(2025-04-07) Hunt Crashing The Car Of Pax Americana

Ben Hunt: Crashing the Car of Pax Americana. "Sometimes when I’m driving… On the road at night… I see two headlights coming toward me. Fast. I have this sudden impulse to turn the wheel quickly, head-on into the oncoming car." (from Annie Hall)

This scene, with a young Christopher Walken playing the role of Annie’s suicidal fantasist brother Duane, is one of my all-time favorites, and it captures perfectly the feeling I have today with the Donald Trump Administration driving the national car

One of the hardest things in life is to hold two conflicting ideas in your head at the same time, like the ideas that Annie Hall is a brilliant movie by a brilliant writer AND that this same brilliant writer is at best a lecherous slimeball who richly deserves his public disgrace.

My ask of you in reading this note is that we make an effort to hold several conflicting ideas in our heads at the same time. Like, for example, that the American socioeconomic system desperately needs fixing after decades of venal corruption from (mostly) Democratic but (also) Republican Administrations AND there is an underlying global system worth preserving that gives the United States enormous privilege, wealth and freedom of action in the world.

Or, for example, that there’s no reason to doubt the authentic intentions of Donald Trump and his Administration to improve the position of the United States AND their economic policies can have the unintended consequence of blasting the underlying global system to smithereens, making it impossible to achieve their goals

The truth is that the United States became as sclerotic and bloated under Joe Biden as the Soviet Union under Leonid Brezhnev, and that Joe Biden’s cognitive decline and its obscene cover-up made the United States government a global patsy and a domestic feeding trough. The truth is that our border policy was stupidly permissive.

AND the truth is that the purpose of government is not efficiency for efficiency’s sake. AND the truth is that the quality of mercy is not strained and neither is due process, so that justice may be sure but never cruel. AND the truth is that spending money to curry political favor abroad through CIA USAID programs is a lot cheaper and a lot more efficient than sending in the Marines, AND is a lot more profitable than seeing the Chinese take our place in the world.

AND the truth is that we have three co-equal branches of government, where the unconstitutionality of a President ‘vetoing’ Congressionally-authorized spending programs through Executive Order is well-settled law. AND the truth is that federal debt isn’t like our own personal debt, so that we can’t go broke as a nation AND we’re nowhere near having a budget crisis AND we have the strongest, most vital economy in the world AND we can still grow our way to a more equitable prosperity without breaking a global system that works so formidably to our advantage.

This underlying global system has a name. It’s called Pax Americana.

Pax Americana is the Bretton Woods monetary system and the Plaza Accords and the SWIFT banking system and the unquestioned dominance of the USD as the world’s reserve currency.

Pax Americana is the NATO alliance and the Pacific Fleet and CENTCOM and the NSA and the unquestioned dominance of the US military as the world’s security arbiter.

Pax Americana is the American brands, American universities, American entrepreneurialism, and most of all the American stories (narrative, culture) that have dominated the hearts and minds of everyone on Earth for the past 50 years.

Pax Americana is the ability of the United States to set the rules for every coordination game in the world. The rules of trade, the rules of intellectual property, the rules of money, the rules of culture, the rules of war … all of those rules were made by us.

The results of Pax Americana?

The United States has seen more than 300 million citizens lifted into the highest standard of living in the history of the world.

The world has seen more than a billion people lifted out of crushing poverty, mostly in China and India but everywhere else, too, as the capacity to make tangible things has shifted permanently (yes, permanently) from West to East.

My strong, unwavering belief is that Pax Americana is a damn good deal for the United States AND the world.

Is it a perfect deal for the United States? No. Do other countries free ride on our provision of security and an end-market of the American consumer? Absolutely. Has the system been internally captured by oligarchs and professional politicians, so that the distribution of this great wealth flowing to the United States goes less and less to ‘average’ Americans? 100%.

But that’s not what this Administration believes. Neither Donald Trump nor his key advisors believe that Pax Americana is a good deal at all

They don’t want to fix the Pax Americana regime of coordination through multilateral rule-setting. They want to blow up the entire deal and replace it with an America First regime of competition through bilateral engagement.

the America First system that this Administration wants to have as a replacement is not a stable system that is possible to have as a replacement.

The end result of blowing up Pax Americana... will be a system that is both worse for the United States AND the world.

Back in September 2016 I wrote a note called Virtue Signaling, … or Why Clinton is in Trouble: "Trump, on the other hand … I think he breaks us. Maybe he already has. He breaks us because he transforms every game we play as a country — from our domestic social games to our international security games — from a Coordination Game to a Competition Game." ((2016-09-29) Hunt Virtue Signaling Or Why Clinton Is In Trouble)

The difference between Trump 1 in 2017 and Trump 2 in 2025 is that this time he means it. Or rather, in this administration Trump has the personnel and the planning to implement this Coordination Game to Competition Game shift in every strategic interaction that the United States government participates in, both domestically and internationally

What’s a Coordination Game? Well, one classic representation of a Coordination Game is what Jean Jacques Rousseau back in 1755 called the Stag Hunt, and in 2×2 graphical form

In the Stag Hunt, if players coordinate successfully with each other, meaning they hunt together (cooperate) to take down a mighty deer that they share, they get the upper left quadrant outcome – the best possible outcome (+2, +2) both individually and collectively.
The upper left quadrant of the Stag Hunt is Pax Americana.

But what if you don’t believe that the upper left quadrant outcome of the Coordination Game is the best possible outcome for YOU?

The only thing that changes in the pay-offs of a Competition Game from a Coordination Game is in the upper right and bottom left quadrants, where the Column Player (upper right) and Row Player (bottom left) can now get their best possible individual result from defecting when the other player is cooperating, from dominating this head-to-head interaction. Sure the total benefits are lower (total of 3 instead of total of 4), but you get ALL the benefits. You are winning.

The problem, of course, with the Competition Game as it applies to international relations is that you keep playing it. ("iterated")

if you’re China or Europe, or even Canada, you don’t have to take the sucker’s payoff of 0, you can push both players into the bottom right quadrant of (+1, +1). You can both be worse off, but it’s better than outright losing

That’s why the Competition Game has another, more common name: the Prisoners Dilemma.

In the Prisoners Dilemma, there is only one equilibrium, not two, only one sticking point where both players will rationally end up to avoid the ‘suckers payoff’ of playing nice while the other player plays to win. That lower right quadrant is (very) quickly the end point of this game

do you think that Donald Trump will ever stop trying to ‘win’, that he would ever stop pressing an advantage if he thinks it exists? What kind of stable cooperative agreement could you ever hope to find with him?

And don’t even start with the tit-for-tat arguments here, because that would require Trump to take a massive and public L to get a reciprocal pattern of cooperation going again. No, once you replace the Pax Americana coordination game with the America First competition game, you’re in it for good.

You cannot unring this bell. Sure, you can reverse this policy and that policy, and god knows we’re going to get plenty of that, but you can never go back to the way things were before

What is lost in the shift from the upper left quadrant of the Stag Hunt to the bottom right quadrant equilibrium of the Prisoners Dilemma?

The unipolar moment of American military dominance becomes a multipolar scrum of regional spheres of influence and diminished global security.

The US dollar becomes a choice, not a necessity, and debt issuance on everything and everywhere – not just by the US Treasury – becomes more risky and expensive.

Global growth and productivity become permanently diminished versus their potential.

Highly efficient but non-robust systems, both economic and political, break. Not all at once, but slowly. And then all at once.

We’re now experiencing the ‘all at once’ moment in capital markets.
Or rather, we’re now experiencing the first leg of that moment.

There is no resolution of ‘uncertainty’. There is only a more or less existential threat against every US company of every size and every industry, with an indeterminate path and duration.

I believe there have been three great pillars of investing success over the past 20+ years: US home country bias, US tech bias, and US dollar bias.

I believe that all three of these are now melting icebergs

That’s the backdrop for a Prisoners Dilemma portfolio

And in the foreground? Policy difference between countries that matters, so that global macro can actually work again. Business model difference between companies that matters, so that discretionary long/short can actually work again

But I believe in my heart of hearts that skill is going to matter again in investing, when it hasn’t for a loooong time now. Especially if that skill is married with AI-enabled tools to track the pace and timing of the melting icebergs and the policy differences and the business model differences that matter. ("Semantic Signature")