The US is pivoting to the traditional model of exploitative empire, what are the implications?

The US expanded its internal borders during its early history. In the 20th and early 21st centuries it transformed into a broader empire with global characteristics. Some would argue this was an accidental consequence of its involvement in two world wars. Some would argue it was an exercise in spreading peace and democracy. Some would take a more cynical view. In any case the US has become a globe spanning empire with its only true rival, a potentially united Asian block with China and Russia at the core.

In some senses, the US Empire has been different to other empires of history. It has been considerably less exploitative than many. The mercantilist British empire sucked resources explicitly out of its vassals, either through direct exploitation or through the terms of trade. Other empires have been more explicit, simply demanding tribute, such as gold or manpower for the armies. The US has actually provided the armies to support and build its empire and has taxed its own citizens for the privilege. At the same time, it has actually provided advantageous trade terms to its trading partners with lower tariffs applied to its imports than its trading partners charge the US on their exports.

The nature of exploitative empires is that they must grow to sustain themselves, the resources gained from each conquest are quickly exhausted maintaining the boundaries so further conquests are required. The US, having been a relatively generous to its vassals, is now trying to rebalance. Hence, the demands that Europe pay for its own defence. Also, the demands for trading relationships that favour the US rather than the system that has favoured the rest of the world.

It is ironic that the founding myth of the US is the desire to free itself of the exploitative taxes imposed by the exploitative British Empire. It is now attempting to fund itself with the same methods. The image shows the Boston Tea Party, a political protest that occurred on the 16^th December 1773, at Griffin’s Wharf in Boston, Massachusetts. American colonists, frustrated and angry at Britain for imposing “taxation without representation,” dumped 342 chests of tea, imported by the British East India Company into the harbor.

The Boston Tea Party

Whether the US can successfully engineer this rebalance to a neutral or exploitative empire without excessive damage to the global economy and financial systems, is yet to be seen. The market seems split on that. The risk is that the golden goose of the free trade low inflation economy that has persisted for so many years weakens to the extent that the result is lose lose.

The other less talked about risk is that the US demands direct tribute from its vassals, in the form of debt relief. The impact of the defence subsidy and favourable trade terms is the US has run up a huge an unsustainable external debt. The concept of converting some overseas holdings of treasuries into perpetuals, even zero coupon perpetuals has been floated. This would be a momentous decision – essentially a default from the worlds reserve currency and may be behind some of the current speculation on gold.

In the near-term, markets are doing the obvious thing. Defence stocks have been rising strongly in the UK, Europe and other parts of the empire such as Japan. We have to question whether the proposed increases in defence spending and the commensurate increase in deficits are consistent with the lower rates and inflation expected in Europe and Japan. We avoid these bond markets for now. We do have a material exposure to the defence stocks. As you would expect from our process, we have been taking profits throughout. We tend to rebalance back to start weight on these big moves simply to keep portfolios in balance.

How the US’s repositioning plays out in the medium term we certainly wouldn’t like to predict. In the near term, it seems that it is providing a much riskier near term background for all risk assets. Understanding the motivations that seem behind a series of seemingly random actions is key to navigating this environment.

David Jane

Premier Miton Macro Thematic Multi Asset Team