Inflation Is Policy
Last week, HAI briefly discussed the Trump administration’s recent vocal turn towards “Hamiltonian economics.” This week, HAI will greatly elaborate on that and discuss its implications in the context of our post-1971 dollar-centric global system.
So called Hamiltonian economics were first discussed by U.S. Trade Representative Jamieson Greer at the World Economic Forum at Davos in January. In his Davos speech, Greer explained that in 1791 Hamilton articulated a plan for the United States to shake off its economic dependency on the British Empire.
As Greer put it:
Hamilton argued for strong economic policy that would allow America to become an industrial power. He called for a combination of tariffs and subsidies to incentivize industrialization. Hamilton believed that such measures were necessary to promote the development of industries like textiles that needed protection from dominant foreign producers to develop the scale that would allow them to supply U.S. needs and be globally competitive. This vision, as I will discuss, laid the foundation for American, and even global, prosperity in the 19th and 20th centuries.
Greer continued:
After the end of World War II, everyone assumed that Hamiltonian economic policy was the default among nations. The negotiators at Bretton Woods and other economic conferences wrote new rules around it, and baked tariffs and trade measures into the post-war international economic order. That makes sense, because all major nations used tariffs and industrial policy to support their economic development. The question for the international trading system, to quote Friedrich List from back in 1837, was “how the common interests of the various nations can best be served and how opposing interests could be reconciled.”
John Maynard Keynes—the great British economist and the British representative to the Bretton Woods conference—had an idea for how this could be done. He argued that the international economic system needed to be organized around the principle of balance… A requirement of long-term balanced trade would protect everyone against so-called “beggar-thy-neighbor” tactics… To put it even more clearly—a country should export in order to import, and if that is not happening then it is a clear sign that something is wrong. Many of Keynes’ most creative ideas for how to deal with this problem, including a proposed global currency, were left on the cutting room floor at Bretton Woods. The system that emerged did not include structural mechanisms to discourage countries from accumulating persistent trade surpluses. If I am being honest, the fact that the United States was running a massive trade surplus at the time may have had something to do with it. That is unfortunate, and we all have to deal with the results today.
Greer’s speech at Davos was an announcement to the world that the U.S. was going back to a Hamiltonian economic system, but a version of it based on the “principle of balance.” Greer even went so far as to specifically refer to Keynes’ Bancor proposal for a neutral reserve asset as one of Keynes’ most creative ideas for how to achieve that balance.
As HAI mentioned last week, both in a speech at the New York Economic Club three weeks ago and then again the next day in a Wall Street Journal op-ed titled “Scott Bessent: Hamilton inspires Trump’s economic statecraft,” U.S. Treasury Secretary Bessent reiterated Greer’s message and confirmed that a return to Hamiltonian economics is the policy baseline for the administration’s “approach to economic statecraft.”
In his speech, Bessent said:
For the better part of a century, the United States was the principal architect and guarantor of an open global economic system that delivered enormous benefits. It raised our allies from the ruins of war, widened the channels of global trade, lifted standards of living, and attained a position of influence that remains unmatched in modern history.
But the success of a system does not absolve us from revisiting its assumptions.
America shaped the postwar order in a world in which our overriding task was to help allies rebuild their economies and defend against the specter of communism. We accepted asymmetries because they served a larger strategic purpose. We opened our market because it helped to create a more prosperous world. And we tolerated imbalances because American economic strength appeared unassailable.
Over time, however, those choices hardened into habits. Habits into assumptions. And assumptions, left unexamined, into vulnerabilities.
We came to believe that access to the American market could be extended without condition—and therefore without consequence. We assumed that closer economic integration would result in a greater convergence of interests. That supply chains would function in every crisis. Low prices would compensate for lost capacity. And above all, that other countries would treat our firms as fairly as we had treated theirs.
Of course, those assumptions failed to materialize. Some slowly, others all at once.
In recent decades, we’ve watched strategic industries migrate abroad; critical supply chains concentrate in jurisdictions that do not share our interests; foreign subsidies, forced technology transfer, discriminatory taxation, and non-market practices distort competition; and American firms grow to global scale, only to become targets of policies designed to constrain or replace them.
Beneath each of those outcomes lay an economic policy that became unmoored from our national strategy.
We’ve emboldened other countries to exploit our dependence as leverage. And to repair those imbalances with the world is not to retreat from it.
On the contrary, it is to engage on terms that make America stronger.
It is to insist on trade that is fair, reciprocal, and consistent with our national interest.
And it is to more closely bind what we should have never allowed to cleave: our economic and national security.
Bessent continued:
We have rediscovered at great cost what Hamilton taught us around the time of our founding: that every nation “ought to endeavor to possess within itself all the essentials of national supply.” That our strength, in other words, is derived from what we can build, for the nation that cannot produce what it needs is not truly secure. The nation that depends on its adversaries for critical inputs is not truly sovereign. And the nation that reduces its economics to consumption is not truly prosperous.
Instead, as Hamilton put it, it is essential to “[enlarge] the sphere of our domestic commerce,” because economic security begins at home…
Yet for years, the question that seemed to consume both our political and commercial class was: Where is the lowest cost? That question still matters, but it is no longer sufficient. We must also ask: Can this supply chain survive a crisis? Can it withstand coercion? Can it continue operating during a pandemic, cyberattack, war, or financial shock? Does it depend on a country that could use economic leverage against us? Does it expose American firms to intellectual property theft? Does it leave our military, hospitals, energy system, or financial system vulnerable?
Of course, supply chain resilience does not require every component to be domestic from beginning to end. That would be unrealistic and unnecessary. But it does compel us to know where our vulnerabilities are and to reduce them before a crisis rears itself. It requires diversifying away from dangerous concentrations, and that we build enough capacity at home to ensure that the American people are never at the mercy of a foreign choke point abroad.
If the U.S. is serious about a return to Hamiltonian economics to achieve reshoring and reindustrialization (and it very much should be), then there are some very important secular implications. Chief among them, in HAI‘s view, is that a return to Hamiltonian economics is just a more delicate way of saying ending the post-1971 U.S. dollar reserve status structure.
The administration needs to end the post-1971 dollar reserve status structure because it needs to materially weaken the dollar to reshore and reindustrialize. At the same time, reshoring and reindustrializing will be very inflationary on a secular basis, meaning some form of functional yield curve control will be needed to keep real yields on U.S. debt negative. Without that yield curve control (or its functional equivalent), the reshoring and reindustrializing will spike yields and trigger a debt spiral. Furthermore, the moment some form of yield curve control is implemented, the post-1971 U.S. dollar reserve status structure will essentially be forfeit anyway.
Why can we be so confident that reshoring and reindustrializing will be highly inflationary? Consider the findings of a Financial Times article from this week titled, “Cutting China reliance would cost the west $23 trillion, research suggests.” According to the FT:
Europe and the US would need to invest an extra $23.6tn over the next 25 years to end their reliance on China in critical industries such as manufacturing and technology, an economic analysis suggests.
Consultancy EY-Parthenon calculated that replicating the infrastructure, research, software, manufacturing and supply chains currently reliant on China would cost the US $13.7tn, the Eurozone $9.1tn and the UK $800bn by 2050.
At $550bn a year, the annual investment required from the US government and American companies to decouple from China is roughly equivalent to the $600bn invested by big US technology groups in data centers in 2025. For the EU, the spending required would amount to a near doubling of its annual budget, EY-Parthenon said.
Worse yet, in HAI‘s view, for a number of good reasons (such as the current dearth of American skilled labor), HAI expects that a serious reshoring and reindustrialization effort will take longer and cost more than even the sky-high EY-Parthenon numbers cited above.
In short, if the U.S. is serious about a return to Hamiltonian economics to achieve reshoring and reindustrialization (as it should be), then the U.S. needs to end the post-1971 dollar reserve status structure because it needs to materially weaken the dollar to reshore and reindustrialize. At the same time, reshoring and reindustrializing will be very inflationary on a secular basis, meaning some form of functional yield curve control will be needed to keep real yields on U.S. debt negative.
Now, if the AI bubble pops and markets crash, we could avoid the inflation for a time, but we’d then face sudden deflation instead. For more than five years we’ve seen that deflationary impulses in the U.S. economy send stocks down and bond yields up. That dynamic (tax receipts down, interest outlays up) would then quickly force Warsh into the same dilemma HAI has outlined for a while. Warsh would be forced to either save the Treasury market (print money to buy bonds and cap yields) or save the U.S. dollar (let rates spike higher and a debt spiral ensue).
At this point, Warsh has talked himself into temporary credibility on fighting inflation and defending the dollar, but either an inflationary ramp-up from reindustrialization or a deflationary collapse from an AI bubble burst will almost certainly see him act quickly to save the bond market rather than the value of a currency this administration already wants lower for national security reasons.
Now, if HAI is wrong about that, and Warsh actually does choose to defend the dollar (extremely unlikely on anything but a short-term basis), gold could continue to suffer. But even in such an instance, don’t be surprised if gold suddenly stops going down. Ultimately, there’s nothing more bullish for gold than rising real rates on a reserve currency issuer that cannot afford such rates due to its debt and fiscal position.
In HAI‘s view, Warsh’s credibility honeymoon may already be getting long in the tooth. This week, leading macro advisory firm TS Lombard argued that the Federal Reserve is running out of valid reasons to avoid confronting persistent inflation.
According to Lombard economist Dario Perkins, Fed inflation fighting credibility has benefited from plausible deniability. In other words, despite over five years of well-above-target inflation, the Fed has been able to justify limiting rate hikes and even cutting rates because inflation was off the highs and intermittently moving back toward target.
However, now, as Perkins said this week (and HAI very much agrees), “plausible deniability is rapidly disappearing.” In other words, the time for Warsh to truly show his hand is rapidly approaching. Either act decisively to bring inflation down to target (despite the consequences), or reveal the truth of what Austrian economist Ludwig Von Misses famously said:
The most important thing to remember is that inflation is not an act of God, that inflation is not a catastrophe of the elements or a disease that comes like the plague. Inflation is policy.
In HAI‘s view, a return to Hamiltonian economics strongly implies inflation as policy, yield curve control (or its functional equivalent), a new neutral reserve asset (gold), and the end of the post-1971 U.S. dollar reserve system as we’ve known it.
For several months, Warsh has been able to impose his hawkish rhetoric onto the market’s perception of reality. In HAI‘s view, reality will soon kick back violently—one way or another. That’s because reindustrialization is the national security priority, inflation is the price, the Fed (and the inflation mandate) is the fall guy, and gold is the exit and financial lifeline.
Weekly performance: The S&P 500 was down 1.55%. Gold was off 2.53%, silver was down 6.59%, platinum was off 1.57%, and palladium was off 2.12%. The HUI gold miners index was down 6.77%. The IFRA iShares US Infrastructure ETF was down 0.53%. Energy commodities were volatile and mixed on the week. WTI crude oil surged 15.57%, while natural gas was off 0.83%. The CRB Commodity Index was up 4.32%. Copper was off 0.21%. The Dow Jones US Specialty Real Estate Investment Trust Index was up 1.58%. The Vanguard Utilities ETF was down 0.48%. The dollar index was off 0.21% to close the week at 100.76. The yield on the 10-yr U.S. Treasury was off 1 bp on the week, closing at 4.55%.
Have a wonderful weekend!
Morgan Lewis
Investment Strategist & Co-Portfolio Manager
MWM LLC
