit Economic growth depends on deregulation, tax cuts and the budget deficit, not on the balance of trade.

It seems to be a matter of faith among protectionists that trade deficits make the U.S. an economic loser. President Trump considers America’s trade imbalances with Canada, Mexico and China a matter of grave concern. At the same time, since taking office he’s announced several ambitious plans to increase foreign investment in the U.S. economy. The commitment both to eliminate trade deficits and to pursue foreign investment shows the inconsistency of the Trump administration’s policy. Trade deficits and capital surpluses are two sides of the same coin.

(…) if the U.S. has a surplus in its capital account balance, it must have a corresponding deficit in its trade balance.

Protectionists can’t turn the tide of markets. If Japanese tech-investing firm SoftBank fulfills its Dec. 16 commitment to invest $100 billion in the U.S., as SoftBank acquires dollars to fund the investment, the value of the dollar will rise relative to what it would have been without the investment, the cost of U.S. exports will rise, the cost of U.S. imports will fall, and the country’s trade deficit will rise. Fortunately, foreign capital investment creates American jobs and fuels economic growth no less than do foreign purchases of American exports.

Trade deficits don’t stifle growth, nor do trade surpluses foster it. (…) Between 1890 and 2024, it is impossible to find a statistically significant correlation between America’s trade balance and its economic growth. (…)

U.S. industrial production today is more than double what it was in 1975, the last time we ran a trade surplus. It’s 55% higher than in 1994, when the North American Free Trade Agreement went into effect, and it’s 18% higher than it was when China joined the World Trade Organization in 2001. Real wages are up 19% from 1994 and 10% from 2001. The inflation-adjusted value of America’s capital stock is 36% higher today than it was in 2001, 66% higher than it was in 1994, and 178% higher than it was in 1975.

Manufacturing as a share of total nonfarm employment peaked during World War II and has declined ever since, following the pattern of employment in agriculture, which fell from 40% of the labor force to 2% over the course of the 20th century. This is attributable not to globalization, but to the spread of modern technology and the rise in demand for services relative to goods. Neither Nafta nor China’s membership in the WTO notably increased the secular rate of decline in the share of workers employed in manufacturing. (…)

Mr. Trump and Congress should focus on advancing economic growth by deregulating, controlling the budget deficit and extending the 2017 tax cuts. Fixating on the trade deficit, an imagined problem, will only draw the nation into a trade war that could overpower the positive effects of the Trump economic program.

Debt Has Always Been the Ruin of Great Powers. Is the U.S. Next? From Habsburg Spain to Trump’s America, there’s no escaping the consequences of spending more on interest payments than on defense.

By Niall Ferguson

(…) What I call Ferguson’s Law states that any great power that spends more on debt service than on defense risks ceasing to be a great power. The insight is not mine but originates with the Scottish political theorist Adam Ferguson, whose “Essay on the History of Civil Society” (1767) brilliantly identified the perils of excessive public debt. (…)

What I call Ferguson’s Law states that any great power that spends more on debt service than on defense risks ceasing to be a great power. The insight is not mine but originates with the Scottish political theorist Adam Ferguson, whose “Essay on the History of Civil Society” (1767) brilliantly identified the perils of excessive public debt.

The crucial threshold is the point where debt service exceeds defense spending, after which the centripetal forces of the aggregate debt burden tend to pull apart the geopolitical grip of a great power, leaving it vulnerable to military challenge.

The striking thing is that, for the first time in nearly a century, the U.S. began violating Ferguson’s Law last year. Annual defense spending—to be precise, national defense consumption expenditures and gross investment—was $1.107 trillion in 2024, according to the Bureau of Economic Analysis (BEA), while federal expenditure on interest payments (the government long ago gave up on paying down principal) topped out at $1.124 trillion.

These outlays can also be expressed as percentages of gross domestic product. The Congressional Budget Office (CBO), which uses a narrower definition of defense spending than the BEA, places it at 2.9% of GDP for last year. Net interest payments (adjusting for the interest received by bonds held by government agencies) amounted to 3.1%.

We have seen nothing like this since the era of isolationism. Between 1962 and 1989, U.S. defense spending averaged 6.4% of GDP; debt service was less than a third of that at 1.8%. Even after the end of the Cold War, the federal government was still spending, on average, roughly twice as much on national security as on interest on the debt.

The fact that the U.S. is currently projected to spend a rising share of its GDP on interest payments and a falling share on defense means that American power is much more fiscally constrained than most people realize. By 2049, according to the CBO’s latest long-term budget projection, net interest payments on the federal debt will have risen to 4.9% of GDP. If defense spending maintains its recent share of discretionary spending, it will amount to half that share of GDP.

Nor is there any real possibility that defense spending will increase dramatically. Because such spending is discretionary, it has to be appropriated by Congress every year, unlike spending on entitlement programs (which is mandatory) and interest payments (nonpayment of which would be default). If anything, budgetary constraints are likely to put downward pressure on defense spending in the decades ahead.

Ferguson’s Law—that it is dangerous for a great power to spend more on debt service than on defense—is borne out by history. (…)

But the best example of all—and the one from which Americans have the most to learn—is that of Great Britain. (…)

In the wake of World War I, debt service exceeded military spending every year from 1920 to 1936. It was this breach of Ferguson’s Law, much more than any trust or sympathy toward Adolf Hitler, that inspired the policy of “appeasement.” Of paramount importance to the Treasury was the concern that higher spending on armaments would jeopardize Britain’s precarious recovery from the Great Depression.

In seeking to appease Hitler, British Prime Minister Neville Chamberlain failed, of course, to deter him and his confederates from launching another world war. Despite the fact that U.K. defense spending rose above debt service in 1937, the signal was not sufficiently strong to dissuade Hitler from invading Poland, even when accompanied by an explicit pledge of support for Poland in the event of a threat to its independence. The most that belated rearmament was able to achieve was to ensure that the British military survived the retreat from Dunkirk and won the Battle of Britain. (…)

What are the implications for America today? Geopolitically, the U.S. finds itself in a situation comparable with that of Britain in the 1930s. Its military commitments are global, as has been true since 1945, and it confronts a new axis of authoritarian powers.

Yet America’s fiscal position is far more constrained today than ever before. The U.S. government is now in violation of Ferguson’s Law and is likely to move further beyond its crucial limit in the coming decades.

Can the U.S., like Victorian and interwar Britain, find a way back? Can it do even better, successfully deterring its foes—as Britain failed to deter Germany—and averting the possibility of a ruinous World War III? Or is America doomed to follow Habsburg Spain, the Ottoman Empire, Bourbon France and Austria-Hungary down the path of default, depreciation and imperial decline—even revolution?

There are four important differences between Britain in the 1930s and the U.S. in the 2020s, and all of them work to America’s disadvantage. First, the term structure of U.S. debt is shorter, making it more sensitive to changes in interest rates. That makes it inherently harder to “inflate debt away” like the U.K. after World War II. Second, much more of it is in the hands of foreign investors. Third, the trend of real interest rates in the U.S. seems less likely to be downward than it was in 1930s Britain.

Whereas British real interest rates fell in the Depression, in America they are currently projected by the CBO to rise from 1.7% in 2024 to 1.9% in 2026, declining slightly to 1.8% in 2034. The real growth rate of the economy is projected to be almost identical. In this scenario, America’s debt will cost more to service in the period 2025-2035 than it did in 2015-2025, when the average real rate was 0.3%, especially because the stock of debt will continue to grow.

Finally, the U.S. today is encumbered with an expensive welfare system designed for a society with a higher fertility rate and lower life expectancy. Entitlement programs such as Social Security and Medicare are now the biggest items of federal expenditure. They will only become more expensive as the population ages.

History suggests that any sustained period when a great power spends more on interest payments than on military capabilities is likely to see its strategic rivals challenge its position. The tension between “guns and coupons” (as the interest-bearing parts of bonds used to be known) may also undermine its domestic stability, as governments try and fail to meet the competing demands of generals, bondholders, taxpayers and welfare recipients.

In the absence of radical reform of America’s principal entitlement programs—which successive administrations this century have either failed to achieve or ruled out—the only plausible way that the U.S. can come back within the limit of Ferguson’s Law is therefore through a productivity miracle.

Today, it may seem that the world is divided between a mighty American “Trumpire” and the feeble foreign competition. But the real contest of the second quarter of the 21st century may be between the much-vaunted economic promise of artificial intelligence—and history, in the form of Ferguson’s Law.

• About That 8% a Year Pentagon Cut Sen. Wicker says it’s not a cut in defense muscle. Let’s hope he’s right.

The Trump Administration is moving so fast it’s hard to know what’s real and what is a media panic. An example is this week’s brouhaha over Defense Secretary Pete Hegseth’s memo calling for Pentagon officials to seek cuts of 8% a year in defense spending. That would be a recipe for national decline if true. (…)

[Senate Armed Services Chairman Roger] Wicker added that the President “intends to deliver” on his campaign promise to rebuild the military. Mr. Wicker has credibility on the point as he has been a rare voice in Washington warning that U.S. defenses are inadequate for the dangerous world now and ahead. (…)

U.S. defense spending as a share of the economy is roughly half its Cold War peak of about 6%. Mr. Trump wants European allies to spend 5% of their economies to defense, yet we haven’t heard Mr. Trump mention a single hard target for U.S. spending on the military. The current budget trend is heading to less than 3%.

Mr. Wicker says his goal is to get back to 5%. With an aggressive China, a malign Russia, nuclear North Korea and perhaps nuclear Iran, and new missile and cyber threats to the U.S. homeland, he’s right.

Let’s hope the Senator is also right about Mr. Trump’s defense intentions. But he and other Republicans in Congress will need to find their voice on defense and foreign policy to make sure Mr. Trump follows through.

• See How Xi and Putin Are Ramping Up Joint Military Drills China and Russia expand cooperation from Alaska to Taiwan in a challenge to the U.S. and its partners

The militaries of China and Russia, America’s top two global adversaries, are working together as never before in their long partnership, probing the defenses of the U.S. and its allies.

The message to America from the growing partnership is that, if drawn into a military conflict, U.S. forces could find themselves confronting both countries.

Chinese-Russian joint patrols and military exercises have become more frequent and increasingly assertive, a review of recent activity shows—and the U.S. and its allies have been forced to respond more frequently as well, scrambling jet fighters and other assets to safeguard territory.

Beijing and Moscow have been displaying close cooperation near Japan, South Korea and the Philippines, nations that the U.S. has pledged to defend, and Taiwan, to which the U.S. sells weapons and provides training. Washington has maintained a policy of ambiguity as to whether it would defend Taiwan from a Chinese invasion.

Alongside growing military ties between Russia and U.S. foe North Korea, the prospect of battling multiple enemies compounds the challenge for the U.S. as it prepares and develops strategy for a potential conflict in Asia.

The point was made closer to home in July, when Russian and Chinese warplanes took off from a Russian air base and flew together past Alaska, prompting the U.S. and Canada to send jet fighters to intercept them. U.S. officials said it was the first time strategic bombers from Russia and China operated together near North America.

“The locations and assets involved in these exercises are becoming more expansive and aggressive,” said Jacob Stokes, a senior fellow at the Center for a New American Security, a Washington think tank. “It’s projecting military force at a scale sufficient to target other powerful states, which is a major shift.” (…)

The flyby was followed in October by a joint patrol to the Arctic through the Bering Strait involving two Russian border-guard ships and two cutters of the Chinese coast guard, a force that has grown in strength and assertiveness.

The two powers made another joint display in December at a sensitive Asian hot spot. As China’s navy was massing for one of its largest shows of force around Taiwan in years, four Russian warships sailed past the self-ruled island. Three Russian corvettes took part—vessels designed to operate in shallow and coastal waters.

The corvettes, accompanied by a Russian fuel-supply ship, communicated with Chinese warships as they approached in what appeared to be a coordinated drill, a Taiwanese security official said. (…)

Working together at an increasing tempo, Russia and China have now conducted more than 100 joint exercises since 2003, according to a database maintained by the Center for Strategic and International Studies’ China Power Project.

The geographical range of the cooperation has expanded, sending a message of broader reach and widening the range of potential conflict. (…)

Meanwhile, also in the WSJ:

(…) By pivoting to support Russia and backing away from Ukraine, Washington is already alienating its allies in Europe, who are collectively the U.S.’s largest trading partner and top foreign investor. The sudden U-turn in American foreign policy could also spook partners in Asia that the U.S. would want on its side in any conflict with China.

On Wednesday, Trump echoed Russian propaganda and directed a stream of invective at Ukrainian President Volodymyr Zelensky, calling him a dictator and blaming Kyiv for starting the war that began when Putin ordered a full-scale invasion of his smaller neighbor in 2022.

That outburst, following a barbed speech delivered to European leaders by Vice President JD Vance in Munich earlier this month and other signs of waning U.S. support for Ukraine, have already caused the biggest rift in relations between the U.S. and its trans-Atlantic allies in several decades. (…)

Trump is “attempting to split an entente between two powers that have ideological affinity and shared strategic interests,” he said. “And what it has done instead is to split the West, while Russia aligns with the U.S. and with China simultaneously.”          

In addition to bringing Russia closer to China as Western sanctions inflicted economic pain, the war in Ukraine has solidified Moscow’s alliances with Iran and North Korea, which supply ammunition, drones, missiles and, in North Korea’s case, troops, to the Russian war effort.

U.S. officials cite the emergence of this new axis of autocracies as a strategic threat that the American military would be hard-pressed to handle simultaneously—and say that Trump’s urgent desire to end the war in Ukraine is driven by the need to weaken, if not break up, that common front of adversaries. (…)

Secretary of State Marco Rubio, in remarks after talks with senior Russian officials in Saudi Arabia this past week, highlighted “the incredible opportunities that exist to partner with the Russians geopolitically on issues of common interest.”

At these talks, the most senior-level encounter since 2022, U.S. and Russian negotiators discussed the possible economic benefits that would result from improved relations and the lifting of U.S. sanctions that have stunted the Russian economy—and forced it to rely even more on Beijing. (…)

In remarks at the Halifax Security Forum in November, U.S. Navy Adm. Samuel Paparo, the commander of the Indo-Pacific command, said Beijing and Moscow have a “transactional symbiosis,” and that “to think that we will be able to drive a wedge between them is a fantasy.” (…)

“Russia knows that China is its giant neighbor, that the Communist Party of China will keep ruling it for as long as Russia can foresee—and that alienating China creates a mortal danger for Russia,” said Alexander Gabuev, an expert on Sino-Russian relations who heads the Carnegie Russia Eurasia Center in Berlin.

That doesn’t mean Putin won’t engage. Trump’s overtures offer the prospect of getting from Washington something his armies couldn’t achieve in three years of war: regime change in Kyiv and the return of Ukraine, and possibly other parts of Europe, to Moscow’s sphere of influence.

“I don’t see why Russia wouldn’t pocket all that Donald Trump brings it on a platter, undeservedly, while at the same time maintaining the tight bond with China,” said Thomas Gomart, director of the French Institute of International Relations, a Paris think tank that advises the government.

While China is watching Trump’s pivot to Russia with some apprehension, it is also cashing in a strategic windfall: Its two main goals in Europe, propping up the Putin regime and splitting the rest of Europe from the U.S.—objectives that were mutually exclusive until now—are suddenly within reach.

As Washington heaped scorn on Zelensky and European leaders, Chinese Foreign Minister Wang Yi spoke of the need to maintain international law and the charter of the United Nations. He recently described Ukraine as “a friend and a partner” as he met his Ukrainian counterpart.

Rather than a “reverse Nixon” as some are suggesting, Trump’s support of Putin looks more like “another Chamberlain”. Hopefully, this history won’t rhyme…

British Prime Minister Neville Chamberlain (left) shakes hands with Adolf Hitler after signing the Munich Agreement, Sept. 30, 1938. Photo: Associated Press

Walmart Warns of Slower Sales Gains After a Bumper Year Retailer posts strong sales in holiday quarter from shoppers looking for discounts on groceries and other items

(…) “Wallets are still stretched,” John David Rainey, Walmart’s chief financial officer, said in an interview, but U.S. Walmart shoppers are acting basically the same as they have for several quarters, with cautious but steady spending. In Walmart’s Mexico business, tariff talk has caused fear and some additional shopper pullback, he said. (…)

The company feels prepared to manage through an environment of tariff increases, he said. “We are not immune to what is being suggested, but we’ll work with suppliers,” he said. Walmart didn’t incorporate tariff increases into its financial expectations for the year, he said.

To start the year, executives set targets for fiscal 2026 that would come in below where it finished fiscal 2025—where revenue ended up rising 5.1% and operating income rose 8.6%. They are expecting fiscal 2026 revenue growth of 3% to 4% and operating income improving at a faster clip than sales.

Those figures were somewhat cautious, said Rainey on the call with analysts. “We have to acknowledge that we are in an uncertain time and we don’t want to get out over our skis here,” he said.

The company’s projections would put its fiscal 2026 adjusted per-share earnings in a range of $2.50 to $2.60, compared with Wall Street’s earnings estimate of about $2.77 a share for the year. (…)

Walmart said it was seeing broad-based gains with American shoppers looking for deals, especially among higher-income households, a group Walmart defines as households that earn $100,000 a year or more. That gain was especially strong for nongrocery items, driven by the convenience of same-day delivery services, said Rainey. (…)

Walmart’s U.S. comparable sales, those from stores and digital channels operating for at least one year, rose 4.6% in the three-month period ended Jan. 31. Wall Street analysts expected a 4.4% gain in that closely watched metric.

Initial unemployment claims rose a little last week (Feb. 15) and may be starting their mini seasonal pattern, beginning at a higher level than in 2023 and 2024, towards a summer peak.

Initial jobless claims are already on the rise in and around Washington, DC, and economists are bracing for broader impact. So far, President Donald Trump and Elon Musk’s Department of Government Efficiency have fired more than 10,000 government workers, based on press reports, and about 200,000 other probationary workers are being targeted.

There’s also a multiplier effect that ripples out to millions of federal contractors and others who do business with Washington, plus state and local governments and organizations that rely on its services. And it’s not just the direct hit to employment — layoffs have the potential to further dent housing activity as well as broader economic growth. (…)

First-time filings have already been climbing in Washington, DC, Maryland and Virginia, which cumulatively stand at the highest level in three years. (…)

The baseline expectation from Moody’s Analytics is for almost 100,000 federal government positions to be eliminated or moved out of the capital, which would result in a double-digit decline in employment by the second half of 2026, economist Adam Kamins said in a Feb. 18 analysis.

The lost positions will primarily be well-paid roles held by highly educated workers, which will spill over to consumer-facing industries and housing. That will push Washington into a mild recession by the summer, Kamins said.

The firings are also likely to show up in the March jobs report, which is due April 4, said Gregory Daco, chief economist at EY-Parthenon. If all of the probationary federal workers are fired, it could amount to the first drop in job creation since 2020, he said.

There are also 75,000 federal employees who took the Trump administration’s offer to resign and still be paid through September, which could temporarily boost payrolls if those workers take another job between now and then. (…)

Beyond employment, other parts of the economy are also at risk. Layoffs at the Federal Housing Administration and the Department of Housing and Urban Development could further hamstring a housing market already constrained by high prices and borrowing costs. And broader cuts to federal spending — which has largely added to gross domestic product in the last two years — stand to undermine growth. (Bloomberg)

The FOMC will be navigating in these turbulent and murky waters…

Trump’s Tariff Wars Leave US Small Business With Nowhere to Hide Firms have less ability to absorb costs, or bargain for special treatment, than bigger rivals.

Many smaller firms say they’re having to hike prices, freeze expansion plans or absorb a hit to already-thin profit margins as import bills climb. Such businesses employ half the US workforce, so how they cope with Trump’s ramped-up trade war will be crucial to the wider economic impact. (…)

Foreman says his prices with vendors and customers were already locked in through the third quarter when a new 10% China levy landed this month. For now he has no choice but to absorb the costs, which could wipe out almost one-third of this year’s profit margin.

After that, if there’s no US-China deal to remove tariffs, his options include pressuring suppliers to charge less, accepting smaller profits, and raising toy prices just in time for the holidays. (…)

Passing on a cost increase isn’t always simple. What if buyers balk at the higher price? That’s less of a headache for the biggest firms, who as dominant players in their markets tend to have what economists call pricing power — the ability to make hikes stick without losing customers. (…)

Lodhie says many of his customers have been with the firm for decades, but that doesn’t mean they’ll pay whatever he asks. “I have a major, 40-year customer that won’t allow me to increase my prices. I’ve told them this is the best I can do,” he says. “I may lose the customer.”

Along with inflation, another key tariff question is how business investment will be affected. The concern is that companies will be reluctant to build factories in America and add jobs — the ultimate purpose of Trump’s trade policy — until they have a clearer idea of how much they’ll have to pay to import machinery, parts or materials.

That’s an issue for corporate giants — General Motors won’t “spend a large amount of capital without clarity,” Chief Executive Mary Barra has said — and, at the other end of the scale, for Todd Adams at Sanitube too.

The family-owned, Florida-based firm makes stainless steel tubing, valves and fittings for food manufacturers. It sources materials from a range of countries, and employs some 20 people. Sanitube has put expansion plans on hold, Adams says, because there’s no telling how much his bills will increase as a result of tariffs — and he needs to conserve cash just in case.

He’s already on the hook for the 10% China duty, and may well be exposed to two separate tariffs due to take effect early March, on metals and Canadian goods. “We are paralyzed as a company,” he says. “Until we have an idea of what tomorrow, next month or this year holds, we’re just sort of in a holding pattern.” (…)

It’s generally harder for smaller firms to adjust their supply chains in order to avoid tariffs, says Claire Reade, a senior counsel at Arnold & Porter and former assistant US trade representative for China affairs and chief counsel for China trade enforcement.

“You’re a little guy — you don’t have the capital to go off and march into a completely different country and try to start over,” Reade said. “You’re stuck.”

Another thing the little guys lack is lobbying power. After Trump launched the trade war in his first term, a “bewildering array” of businesses were able to win tariff relief, according to the Brookings Institute. The upshot was “heavy costs on small- and medium-sized enterprises that were ill-equipped to jump through the bureaucratic and political hoops.” (…)

“I kind of figured that’s my year’s supply and hopefully things will calm down,” she says. If they don’t, Clayton sees a threat to her business because she’d likely have to raise prices. She says she explored sourcing the trays domestically, but concluded it would be too costly. (…)

After Trump won November’s election, an index of small-business optimism jumped to the highest in more than six years. But it fell back a bit last month, when the same survey also showed the steepest drop in capital-spending plans since 1995. (…)

From Ed Yardeni:

How Tariffs Could Shock America’s Power System Transformers used in power grids are especially vulnerable to trade disruptions

(…) The National Renewable Energy Laboratory estimates that about 55% of in-service distribution transformer units are older than 33 years and approaching their end of life. Distribution transformer capacity might need to increase 160% to 260% by 2050 compared with 2021 levels to meet demand, according to the NREL. (…)

Only about 20% of transformer demand can be met by the domestic supply chain, according to Wood Mackenzie, which also estimated that transformer prices have already risen 70% to 100% since January 2020 because of inflation for raw materials such as electrical steel and copper. (…)

Assuming that Trump moves ahead with 25% tariffs on Canada and Mexico, and imposes tariffs on copper as well, Wood Mackenzie estimates that transformer prices could increase by an additional 8% to 9%.

Mexico, Canada and China are important sources of electrical equipment to the U.S. In 2024, China accounted for over 32% of U.S. low-voltage transformer equipment imports and Mexico accounted for 36% of high-voltage transformer imports, according to Wood Mackenzie. Canada accounted for about 16% of U.S. imports of high-voltage switchgear and 100% of imported utility poles. Utilities typically go through a lengthy process to test the reliability of transformers they are purchasing and tend to require custom specifications, so it isn’t an easy process to switch to a new supplier, notes Chris Seiple, Wood Mackenzie vice chairman. (…)

Last week, the New Jersey Board of Public Utilities said its residential customers’ average monthly bill is expected to increase by 17% to 20% for the 12-month period starting June 2025, partly due to data center-driven demand growth. Nationwide, electricity prices have increased at a compound annual growth rate of 5.7% over the last five years, a considerable acceleration since the preceding five years when prices were roughly flat, according to data from the U.S. Bureau of Labor Statistics.

Also worth watching: If the 25% tariffs on steel and aluminum do result in a reshoring of those energy-intensive industries, that itself would add to long-term power demand, notes Seiple.

Building out America’s AI dominance and reshoring manufacturing are popular policy objectives, but they might come at the cost of perhaps the most popular objective of all—lowering consumers’ bills.

• “Tariffs have not effectively increased U.S. aluminium production, as despite the premium doubling in 2018 after the previous Trump administration introduced tariffs, production remains below 2017 levels,” Fitch Ratings said in a note Wednesday. (WSJ)

FLASH PMIs

Eurozone ekes out growth in February

The seasonally adjusted HCOB Flash Eurozone Composite PMI Output Index, based on approximately 85% of usual survey responses and compiled by S&P Global, was unchanged at 50.2 in February. After signalling a rise in output for the first time in five months during January, the latest data pointed to a sustained but marginal expansion in activity.

Where growth was recorded, the main source was again the euro area’s service sector. Services activity increased for the third consecutive month in February, but only modestly and to the weakest extent in this sequence. Manufacturing production, meanwhile, continued to fall, the twenty-third successive month in which this has been the case. That said, the pace of contraction was the weakest since May 2024.

The picture of marginal growth seen at the euro area level masked marked differences between the different parts of the currency bloc. The Eurozone’s largest economy – Germany – recorded a second consecutive monthly rise in output, with the pace of expansion quickening to a nine-month high. In contrast, France posted a marked and accelerated reduction in business activity, one that was the most pronounced for almost a year-and-a-half. Meanwhile, the rest of the euro area posted a solid expansion in output.

The slight increase in business activity was recorded in spite of ongoing signs of demand weakness. New orders decreased for the ninth month in a row. The pace of decline was modest, but sharper than seen in January. Services new business fell for the first time in three months, joining manufacturing in contraction territory. New business from abroad (which includes intra-Eurozone trade) also fell again in February. Although solid, the rate of contraction eased for the third month running to the weakest since May last year.

After having neared stabilisation in the previous survey period, employment fell at a faster pace in February. Staffing levels decreased for the seventh successive month, albeit modestly, as a marked reduction in manufacturing workforce numbers outweighed a slight rise in services employment. In fact, the decline in manufacturing employment was the most pronounced in four-and-a-half years. Excluding the COVID-19 pandemic, the fall was the largest since July 2012. Staffing levels dropped in both Germany and France, with the pace of job cuts sharper in the latter. Meanwhile, the rest of the Eurozone saw employment increase at the fastest pace in five months.

The fall in employment was registered amid further signs of spare capacity across the euro area. Backlogs of work decreased solidly, and to the largest extent in three months. Outstanding business has fallen continuously on a monthly basis for almost two years.
Prices

As has been the case in each month since last October, the pace of input cost inflation quickened in February. The latest increase in input prices was the fastest since April 2023 and above the series average. The overall increase in input costs continued to be driven by services, where the rapid pace of inflation was unchanged from January. Manufacturing input prices rose for the second month running and at the fastest pace in six months, albeit one that remained modest overall.

In turn, output price inflation also accelerated and was at a ten-month high in February. A solid rise in charges in the service sector contrasted with a marginal reduction in manufacturing selling prices, the fifth in the past six months. Output prices were up markedly in Germany, while France posted renewed inflation following a fall in January. The rest of the euro area also saw selling prices rise.

Eurozone manufacturers continued to lower their purchasing activity in February, in response to weak customer demand. The latest reduction was marked, despite being the weakest for two-and-a-half years. A slower fall in stocks of purchases was also recorded, but stocks of finished goods declined more quickly than in January. Muted demand for inputs meant that suppliers’ delivery times shortened for the first time in six months.

Although companies in the Eurozone continued to predict growth of business activity over the coming year, optimism dipped to a three-month low in February, thus remaining below the series average. Sentiment dropped across both manufacturing and services alike. Strong confidence was again seen in the rest of the Eurozone. Positive expectations in Germany dipped and were below-average, while optimists in France only just outweighed the pessimists.

 

Japan: Output expands at strongest rate in five months

Japan’s private sector experienced stronger expansion at the midpoint of the first quarter, with the Composite Output Index reaching its highest level in five months. This modest improvement was driven by sustained growth in services activity, while manufacturing output declined at a softer rate. In areas where growth was recorded, firms often attributed this to business expansion plans and improved sales.

New business received by Japanese private sector companies increased for the seventh time in eight months in February. However, the pace of expansion was only modest and the softest recorded since last November. While new orders for manufacturing continued to decrease, the decline was only mild and was more than offset by an increase in new business within the services sector.

Confidence regarding business activity growth over the next 12 months softened in February, reaching its lowest point since January 2021. Companies cited labour shortages, persistent inflation, and economic malaise in the domestic economy as factors dampening overall sentiment. In fact, employment levels among Japanese private sector firms rose at their slowest rate in just over a year. Additionally, the rate of input price inflation across the private sector was little changed from January’s historically sharp pace.

 

The U.S. flash PMI is out later this morning.

Continental to Cut Around 3,000 Jobs in Automotive Segment

The German car-parts company on Tuesday said the cuts amounted to around 10% of its global research-and-development jobs. Less than half of the job cuts will be in Germany, it said. (…)

Continental’s job cuts come a year after France’s Forvia, one of the world’s largest auto parts suppliers, said it was cutting up to 10,000 jobs in the midst of a global automotive shift to electric vehicles.

Several European carmakers and suppliers have warned about waning demand as the industry struggles with a sluggish electric vehicle market and fierce competition from Chinese rivals.

More recently, German car-parts supplier Robert Bosch outlined plans to cut up to 5,550 jobs, while Michelin and Schaeffler said they planned to close factories and reduce thousands of jobs in Europe, which together equal nearly 6,000 positions.

‘Mar-a-Lago Accord’ Chatter Is Getting Wall Street’s Attention Backers float US debt deal, weak dollar as part of plan

It sounds too radical to even warrant a second thought. That President Donald Trump could force some of the US’s foreign creditors to swap their Treasuries into ultra long-term bonds to ease the country’s debt burden.

And yet, that’s what Jim Bianco corralled his clients to discuss on Thursday after rumors of a so-called ‘Mar-a-Lago Accord’ began making the rounds. (…)

The idea of dramatically restructuring America’s debt load is part of the Trump team’s agenda to revamp global trade via tariffs, weaken the dollar and ultimately reduce borrowing costs, all with the goal of putting US industry on more even footing with the rest of the world, said Bianco, an over three-decade market veteran and founder of Bianco Research.

Other elements of the plan include the creation of a sovereign wealth fund — which Trump has already set in motion — and forcing America’s allies to shoulder a larger share of security spending. (…)

Many of the ideas behind the agenda come from a November 2024 paper by Stephen Miran, Trump’s nominee to lead the White House Council of Economic Advisers. In it, the former Treasury official laid out a road map for reforming the global trading system and weeding out economic imbalances driven by “persistent dollar overvaluation.” (…)

“The whole idea hopefully is lower the value of the dollar, lower the value of interest rates, bring down the debt burden in the country. And that’s what they’re trying to do.”

Bianco, like Miran’s paper, referenced the work of former Credit Suisse Group AG strategist Zoltan Pozsar, who has for several years called for a “Bretton Woods III” revamp as part of his theory that the dollar will play a much less dominant role in global finance in the coming decades.

One key idea of Pozsar’s is that other nations should pay more for the security and stability provided by the US. A way to do so would be by swapping some of their Treasuries into 100-year, non-tradeable zero-coupon bonds. If these nations needed cash quickly, the Federal Reserve could make it temporarily available to them through a lending facility.

Bianco stressed that this type of debt swap may not actually happen, and if the US were to pursue it, it would require significant international cooperation and could potentially impact global financial stability. (…)

“Take them seriously, don’t take it literally,” he said referring to the debt swap idea and some of Trump’s more radical proposals in general. “If Trump is willing to blow up NATO, why wouldn’t he be willing to blow up the financial system?”

CHINA MATTERS

CCG’s side event within Munich Security Conference 2025

On February 15, 2025, the Center for China and Globalization (CCG) hosted “Writing on the Wall? The China Playbook 2025,” a side event within the Munich Security Conference (MNC), the venues where J.D. Vance made his controversial speech.

Some excerpts.

Xue Lan, Cheung Kong Chair Distinguished Professor and Dean of Schwarzman College, Tsinghua University

I was on the expert committee for the previous Five-Year Plan. I also have already participated in some discussions about the 15th Five-Year Plan. (…) the Five-Year Plan is a process that engages the national effort, with all the academics, government agencies, and also many of the public involved. There are also provincial and city-level Five-Year Plans and sectorial plans. Based on some discussions that I’ve attended, let me just make some brief remarks on this (…).

First of all, a summary of the 14th Five-Year Plan: what’s been achieved and what’s not. In general, most of the initial targets set five years ago was pretty much achieved, and some were actually surpassed. There are also some targets that have not been achieved. The few, I remember, were in the health and education sectors. I was quite surprised by that.

But let me move on to the 15th Five-Year Plan: what are some of the priorities that people have discussed? Again, you will notice this is very much domestically oriented. China’s Five-Year Plan was initially called the economic plan and now it’s called the economic and social plan. (…)

I think the first thing people are concerned about is economic growth: whether there should be any numerical targets being set, and if so, then how much. 4%? 5%? There is some disagreement on that. That’s one priority.

The second is about the so-called growth quality. China has been advocating for high-quality growth. So what does it mean? People talk about many dimensions of that, including a more balanced and diversified economic structure, more balanced rural-urban development, particularly the regional balances and how to maintain the achievements of the poverty allegation effort. (…) That’s the second dimension, growth quality.

The third is on innovation and digital economy: how to continue to promote S&T development and innovation and make sure that S&T remains the main engine of China’s economic growth. There is also, of course, the continued promotion of the digital economy, including the diffusion and application of AI technology in various domains.

The next one is on sustainable development. As we know, China has promised to achieve carbon peaking by 2030. So how can China do that? That’s not a simple task. There are a lot of calculations of how you might do that and so on. So I think that’s another major issue.

The next item people talk about is openness: how to further promote openness and international engagement. (…) China is very much determined to do that and there are many efforts. (…)

And finally, the governance. China is already working on the so-called modernisation of China’s governing capacity. (…) This is a goal that would also be brought into the overall plan, trying to make sure that the rule of law and other elements of the governing capacity will be modernised. Thank you.

Yao Yang, Professor, China Center for Economic Research, National School of Development, Peking University

(…) This is a concise session, so let me just pick up one thing, that is, China’s investment in higher education. Higher education is becoming more and more important because China is moving into an innovative stage of growth. And the right comparison is not to compare China with the United States, right? As economists, we should compare China with countries with similar levels of income. So what are those countries? Brazil, Malaysia, etc.

Compared with those countries, China has done a wonderful, fantastic job in higher education. China now has four universities ranked in the top 50 in the world. If you look at AI publications, among the top 10 institutions in the world, China has four. Tsinghua is just behind Google, ranked No. 2. Our university, Peking University, and Zhejiang University are ranked No. 6. There is another university, I think, Shanghai Jiaotong University. So this is a lot. China each year produces over 10 million university graduates. That’s a huge human resource pool. Anyone who doesn’t believe in China’s growth prospects will make a huge mistake.

Then how to explain the so-called slowdown of the Chinese economy over the last several years? Many people take that as a sign that China is going to follow the Japanese way of growth since the 1990s: deflation, slow growth, and also an ageing population. That’s wrong. The slowdown has been the result of deliberate government actions.

Starting in 2018, the Chinese government has deliberately started several programmes, even campaigns, to deal with the problems in the Chinese economy: over-leveraging or over-financialisation. I think this is very important for the international community to understand the Chinese economy.

One of the lessons that the Chinese leadership has drawn from the United States is that the United States has hollowed out its manufacturing sector mostly because the United States has too big a financial sector. That’s why the Chinese leadership has begun this huge deleveraging campaign—it’s really a campaign—to try to reduce the size of the financial sector. (…)

Of course, that has a real effect on the economy. But I guess in the mind of the Chinese leaders, you know, the Chinese economy is robust and we can stand the slowdown. That’s why you don’t see huge stimulus packages over the last several years.

Okay, but what about the headwinds? For example, aging. Many people say ageing is going to kill the Chinese economy. I don’t think so. You know, the current problem in China is unemployment, not a lack of labour. We’re all worried about, like in other countries, AI and automation going to replace too many people. China is moving fast in those so-called lighthouse factories. Among those new lighthouse factories, China accounts for two-thirds. That’s just too fast. So I don’t think ageing, at least from the supply side, is going to be a factor slowing down China’s growth.

What about the international environment? Since Trump started the first trade war, China’s exports to the U.S. have declined. But, and that’s very important, if you count by the value added, actually, the United States’ reliance on China’s exports has increased, not declined.

So that’s why the United States is putting tariffs on surrounding countries—because Chinese exports go through those countries. Even when we think about the world’s reliance on China, that has not declined; it has actually increased. Of course, it’s going to be a very difficult situation in Trump’s second term, but I still see a lot of room for cooperation and improvements.

Michael Froman, President, Council on Foreign Relations

(…) I think for decades, our expectation had been that if we brought China into the international economic system, brought them into the WTO, engaged them in forums like the G20, they would become more like us. They would sort of sign on to the international rules.

What happened in reality was that we learned that Chinese economic reform didn’t go as far, as fast, as linear in fashion as we had expected. And instead, we saw some very important reversals. I think the key moment was in 2015, the Third Plenum, and laying out plans for China 2025, where there was a sudden realisation that this dialogue that we’ve been having about economic reform, about China moving to more domestic demand-led growth, about social safety net reform, and moving off of an export-led model, that all of that was falling on deaf ears; and that we weren’t making any real progress on that.

And that, plus the hollowing out of the U.S. manufacturing, which I don’t think is because we had too many people in the financial sector but had to do with the fact that China had a tremendous excess capacity and exported its way with subsidies, with various dumping practices, in a way that hollowed out several communities in the United States.

And we saw the results of that in the rise of populism, in the rise of anti-Chinese feelings and in the 2016 election, and now in the bipartisan consensus across both parties about the nature of the China challenge. How different that is than where things worked 14 years ago.

Did we make a mistake in thinking that China was gonna become more like us? You know, perhaps. Did China change its mind and take a different course? I think one thing we have learned is to be humble about our capacity to influence China’s economic strategy.

Instead, I think what you’re finding is that the focus is on changing that international environment in which China operates. So after having lectured the Chinese for years about avoiding protectionism, allowing, not restricting foreign investment, avoiding subsidisation and industrial policy, we are now engaging in protectionism, restrictions on foreign investment, and industrial policy.

So rather than China becoming more like us, we have become Chinese. And in fact, I would say that Making America Great and America First actually is taking a page out of China’s 2025 strategy, putting China first, China rejuvenation. That we are very much following a Chinese strategy. And I see us continuing to do that going forward.

So what does that mean for our capacity to cooperate with each other going forward? I think we have to find ways of reaching a new set of rules. It’s not gonna be the WTO rules. Those aren’t gonna be something that the U.S., let alone others, are gonna be able to support and say, we’re gonna continue to live by a set of rules where China–and by the way, I have great respect for this: China has had tremendous discipline in pursuing its national interests narrowly defined. The problem is that in pursuing its national interests narrowly defined, it’s come at the expense of the rest of the world.

And we are talking right past each other. When we talk about excess capacity, I hear from Chinese counterparts, well, you must have excess capacity in soybeans because you export. That’s a disingenuous argument, right? Exports don’t mean excess capacity. Excess capacity is a result of subsidisation, unfair trade practices, restrictions on your market in a concerted strategy of building up so much more capacity you could possibly use and then dump it on other markets at the expense of their capacity to ultimately compete with you. I think that’s the reality of this as we face it today.

So I think the good news is President Trump—and again, I certainly don’t speak for him. I don’t pretend to know his mind. But he is very transactional. He’s very personal. And he wants to cut a deal, including with China. And he has great respect for President Xi and wants to sit down face-to-face and work something out.

What that looks like because it’s gonna be different than the Phase One deal of term 1.0 when that deal was never implemented and two, I think the world has evolved since that time. So we’re seeing more predatory practices and excess capacity at the expense of the U.S., European, other industrialised countries. And so I think it’s gonna be a much more challenging argument.

And the question will be, right now, we have selective technology decoupling, whether we begin to have broader decoupling or not. I personally feel there’s a great opportunity for the U.S. and China to continue to trade in non-strategic products, to grow that trade.

But I think increasingly, we’re gonna find ourselves having tensions over sectors where China is determined to grow its global foot. And the U.S. and Europe and others are gonna want to retain some role in those sectors: EVs, some of the clean energy technologies and the like. And I think we’re gonna have to find creative ways to resolve those because our traditional ways of resolving them are not gonna be effective.

Arancha González Laya, Dean, Paris School of International Affairs, Sciences Po

(…) Look, Europeans may not necessarily love a world that is a G2 world, but the Europeans don’t love it when the two parts of the G2 go in funny directions. It’s bad enough that one goes in a funny direction, but when the two are embarked on questioning the system, bringing a wrecking ball into rules, institutions, and principles that have been working together, it becomes a little more challenging. (…)

But there are three things that, in my view, Europe would be watching very carefully in the next China plans. Let me start with climate change.

It’s important that China has signalled that 2030 is its carbon peak. But bearing in mind the evolution of emissions worldwide, bearing in mind the evolution of technology in the world, and bearing in mind this has become a critical issue, I would be watching very carefully to see if China takes more ambition to decarbonise its economy.

I’m saying this because, at the end of the day, keeping within the boundaries of the Paris climate agreement is going to be harder now that one integral part of the agreement has decided to move out. Given the amount of emissions that China represents, it would be very important to see if China doubles down on the fight against climate change. So, I will be watching very carefully the commitments China will be taking there.

The second area I would be watching carefully is what steps China takes to rebalance its economy, particularly the current imbalance between savings and investments. I take what Xue Lan said about health and education because I do think these are two very good areas where there needs to be greater investment on the Chinese side. That would likely help address an economy that, let’s face it, is imbalanced and create capacity that needs to be exported, and probably, as we have seen in the last few decades, create imbalances in the international market.

So, I will be watching very carefully the debate that is taking place in China between savings and investment. I’ll be watching because, obviously, it has a lot to do with the demographic challenge, technology uptake, and whether or not China makes the leap to the next stage of development. I’ll be watching this because it has repercussions for the European economy and Europe’s ability to engage with China.

The third and final marker that I’d be watching attentively is how much skin is in the game. Is China ready to build cooperative spaces internationally? It sounds good and fine to go nationalists, turning words, but there are a few issues where we need spaces for international cooperation. It’s good to say we don’t like the rules that we have, but we still need to build these spaces for cooperation, whether it’s in artificial intelligence, international trade, fighting pandemics, or ensuring financial stability. I’ll be watching to see how much skin in the game China is ready to put in building a less corrosive international Olympus because a lot will depend on China’s decision to invest in this space.

It’s outside the list, and maybe it’s a bit convenient, but obviously, I’ll be watching very carefully to see if we stick with this idea that there will not be a change in the status quo of Taiwan by force. I know it’s outside the scope, but since we are in the middle of the Munich Security Conference, I thought I would also put this on the table. So, Henry, thank you again, and back to you.

The moderator:

Graham, you’ve been remarkable. With such senior age, you’ve travelled between China and the U.S. after Dr. Henry Kissinger. I know that President Xi received you last March, and Wang Huning just received you two months ago. Yesterday, you met with Foreign Minister Wang Yi.

So, you’re a voice between China and the U.S. now, and we’d love to hear from you. I agree with you, there are a lot of positive signs that Trump has expressed towards China, inviting President Xi to his inauguration and saying that if the U.S. and China work together, nothing in the world can not be solved. He also delayed the TikTok issue, and of course, yesterday, Google and Apple resumed the TikTok app downloads.

So, a lot of positive things are happening under President Trump. I hope he visits China soon, and we’re still looking forward to a phone call between President Xi and President Trump. What’s your latest take on the bilateral China-U.S. relations, as a go-between for both countries?

Graham Allison, Professor of Government, Harvard University

(…) Firstly, if we think about the U.S.-China relationship at this point, it’s easier to create scenarios where things go badly than scenarios where things go well. And that would be the Washington consensus. But I made a bet at Davos, and I’m happy to make a bet here today if somebody wants to make the bet for a modest amount of money—say, $100 or $1,000. If we have the good fortune to meet this time next year, we will have been surprised by the upside in terms of what happens in the relationship. I can give you a long account of why that might be, but I think the most significant factor in that story is Donald Trump.

The second point, what about Trump? Well, again, that’s another long lecture. I would say, try, despite the antics, to take him seriously, even not literally. Don’t get bogged down with a little literalism, since he doesn’t speak in normal language. He speaks in hyperbole. Millions and billions mean a lot, okay? He doesn’t count the way we normally would. It’s a combination of fact, fiction, and fantasy that he weaves in his own way.

But if you look at the campaign that we just went through in the U.S., with more than 1,000 individuals running for national office—435 House seats, 100 Senate seats, president, and vice president—not a single one of the thousand candidates, and 80% of Americans have a negative view of China. In an election, what you do is try to appeal to people’s views. Not a single candidate had anything positive to say about China, with one exception. And if you look and see what this exception said, you have to be shocked. (…)

And in the middle of it, he will say, I respect China. You say, what? Then he goes on to tell us about Hannibal eating somebody, or this and that. Then another time, he says, “I respect Xi Jinping.” He says, “My people tell me I shouldn’t say this, but he’s brilliant. I know the guy. He’s brilliant.” He even says, “I want China to do well.” In one of these acts, he says, “I love China.”

What? He didn’t get much applause for that. Okay, so what’s this about? I think it’s quite likely that he has a radically different view of relations between the U.S. and China than China experts, China hawks, and the Biden administration. Some for good and some for evil. So that’s my bet. (…)

I think you can see the handwriting on the wall for the positive scenario. I believe the war in Ukraine is going to end relatively rapidly. I believe that China is going to become an active partner in that process. I believe China may even be part of the guarantor structure that will give Zelensky some reassurance that this is not just a modest intermission with China. I think TikTok will be made to seem as big a crisis as possible until it’s easily solved. Trump has a great capacity for theatre, and he’ll make this out to be a great act. But I don’t think it’s very hard to do.

On the tariff war, I think I would defer to my colleagues. But I think it looks to me like if the trade agreement part one that was reached in 2019-2020 was the greatest deal of all times, then this is not that hard to get some version of something like that, that manages.

Taiwan is a big question mark. But I think, if I were stretching, I could even imagine a new communiqué in which it becomes very clear that the U.S. does not oppose any version of peaceful reunification. And then you have to wrap it around with some diplomacy, the details. So I could tell a story of how this goes well.

And one final point, Trump has more than five times said, including in his phone call with Xi, that the U.S. and China working together can solve all the problems. He didn’t say the U.S. and Europe. He didn’t say the U.S. and the UN. So again, G2, we may hear about it again. I don’t think anybody will advertise it in those terms, but I think it’s imaginable for me. And from what I can read of Xi Jinping and the Chinese side of this, having a transactional president who wants to do deals over a range of issues looks like a, I think they call it win-win.

Daniel Kurtz-Phelan, Editor of Foreign Affairs

Let me pick up where Graham left off, but slightly disagree with him. (…)

I think as we try to understand the Trump policy on China, there’s been a lot of reading of released signals from him, the campaign rhetoric. And I think among Chinese analysts, a lot of hopeful signs in that early rhetoric. But I think the challenge with Trump, as ever, is that there is not going to be a Trump China policy.

There are going to be Trump China policies, and how those interact in a chaotic policy-making system, without the normal kind of interagency that would reconcile differences and come to a common strategy, it’s going to manifest in very unpredictable ways.

So, I think it’s worth looking a layer down from the kind of signals that Graham mentioned to some of the other players in the administration, who I think will be shaping this. I think I would break those into three basic categories. When all of us were watching Trump choose his appointees and the people who were going to staff his administration, the one common theme among them, despite everything he said in the campaign, is that they were extremely hawkish on China—so almost to a one. But there were three different kinds of hawks that I saw.

There’s the kind of Marco Rubio traditional hawk, which I think grows out of neoconservatism, has a heavy ideological element, and really does, whether they say this explicitly or not, I think some of them, such as Matt Pottinger in the last administration, would say this very explicitly—they see the CCP as a regime that will never be able to be a decent member of the international order, there will never be an accommodation between the CCP and the United States, and so it must be U.S. policy to weaken the CCP. There’s a heavy human rights element to it. That obviously leads to conflict in lots of dimensions if you start from that point.

The second hawkish camp has a much more restrained view of U.S.-China competition. It’s still very hawkish, very focused on deterrence in the Indo-Pacific, the Taiwan Strait, and the South China Sea, but leaves out that ideological element. So, it sees space for some kind of accommodation. I would put some of the National Security Council staffers, National Security Advisor, and people like Elbridge Colby in the Pentagon in this category. They’re not ideological, but they’re very hawkish and very focused on the U.S. military presence in the Indo-Pacific.

Then the third camp is more, I think, accurately described as isolationist—much more restrained and it would be easier to reach an accommodation.

And then there’s, of course, Trump himself, which leads to lots of unpredictability and impulsiveness. But I agree with Graham on the basic analysis of where Trump is. The difficulty is that Trump has a very narrow set of issues on which he wants to focus and make deals, and that leaves the whole other set of issues in the U.S.-China relationship out. And that’s where things get really complicated. So yes, I think we’ll see probably a little bit of drama around trade and tariffs, which will at some point resolve more or less. It will not destroy the global economy.

But that doesn’t really get you a lot of clarity on the Taiwan Strait, and I’m much more sceptical than Graham that there’d be major diplomatic progress there, especially given the players involved on the U.S. side. The South China Sea remains a huge problem and to me a huge source of risk, even in a Trump administration. And I don’t see anything in what Trump has said that allays that risk in any way. The de-confliction mechanisms, the crisis response mechanisms are somewhat better than they were before the Woodside summit a couple years ago, but still not that good.

And then the whole set of regional issues, which are really, I think, at the heart of some of the U.S.-China competitive dynamics. And all of those will remain really difficult to resolve. And as we saw in the first term—I’m going to sound a little bit like Lindsey Graham defending Trump on Russia on stage here—Trump might be saying one thing about Xi in public, even as the administration is taking very, very tough moves in other ways. You saw this in the first term of Russia with arms control and arming Ukraine. I’m not sure Trump was especially paying attention to that, but all of that was happening even as he was saying nice things about Putin and having summits. And I think you’ll see a version of that on China.

The last thing I would say on the U.S.-China relationship, you hear a lot from especially more hawkish Chinese observers and sometimes people in government on the Chinese side about their eagerness. They are excited that Trump is likely to, in some ways, erode U.S. alliance relationships and partnerships in East Asia. I think most of them see that as a good thing. That’s your kind of risk-taking Chinese hawk. You see that as a moment of opportunity.

I would caution to those voices and anyone in the U.S. who also wants to step back from those relationships that we know that that system has really underpinned stability in Asia, the kind of stability that has enabled the kind of economic success that some of the earlier speakers were talking about. And as that starts to come apart, I think we get to some pretty scary dynamics and some pretty risky dynamics.

From a Chinese perspective, having a nuclear South Korea or Japan that’s really thinking about developing a nuclear weapons capability, I mean, all of that and similar knock-on effects, I think, could really destabilise the region in a way that even if you have a Trump trade deal, even if you have a degree of comedy on these other issues, I think in the medium term that starts to get scary really fast.

So I don’t know if that’s exactly a bet against Graham Allison, which would probably be a stupid thing to do, but I think there are some tensions there.