Is Europe Better Positioned than we Think?

The problem of coalition maintenance is on full display when Europe has to make tough decisions. There is no such thing as a European. There are German, French, Dutch, Italians, Spaniards, and so on. There are no Europeans. Each leader of, sometimes fragile, domestic electoral coalitions has to walk a tight-rope between international, European-wide, domestic, and even regional issues. I don’t say this with any derision at all. These are people who practice state craft at a level American politicians can’t seem to muster. And Chinese and Russian politicians, such as they exist, will practice only in the most vague and muted sense. For example, Russia primarily using non-Russian minorities as fodder in Ukraine, to prevent unrest in the Russian population.

In a crisis, like columns of Soviet and their allied armor crossing through Poland and headed to Germany, the US would effectively short-cut the decision making and command the response. The US could also impose standards on systems to avoid the problem of ten different versions or calibers of the same piece of gear. It was a practical standardization supported by America’s ability to design and produce products at a scale larger than even a collection of countries. Especially in the 1950’s through the 1980s. But, at least during the cold war, there weren’t member countries actively working with the Soviet Union (although France was more than a thorn in the side). Hungary is almost Russian aligned. Turkey is more than soft on Russia – but they seem to ultimately prefer the prosperity Europe has to offer. But good state craft has either muted or side-lined Turkey, Hungary, or Slovakia’s ability to be a problem for NATO.

At this point I can’t imagine a NATO member who isn’t thinking about what they need to do to mitigate the absence of US leadership. I’m sure many are also trying to understand how they deal with a US threat. Without America, NATO will lose the third party that effectively deflects and absorbs domestic fallout from unpopular decisions, such as the 1980s IRBM deployments. In the next twenty-four hours, there is no substitute for the US forces stationed in Europe. But their reliability is now questionable to a degree it was not six months ago. By 2030 or 2035, an increasing portion of those US troops, aviators, and seamen need to be replaced by Europeans. Whether you see the fiscal situation of the US as unsustainable, the state failing as paramilitaries start ethnic cleansing in US cities, or an electorate tired of overseas commitments, US participation is no longer guaranteed. What is guaranteed is a Russia that wants to re-absorb portions of Europe, destabilize the rest, and is a client state of the trading partner that could offset the negative impact of US tariffs (China).

There is some good news. Currently, the EU plus the UK is a larger economy than Russia plus China. China not only has a worse form of the same demographic problem plaguing Europe, but dictatorships are inherently unstable. The inability to flow information in China is not a strength. It is a weakness. Russia doesn’t require large, blue water navies to manage. Europe has a safe lake separating it from Africa and the near east. Europe has a highly educated population. The US is currently destroying its appeal to foreign researchers and graduate students, opening a door for Europe to reverse the brain drain. Much of Europe has a more sustainable fiscal policy than the United States and the Euro is also on track to be the next major reserve currency. Not because of great European decision making, but because the relief valve from American deficit spending is likely to devalue the currency and inflate away the problem.1 There is not enough Swiss Franc and Gold to support international trade. China has an opaque and highly interventionist approach to the Yuan. And crypto currencies are useless because their volatility means the value of your goods can change 5% or more in one trading day.

I know Peter Zeihan has dim opinions on Europe, with other regions as more attractive, such as the Texas-Mexico border region. But even good demographics, an ample supply of energy, and plenty of other resources are useless if you cannot create a stable country or educate your population. If Europe can mange the collective decision process, or figure out how to turn it into a strength, Europe may be more than okay. For example, the Texas-Mexico manufacturing story may be mute if North American political upheaval combined with Mexican drug warlords results in chaos. With three to four times the population and more than 10 times the GDP as Russia, Europe can afford the capabilities needed to counter Russia. Trade can be managed across the Mediterranean and down the African coast with only coastal navies, or through the Suez. If trade with China were to fall off due to contested sea lanes, there is still India and parts of Europe to fill the gap. This does not mean Europe will be a major power projecting force to every corner of the globe. But it will be far from dire straits.

  1. The US debt is 125% of GDP while the EU is around 85%. But more importantly, the US is showing little restraint in going higher. ↩︎

It Doesn’t Matter If It’s TACO This Time

Or it might not be TACO. We might be back here in a month or two after negotiations around this same ridiculous idea to annex Greenland. Or it could be TACO and we will have a completely different unnecessary, invented, highly destabilizing, and unhinged crisis. As Republican congress people line up behind Trump, and the Supreme Court has given him at least one more month of tariffs by delaying the release of their opinion, we have to conclude the Republicans are the autocrat party. And their supporters welcome autocracy. The legislature and courts will help him cement his power. Tying logic into knots of socioeconomic reasons as to why enough people in a given swing state switched to Trump is a useless exercise. It’s because the are garbage people, with garbage educations, and a garbage sense of the world. They operate on a gut level, moving from meme to meme on their phones, thoughtlessly retweeting Russian or Chinese made propaganda. A strong man tickled the part of their brain little changed from our days as lower primates. They mumbled something about the price of eggs, and chose the strong and confrontational white man over the sensible brown woman.1

The paramilitaries deployed to harass and intimidate cities run by the opposition, using corruption accusations to go after perceived enemies, threatening the media with retribution over factual stories, and removing civil servants when they refuse to break the law, are all hallmarks of an autocrat. The fact the few remaining people in his party who don’t want to go down the path of needless chaos, mostly because they are retiring, push back but then cave shows how little power they think they have. And where does his power come from? Like any autocrat, whether it was Assad in Syria or Qadaffi in Libya, Pinochet2, or any number of other autocrats, they rely on a highly motivated base. That’s why they showed up at Charlottesville, and many other protests, with guns. That’s why they cos-play militia on weekends. They want to show they are armed and almost begging for a fight. And, like any autocrat, they do not need broad, popular support as long as they keep the support of their dedicated bases. Trump has a core of support that is armed, intense, willing to use violence, and believes they are attacked when Donald Trump is attacked.

The market popped this morning because they believe it was just TACO all along. We’re not going to blow up the transatlantic relationship. We’re not going to use force against an ally. We’re not going to piss off the Europeans to the degree they would eject our troops (but likely keep all the free shit we’ve staged over there). But like enough shots on goal, eventually one gets through. Maybe the next shot on goal will be something in Korea, Japan, or Brazil? Some time in the future it won’t be TACO. As we se the stakes escalating, like some unhinged reality television show trending to the mid-season cliff-hanger, the cost of TACO not coming to the rescue become serious. At this stage, we should be thinking about preemptive mitigation.

Carney cutting a deal with China and the EU with South America is a start. Pressure might be applied by replacing Tesla with BYD in their EV market. But middle powers have to do two things. The first is stop or reduce buying US debt, especially long-dated US debt. In the bizarre echo chamber of the American autocrat party, people are already starting to float the idea of not paying the coupon on foreign held debt. A strange and seemingly fantastical idea? Like invading Greenland? That would also likely be a TACO moment, but maybe the next President feels like Trump’s mistake was not going through with the idea. The autocrat party has shown they’ll fall in line. The non-political people are being gutted from law-enforcement, the military, and the bureaucracy. Some think someone like Scott Bessent can assuage those truly stupid ideas. He’s shown a willingness to put stooges in key positions (another hallmark of an autocrat), so what’s to stop him from putting a moron up as Treasury secretary. The members of his autocrat party won’t stop him.

Next, every piece of technology from either the US or China that can be remotely switched off because of an internet based service hosted or controlled by the US or China should be removed, reverse engineered, or the operator should have a contingency plan. This includes everything from civilian infrastructure, like John Deere tractors, to weapon systems like cruise missiles. As the US has shot its tariff load, the threat of tariffs for backing out of agreements over IP law is a mute point. The tariffs are coming at the drop of a hat, with no push back from either the autocratic party or the ineffectual party. (In fact, I suspect the court has a weasel position that allows the tariffs to effectively stay in place. My, thankfully often wrong, tinfoil hat instinct is the court is delaying the release because it will effectively entrench the power of the executive). Ideally, the UK, Canada, Australia, and New Zealand should start the process, arguing their exposure to Chinese products makes this necessary. This can also be pushed through laws requiring a domestic partner or other forced technology transfers.

Middle countries should have a multi-provider strategy for digital infrastructure and they should limit or tax the penetration of US and Chinese social networks and digital services. X is the social media arm of the autocrat party. Middle powers should change their laws to promote something like Mastodon services but hosted within that country, with forced data portability from US and Chinese based services. This includes AI, where I suspect smaller models engineered around specific tasks will outperform (in terms of cost), massive general models. The EU and Japan have the technical capability and economic capacity to have a domestic AI industry. And while the AI “problem” may resolve itself if the bubble implodes, the social media problem is one of influence and intelligence gathering.

For a long time, the rest of the world could rely on the US as having a bi-partisan and fairly level-headed foreign policy posture. But the internal mechanics of US politics have changed. The Republicans could now be called the Autocrats and the Democrats could be called the Ineffectuals. And what has been laid bare is that even the educated, intelligent members of both parties will fail to push back but for different reasons. The idea Merz could have a meeting with Trump and get it all sorted by discovering a ‘real reason’ or appealing in some way to the cesspool that passes for Trump’s conscience, is ridiculous. He’s negotiating with an autocrat in the process of cementing his power. German, Italian, UK, Australian, Korean, Japanese, etc voters need to vote like they believe the in the idea the US is no longer a reliable partner. That largely level-headed, bi-partisan, foreign policy lead by seasoned professionals is gone. Now it’s just crazy until TACO, or someday not TACO. Even if the Ineffectuals take power in the next election, they will not remove the hacks and shills currently being embedded into the system and rebuild its expertise. If anything of the professional, capable US foreign service is left in three years, the next victory by the Authoritarians will wipe it out.

  1. I used to believe it was because Ms. Harris made one or two errors, or she didn’t have enough time, or not enough distance from Biden’s policies. I don’t think that any more. ↩︎
  2. Assad has his Alawite militia, Quadaffi and Pinochet’s support came from the military. They realized that if they don’t back their leaders to the hilt, their bodies get burned along side their dictator’s body. ↩︎

The Problem with a Coalition

Different European states want different things out of the US relationship. The Baltic states need to avoid a losing game of attrition with Russia, likely starting with an invasion of little green men. (I can’t imagine a direct invasion like Russia tried in Ukraine). Italy likely wants to sell stuff to America. The UK needs both defense help and is probably still fantasizing about some trade deal. Germany needs the export market. It may be easy to agree on the idea Europe should respond as a general principle. But the large coalition makes choosing a specific action hard, as the retaliation could come in a way that hurts one member much more than the other. A collapse of NATO, which I suspect may be inevitable, would hurt the Baltic states more directly than, say, Spain. While a tariff war would hurt Italy and Germany at a time when their economies are struggling.

More trade with China might make some countries happier, but would be a threat to the German industrial base. And, frankly, if Europe wants to have security, they need an industrial base. In fact, they need both a low tech base for shells and artillery tubes, and a high-tech base for drone and counter-drone operations. They are sensitive to energy demand, but pushing South to Africa may mean getting involved in stabilizing their trading partners. That would require them to build the military capability to project strength down to Africa. This might be culturally difficult for some countries, although some compromises are easy when shivering in the cold is your other option. I could imagine Italy, France, and Spain working to secure energy supplies from Africa, but I can’t imagine the average UK or Finnish voter wanting to do the same. And they would have to compete with China and Russia. Maybe as part of a broader trade deal, a push to establish a military presence to the South might have some appeal.

Europe’s numbers are not great from a demographic standpoint. From a GDP and population standpoint, they compare favorably with the US. They have about 120,000,000 more people than the US. They have good technical skills and educated populations. They could offset the demographic issue with automation. However, the US holds a lot of the technology cards. But upending trade deals around IP law, such as weakening patent protections or allowing companies to reverse engineer products, could backfire for some countries, particularly the Nordics. But there might be an area of broad compromise, if they tax digital services that are largely provided by the US, such as on-line advertising. Depending on the company they make between a quarter and a third of their revenue from Europe. This could be billions of tax dollars in short order. But despite the valiant efforts of Schleswig-Holstein, it’s unlikely they could do away with Microsoft, Google, and AWS, entirely.

One thing that is certain, it is unlikely they can defeat the US in an armed conflict. For one thing, they spend just over half of what the US does on defense. For another, they depend on US weapon systems that can be deactivated by the US. This has been a great deal for US defense contractors. And future business for those contractors could be a point of leverage. The US also provides and manages a lot of the space based assets for NATO, along with intelligence. The EU does not have the infrastructure to fill that capability gap. In fact, the US is key to command and control. The EU has a much better arctic capability, but the US can just overwhelm with numbers and technology. In addition the size of the US surface and submarine fleet would deny Europe access to Greenland.

The one thing Sweden, Germany, and Poland could do is to develop a nuclear capability. But a nuclear capability is more than just making bombs. The actual bomb itself is well within the capability of Swedish, German, and Polish engineers. And they have economies or a specific need to quickly develop a bomb. Maybe it takes longer with Poland due to their limited budget, but the would be motivated. Next they need a delivery vehicle, which would likely be a cruise missile or IRBM. Submarine launched missiles would take a while longer. The UK, although it does have nuclear warheads, they travel on US missiles. That would need to change to have a complete solution. And for a second-strike capability, submarines are a better fit. Of course, like many projects, it depends on the focus and execution by the member country. If they start by hiring a company to write the request to set up an office to manage the project to design the 50 year plan for a nuclear deterrent, in order to set the parameters for a European nuclear policy, they’ll fail. They need to skunk-work it through, quickly, quietly, and in a way that denies Russia the ability to use nuclear extortion to stop the project.

Depending on the escalation, it’s not that the US is invulnerable. Although the majority of American debt is held by Americans, the Europeans hold much more of the debt than China. They don’t have to set much of it alight to cause problems for the US. It’s likely they have a carrot here, as well as a stick. Without willing buyers at the long end of the yield curve, US interest rates will struggle to drop. Long term rates are actually rising even though rate cuts are likely (something of which I am painfully aware). Europe can offer to purchase an additional tranche of US debt with maturities in the 20-30 year time-frame. And if the US attempts to backslide, they can quickly stop their purchases. It would push down long term rates, as the supply of long bonds is a little constrained. The paper issued by the treasury for the last few years has been in the short end of the market. The US is not a default risk (although there are some people in the US who think that’s a possible policy). It is an interest rate and inflation risk, with inflation and currency devaluation being the fastest way out of its high debt levels.

It’s not that there aren’t a lot of solutions. Some better than others. And the Europeans have been good negotiators. Access to the US market has been the major carrot the US trade negotiator has used with Europe. But the existing tariffs, and constant threats of additional tariffs, have soured the taste of that carrot. The difficulty is finding something the member countries (including some that lean toward Trump) can agree upon. I’m sure some Europeans imagine that once the mid-term elections happen, Trump will be checked. That he has, at most, another year of being able to act before the next Congress takes their oaths. But let’s say the Democrats who win also have a populist streak, or the Republicans are able to rally and hold the Senate. The ability of Democrats to “stop Trump” would be muted. And a future election could bring another edition of an anti-European, populist leader. I would look at Trump as evidence of the sentiment lurking in parts of the US toward the rest of the world. And that in the face of a “might makes right” bully, having the moral high-ground is not as good as being able to lay out the bully. That needn’t be militarily. But the reliance on the US, especially for technology, can’t be a continued modus operendi for Europe. But the status quo is a lot easier than a new direction, when so many different voices have the power to say ‘no.’

Why Advocate Against My Country?

Surely, once Trump is gone, the US can return to normal? Right? And then America’s diminished capacity will hurt my quality of life.

In order to understand why, you have to get past the polling that shows Trump has 40% approval. If an election were held today, and he were on the ballot, he would not lose 40% to some Democrat’s 60%. It would be surprisingly close. Trump would likely lose, because many people are not happy with the economy, but at most by by 2 or 3 percentage points. A large number of Americans that identify as independent, or who are “disapproving” of what Trump is doing, are actually neither. The threat that someone comes into office and treats all people with dignity or provides them health-care is unconscionable. Despite all the contrary evidence on spending and deficits, they would say the spendthrift Democrat would raise the debt. They worry more about fantasies of shared bathrooms (something common in many other parts of the world). And some people are just hateful bigots that do not like people based on their race and creed.

If Trump were to go tomorrow, those people persist. The 40% that approve of threatening allies, of imposing tariffs, and rounding up people that look foreign, because they’re brown, aren’t going away. Nor are the 10% or so on top of of the 40% going away who claim to be independent, claim to not like the policies, but are in the bag for Trump. If there’s a little bit of an economic boom, or the Democrat says something a little too weird, we might even get an illegal Trump 3rd term. The opposition has been ineffective, his own party will do nothing to moderate him, and the Supreme Court has given him more than one inexplicable pass. But advocating for a move away from the dollar as a reserve currency doesn’t address that issue. It will raise US interest rates and make it harder for the US pursue policies like sanctioning Russian oligarchs.

I would say a world where three great powers divide up the globe under their patronage systems, will be a poorer, less free, and more miserable world. Russia is one example, but China also engages in state sponsored kleptocracy to maintain its power base. America doesn’t want a transition to “multi-polarity” where different regional powers take responsibility for the security and prosperity of their regions. The American President, along with the Chinese and Russian leaders, want a tri-polar world where they get to dictate the policy they see fit in their assigned area of influence. With an endless series of proxy wars to try to expand or counter the expansion of those spheres. But that’s making the Chinese rich, right? Yes and no. It’s making some Chinese rich, but mostly the politically connected people. Outside the glamorous coasts, most of China is a backwater or epic proportions. And being rich does not guarantee you are not disappeared. The same is true of Russia, with a resplendent metro in Moscow, and outhouses in other parts of the country. The most autocratic countries in Europe, like Hungary and Belarus are also the poorest. If you want to be rich, live in a strong liberal democracy.1

If you care about being a moral, good person, with values you want to pass on to your children to also lead good lives, you do not want a might-makes-right world. Nor do you want to live in a world where you are not secure in your rights as a first principle, but only secure in your rights based on race or political favor. We’ve had that world in the past and it was not good. As we evolve we came to reject absolute monarchy or Jim-Crow style laws. There are plenty of people who would rather be poor and in charge than rich and powerless. Although the already rich would love to have more power, imposing their stamp on policies and places to feed their ego. That’s the path down which we are heading. And that should not be allowed. And as that world won’t be safer and the vast majority of people will be poorer, anyway, why not sabotage the movement toward that end?

Until this last Spring, I thought it would be good to have more boots in each of the services. The US armed forces have shrunk to such an extent that I began to wonder if we could hold our own if China tried a quick dash-and-grab for Taiwan, leading to a protracted, regional fight.2 In both Europe and Asia, we had too few people dependent on too few high-tech weapons, that once fired are not easily replaced. Ukraine was bringing back good-old-fashioned 155mm artillery in a war of attrition. The way the US and allied forces were structured, we would have to go home once the supply of pricey missiles are exhausted. They take weeks or months to manufacture and the planes that deliver them sometimes equally long to repair. Now, I want to see the size of the armed forces cut. To a small degree because of the horrific deficit, but mainly because I see the threat of those forces being turned against cities in the US. That’s why I would argue to cut military spending. The administration has threatened to turn it into an occupying force. Why give them more guns and boots?

Arguing for certain policies that would slow the de-evolution of the us US to keep the world more prosperous, safer, and free is not in conflict with being an American. Even a patriotic American. Because when everything is said and done, America is about the constitution and those liberal, enlightenment values. Without that we are no more exceptional than Argentina. And with an electorate that produces Trump, based on the whims of a few counties in four states, that’s not a bad thing. When about half the electorate is fine with racism and autocracy, I have to ask if such a country should lead the world in any sense. The Republican party likes to make a big deal about their pocket constitutions. But if you don’t live the words, you have is a tribal talisman, not a blueprint for liberty and justice. What is shown to be possible by their support of an unhinged autocrat, leads me to think they do not care about what made American a beacon to others. That means a safer world is one where, should this continue or the racist and autocratic forces come back to power, America is least able to act.

  1. A lot of Americans don’t understand what the world ‘liberal’ means in this case. They think it means “lefty,” rather than the idea we have inalienable rights and the state should guarantee that we are secure in our persons and our possessions. ↩︎
  2. Many people are fixated on the boats China has but it would likely use air assets to quickly move troops across the straight. ↩︎

Dollar Denomination of Contracts

Quite a bit of commerce is done in dollar denominated contracts. If you’re a European company, that means you have a built in interest rate risk every time you buy or sell. European companies may hold dollar deposits to smooth the risk, as they need dollars for future transactions, so there isn’t an immediate need to convert all at once. However, at this point, they should be pushing for Euro denomination on some contracts for commodities. Certainly, the Yuan isn’t acceptable.

As the US begins flirting with erratic, dangerous, and radical policy ideas, the value of the dollar itself will diminish. Part of the issue with accepting the Yuan, is the goals of the Chinese government will result in unwanted currency manipulation. The easy, lazy, and stupid retort is ‘America also manipulates.’ For the most part, America has kept the dollar relatively strong, meaning that imported goods had an advantage, along with American consumers. The Chinese would take the opposite tack, making their currency cheap and promoting its own exports. As they engage in their cycle of capturing the technical aspects of producing a product, withering the foreign expertise in producing the product, and retaining their dominance once the lock up the technology.

Also, this would encourage other countries to adopt the Euro as a reserve currency. I don’t think there’s any economist worth their salt, looking at gold returning as a reserve, that is happy about the current state of reserve currencies. Washington is making the dollar more toxic every day and I think there are countries dying to find an alternative. Right now the Euro has a small plurality of reserves (20%-ish). That could bloom by just moving more contracts for commodities to the Euro, where the dollar is currently used.

Why Can’t We Just State the Obvious

“Who are you going to believe? Me or your lying eyes?”

I see Scott Bessent interviewed on the news or at Davos and I hear the words coming out of his mouth. The are disconnected from reality. Trump is a deranged liar and an agent of chaos. Bessent was supposed to bring order and some level of credibility to the administration. At least on fiscal policy. He has either burned his credibility to the ground by showing he believes in the same stupidity as his boss or willing to say anything to keep his position. (Which should make us ask how handsomely he must be profiting from it). And no one is really calling him on his complete lack of credibility. Even Noem got to a point where she had to walk back a statement saying ICE and CBP weren’t using tear gas. Bessent just digs in and bumbles forward, expecting everyone else to be too polite to call him out. At some point someone is going to have to say something and not just nod with a concerned look on their face.

Europe Needs to Implement a Digital Services Tax

If the EU wanted to do something more than the absolute minimum proportional response (if that), they should do the following three things.

  1. Resurrect the digital services tax.
  2. Get off US infrastructure.
  3. Promote interoperability.

I don’t say this lightly as I work on that US infrastructure. But the road has not gotten better. It has gotten worse and there is no indication it will get better. If Greenland, than why not Iceland? Why not the Faroe Islands? Heck, why not Air Strip 1? Let me be clear about what could happen in the future. Not what could happen next week, but maybe in a few months, if things continue to escalate.

First, the US puts EU leaders on the sanctions list as they did to a judge at the ICC. This would make it impossible to access any of the services provided by Office or Google Cloud. Their 365 e-mail account gets locked, along with all their files, and they are unable to perform almost any financial transaction that involves a bank or on-line retailer. In other words, they are locked out of their work accounts, personal accounts, and are limited to almost a cash existence. Imagine Kier Starmer, Merz, or Meloni having to find an individual in their office that can use MS office on their behalf. This might lead to countries backing out of the various agreements and treaties that allow sanctions to be comprehensive. Which could inadvertently result in Russians getting sanctions relief. Some EU banks, with US ties, may find themselves in the impossible position of satisfying the US and the EU at the same time. They would like pressure the EU to back down.

The US government taps AWS, Microsoft, Oracle, and Google and suggests that hyper-scalers slow-roll or stop updates to Sovereign cloud offerings in these countries. Within a period of weeks, as certificates expire, these clouds will begin to fail. In addition to the US DoJ, legally or illegally, demanding access to the data stored for European governments and European companies. Essentially, the US would likely have a carte blanche to access Google or Microsoft hosted mail and messaging for those governments. These offerings were meant to give the European governments, militaries, police, and intelligence agencies high-quality, secure cloud services. They might have local operators, but they are completely dependent on US companies providing updates. Even though the data centers reside in the EU, the US parent company has a degree of control over the systems that could result in the data being exfiltrated and their services being disabled.1

This is horrifying and what the end of NATO could look like. To get ahead of it, Europe needs to prime the discussion now, because it takes way too long to agree on anything. The first part is straight-forward. It is mostly US companies selling digital services to Europe. Or start fining them to implement desired EU policies such as more open App stores and anti-monopoly rules. Just restarting these discussions may add pressure on US companies that control much of social media and digital infrastructure. They will pressure their own advocates in Congress. If anything, fining X should be a priority across the board. Social media and internet services companies could threaten to pull out of one country, like Denmark, but the would not want to pull out of France, the UK, Germany, Italy and the Nordics. But the “big” countries have to all agree or the “small” countries don’t stand a chance.

Next, they should start discussing (again because of the length of the talk runway) plans to move to EU providers for key infrastructure. The ability to run a railroad or run a water treatment system should not depend on the whims of an aspiring autocrat 5,000 kilometers away. This, by the way, applies to some power systems supplied by China, which could be cut off to help their client state, Russia. Europe needs to put “sole source” laws into place indicating to only buy the product, device, or service, only if no European supplier exists. Or local partner laws, like China has had, to force technology transfers. But the process of moving off that infrastructure is not quick. It will also be expensive, as cloud providers try to create one way valves. Cheap to get data in but expensive to get data out. That cost could be offset with a digital services tax.

Next, the EU should promote adversarial interoperability. The EU should actually (not just make face noises about it) withdraw from provisions of the trade agreements that prevent EU companies and citizens from jail-breaking their devices. This is necessary to prevent a foreign power from bricking your infrastructure. If it is completely legal to replace the tractor firmware with your own firmware, you don’t have to worry about John Deere turning it off, remotely. (Like they did to the ones Russia stole from Ukraine). If EU citizens are allowed to jailbreak their devices, or reverse engineer apps on those devices, they could decide to have X – but without the Nazis. Or they could elect to install an App Store that only charges the listed Apps 5% instead of 30%, where even US companies would want to be listed. Interoperability should include, taking all the data you like from Facebook or Instgram as a scrape, get rid of the adds and unwanted content, and have that as your version of social media. (Although social media is largely a tool used by adversarial nation state actors to conduct influence campaigns and not a great loss if it did go away).

This is getting ugly, stupid, and weird. America has enough legacy income and wealth to get by for a long time, as the institutions that have underpinned its success get wiped out. There is anger on both the left and the right against the institutions, as they have been used too often as spring-boards for their leaders, who profit from them. For example, the possible insider trading both at the Fed and in Congress. And when those people leave, they get plumb jobs in industry or finance, shaping the rules and laws in their employers’ favor. Court rulings that make government bribery charges against officials almost impossible to prove. Parties that have allowed themselves to be captured by monied interests to the point they align only in places where the welfare of dollars are at stake. Europe does not have to get dragged down by the US as it implodes. In the process, tearing apart countries and the conscience of the EU member states.

It’s not that Europe doesn’t have its own challenges. In some ways life without America will force some countries to come to grips with the level of commitment necessary to provide their citizens with security against Russia, Iran, and China. And their aging populations may require them to re-think their approach to their own welfare states or economics, given new security needs. They may take a more active role in the middle east in order to prevent waves of refugees from each successive crisis that god-forsaken part of the world continually spawns. They might have to project power into Africa, both to deal with refugees and secure energy for their countries. And finally, with no expectation of the US nuclear umbrella, German, Poland, and the Nordics need to plan for developing nuclear weapons and a strong second-strike capability. They have relied on the US too much, who was both willing and able to pay for these missions. I can’t imagine the 79 million Americans who voted for Trump being willing to stick their necks out of Polish, Romanian, or Estonian sovereignty.

But they should do this as a United Europe. All these problems are bigger than just one country and require cooperation between multiple countries. That spirit of cooperation and strong institutions is the model that will bring every region a better quality of life. Once upon a time, your impact on the world extended no further than your neighbors, then your city, and then a nation, and now problems are so large they are trans-national. The US is attacking the basic idea there is value in these alliances. They are an agent for a rolling back of progress, along with Russia, and a China that views trade as wealth extraction from the rest of the world. If the world of cooperation, alliances, economic and social progress is going to defeat the world of angry isolation, it needs to rise to the moment. One way to do this, is to be explicit that the US intimidation could come at the cost of the part of the economic order helps enable US digital hegemony.

  1. Note that the UK has to ask the US for permission to fire its nuclear missiles. France does not. And if the US exits NATO, the UK should prioritize fixing this problem. ↩︎

Semantics Are Useful

It’s 1990 and I’m in a Poli-Sci class and we’re talking about El Salvador. The cops, or maybe cops – sometimes you can’t tell, running around with assault rifles and armored vehicles were called paramilitaries. Some of them were police, some of them were national guard, and others were just regime supporters wearing a mask. “Paramilitary” is not a particularly positive term. It either connotes over-armed enforcers or poorly trained military. But that’s what I see on the streets of Minneapolis. The same over-armed, hyped-up, highly partisan paramilitaries wire-brushing a “blue” city under the guise of rounding up “criminals.”

It’s hard to sometimes look at yourself and see what it is. It’s easier to say “shooting” or “officer involved shooting” instead of murder at the hands of regime paramilitaries, it makes it easier to take. The paramilitaries in El Salvador were engaged in targeted, extra-judicial murder. These were the death squads. Do I think we’re in death squad territory? No. But is there anything left that I think would prevent that? Yes, but the system isn’t as robust as it once was. Largely, I think, it would be how it polls. Could I see the ICE/CBP paramilitaries deciding to start down that route if they have blanket immunity from prosecution? An FBI that will bury the investigation? Maybe. The only thing that stops that is broad and intense public disapproval. It used to be the case if you tried that you would be charged with murder. Now, there’s no risk of these paramilitaries being charged with murder unless the right wing media machine loses control of the narrative.

The Weirdness in Unemployment Claims

Here are the first time unemployment claims from 2000 to 2008. Although the first time claims rate accelerates before the 2001 recession, that doesn’t happen in every recession, with the first time claims generally being a trailing indicator. The lowest point on the chart, touched briefly at the peak of dotcom boomery, is about 260k.

Here is the last couple of years of first time claims. Its highest point is about 260, which it touches during spikes. Although it looks more variable than the chart above, it’s not. It might be even slightly less variable. It’s low points are at 190,000. If I were to look at this, I would assume the jobs number would be substantially higher. We’ve created about 150,000 jobs over the last six months. To absorb new entrants into the labor market, that should have been 600,000. To grow, that should have been closer to 800,000.

There is a degree to which we could be job hugging. No one is convinced they can hire a decent replacement. No one is convinced they can find a better job. People aren’t getting fired and they aren’t quitting. And there aren’t enough new jobs to absorb new entrants. What we should see in the JOLTS data are low separations, low hires, and low openings. But that’s not what we’re seeing. Which actually further confuses the situation.

Separations and hires are still historical norms. Openings are still high. This leads me to be even more convinced, every passing week, that we’re measuring the wrong thing. That’s dangerous because we can be optimizing the wrong numbers. Maybe the Fed is too worried about the job market. Maybe it’s doing better than anticipated. I’m more convinced the job market is structurally different than it was even 10 years ago. That means comparing even 2006 numbers with 2026 numbers could be misleading. Is the gig economy, ranging from Uber to Only Fans the new “go to” when you get fired? Should we be measuring the number of gig workers? The BLS understands the need. But the current statistics are too spotty and hard to compare (also because of the lack of history).

If this seems like splitting a hair, let’s take a look at some policy choices. The first is to leave short term rates where they are. This is likely having a depressing impact on the labor market. If we depress the labor market too much, we go into recession. (Although our latest Keynesian experiment may offset that). If we cut rates slowly, we relieve pressure on the labor market, but does that cause more competition for labor to the point where we get inflation? Or does it ease the pressure to relieve the risk of recession? Finally, there is aggressively cutting rates, which what the economics illiterate Cheeto wants. That could drive a freight train of inflation through the economy and tank the dollar. But from the labor market data, it’s hard to say which is right.

All the options seem logical. If you look at the monthly jobs number, it looks like recession is right around the corner. If you look at people losing their jobs and filing unemployment, we have a perfectly fine labor market. If you look at the JOLTS data, the labor market is dangerously tight, with many more openings than workers. Or is the JOLTS data signalling weakness as we drop below the 5,000 level? I’m more partial to the jobs number and its erratic cousin, the ADP report.

Our Upcoming Keynesian Experiment

We have aggressive deficit spending in place. The administration is discussing an additional 45% in defense spending. Let’s say the AI bubble pops. (Which I don’t think will be because AI is useless, but because there’s no path to profitability). Even if the magnificent seven collapse in value (Nvidia loses well over half their value, and Meta, Microsoft, and so on have large drops). I think that would start a change in spending as people see their wealth evaporate. I think it would also put a lot of pressure on banks that have loans, or loans to private equity, to fund data centers that will not be needed. Or OpenAI or Anthropic declare bankruptcy. This should be enough to push toward recession.

However, we have cut taxes (albeit largely on a group of people who just accumulate wealth rather than spend more to stimulate the economy). We are engaged in aggressive deficit spending, although slightly smaller as a share of GDP. Spending on defense largely mandates spending on US suppliers. Also, especially if Trump is able erode away Fed independence, we will get substantially lower rates. Even if the AI bubble bursts, we may be pre-staging the kind of counter-cyclical spending needed to keep the economy afloat. We would almost need the AI bubble to unwind in order to counter the inflationary impulse coming into the economy. In a way, this will prove if Keynes was right, that in the face of economic slow-downs, you can just dump money into the economy to get out of it.