Back Stories for the Week
TOPICS: ·National Security Threats·The Fed·Traditional Technical Market Research·U S Dollar
RELEVANCE: ·bad·good·not sure
Summary As many investors recall from the Great Recession more than a decade ago, indiscriminate selloffs can generate big potential rewards. Today, nearly every fixed-income sector presents such opportunities, albeit in the context of continued volatility over the near term. But that doesn’t mean our expectations for every sector are uniform. Our outlook for the major bond sectors globally, beginning with an assessment of a condition plaguing all of […]
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As many investors recall from the Great Recession more than a decade ago, indiscriminate selloffs can generate big potential rewards.
Today, nearly every fixed-income sector presents such opportunities, albeit in the context of continued volatility over the near term.
But that doesn’t mean our expectations for every sector are uniform. Our outlook for the major bond sectors globally, beginning with an assessment of a condition plaguing all of them: illiquidity.
By Scott DiMaggio and Gershon Distenfeld
Most of the global bond market sold off sharply in the first quarter as the coronavirus crisis emerged and intensified. Economic activity halted across much of the world. Credit spreads—yields relative to comparable-maturity government bond yields—ballooned to historical wides at a record pace. And even developed-market government bonds suffered from choked liquidity.
As many investors recall from the Great Recession more than a decade ago, indiscriminate selloffs can generate big potential rewards. Today, nearly every fixed-income sector presents such opportunities, albeit in the context of continued volatility over the near term.
But that doesn’t mean our expectations for every sector are uniform. Below, we provide our outlooks for the major bond sectors globally, beginning with an assessment of a condition plaguing all of them: illiquidity.
Policymakers Pull Out All the Stops
Liquidity seized up in March when markets quickly repriced to reflect a significantly darkened economic scenario and uncertainty about how deep and long the coronavirus-induced recession might be. Many sellers came to market, but they found few buyers willing to hold more risk than they already had on their books. Dealer banks that had acted in the past as market makers, stepping in to buy or sell as needed, no longer play the role of buyer in the years since the Global Financial Crisis.
Without this traditional backstop, prices tumbled and the price of liquidity soared. Deleveraging and forced sales worsened the collapse and accelerated the liquidity spiral. As a result, many investors who sold assets in March paid a great deal to do so. Meanwhile, investors also paid a premium to buy the most liquid securities on the market—US Treasury bills. T-bill yields dipped into negative territory in late March as the flight to liquidity accelerated.
In response to the economic shutdown and resulting liquidity challenges, policymakers have rolled out unprecedented fiscal and monetary support globally. Central banks worldwide dusted off nearly every available tool to restore liquidity to markets and support economic growth. The US Federal Reserve cut rates to zero, resumed quantitative easing and launched numerous facilities to ensure that the plumbing of the financial system will work properly again. Other central banks have taken similar actions to support the flow of credit and the normal functioning of markets.
On the fiscal side, action has been swifter and more robust than in 2009. From China to Spain to the US, governments around the world have rolled out massive fiscal aid to keep their economies afloat. While fiscal packages can’t restart the economy before the public health situation eases, they will make it much easier to restart the economy down the road.
It’s early days yet to know whether this flood of stimulus is working. The picture is mixed. On the one hand is an encouraging surge in new issuance. US$100 billion of US investment-grade corporate issues were priced in the market in the last week of March, possibly heralding the return of buyers to the market at these attractive levels.
On the other hand, liquidity remains constrained, albeit mildly improved versus weeks ago. And bid-ask spreads are still very elevated across global bond markets, even for government bonds. On March 31, the bid-ask spread on the 10-year US Treasury was about three times pre-crisis levels.
Most importantly, most countries have not yet seen a peak in COVID-19 cases. Until the pandemic is under control, uncertainty, volatility and trading challenges will persist. Under these conditions, liquidity management remains imperative.
Corporate Bonds: Fallen Angels, Expected Defaults and Compelling Yields
Indiscriminate repricing of the corporate bond market reflects major economic uncertainty as the world slides abruptly into recession. The longer the economic shutdown persists, the deeper and more lasting the damage. We’re likely to see this take the form of a spike in downgrades and defaults.
We currently expect a sharp economic contraction in the first half of 2020 to be followed by a moderate rebound in the second half. In this scenario, the global economy would return to its previous trend rate of growth—thanks to the massive stimulus efforts noted above—but at a lower level than would otherwise be the case.
Even so, the result would be a meaningful increase in the number of fallen angels—securities downgraded from BBB, the lowest tier of the investment-grade market, to below investment-grade ratings.
Not surprisingly, the sectors most at risk for a blizzard of fallen angels are those most negatively affected by the coronavirus pandemic and lower oil prices, as well as issuers who had levered up for mergers and acquisitions. Sectors at risk include consumer cyclicals (autos, gaming, home construction and retail), consumer noncyclicals (primarily leveraged food & beverage credits) and energy.
The 8.5% share of the market that we expect to be downgraded below investment grade over the next three years is similar to the share we saw similarly downgraded following the recession of 2002–2003 (10%) and the Great Recession (8%). However, because the investment-grade corporate market is now about four times bigger than it was in 2008, the value of downgraded debt will be far larger than in prior crises.
For investors who can hold below-investment-grade debt, fallen angels can present buying opportunities because their prices tend to bounce back quickly after downgrade, as the securities find new buyers among high-yield investors.
But what is the impact on the high-yield market of a slew of fallen angels? Historically, the surge in supply in a comparatively small market at first creates technical pressure. But over time, the high-yield market digests the volume.
Today, global high-yield spreads are more than 10%—well above their long-term averages of about 5.5%. In fact, on a risk-adjusted basis, high-yield underperformed equities in the first quarter. Typically, high-yield drawdowns measure about half as much as equity drawdowns; but year to date, high yield fell about two-thirds as much as stocks.
At these levels, high-yield corporates appear to be attractively priced, but it’s important to be aware of the much higher potential for defaults today than just three months ago. We’re expecting a spike in defaults of around 8%–12%, depending on the length and depth of the downturn. Ample yields already compensate investors for significantly higher defaults ahead. And remember, a high-yield portfolio’s starting yield has been an excellent proxy for return over the next five years.
The takeaways for credit investors?
First, it may be time to begin adding credit risk. It’s impossible to call a bottom to the recent rout, but given the dire expectations already priced into most corporate securities, yields are compelling. In the investment-grade market, new issues are coming to market at an especially attractive yield premium. That said, be selective; fundamentals matter.
Second, be selective in BBB-rated debt. This is the quality tier from which most fallen angels plummet, and investors need to make sure they’re being compensated for the risk that a given security will be downgraded.
Third, high-yield investors should consider adding to positions in debt rated BB and B. Look for companies with strong liquidity positions that can weather the current storm.
Fourth, be cautious within the energy sector. As oil prices decline, default risk increases. Energy issuers with more diversified and higher-quality assets, more experienced management teams and lower production costs than their peers are better positioned to weather the oil-price plunge.
Finally, consider the subordinated (AT1) debt of European banks, whose capital is at an all-time high and whose nonperforming loans are at historical lows. Stronger national champion issuers and AT1 structures are especially attractive today, in our view.
Emerging-Market Debt: Oil Shock Creates Opportunities
Investors might also consider diversifying into emerging-market debt (EMD), where a combination of liquidity challenges and an oil shock have resulted in severe price dislocations—and opportunities.
The oil shock began in March, as global demand fell off due to the coronavirus pandemic. When OPEC+* failed to agree on an extension of output cuts, Russia and Saudi Arabia ramped up production in a battle for market share.
Collectively, these conditions caused the price of oil to plunge to unprecedented lows. West Texas Intermediate (WTI) crude oil fell from its January high of US$63.27 per barrel to just US$20.83 on March 18. Prices have since recovered a bit, but they’re 60% lower than three months ago.
Oil-exporting countries, which comprise 40% of the hard-currency EMD market, suffer when oil prices are low. Oil-importing countries, in contrast, benefit from cheaper oil. But these benefits have been offset by the broader effects of the coronavirus crisis and general risk-off sentiment.
The US Fed recently promised new swap lines to nine countries to ensure they get access to US dollars, which are in high demand. The World Bank and International Monetary Fund also made funds available to the developing world. These actions have helped improve investor sentiment.
Yet EMD spreads remain far wider than their January levels, and price dislocations persist. In our view, this represents a good opportunity to incrementally increase exposure to EMD, both broadly in investment-grade countries and selectively in high-yield sovereigns whose prices have reached attractive levels from a fundamental perspective.
Securitized Assets: A Disconnect from Fundamentals
The liquidity spiral helped drive a massive sell-off in US credit risk transfer (CRT) securities—residential mortgage-backed bonds issued by US government-sponsored enterprises. This sector felt the impact of leverage being unwound: forced liquidations, margin calls and cancelled repo lines.
Why? Investors had used them as leverage precisely because of their high quality. In other words, the pressure that CRTs experienced in the first quarter wasn’t entirely driven by fundamentals, even if some concerns stemmed from prospects for forbearance and uncertainty around payoff profiles. Indeed, the fundamental picture looks meaningfully better today than in the runup to the Great Recession. (CRTs didn’t exist at that time; they were created in 2013 to get US taxpayers off the hook for losses like those racked up on mortgage loans in 2008 and 2009.)
To begin, the underwriting standards for residential mortgages are much stricter now. Most borrowers have FICO scores—measures of an individual’s credit risk—above 750, indicating an excellent credit history. Home prices have also appreciated significantly since 2008. And today’s mortgage bonds have much less risk layering than years ago, a practice that led to high credit losses during the US housing crisis. CRTs typically don’t layer high-risk metrics such as poor loan-to-value (LTV) ratios plus low FICO scores plus high debt-to-income ratios.
Fundamentals for commercial mortgage-backed securities (CMBS) are also significantly better today than in 2008. Then, the average LTV at origination was nearly 70%. Today, LTVs average a healthier 62%, given multiple years of deleveraging as well as a significant increase in prices across property types.
Equity cushions, service coverage and internal cash flows are all higher today. Tighter underwriting standards for recent vintages have helped too. Lastly, the banking system shut down in 2008, making real estate transactions impossible to conclude. In contrast, today’s commercial real estate transactions are continuing, and lenders are still willing to provide capital.
Much of the pressure on CRTs and CMBS has instead stemmed from liquidity challenges and negative headlines around retail in a world wrestling with COVID-19. But in our view, current valuations more than adequately compensate investors for any potential negative factors and expected losses.
The Sun Will Shine Again for Bond Markets
Even though the storm continues to rage, we’ve begun to feel cautiously optimistic. No investor or manager knows precisely when the bond markets will rebound, but we know they will.
Trillions of dollars of fiscal stimulus and rock-bottom interest rates can help economies restart quickly from their government-imposed deep freeze. Indeed, with a record amount of cash sitting on the sidelines today, credit markets are more likely to snap back than to tentatively return to normalcy.
In the meantime, investors who are prepared to ride out near-term volatility might consider leaning into opportunities to get an edge over broad investment sentiment—and the inevitable rainbows.
The views expressed herein do not constitute research, investment advice or trade recommendations and do not necessarily represent the views of all AB portfolio-management teams.
*OPEC+ denotes the 11 countries that belong to OPEC, including Iran, Iraq, Kuwait, Saudi Arabia and Venezuela (the five founders), plus 10 non-OPEC oil-producing countries, including Russia, Mexico, Kazakhstan, the United Arab Emirates, Libya, Algeria and Nigeria.
Editor's Note: The summary bullets for this article were chosen by Seeking Alpha editors.
Summary Most of the Fed’s liquidity operations, ultimately, are to support the U.S. treasury security market. The U.S. debtor nation status plays an important role in why the Fed is on the hook to provide foreigners with dollar liquidity. Keep an eye on international markets with positive net international investment positions; they could do well post-virus. Looking for a helping hand in the market? Members of Stock Waves get […]
Quickly Publish or Save as DraftTitle:
Original Article Text
Search 2 keywords found: technical
Most of the Fed's liquidity operations, ultimately, are to support the U.S. treasury security market.
The U.S. debtor nation status plays an important role in why the Fed is on the hook to provide foreigners with dollar liquidity.
Keep an eye on international markets with positive net international investment positions; they could do well post-virus.
Looking for a helping hand in the market? Members of Stock Waves get exclusive ideas and guidance to navigate any climate. Get started today »
Over the past several weeks in response to the COVID-19-induced global economic shutdown, the U.S. Federal Reserve has announced an unprecedented number of operations to relieve or bail out various markets, as the lender of last resort.
Eric Basmajian provided a solid breakdown of the operations in place as of a couple of weeks ago, and that article is certainly worth a read. The Fed has expanded the monetary base to buy Treasuries and other securities at a record pace, has put in place various lending facilities, and has opened a record number of currency swap lines with other countries.
This article takes a look specifically at some of the Fed’s international operations to help readers understand why the rest of the world is currently the Fed’s problem. The short version is that most of what they are doing is ultimately to protect the U.S. Treasury market.
It’s The Debt, Not Just The Virus
Many analysts are focused on the impact of the virus itself, which is indeed very large. Nearly 10 million jobless claims were filed in the United States in the past two weeks due to the shutdown of restaurants, travel businesses, casinos, physical retail, and parts of several other industries, and that can’t be understated. Job losses are likely to continue as well.
However, the sheer speed of the market’s crash, and the unprecedented actions by the Federal Reserve and other central banks around the world to support the credit market, point to an even larger issue: we’re likely in the later stages of a global debt supercycle. The sheer amount of debt in the world makes temporary income disruptions a lot more financially impactful than they would be in a system with less leverage.
As of 2019, global debt surpassed $250 trillion, which is more than 250% of the world’s GDP.
In the United States, our total debt (government, corporate, and household) is around 350% of GDP, which is the same ratio of debt that we had back in 2007 at the start of the previous financial crisis (although during the crisis, it ended up reaching as high as 380%):
Chart Source: St. Louis Fed
We have less mortgage debt relative to GDP, but most other types of debt, especially sovereign debt, are higher as a percentage of GDP in 2020 than in 2007. We just re-arranged where the debt is concentrated, and pushed it up especially to the sovereign level.
The $40 Trillion Problem
The U.S. dollar is used around the world for purchasing commodities, settling a large portion of international trade, and providing financing for companies between nations. However, the usage of the dollar has exceeded the growth of the U.S. economy and U.S. money supply, which along with other factors has led to a global dollar shortage. This shortage becomes particularly acute during global economic slowdowns or recessions, such as in 2008, 2016, and 2020 when trade diminishes and commodity prices fall in dollar terms.
There is a lot of dollar-denominated debt held by institutions outside of the United States. The Bank for International Settlements estimates this figure at over $12 trillion. It’s much smaller than the amount of dollar-denominated debt within the United States, but can be just as problematic because dollars are more scarce outside of the United States.
And it’s worth noting that these $12+ trillion in dollar-denominated debts mostly aren’t owed to lenders in the United States; institutions in various countries lend to others in dollars.
When global trade slows down and commodity prices fall, the global dollar flows diminish from a roaring river to a small stream, so these dollar debts suddenly become a lot harder to service thanks to a scarcity of dollars outside of the United States relative to the size of these debts.
Here’s the BIS chart of ex-USA dollar-denominated debts:
Back in 2008, when ex-USA dollar-denominated debts were about $5-$6 trillion and global trade slowed down, the Fed did currency swaps with several major ally central banks, to ensure they have adequate dollar liquidity to supply their institutions with. In 2020, they’re doing currency swaps with the same countries, but also nine new ones including several emerging markets. In addition, the Federal Reserve has an international repo operation, meaning that foreigners can lend their Treasuries to the Fed as collateral in exchange for dollars.
Many readers may be wondering, why is this the Fed’s problem? Why does the United States need to provide dollar liquidity to the rest of the world, who have $12+ trillion in dollar-denominated debts and a shortage of dollars to service those debts? Why not just let it all burn down, i.e. let it all default, outside of the United States?
For sure, it’s not out of the kindness of the Fed’s heart. Instead, it’s because the U.S. is a debtor nation, and providing dollars is required if the Fed wants to ensure stability in the U.S. Treasury market and the rest of the U.S. economy and capital markets.
As I described in my article about the Great Depression, after World War I, the United States became the world’s largest creditor nation, meaning that Americans owned more foreign assets than foreigners owned of American assets.
However, due to persistent trade deficits as the world reserve currency (meaning more wealth flows out of the country each year than into the country), we lost creditor status and entered debtor status starting in the 1980s, meaning that foreigners now own more American assets than Americans own of foreign assets.
When the 2007/2008 financial crisis began, the U.S. net international investment position was equal to about -10% of U.S. GDP. It has worsened significantly since then in just those 12 years, and is now about -50% of U.S. GDP.
Chart Source: St. Louis Fed
Specifically, foreigners own $40 trillion in U.S. assets, including portions of our government debt, corporate debt, stocks, and real estate. Americans own just $29 trillion in foreign assets. So, we have a negative $11 trillion net international investment position (NIIP deficit) with the rest of the world, which equals about -50% of our $22 trillion GDP.
Chart Source: U.S. BEA
Today, Japan is the world’s largest creditor nation, meaning that they have the largest absolute positive NIIP. This means that the gap between the amount of foreign assets they own vs. the amount of Japanese assets foreigners own is larger in absolute terms than any other country. Germany, China, Taiwan, Switzerland, Norway, Singapore, and Saudi Arabia are also high on the list of creditor nations in absolute terms.
The United States is the world’s largest debtor nation, meaning we have the most negative absolute NIIP. We’re the world’s worst in absolute dollar terms, and one of the low ones in terms of NIIP as a percentage of GDP, although several countries like Ireland and Spain are worse in those relative-to-GDP terms, so we’re not at the very bottom in that sense.
The reason why this matters, is that foreigners have two ways to get dollars when they really need them. They can participate in international trade, or they can sell their U.S. dollar-denominated assets. In healthy markets, they choose the first option (and are generally net buyers of U.S. assets with the dollars they receive through trade), but during a global slowdown or recession, that trade dries up. So, when dollar debts need servicing, they are forced to sell U.S. assets to get dollars. In fact, that’s one of the key reasons why international central banks hold foreign-exchange reserves in the first place; to backstop external obligations if necessary.
This is why the dollar tends to briefly spike higher during recessions. International trade slows, dollar-denominated debts become an international problem, and everyone scrambles to get their hands on dollars.
And this is why the U.S. Federal Reserve has a $40 trillion problem at the moment. There is a global dollar shortage, and with international trade and commodity prices so low, dollars outside of the United States are in short supply relative to the size of the dollar-denominated debts that those dollars need to service. Therefore, many institutions, both public and private, need to tap into their store of reserves, sell U.S. assets, and get U.S. dollars. Foreigners held $40 trillion in U.S. assets going into this crisis, of which nearly $7 trillion were U.S. Treasury securities (bills, notes, and bonds).
Foreign-holding data for U.S. Treasuries gets updated monthly and with a considerable time lag, but the large subset of foreign holdings of U.S. Treasuries at the Fed’s custodian account is updated more frequently. It’s an incomplete data set, but a more rapidly-updated one, and it shows us that foreigners sold at least $119 billion in Treasuries in the past four weeks:
Chart Source: St. Louis Fed
That chart shows the trade-weighted dollar index in red and the value of Treasuries held by foreigners at the Fed as custodian in blue. Whenever the dollar spikes higher, foreigners start selling Treasuries.
Those few weeks in mid-March, when the blue line went vertically down meaning that foreigners were rapidly selling Treasuries, is when Treasury yields spiked, Treasury bid/ask spreads widened to the point of becoming uninvestable, and when long-term Treasury security prices crashed. For example, the iShares 20+ Year Treasury ETF (TLT) suddenly dropped by 16% and the Pimco 25+ Year Treasury ETF (ZROZ) dropped by well over 20%:
During the long-duration Treasury security crash, the Fed then began rapidly ramping up its bond-buying program, and introduced a new range of dollar liquidity assistance operations.
The problem for the Fed is that there are not sufficient buyers for Treasuries anymore, especially at a time when foreigners were aggressively selling and some domestic leveraged hedge funds with Treasuries were unwinding positions.
Ever since the repo spike in September 2019, the Fed has been the main buyer of Treasuries via “money printing.” For lack of sufficient buyers, and a large amount of Treasury security supply due to large government deficits, the central bank is now monetizing U.S. government debt. In other words, the Fed is bailing out the Treasury market. They do this by creating new dollars, and using those new dollars to buy Treasury securities on the secondary market. It was when Treasury security prices were crashing back in mid-March that the Federal Reserve’s balance sheet expansion went truly vertical:
Chart Source: St. Louis Fed
The Fed’s balance sheet has shot up rapidly over the past month to buy Treasuries and other credit securities, to try to backstop the market and provide liquidity. They’re currently running at a $500 billion or more weekly expansion rate, although they are looking to slow that rate a bit in the weeks ahead.
To address this without having to outright buy everything, in addition to a record number of currency swap lines with other central banks now in place, the Fed has initiated a foreign repo operation. Foreigners can now lend Treasuries to the Fed for dollars rather than outright sell Treasuries on the open market to get dollars, and this will apply to basically any country that has Treasuries and an account at the Fed.
This facility should help support the smooth functioning of the U.S. Treasury market by providing an alternative temporary source of U.S. dollars other than sales of securities in the open market. It should also serve, along with the U.S. dollar liquidity swap lines the Federal Reserve has established with other central banks, to help ease strains in global U.S. dollar funding markets.
In addition, the Fed recently changed leverage ratios for U.S. banks so that they can hold more Treasuries and less cash, which is another way of bailing out the U.S. Treasury market by trying to increase the available buyers, so that the Fed isn’t stuck as basically the only large buyer.
To ease strains in the Treasury market resulting from the coronavirus and increase banking organizations' ability to provide credit to households and businesses, the Federal Reserve Board on Wednesday announced a temporary change to its supplementary leverage ratio rule. The change would exclude U.S. Treasury securities and deposits at Federal Reserve Banks from the calculation of the rule for holding companies, and will be in effect until March 31, 2021. Liquidity conditions in Treasury markets have deteriorated rapidly, and financial institutions are receiving significant inflows of customer deposits along with increased reserve levels.
The foreign operations are particularly interesting to me. It’s an awkward position for the Fed, because they are lending dollars to creditors of the United States in exchange for collateral, so that the creditors of the United States don’t keep hard-selling U.S. assets, especially including U.S. Treasury securities. And any securities that those foreign creditors do sell, the Fed ends up buying outright.
In the long run, this amount of deficit spending driven by new money creation is likely dollar bearish (and I think the consensus underestimates the extent of deficit spending in 2021, 2022, etc), but not until the global dollar shortage is sufficiently alleviated.
Right now, most central banks are treading water in terms of dollar liquidity until trade increases again. In response to foreign selling-pressure, the Fed will keep aggressively buying U.S. Treasuries and other securities, and keep providing liquidity with swaps and repo operations. We’ll see if they take other actions as well.
More broadly, if we look back at the 2008/2009 global recession, the U.S. stock market double-bottomed at the same time as the dollar index double-topped:
Chart Source: St. Louis Fed
As long as the dollar remains this strong or strengthens further, it will be challenging for U.S. asset prices to rise on a sustained basis, in part because foreign holders of those assets would be more inclined towards being net sellers of those dollar-denominated assets to get dollars. The Fed’s liquidity operations and eventually a resumption of trade, can alleviate this dollar shortage in time. But for as long as trade remains in peril due to COVID-19 shutdowns, this remains a risk. Only when the dollar falls vs. other currencies would it be easy for U.S. asset prices to rise on a sustained basis.
Emerging markets tend to be particularly dollar-sensitive, because they rely the most on foreign funding relative to their GDP. However, many investors treat emerging markets as one big basket, when the reality is that they are all quite different.
As it relates to the global dollar shortage, some nations have enough dollar-denominated assets to cover their dollar-denominated debts, while others do not.
This chart shows the foreign-exchange reserves of several major emerging market nations as a percentage of their GDP, as well as their dollar-denominated debts as a percentage of their GDP, that they went into this crisis with:
The EM currencies with more FX reserves than dollar-denominated debts, such as Taiwan, South Korea, China, Malaysia, and Thailand, have held up rather well in this crisis. They have positive NIIPs and when push comes to shove, they have enough U.S. assets to sell to support their dollar-denominated debts. Although they are all under pressure at the moment like everyone else, most of them are creditor nations, which makes a large difference in the end.
On the other hand, the EM currencies with less FX reserves than dollar-denominated debts, and generally with negative NIIP positions, such as Turkey, Indonesia, Mexico, Chile, and South Africa, have lost more value over the past couple months. They are at the mercy of global markets and possible IMF assistance, because they don’t have enough dollar-denominated assets to cover their dollar-denominated debts. They are debtor nations, like the United States, but with liabilities in a currency that they cannot print. These markets could have strong upside potential in a weakening dollar environment, but don’t really have any agency in the matter and thus have high risk.
There were some exceptions to this trend. For example, Russia has more FX reserves than dollar-denominated debts, and has a positive NIIP as a creditor nation, but as a major oil-producing nation, its currency has taken a hit anyway in this extremely low oil price environment. Saudi Arabia’s currency is pegged to the dollar so they didn’t experience a currency decline at the moment. Brazil’s currency was also hit a bit harder than its ratio of FX reserves to dollar-denominated debts were imply, because it’s also a large oil-producing nation.
So, in this EM currency sell-off, EM currencies that either had a large oil-producing reliance, or shallow FX reserves relative to dollar-denominated debts, were hit the hardest.
In this current sell-off overall, emerging markets have had very similar performance to the S&P 500 so far in terms of drawdowns from their YTD highs:
Back in 2008/2009, when the dollar rose in response to the global recession and dollar shortage, the MSCI Emerging Market Index that tracks equities in emerging markets (EEM) was crushed. The index was hit particularly hard because it went into that crisis extremely overvalued, unlike today where emerging markets were already priced for value.
When the dollar fell in 2009, after all of the Fed liquidity injections and the beginnings of a global economic recovery collectively alleviated the dollar shortage, the emerging market index shot up by 100% in about 10 months. For EEM, this translated into a move from roughly $20 to $40 per share.
As the dollar weakened, the monetary conditions in several EM countries effectively eased, allowing for a rebound in both fundamentals and asset prices.
It’ll be interesting to see how the next year or two plays out. Value-minded investors may wish to look into international markets that are currently at low valuations, but that are creditor nations with sufficient reserves to cover any dollar-denominated debts that they have. The risk/reward potential is rather favorable towards them in my view, for investors that take a long-term perspective.
Keeping an eye on the global dollar shortage, the Fed’s actions to supply dollar liquidity, and the resumption of global trade (in part dependent on higher commodity prices), is helpful for determining when U.S. and global asset prices will be under less selling pressure, all else being equal. That seems obvious, but many analysts are focused just on the economics and virus news, when in reality, the global dollar situation is similarly important.
Likewise, noting the difference between creditor nations and debtor nations in terms of NIIPs helps investors manage risk by seeing which currencies are most at risk in a dollar-spike scenario, and explains why the Fed is effectively forced to provide so many foreign liquidity operations if they want to support the U.S. treasury market.
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I’m a big fan of violent suspense movies: The Bourne Identity , Fight Club , Winter’s Bone . But horror films? Not so much. The reason, I think, is that horror movies are all about experiencing the feeling of helpless terror, which isn’t my thing. The whole point of a thriller, by contrast, is to identify with protagonists who have enough agency and wit to assert some measure of […]
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I’m a big fan of violent suspense movies: The Bourne Identity, Fight Club, Winter’s Bone. But horror films? Not so much. The reason, I think, is that horror movies are all about experiencing the feeling of helpless terror, which isn’t my thing. The whole point of a thriller, by contrast, is to identify with protagonists who have enough agency and wit to assert some measure of control over the situation, no matter how dreadful.
To many people, the Trump presidency has felt like one long horror movie. To me, it’s been more like a thriller: disorienting, appalling, emotionally wrenching, but not disempowering. Almost every insane or diabolical decision the president has made has been met with countermoves—by the courts, civil servants, voters, Nancy Pelosi—that have frequently lessened the impact and fortified my faith that all is not lost.
The novel coronavirus is the latest case in point. Trump’s willful dismissal of the crisis in its early weeks will almost certainly result in many unnecessary deaths. But the wise words and prudent actions of others, from the National Institutes of Health’s Anthony Fauci to ordinary citizens, give me hope that we can “flatten the curve.”
Similarly, the possibility that Trump could be reelected is, for many people, like a horror flick too frightening to watch. The essays in our cover package certainly provide evidence for maximum alarm.
But there are reasons to think that a second Trump term would not be as apocalyptic as we might imagine. One reason is that the direst scenarios our essayists lay out—the end of Obamacare, a slashing of the safety net—are likely to happen only if Trump is able to continue to pack the courts with conservatives. But that presumes that the GOP holds the Senate. This has not been a sure bet since vulnerable Republican senators like Maine’s Susan Collins supported him in the impeachment trial. It is even less so now that the presumptive Democrat presidential nominee is moderate Joe Biden—and not Bernie Sanders, who down-ballot Democrats rightly see as a potential drag on their chances.
Another reason is that second-term presidents almost always find themselves in a weakened position. Sometimes it’s because foolish decisions they made in their first terms catch up to them in the second term—think George W. Bush putting the singularly unqualified Michael Brown in charge of FEMA two years ahead of Hurricane Katrina. Sometimes it’s because they let their reelections go to their heads and then act carelessly—as Bush did with his push to privatize Social Security, Bill Clinton did with Monica Lewinsky, and Ronald Reagan did with the
Iranian arms-for-hostages deal. Even presidents who appear invincible can suffer irreparable damage. Nixon won the 1972 election in an overwhelming landslide. He was gone in less than two years.
Of course, Trump has created more scandals in his first three years than any other president did in eight. What’s protected him so far, and what gives him a decent chance of winning reelection, is the rock-solid approval of Republican voters. Even in the wake of his mismanagement of the pandemic, that support remains (as of this writing) undiminished.
Will his base continue to back him unqualifiedly for four more years regardless of conditions on the ground? I doubt it. Recall that George W. Bush was also beloved by conservatives in his first term. But then, after being re-inaugurated, he tried (and failed) to privatize Social Security. Then Katrina hit. Then Harriet Miers had to withdraw her Supreme Court nomination. Between January and November 2005, Bush’s approval rating among Republican voters fell by 22 points.
Sure, Trump benefits from a hermetically sealed right-wing media ecosystem that recycles his self-serving nonsense. But that system was already a BFD during the Bush years—Fox News drew more viewers during the 2004 Republican National Convention than any other TV network. In the end, it could not save Bush from the real-world consequences of his own actions.
The parties are even more ideologically sorted today, and Trump plays to the racism and xenophobia of his base, which Bush mostly did not. So it’s possible that he will retain the loyalty of his supporters regardless of what happens in a second term—continuing mass deaths from the coronavirus, a brutal recession with few fiscal tools to fight it, and so on.
But if his numbers do begin to slip, it will be huge news. GOP lawmakers with their eyes on the 2022 elections will start to defy him. He will lash out and do more foolish, counterproductive, unconstitutional things. His base of support will shrink further. His party will get wiped out in the midterms. The House will impeach him again, and this time the votes will be there in the Senate to convict him. He’ll helicopter to Mar-a-Lago, where federal agents will be waiting with subpoenas. After a lengthy trial over crimes committed before and during his presidency for which he no longer enjoys immunity, he will live out his final days in prison.
Hey, it’s my movie.
Can civil rights and civil liberties withstand a second term of President Donald Trump? They have already taken a major hit. Playing to his base, Trump has unremittingly targeted the most vulnerable among us. His anti-immigrant measures began with the Muslim ban, which he recently expanded to bar immigrants from three more predominantly Muslim countries and three countries with large Muslim minorities. He has separated families, detained individuals who […]
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Can civil rights and civil liberties withstand a second term of President Donald Trump? They have already taken a major hit. Playing to his base, Trump has unremittingly targeted the most vulnerable among us. His anti-immigrant measures began with the Muslim ban, which he recently expanded to bar immigrants from three more predominantly Muslim countries and three countries with large Muslim minorities. He has separated families, detained individuals who posed no threat to others or risk of flight, sought to deny asylum on grounds that were directly contrary to statute, and attempted to rescind protected status for the Dreamers.
On reproductive freedom, he promised to overturn Roe v. Wade, and has appointed judges with that goal in mind. He barred federally funded Title X family planning clinics from advising pregnant women about their rights to abortion, blocked undocumented teens in federal custody from accessing abortion, and gave a green light for employers to deny insurance coverage for contraception to their female employees.
He has sought to reverse nearly every advance that the LGBTQ community made under President Obama. He barred transgender individuals from serving in the military. He rescinded guidance requiring schools that receive federal funding to allow transgender students to use facilities that correspond to their gender identity. And his administration argued in the Supreme Court that a bakery had a First Amendment right to discriminate against a gay couple who sought to purchase a wedding cake, and that federal law does not bar employers from firing their workers for being gay or transgender.
He praised white supremacists in Charlottesville as “very fine people,” and referred to African countries as “shitholes.” His Justice Department sought to back off from consent decrees requiring police to treat their citizens with equal respect and dignity. And he reversed a rule requiring local governments to avoid housing plans that have a disparate impact on minority communities.
At the same time, he has appointed an unprecedented number of federal judges, most of them handpicked by the Federalist Society for their conservative ideological commitments.
You get the point.
But there’s hope. With the exception of his judicial appointments, most of what Trump has done can be undone. All of his initiatives targeting immigrants, restricting reproductive freedom, and countering racial and LGBTQ equality were accomplished through unilateral executive action. As a result, they can all be reversed through unilateral executive action. This doesn’t diminish the harms these actions have already inflicted on hundreds of thousands of people, but it does mean that the damage can be cut short. If he is defeated.
But if Trump manages to win, then what? The next president will almost certainly have the opportunity to appoint one or more Supreme Court justices. The Court is already more conservative than it has been in nearly a century. If Trump gets to replace a liberal justice and create a 6–3 conservative-liberal split, the number of 5–4 decisions splitting in a liberal way, already relatively rare, will likely be erased altogether. We would then need not one but two “swing” justices to swing in the progressive direction for the liberal view to prevail.
Roe v. Wade could be overturned, affirmative action ended, and progress on LGBTQ rights ground to a halt. The Court would be even more solidly pro-business, anti-labor, and anti-consumer than it currently is.
What might this mean? Roe v. Wade overturned, the end of affirmative action, and very little chance that
LGBTQ equality could be advanced through the courts. The Court would be even more solidly pro-business,
anti-labor, and anti-consumer than it currently is. And we would likely see a radical expansion of gun rights, property rights, and religious rights—including the right to invoke religion to discriminate against others. Criminal defendants and immigrants, who haven’t fared well in the Court for decades, would do even worse, and government officials would be given a green light to further strip them of meaningful constitutional protections.
The Justice Department’s Civil Rights Division would remain moribund for another four years, further enabling voter suppression and police abuse across the country. An AWOL Civil Rights Division would have political repercussions far beyond 2024. The 2020 census results will kick off nationwide redistricting, and without a vigilant Justice Department overseeing the process and intervening where appropriate, the Republicans will seek to build in ten-year advantages in the district maps they draw.
More generally, if Trump wins reelection he’s likely to believe that xenophobia worked, and that will then prompt him to try to implement even more virulent and aggressive measures against immigrants, especially those of color. Particularly if there is a terrorist attack that implicates ISIS or al-Qaeda, the Trump administration’s response will likely make George W. Bush’s brutal “war on terror” tactics look humane.
So what can be done?
If Trump wins, it will become all the more essential that “we the people” exercise our First Amendment rights to resist. Trump acts in many ways like a populist autocrat. But unlike some of his counterparts in eastern Europe, he has to operate in an environment with a robust civil society and a strong free speech tradition. The First Amendment empowers citizens to check their government by protecting the right to criticize their leaders; the right to associate with like-minded others to amplify their concerns; the right of the press to report on government abuse; and the right of the citizenry to assemble and to petition their government for change. This is why autocrats in other countries often target the press, the nonprofit sector, and the academy—that’s where resistance to autocracy resides. Suppressing or silencing civil society is a lot harder to get away with in the United States.
Our system of divided government also facilitates resistance. Federalism means that blue states will continue to be able to push back against federal policies that hurt their citizens, as many states have already done by suing Trump in his first term. State courts, legislatures, and town councils can provide protections to their residents that the federal government takes away, including protections for LGBTQ individuals, immigrants, and the poor.
If the House remains in Democratic control, it will be able to play a checking role, through oversight, appropriations, and refusing to pass laws that erode our rights. And even though Trump has appointed nearly 200 judges, the federal courts will remain an important backstop. The courts’ legitimacy rests on the rule of law, a principle and norm that Trump routinely flouts. This is why he has lost more legal challenges than perhaps any prior president, before judges appointed by Democratic and Republican presidents alike. Even his own appointees have ruled against him, as when D.C. District Judge Timothy Kelly ordered the White House to restore press privileges to CNN’s Jim Acosta after the president revoked them.
That may change if he wins reelection and appoints another major portion of the federal judiciary. But this possibility only underscores why we must hold the courts to their most solemn responsibility—of protecting those whose interests the majoritarian process sacrifices. Checks and balances do not run of their own accord. We the people are the ultimate guardians of our liberties.
But if you believe that a second Trump term would create a civil liberties dystopia, the single best thing to do is stop it from happening. In the words of the ACLU’s 2018 midterm campaign, “Vote like your rights depend on it.” (The ACLU is nonpartisan, and does not endorse or oppose candidates, but we educate voters and urge them to make their votes count.) It’s not enough to vote; you need to amplify your voice by encouraging others to vote like their rights depend on it, too. After all, Trump won in 2016 not because he earned a larger share of the vote than Mitt Romney did in 2012. His share was, in fact, smaller. The reason Trump won is that Hillary Clinton’s vote share was less than Barack Obama’s. It was low Democratic turnout that made the difference. If that changes because people vote for civil rights, Donald Trump will lose. It’s as simple as that.
Amy Swan On the campaign trail in 2016, Donald Trump vowed to make sweeping changes to the U.S. immigration system. If elected president, Trump said, he would build a wall spanning the entirety of the U.S.-Mexico border, ban all Muslims from entering the country, completely eliminate the resettlement of Syrian refugees, and deport millions of undocumented immigrants who have lived in the interior of the United States for years. […]
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On the campaign trail in 2016, Donald Trump vowed to make sweeping changes to the U.S. immigration system. If elected president, Trump said, he would build a wall spanning the entirety of the U.S.-Mexico border, ban all Muslims from entering the country, completely eliminate the resettlement of Syrian refugees, and deport millions of undocumented immigrants who have lived in the interior of the United States for years.
As his first term comes to an end, Trump has made serious progress on many of these promises. The administration has spent billions of dollars replacing chain link fences along the border with 100 miles of steel barriers, with new barriers under construction. He has banned nationals of certain Muslim-majority countries from obtaining visas. The U.S. still takes in refugees, but admissions have hit an all-time low: The resettlement cap for the 2020 fiscal year was just 18,000, a 79 percent drop from Barack Obama’s last year in office. Immigration and Customs Enforcement (ICE) has carried out massive raids and opened more than a dozen new immigrant detention facilities. The administration has implemented a number of measures meant to deter asylum seekers from even trying to come—including separating migrant children from their families, a practice that continues in some cases.
Unable to pass major immigration legislation, the administration has accomplished all of this through executive action, spurring lawsuits from activists. Sometimes, the litigation has been a success. In 2019, a federal judge blocked a Trump executive order that would have barred immigration by those who could not quickly purchase U.S. health insurance, ruling that it was beyond the president’s powers. Several district court judges issued an injunction against the wall, arguing that Trump was unconstitutionally violating the will of Congress.
If the Supreme Court lets Trump deport the Dreamers, he could hold them ransom for massive cuts in legal immigration—and congressional Democrats might take that deal.
But the Supreme Court has allowed many of the president’s policies to take effect while courts consider their legality, including construction of the border wall. In a recent concurring opinion about immigration, Justices Neil Gorsuch and Clarence Thomas rebuked circuit judges who issue nationwide injunctions against the administration’s policies, claiming that they are largely acting out of turn. The Court has also given Trump more decisive victories, including signing off on a modified version of his travel ban.
Should Trump win a second term, he will likely nominate at least one additional Supreme Court justice and add to the nearly 200 federal judges he has appointed so far (a quarter of all federal judges). The legal firewall that has held back the most radical of his executive orders could crumble. He will continue to target not just undocumented immigrants and asylum seekers, but legal immigrants as well.
“I don’t think there’s an end in sight,” said David Bier, an immigration policy analyst at the Cato Institute, a libertarian pro-immigration think tank. “As soon as they get these different measures approved by the courts fully, they’ll move on to the next step of expanding them. That’s what we’ve seen every step of the way with this administration.”
The president’s war on immigration is being waged on two fronts: at the border and in the interior. In both domains, he’s just getting started. In late 2019, the president created two pilot programs—the Prompt Asylum Claim Review (PACR) and the Humanitarian Asylum Review Process (HARP)—that fast-track asylum cases for Mexican and Central American migrants at the southern border. Although the ACLU and other organizations have sued the administration over these programs, which they say deny migrants a fair day in court, it’s likely they’ll be expanded further if Trump is reelected, even before courts decide their legality.
The expansion of PACR and HARP could echo the administration’s rollout of the Remain in Mexico policy, which began as a pilot program at a single port of entry in California in January 2019. It has since been expanded along the entire border, forcing roughly 60,000 migrants to wait in Mexico while an immigration judge in the United States decides their case. Originally, the policy was only applied to migrants from Spanish-speaking countries. But in January, the administration began sending Brazilian nationals seeking asylum to Mexico.
If Trump is reelected, it’s only a matter of time before the administration decides to further expand this program too. It may start with Indian nationals: According to federal data analyzed by the Migration Policy Institute, 72 percent of all extra-continental migrants apprehended at the border during the fiscal 2018 hailed from India. Migrants from Cameroon, the Democratic Republic of the Congo, and Eritrea—the most prevalent African nationalities at the border, according to the same data—could be added to the administration’s list as well.
During a second term, it is also likely that Trump would expand the border wall. With the blessing of the Supreme Court, the administration already reallocated nearly $10 billion in military funds to pay for construction of the wall. The administration diverted another $3.8 billion in funds from the Pentagon in February. Unless legislators explicitly forbid the administration from reprogramming funds, Trump will likely continue to use military money to fortify the border during his second term.
The wall may be a Trump original, but some of the president’s toughest policies were first proposed by influential conservative think tanks. To get a sense of what a second term might bring, it is worth looking at what those institutions are proposing. The Heritage Foundation has urged the administration to unilaterally give immigration judges the ability to decide all status cases without listening to immigrants’ testimonies, not just those of the undocumented at the border (as PACR and HARP already do). The influential right-wing think tank also wants immigration judges to have the power to rule against different forms of protection, including asylum, without hearing a full trial.
This agenda, of course, would likely encounter massive resistance by liberal municipalities. Hundreds of cities across the country, including New York City and Washington, D.C., have declared themselves “sanctuaries” for undocumented immigrants. Though there’s no legal definition of a sanctuary city, these jurisdictions typically limit their cooperation with federal immigration authorities. But this could make them a target under a second Trump term. The Department of Homeland Security is deploying 100 officers from the U.S. Border Patrol’s elite tactical unit to the interior of the country, where they’ll help ICE carry out arrests in these places.
In its official capacity, the Trump administration claims that it isn’t against immigration per se, just illegal immigration and immigration by people who are supposedly a drain on the economy. The administration says that it actually wants legal migrants, so long as they are educated or possess economic talent. The president’s signature legislative proposal, for example, wouldn’t necessarily cut immigration levels. Instead, it would largely replace family-based green cards with employment-based ones.
His actions, however, suggest that immigration at large is the target, and it’s likely that a second Trump term would enable federal immigration agencies to make life harder for documented immigrants, too. Even in sanctuary cities, ICE sometimes arrests and tries to deport green card holders who have come into contact with the criminal justice system. The administration has also signaled a desire to begin targeting naturalized citizens, creating a new denaturalization “task force” under the Department of Justice in February.
This shouldn’t come as a surprise. The think tanks and advisers who surround Trump have made it clear that they view legal immigration on the whole as an ill. Former Trump chief strategist Steve Bannon and current Trump adviser Stephen Miller agreed in a 2016 conversation that legal immigration is the “beating heart” of America’s migration “problem.” Miller has pushed repeatedly to slash green card levels.
Miller may succeed even if Democrats hold the House—and not only through the president’s executive actions. The Supreme Court is expected to rule soon on the fate of the Deferred Action for Childhood Arrivals program. If the Court lets the program end, Trump may go to Democrats in Congress and promise protection for Dreamers, but only in exchange for broader immigration cuts. The party shut down the government for several days in January 2018 to try to make sure Dreamers wouldn’t be deported, and failed. Though the party’s progressive wing would likely refuse to fall in line, it isn’t hard to imagine that to protect them, come 2021, Democrats would give Trump what he wants.
Amy Swan From the perspective of the liberal policy establishment, Donald Trump has launched an aggressive and unprecedented assault on workers’ rights and the labor movement. From the perspective of the right, Trump has governed on labor almost exactly as any other Republican president might have. “When he was first elected, I ventured his administration might be different from traditional Republicans in a few ways, including in its relations […]
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From the perspective of the liberal policy establishment, Donald Trump has launched an aggressive and unprecedented assault on workers’ rights and the labor movement. From the perspective of the right, Trump has governed on labor almost exactly as any other Republican president might have.
“When he was first elected, I ventured his administration might be different from traditional Republicans in a few ways, including in its relations with unions,” Walter Olson, a labor policy expert at the libertarian Cato Institute, said. One of the president’s first meetings in 2017 was with leaders of the building trades, Olson noted. “But in the end, they have been very much in line with what you would have expected from, say, Carly Fiorina.”
In many respects, Trump’s administration has followed in the footsteps of Ronald Reagan and his acolytes, who pioneered the Republican playbook on weakening unions. From stacking his administration with anti-union ideologues to firing more than 11,000 striking air traffic controllers during his first year in office, Reagan set in motion a pro-corporate agenda that Trump has continued to push forward. In case there was any doubt about how the Trump administration regarded the conservative icon’s labor record, in August 2017 then Labor Secretary Alexander Acosta announced that Reagan would be inducted into his agency’s Hall of Honor.
One way Trump has taken aim at unions is through the National Labor Relations Board, or NLRB, which is the federal agency tasked with protecting the rights of private-sector workers and encouraging collective bargaining. Private-sector workers are barred from bringing workplace grievances through the courts themselves, so filing complaints with the NLRB—which has more than two dozen regional offices spread across the country—is how employees can seek redress if they feel their rights have been violated. If an issue can’t get settled at the regional level, it gets kicked up to the agency’s five-person panel in D.C., which issues a decision.
Trump’s NLRB has kept busy, handing down a spate of decisions that align with employer interests and overturn Obama-era decisions. In early 2017 the Chamber of Commerce, a powerful business lobby, published a wish list of 10 policies it wanted to see changed under the Trump administration. In less than three years, the NLRB addressed all 10 items on the list, even going beyond what the lobby requested in some instances. For example, new NLRB decisions make it harder for workers and union representatives to discuss issues on employer property, and give employers more power to unilaterally change collective bargaining agreements. Decisions like these tend to have modest immediate impact but become far more consequential as they have more time to take effect.
“Unfortunately, how the three Republicans on the NLRB seem to view their job is to weaken the law as it pertains to workers’ rights, but also amp up scrutiny of unions and penalties against them,” Lynn Rhinehart, a senior fellow at the left-leaning Economic Policy Institute (EPI), said.
Republicans say the flurry of Trump administration actions is a natural response to what they viewed as aggressive rule making by the Obama administration. “The perception on the Republican side is that Obama hit so many balls across the net, so [the administration] is responding by swatting balls back now,” Olson, the Cato Institute expert, said. “Generally, I think the business community just wanted to get some relief from all the new rules imposed by the prior administration.”
But beyond playing ping-pong with Obama-era dictates, the Trump administration has also been working to hollow out the NLRB. According to an EPI analysis, the number of full-time employees working in the agency dropped by 10 percent during Trump’s first two years in office, including 17 percent fewer regional field staff.
Given that the nation’s roughly 129 million private-sector workers can’t bring their grievances through the courts, the fewer NLRB staff available to process their complaints, the fewer opportunities workers ultimately have to get justice.
Perhaps the clearest example of the Trump administration’s attitude toward unions is its treatment of federal workers. Over the past three years, with the strong encouragement of the president, agencies have taken steps to strip federal workers of their union rights and undermine their negotiated contracts.
“I have to admit federal workers have suffered,” Everett Kelley, the national president of the American Federation of Government Employees, said. “We’ve seen federal worker contracts just ripped up and replaced with contracts written by management that had no negotiations at all,” he said. Civil servants have been forced out, Kelley continued, while staff vacancies have been left unfilled.
Last October, the Trump administration instructed agencies to move as fast as possible to restrict unions in federal workplaces. One of the first, practical consequences was that many union reps, who for years had access to government agencies, were no longer welcome inside. In late January, the president took another step, issuing a memo that gave Defense Secretary Mark Esper the power to end collective bargaining for the Pentagon’s civilian workforce of roughly 750,000 people, more than half of whom are in unions. It’s not yet clear what Esper will do with that power.
A second term for Trump would likely bring more of the same, said Donald Kettl, a professor of public policy at University of Texas at Austin and an expert on the federal government. While past Republican presidents have tried to diminish federal unions, he said, few presidents have been as successful as Trump. “He’s skillfully found a way to use these issues to energize the [Republican] base,” Kettl continued, and he’s pursued tactics that don’t require legislative action. Trump has latched on to recurring conservative themes—his “deep state” attacks on bureaucrats are not radically different from Nixon’s “enemies list”—but his push has been “a more focused, concerted, and successful effort than the anti-bureaucracy campaigners have been able to muster in the past,” Kettl said.
If Trump’s first term was focused on making it tougher for workers to unionize, both conservatives and liberal policy wonks agree that a second term would likely mean more attention directed toward regulating gig workers. Generally, gig workers—like Uber drivers—aren’t afforded the protections of traditional employees, like minimum wage, overtime, unemployment insurance, and the right to join a union. Increasingly, though, labor advocates are building a case that many of these workers have been shortchanged; they’re functionally employees and should be protected as such.
It’s clear that the Trump administration disagrees. In one 2019 decision, the NLRB reversed an Obama-era ruling to find that SuperShuttle drivers were independent contractors, not employees. The agency’s general counsel, Peter Robb, another Trump appointee, reinforced that decision, issuing a memorandum declaring the same thing about Uber drivers. That sends a strong message to gig workers to not bother bringing any new cases to the NLRB on this topic.
Meanwhile, blue states have been pushing in the opposite direction. At the start of 2020, a sweeping new law known as AB5 went into effect in California, taking aim at the problem of misclassifying employees as independent contractors. Other states, like New York and New Jersey, are now following suit with their own versions of the law, and the Democrat-controlled House of Representatives passed its own bill in February that similarly would make it harder for employers to classify their workers as contractors. Other states, like Washington, are considering bills to allow for so-called “portable benefits”—where workers, regardless of whether they are employees or contractors, could accrue benefits on a per-hour basis, and these would be fully portable, like Social Security. (The Washington Monthly has championed this idea.)
Rachel Greszler, a labor policy expert at the conservative Heritage Foundation, said that while Republicans are interested in addressing some of the concerns faced by contractors and gig workers, their proposed reforms differ from laws like AB5. She suggested policies making it easier for contractors to pool together to finance their health insurance, using what are known as “association health plans.” Greszler also pointed to universal savings accounts, which would function similarly to employer-administered 401(k) accounts. The Trump administration supports both of these policies and has already taken steps to make association health plans available more broadly.
The decisions already issued by Trump’s NLRB could weaken the impact of California’s new labor law by confusing workers and deterring other states from moving forward with their own solutions. “I think it is probably very confusing to hear that you are not an employee and don’t have a right to collectively bargain under federal law, but that you are an employee for the purposes of California law,” said Sharon Block, an Obama Labor Department official and now a labor expert at Harvard Law School. “When labor rights are more complicated it makes it less likely that they will be invoked. It’s good lawmakers are moving forward in California, but this counter-signal from the federal government could have a chilling effect on workers who might otherwise assert their rights.”
Another four years of Trump, said Shaun Richman, a labor expert at SUNY Empire State College, would mean an even greater effort by the NLRB to try to stop federal labor law from adapting to “the modern workplace.”
“They are closing their minds to the ways that business models actually work, they don’t want the National Labor Relations Act to adapt to the fissured workplace,” he said. “It’s not an exaggeration to say four more years is an existential threat.”
Amy Swan T his essay is part of a package imagining the policy consequences of a second Trump term. Read the rest of the essays here . And, if you enjoy what you’re reading, please consider making a donation—we’re a nonprofit media organization and rely on the support of our readers. In January 2018, the Centers for Medicare & Medicaid Services announced that it would support states that wanted […]
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This essay is part of a package imagining the policy consequences of a second Trump term. Read the rest of the essays here. And, if you enjoy what you’re reading, please consider making a donation—we’re a nonprofit media organization and rely on the support of our readers.
In January 2018, the Centers for Medicare & Medicaid Services announced that it would support states that wanted to add work requirements to Medicaid. Six months later, Arkansas became the first state to put that guidance into practice.
The results were disastrous. More than 18,000 people lost health coverage. It turns out, however, that most of those people had met the requirement or qualified for an exemption. So why did they lose their health care? The new regulations required recipients to log their hours online—something that was almost impossible for those who had no internet access or who tried accessing the website during its nightly shutdowns. Meanwhile, administrative mistakes meant lost coverage for thousands.
A district court halted Arkansas’s work requirements, concluding that states cannot “refashion the program Congress designed in any way they choose.” The rule has since bounced around in the court system, as more states have attempted to add work requirements, and more judges have struck them down. The Trump administration will likely take their case to the Supreme Court, and there is no telling how the Court might rule on it.
Medicaid work requirements are just a glimpse into the Trump administration’s unified, coherent, and intentional assault on the safety net. It has also targeted food stamps, public housing, health care, and immigrant services with changes that would make benefits harder to access. These attacks ignore the broad public support of government programs, and reams of social-science research, putting millions of Americans at risk.
But unlike the GOP playbook of yore, where changes or cuts to safety net programs played out through the legislative process, Trump’s approach takes place almost exclusively behind the scenes—through executive actions and administrative rule making, and in the federal courts. While some of the administration’s proposals have proceeded, the courts have, until now, served as an important bulwark against these initiatives. If Trump wins a second term, that’s likely to change.
Republican efforts to cut safety net programs are not new. When Ronald Reagan came to power in the early 1980s, he launched an aggressive campaign against the welfare state, arguing that Lyndon Johnson’s Great Society project was “the central political error of our time.” The Reagan administration reduced funding for a range of safety net programs and restructured them to shift authority to the states.
Republicans accomplished much of their agenda in that era by working with moderate and conservative Democrats. But that bipartisanship—as well as public support for many antipoverty policies—limited their efforts to dismantle the programs.
Trump differs from his conservative predecessors in that he has made no such effort to work with Democrats. His first attempt to repeal the Affordable Care Act was profoundly unpopular, with support for the effort polling in the teens and 20s, the lowest ratings for any major piece of legislation in at least a generation. Republicans nonetheless tried to ram through several bills, which generated widespread protest and outrage, and eventually failed. Congressional efforts to cut the Supplemental Nutrition Assistance Program (SNAP), otherwise known as food stamps, were also unsuccessful.
And so, the Trump administration has shifted its attention away from Congress and to the rule-making process. Last year, in the span of nine months, the Agriculture Department proposed a bevy of changes to SNAP. For example, they proposed tightening work requirements and raising the income and asset limits that determine eligibility. Court decisions have stopped work requirements for now, and the asset rule has yet to go into effect. But if it does, about three million people will lose benefits.
Other agencies have been busy changing rules, too. Under dispute in the courts now is a proposal from the Health and Human Services Department that would allow health care providers to withhold medical services, medications, and information if they have moral or religious objections.
The Department of Housing and Urban Development proposed a rule forbidding people who qualify for public housing from living with an undocumented family member. For some, loss of housing or family separation would become the only options.
In many instances the courts have blocked these changes. But there are ominous signs on the horizon—specifically from the Supreme Court. In January, it overturned a lower court’s injunction and allowed the Department of Homeland Security’s “public charge” rule to move forward. The rule allows the federal government to deny green cards to immigrants who use Medicaid, food stamps, housing vouchers, or other forms of public assistance. In late February, the administration began implementing that change.
The lower courts’ resistance to the administration’s proposals has come to frustrate many prominent conservatives, including at least one on the Supreme Court. Justice Neil Gorsuch has criticized this “increasingly common” use of nationwide injunctions by district court judges to halt government policies, and has vigorously urged the Court to confront the issue.
If given four more years, Trump will continue to work with Republicans in the Senate to reshape the judicial system to accommodate conservatives’ decades-long goal of dismantling the welfare state. He has, at breakneck speed, already appointed more than a quarter of the active judges on the U.S. Court of Appeals. His judicial appointees are also comparatively younger than his predecessors’, extending their long-term power. Trump’s judicial legacy will entrench conservative governance for the foreseeable future.
IThe U.S. safety net is not easily understood. More than 80 interwoven and interdependent programs are spread across several departments and agencies. Nearly every program has different application procedures, eligibility criteria, and benefit levels. For millions of underemployed workers, children needing free lunch, families with exorbitant health care bills, people who cannot work because of a disability or chronic illness, and others, these programs may be the only reason they get by. But the vastness of the safety net makes it difficult to protect.
The programs do, however, have one unifying element: Nearly all of them use the federal poverty line to determine eligibility. Changing that line would hit all the programs at once, upending the lives of millions.
In 2019, the Trump administration proposed redefining the poverty line formula and changing how inflation is factored in. While it is not clear which inflation index the administration would use, it seems likely they would choose one that grows slowly. In other words, as the cost of living increases for everyone, the federal poverty line would stay comparatively low.
This change would ripple across the dozens of federal programs that use the poverty line in some way. More than 250,000 low-income seniors and people with disabilities would receive less help from Medicare, or lose it altogether; over 300,000 children would lose comprehensive health coverage, as would some pregnant women; at least 250,000 adults would lose health care coverage that they gained through the ACA’s Medicaid expansion; around 40,000 infants and young children would lose nutritional supplements; and more than 200,000 people, most of them in working households, would lose food stamps.
It is unclear whether the administration even has the authority to make this change on its own, but that has not stopped them before. For now, the rule is under review and hasn’t been finalized. If it is, it will almost certainly be challenged in court. But if that case comes before a judge who is sympathetic to the administration’s argument, millions of Americans could lose access to health care, food assistance, prescription drug benefits, heating assistance, or housing subsidies.
Government antipoverty programs work. Census data shows the massive economic impact these programs have on low-wage workers: In 2018, income from these programs kept more than 47 million people out of poverty. During economic downturns, they play a critical role in helping low-income families meet basic needs and act as a stimulus for the economy. Studies of the Great Recession suggest that the effects of unemployment spikes and poverty increases were buffered by safety net programs that acted as a counterforce. The changes proposed by the Trump administration will likely obliterate this cushion in the next recession.
Incomes are soaring and poverty is plummeting, Donald Trump said during the State of the Union address in February. “Our economy,” he said, “is the best it has ever been.” The facts reveal a different reality. A 2017 study showed that nearly 40 percent of Americans cannot pay for a $400 emergency expense. Income inequality is worsening, and the racial wealth gap is widening. Real wages have stagnated. Inflation and rising prices are creating new economic burdens for low-income families. A third of Americans struggle to afford food, shelter, or medical care. Social mobility has plummeted.
The 2021 budget proposal confirms Trump’s intent to cut social programs. Billions of dollars in spending on programs that provide economic stability and health care for families could be slashed. Student loan assistance, Medicaid, children’s health insurance, food stamps, housing assistance, disability insurance, heating assistance, and Medicare all face major reductions.
If Trump wins a second term, the emergence of a stingier, more punitive, and increasingly burdensome safety net would be a high priority for the administration. The federal court system—not Congress—would become the primary battlefield where social policy is contested. The judicial system, ripe with appointments of like-minded judges and perhaps another justice to the Supreme Court, would wage the administration’s war on the safety net. The damage to the policy infrastructure would not be easily undone. In the meantime, millions of already sidelined Americans would become hungrier, sicker, and more vulnerable, eradicating any shot at the American dream—or even just plain survival.
Amy Swan If I were Trump, I’m not sure I’d really want health care to be my headline legislative battle,” said Harold Pollack, a professor at the University of Chicago and an expert on health policy. Health care is the one issue where Democrats have a huge polling advantage, he continued. “Why foreground that if you can do other things?” Which is not to say that nothing will happen, […]
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If I were Trump, I’m not sure I’d really want health care to be my headline legislative battle,” said Harold Pollack, a professor at the University of Chicago and an expert on health policy. Health care is the one issue where Democrats have a huge polling advantage, he continued. “Why foreground that if you can do other things?”
Which is not to say that nothing will happen, he was quick to add.
Health policy experts from across the political spectrum agree that if Trump wins a second term in the White House, health care may not be a legislative priority. Particularly if Democrats retain a majority in the House of
There’s always the possibility that an external factor will spur action. A new disease threat—either the new coronavirus or some other highly contagious disease—could force the White House and Congress to work together to improve the nation’s public health infrastructure. Also looming is the insolvency of the Medicare trust fund, currently estimated to take place in 2026. The last two times Medicare was close to not being able to pay all its bills—in 1983 and 1997—Congress and the president (Ronald Reagan and Bill Clinton, respectively) stepped in to shore up the program’s finances.
Then there are a handful of issues so important to the public that addressing them has gained bipartisan support in Congress. Finding a way to bring down drug prices has been a priority for both Congress and Trump, as has fixing the problem of “surprise” medical bills that show up when an insured patient receives health care outside of his or her insurance network. If these issues aren’t dealt with before the 2020 election, they will likely get rolled over onto the next Congress’s to-do list.
If he’s unable to make much progress through legislation, Trump is likely to turn to a strategy Obama embraced in his second term: Use executive authority. “I’ve got a pen, I’ve got a phone,” Obama famously said. Since congressional Republicans and the Trump administration have failed to repeal and replace Obama’s signature health law, they’ve already adopted this approach.
Judges have blocked many of the administration’s rule changes, like its efforts to add work requirements to Medicaid. If Trump wins a second term, this trend might reverse.
“Obamacare won’t be repealed, it will just rust away,” Pollack said. For example, the Trump administration has hobbled the state marketplaces where individuals can buy insurance, with a variety of small-scale policy changes. The administration cut nearly all the funding for staff to help people sign up for coverage through the marketplaces, and made it easier for consumers to buy cheaper plans elsewhere that may not cover preexisting conditions, one of the core requirements of the Affordable Care Act. “The president and Republicans see it as politically advantageous to have the marketplaces function poorly,” Pollack told me.
The administration may have other rule changes teed up. A second-term Trump administration might try even harder to make changes to Medicaid that would allow states to functionally shrink the program. In exchange for decreased federal funding, states would be allowed to side-step some current federal rules on who and what must be covered. The proposal is almost certain to be challenged by opponents in court. But if it goes into effect, people in states that take the deal could see Medicaid co-pays increase and benefits decrease, or could lose coverage entirely.
Trump has already put forward a number of far-reaching executive initiatives only to have them halted by the courts. Proposals that would let states require Medicaid recipients to prove that they work or perform community service in order to keep their health insurance have been struck down in three states. In a recent ruling overturning the new requirements, judges noted that when Arkansas added work requirements, some 18,000 people lost health coverage. In most cases, people lost coverage not because they failed to meet the work requirements, but because the process for reporting their hours to the state was too cumbersome. In addition, the courts blocked a Trump order that would make it easier for health care workers to decline to perform or even help with abortions or other procedures that violate their conscience. A rule that required drug companies to include prices in their television ads was also struck down.
If Trump wins a second term, this trend might reverse. The Senate spent most of 2019 not passing legislation, but approving new judges—at twice the typical annual rate. In 2019 alone, according to the National Review, the Republican-majority Senate filled the seats of nearly 12 percent of the American judiciary. With a simple majority vote, Mitch McConnell sped up confirmations by changing Senate rules. And on average, Trump-appointed
judges are more conservative than those chosen by past Republican presidents.
The White House is wearing this as a badge of honor. “President Trump’s historic appointments have already tipped the balance of numerous Federal courts to a Republican appointed majority,” read a White House press release, adding, “Approximately 1 out of every 4 active judges on United States Courts of Appeals has been appointed by President Trump.”
There is also the possibility that another seat will open up on the Supreme Court. If Democrats don’t win the presidency in 2020, it’s hard to see how some of the aging liberals on the Court could hold on for another four years. Ruth Bader Ginsburg is 87, and in poor health. Stephen Breyer will turn 82 in August. A third pick for Trump would cement the conservative majority that’s already in place, perhaps for a generation.
The headline-grabbing issue for a change at the Court is abortion. There are already five nominally anti-
abortion justices, and the first major abortion case since Brett Kavanaugh joined the bench will be decided later this year. Most observers think it unlikely that the Court will expressly overturn Roe v. Wade, the landmark 1973 case that legalized abortion nationwide. More likely is that it will simply approve more and more drastic restrictions until abortion is only available in the bluest of states. A sixth anti-abortion justice would make that all but certain.
And far more than abortion is at stake. Many of the president’s blocked proposals could eventually get a stamp of approval from a 6–3 conservative majority. The administration is supporting a lawsuit, currently making its way to the Court, that would declare the ACA unconstitutional in its entirety. Lawyers across the ideological spectrum consider the case legally dubious. But if the Trump administration wins another Supreme Court seat, the ACA could be struck down, and, with it, protections for preexisting conditions and other popular provisions.
One potential bright spot, Pollack predicts, is that Trump may not have the patience to enact other sweeping changes to the health care system. “I think this requires too much work,” he said, “and I think he’s bored by the level of detail.”
Amy Swan It has never been easy to be a public official in the United States. In contrast to other rich democracies in Europe and Asia, bureaucrats are not held in high esteem. In Germany, Japan, France, or Britain, the country’s best and brightest aspire to public service, whereas in the U.S. they go to the private sector or, if they are public spirited, into the NGO world rather […]
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It has never been easy to be a public official in the United States. In contrast to other rich democracies in Europe and Asia, bureaucrats are not held in high esteem. In Germany, Japan, France, or Britain, the country’s best and brightest aspire to public service, whereas in the U.S. they go to the private sector or, if they are public spirited, into the NGO world rather than government service. Conservatives in particular have long derided “pointy-headed bureaucrats” who today have morphed into a “deep state” that is seeking to subvert the personification of the people’s will, President Donald Trump.
As a result, American public service is under grave threat. It has been heavily politicized during the first Trump term, and in a second may deteriorate rapidly as cronyism, corruption, and incompetence become the new norms.
This is immensely concerning. American government—indeed, all governments everywhere—depends on the efforts of competent officials who are loyal not to the politician who appointed them but to a broader public interest. This loyalty is encapsulated in the United States by the oath that higher-ranking officials take to defend the U.S. Constitution, rather than to serve the president who appointed them. While public officials do have political preferences—how could they not?—vast numbers of them go to work every day believing that they are neutrally serving the public interest rather than a particular political party. Consider NASA, the Centers for Disease Control and Prevention, the Federal Reserve, the Forest Service, the Social Security Administration, or the uniformed military, all integral parts of the federal government.
We may see an EPA chief who asserts that global warming is a hoax, a CDC head who claims that the new coronavirus was a Chinese plot, or a surgeon general who says the anti-vaxxers have a point.
But under Trump, no department or agency appears secure. In his first term, Trump has criticized his own intelligence community, the FBI, the Justice Department, the National Security Council, and the State Department for seeking to undermine him. The Federal Reserve and its chairman, Jerome Powell, have been constant targets of a president wanting the Fed to inflate the money supply to help his reelection chances. Trump has intervened to overturn the military’s punishment of Navy SEAL Edward Gallagher, and tried to influence a Defense Department decision to award a multibillion-dollar contract to Microsoft rather than the target of his ire, Amazon. Even a local outpost of the National Oceanic and Atmospheric Administration came under attack for disputing the president’s false assertion that Hurricane Dorian was threatening Alabama. Trump’s disdain for public service is reflected in the huge number of senior positions, including ones like secretary of defense, that have been left unfilled for extended periods of time.
Perhaps the most dangerous of Trump’s interventions concern the actions he has taken toward the Department of Justice. Trump seems not to have the slightest understanding of the rule of law, believing that the law should serve his interests rather than the reverse. During the 2016 campaign he urged criminal prosecution of his political rival Hillary Clinton, and later pushed his loyal attorney general, William Barr, to investigate his own department over the Mueller investigation. Barr has questioned the U.S. Attorney for the Southern District of New York for looking into the activities of Trump’s friend Rudy Giuliani and the Trump Organization. Most recently, the president tweeted criticisms of the sentencing guidelines handed down after the conviction of his friend Roger Stone, leading to the resignations of four prosecutors involved in the case. The deference of the senior leadership of the Justice Department to his wishes has sent shivers down the spine of every federal prosecutor in the country.
The rule of law is not some physical mechanism that limits the authority of powerful officials. It ultimately depends on the political power of other institutions in our complex constitutional system. When Republicans in the U.S. Senate acquitted Trump in his impeachment trial without hearing further witnesses, they were, in effect, telling him that it was okay to use the power of the U.S. government to promote his own election chances. Since his acquittal, he has behaved more overtly like a mafia boss, using his authority to punish enemies and reward friends. If he is reelected and the Republicans continue to hold on to the Senate, the hunt for disloyal officials will escalate. The president will truly feel that he has the mandate to do whatever he wishes, like having his attorney general initiate criminal prosecutions against his Democratic opponents. He will be safe in the knowledge that the Senate will not object.
It is not as if the federal government was a competent, finely tuned machine prior to Trump’s election. The Progressive Era project of professionalizing public service, begun at the turn of the 20th century, got only so far before the antistatism of American politics halted and reversed it. Today, a change in administrations, even within the same party, leads to the turnover of roughly 4,000 political appointees, compared to the mere handful that change in European and Asian parliamentary democracies. In the State Department, it is hard for a foreign service officer to rise to the rank of assistant secretary or ambassador given the number of political appointees claiming these positions.
Politicization of the government today takes many forms. Over the past decade, nearly one-third of the new hires in the federal government have been military veterans, due to the congressionally mandated Veterans’ Preference program. This policy is understandable in light of America’s wars in the Mideast, but it does not necessarily provide the best pool of applicants. Federal contracting is subject to myriad rules requiring minority, female, Native American, and small-business preferences. One of House Minority Leader Kevin McCarthy’s relatives, for example, was the beneficiary of a Native American preference, despite his extremely tangential relationship to that group.
While many Americans believe that the size of the U.S. government has expanded relentlessly over the decades, we have no more full-time federal employees than we did in the 1960s, and today the government is no larger than it was 60 years ago. Both Republicans and Democrats have participated in the charade that they are holding back the government’s size by replacing civil servants with legions of contractors, whose activities are far less transparent and accountable, and more costly.
The long-term consequence has been the erosion of the prestige of public service and an accompanying decline in the numbers of young people willing to enter it. Paul Volcker, whose lifetime passion was promotion of public service, led two commissions (in 1990 and 2002) that documented the aging and declining morale of the federal workforce. In the time since the second Volcker Commission, the problem has only grown worse. What idealistic young person today would want to join the State Department or the EPA and find themselves working for a political operative who didn’t believe in the central mission of the agency, and was unwilling to back employees who did?
In How Democracies Die, Steven Levitsky and Daniel Ziblatt note that democratic regression today does not take the form of a military coup but, rather, unfolds as the piecemeal erosion of democratic norms over an extended period of time. Donald Trump did not likely start out wanting to be an authoritarian leader; instead, he expected that he could run the country like a large family business. Since then he has come up against the Constitution’s checks and balances and has fought relentlessly to get around them. One of these checks is the existence of a neutral civil service.
Americans do not need to look far to see what Trump might do to this institution during a second term. In recent days, Trump has put in place as director of national intelligence a political supporter with no background in intelligence because he didn’t like the IC’s conclusion that Russia was interfering in the 2020 election. His newest national security adviser has also publicly claimed not to have seen any information supporting this view. If Trump wins reelection, we may see an EPA chief who asserts that global warming is a hoax, a CDC head who claims that the novel coronavirus was a Chinese plot, or a surgeon general who says the anti-vaxxers have a point.
The U.S. federal bureaucracy has weaknesses: It is too rigid and too rule bound, and it fails to attract the best talent. In an ideal world we would undertake a major reform of U.S. public administration and implement a 21st-century version of the 1883 Pendleton Act, which mandated, among other things, that federal jobs be allocated by merit. But under the current circumstances, it will be enough to fight a rearguard action in defense of classic public service as it exists today, warts and all.
Amy Swan Donald Trump’s critics have often charged him with ignorance and a lack of a strategic approach to foreign policy. This is a profound misunderstanding of the president. In fact, Trump has always had a certain strategy, based on his “gut” and his experience with international business and business personalities. It is a strategy built on old-style U.S. isolationism and an appreciation of the new realities of international […]
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Donald Trump’s critics have often charged him with ignorance and a lack of a strategic approach to foreign policy. This is a profound misunderstanding of the president. In fact, Trump has always had a certain strategy, based on his “gut” and his experience with international business and business personalities. It is a strategy built on old-style U.S. isolationism and an appreciation of the new realities of international business. His reelection will confirm a profound realignment in U.S. security policies and U.S. military priorities. This strategy will be based on transactional values and uninhibited by history and experience.
For more than 70 years the United States has maintained its powerful grip on western Europe, an outgrowth of World War II and the subsequent Cold War challenge of the Soviet Union. The principal instrument of U.S. influence has been NATO, in which the U.S. provided the dominant military component while the Europeans provided the geography, and a lesser degree of financial commitment and defense resources. It was a matter of mutual using—we used the Europeans’ diplomatic and financial clout to serve what we believed were vital U.S. interests, not only in Europe but also beyond, and they got a powerful security umbrella, under which they could devote proportionately greater resources to social welfare without fear of renewed intra-European conflict. With more than 500 million people, a GDP that rivals our own, and a culture that largely shares our own values, Europe was our natural partner—and the transatlantic partnership has been hugely successful in promoting peace and prosperity.
After his reelection, President Trump is likely to gut NATO of its significance. Expect policy changes by tweet. Russia will no longer be seen as a threat. NATO enlargement will cease, and support for Ukraine and Georgia will be curtailed. Countries will be expected to spend more than 2 percent of their GDP on defense, and they will pay more for U.S. troop presence and exercises. Article 5—collective defense—will be conditioned. Security arrangements will be created with the United Kingdom outside NATO, and NATO will be held hostage to more favorable U.S. trade terms. Should the European Union resist U.S. economic pressures, the president will bring leverage through diminished American support for NATO.
The United States will look increasingly to the financial consequences of its alignments and alliances. China will be able to purchase a U.S. withdrawal from the western Pacific.
The consequence will be an opening for Russia to exploit the particular weaknesses of each of these countries, politically, economically, or informationally, further weakening not only NATO but also the EU. Europe, including western Europe, will be open for deeper penetration by Russia and China.
In the Mideast, the U.S. will anchor a U.S.-Israeli-Saudi alliance directed against Iran. American forces will leave Iraq and Syria. Russia will be viewed increasingly as a sometime partner, sometime collaborator, and sometime adversary as it consolidates its control over Syrian and Libyan oil and stabilizes Turkey’s expansionist tendencies. ISIS will become a weapon used primarily against Iran and the Kurds, reducing parts of Iran to a failed state. But U.S. military efforts, largely directed against ISIS, will be curtailed.
In Africa, U.S. investment efforts to increase its influence under an enhanced U.S. International Development
Finance Corporation will be too little, too late. An expanding Russian military and contract military footprint will further grow Russian influence over not just Europe and the country’s own oil and gas needs, but also its investment flows into Africa. Continuing large Chinese investments in resource-rich southern African countries will enable China to find the resource security it seeks.
In both the Mideast and Africa the consequence will be continuing low-level conflict and a loss of broader Ameri-
The U.S. military needed to pursue the America First strategy will be subtly transformed with higher technology and smaller forces, even as the defense budget grows. The emphasis will be on defense, not intervention, and where there is intervention, it will be a quick strike and then withdrawal. Forward forces will be largely withdrawn, including, at last, from Afghanistan. Active, multiple lines of defense along our southern border will be established, with the U.S. Border Patrol increasingly supplemented by deep intelligence and backstopped by mobilized National Guard forces.
The Army will likely face the greatest cutbacks, with withdrawals of forward forces from Korea and Europe enabling major units to be cut. Special Operations Forces will be protected, even as some forces are withdrawn from Africa. The National Guard can expect to be well funded and to receive expanded missions in fields such as cyber-defense and border reinforcements. High-tech projects like directed energy weapons, hypersonic missiles, glide aircraft, and space-directed efforts will continue.
The Navy will be sustained with a focus on its missions in the Mideast and the Indo-Pacific, but it will be seen as particularly valuable as leverage in securing the right trade arrangements with China. In the end, it will sustain deep cutbacks in ships, and especially aircraft carrier battle groups, as the U.S. pulls away from its extended overseas commitments.
In Asia, the U.S. will look increasingly to the financial consequences of its alignments and alliances. Temporarily, Japan and South Korea will be able to maintain a U.S. presence and commitment by substantially raising their “host nation support” payments. But in order to move forward with a resolution of U.S. trade issues with China, the president is likely to trade off U.S. forward presence in the western Pacific; the key issue will be the price. These military commitments will be viewed in transactional terms—how and how much will China pay for the U.S. to depart the region?
The consequence in Asia will be to avoid an armed conflict with China over Taiwan and the South China Sea—the so-called Thucydides trap—but it will also trade U.S. alliances for an economic purchase of American withdrawal, greatly increased Chinese power in the area, and reduced U.S. influence.
In Latin America, the president’s principal aim will be to drive back immigration, including illegal immigration. Foreign assistance will be directed to those countries and activities that can best preclude immigration. A secondary aim will be to ensure that U.S. companies can exploit any particular resource opportunities, for example the massive oil find off the coast of Guyana, and to maintain the current trade balances under the newly agreed United States-Mexico-Canada Agreement.
History and experience would teach us that these policies are unwise. In two world wars in the twentieth century, the United States determined that it could not allow a hostile power to dominate Europe. Three generations of American leaders faithfully sustained that lesson, maintained peace, and ensured that the United States—and American values—maintained their dominance through the Cold War and post–Cold War period across the globe. But that lesson, and the alliances and forces that enabled it, and the world that was built with American values and American blood, will be left behind with the 2020 reelection of President Donald Trump. Long-term security will be negotiated away for short-term gains, both economic and political. In the world left to our children, America will be more isolated and less secure. Hardly America First.