[By Yanis Varoufakis, translated by Guo Han of Observer Network]

"Mr. President, my philosophy is this: all foreigners want to cheat us, and our duty is to cheat them first." The U.S. Treasury Secretary successfully persuaded the president to launch a massive shock to the global economy with these words. According to a presidential aide, the aim was to achieve "the controlled disintegration of the world economic system."

No, the above is not a communication from Trump's team before launching the "Liberation Day" tariff shock on April 2nd. Although the phrase "foreigners want to cheat us" clearly has a Trump-like style, these words were spoken by then-U.S. Treasury Secretary John Connally in the summer of 1971. It was he who successfully persuaded Nixon to initiate the infamous "Nixon Shock" a few days later.

Critics should be well aware that it is inappropriate to describe Trump's current tariff shock as "unprecedented," and like all previous "reckless" actions challenging the existing order, it is destined to fail. Compared to today, the Nixon Shock had far greater destructive power, especially for Europe. And it was precisely through the economic destruction caused by this shock that the architects of the entire system achieved their main long-term goal: ensuring that American hegemony expanded alongside America's twin deficits (trade deficit and fiscal deficit).

"The idea of the market as an impartial arbiter is tempting. But when the need for stable international systems conflicts with the pursuit of national policy autonomy, many countries, including the United States, choose the latter."

Then, with one sentence, he undermined the foundation of the post-war economic miracle achieved by Western Europe and Japan: "Ensuring the controlled disintegration of the world economy is a reasonable goal for the eighties."

Ten months after making this statement, Paul Volcker became chairman of the Federal Reserve and quickly doubled interest rates and then tripled them. The "controlled disintegration" of the global economy began when Nixon was persuaded by Connally and Volcker to decide to destroy the still stable exchange rate mechanism. However, it was the Federal Reserve's subsequent sharp interest rate hikes that delivered the final blow—their destructive power far exceeded Trump's current tariff measures.

Paul Volcker served as Deputy Minister of the Treasury under the Nixon administration and was Chairman of the Federal Reserve from 1979 to 1987.

Therefore, Trump is far from the first U.S. president to use a devastating shock to let the global economy "disintegrate controllably"; he is not the first president to deliberately sacrifice allies to maintain and revitalize American hegemony; nor is he the first president to be prepared to let Wall Street suffer in the short term while strengthening America's long-term capital accumulation. Half a century ago, Nixon had already mastered this approach perfectly.

Ironically, the "lost world" mourned by today's Western liberal elite is precisely the product of the Nixon Shock. While they condemn Trump's reckless attack on the global economic order, they mourn the illusion created by another U.S. president's greater shock—the Nixon Shock gave birth to the liberal establishment represented by neoliberalism, financialization, and globalization.

The core issue facing Nixon's team was: "How can hegemony be maintained when the U.S. becomes a deficit country?" Was there any way other than adopting austerity policies (which might trigger an economic recession and weaken U.S. military strength)?

They concluded that the only way was the opposite of "tightening belts": expanding trade deficits and having foreign capitalists pay for them (the "preemptive strategy" that Connally persuaded Nixon to adopt).

This bold strategy to make foreigners pay for America's twin deficits was built on reconstructing the circulation system of capital flows. This meant breaking free from the constraints on Wall Street since the New Deal era, wartime economy, and the Bretton Woods system. After suppressing bankers for forty years (to avoid a repeat of the 1929 crisis), Nixon's team chose to loosen the reins. But this required a new set of economic theories and political ideologies to package it.

On August 15, 1971, Nixon announced the decoupling of the dollar from gold

Under the ideology of neoliberalism and its pseudo-scientific facade, bankers realized that they could engage in financial games with tens of billions of foreign capitals in a deregulated environment, thus ushering in the era of financialization. The more the new system, which sustained the export demands of European and Asian countries with American deficits, developed, the larger the scale of trade needed to sustain this deliberately imbalanced globalization system—thus globalization was born.

Many people describe such a world—the era when the "60s" and "70s" generations of Americans grew up—as the "neoliberal era," while others call it the era of globalization or financialization. But本质上, these are one and the same thing. The era opened by the Nixon Shock was shaken at its roots by the 2008 financial crisis. Since 2009, although American hegemony continues, it has lost momentum. At least in the eyes of Trumpists who hope to rejuvenate American hegemony, this system is "on its last legs." This is the full significance of Trump's shock and its strategic layout, including the tactical means adopted, such as embracing cryptocurrencies.

However, there is still an essential difference between Trump's shock and the Nixon Shock. Although both advocate strengthening the status of the dollar as a global reserve currency while allowing significant devaluation of the dollar, the paths to achieve this are quite different. The Nixon Shock allowed currency markets to depress the value of the dollar, combined with skyrocketing oil prices (which hit European and Japanese companies harder than American ones) to intensify allies' pain. In terms of oil prices, Trump may have some intention to emulate Nixon, but he attempts to achieve the goals pursued by Volcker through Federal Reserve interest rate policies using tariff sticks: precisely targeting capitalists in Europe and Asia, causing them to suffer more severe damage than American capitalists.

The key to the success or failure of Trump's shock lies in the continuity of his policies, which may require support from bipartisan consensus. Historical experience shows that Nixon's strategy succeeded because Carter appointed Volcker as head of the Federal Reserve and allowed him to continue Nixon's policies; Reagan further advanced this strategy by appointing Greenspan to replace Volcker in 1987. Given the extreme polarization in today's America, can Congress parties replicate the former默契? This seems unlikely, yet who could have foreseen that the Biden administration would fully inherit Trump's first-term tariffs on China and escalate the "New Cold War"?

Former U.S. President Biden. Photo: AP

If Trump's shock truly replicates the success of the Nixon Shock, where will the world go? It is premature to draw conclusions now, but Peter Thiel's new "anti-progressivism" technofeudalism is challenging neoliberalism. Cloud capital is replacing financial capital, challenging the traditional "myth" of the market with the "Holy Grail" of transhumanism (i.e., the fusion of cloud capital, artificial intelligence, and biological individuals).

The process of financialization will also face similar pressures. With the development of artificial intelligence, Wall Street will be unable to resist the trend of the integration of cloud capital and finance, just as Musk's ambition to turn X into a "universal application" shows. This development trend means that payment systems will undergo a transformation akin to the replacement of fax machines by the internet, causing serious shocks to financial stability (including the future role the Federal Reserve can play).

The beautiful vision of the "global village" will give way to the reality of "high-walled nations." Despite this, the ebb of globalization does not mean the world will enter a self-sufficient closed economy. Trump's shock is dividing the world into two camps: one is the coalition of vassal states compliant with the "Trump Plan," and the other is the BRICS organization exploring independence and self-reliance.

Each generation tends to believe that it is at a historical turning point. And the curse of our generation is—truly being at this turning point. Instead of focusing too much on the character flaws of a White House occupant, we should remember that the significance of the Nixon Shock far exceeds Nixon himself. If Nixon could reshape the world, making it more unbalanced and brutal, Trump can certainly do it again.

(Originally published on UnHerd Comment website in the UK, original title: "Will Trump's 'Liberation Day' Change the World? The Nixon Shock Created a Radical Precedent." Translation is provided for readers' reference only and does not represent the views of the Observer Network.)

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