“I think we are making a mistake,” said the Vice President, in what the media is criticizing as an unclassified text message discussion.
The administration was discussing if, when, and how to strike against the Houthi rebel group in Yemen, which has been menacing commercial ships in the Red Sea since late 2023.
The media is focusing on the fact that someone had inadvertently (or perhaps intentionally) added a reporter from the Atlantic to the chat group. But once again the media has missed the point.
What matters far more is how JD Vance crystalized the current situation: that just “3 percent of US trade runs through the Suez [Canal, where the Houthis strike]. 40 percent of European trade does…”
In other words, this Houthi situation is far more important to Europe than to the US… so Europe should take the lead, step up, and do something about it rather than wait for America to once again ride to the rescue.
“I just hate bailing Europe out again,” Vance says, with other administration officials in agreement about “European free-loading”.
This is a telling exchange which reflects the mood right now. The Trump team believes that the US unfairly has to shoulder the security burden for Europe. And, frankly, their position is totally valid.
But to play devil’s advocate, the Europeans would say, “Well, that’s the price you pay for the exorbitant privilege of having the world’s reserve currency.”
And that’s not a crazy assertion either. Just ask Liz Truss.
If you don’t remember Ms. Truss, she was British Prime Minister for all of 51 days; back in September 2022, her government announced its ‘mini-budget’ which proposed significant tax cuts combined with government subsidies for household energy expenses.
The result would have been higher budget deficits, which the government intended to finance by borrowing more money.
Unfortunately for Truss, her proposals were poorly received, and investors dumped their British government bonds.
Yields collapsed. The pound went into free-fall. And Ms. Truss– the Prime Minister of one of the largest and most powerful economies in the world– had to resign in disgrace… all because the bond market didn’t like her economic plan.
That’s what happens when you DON’T have the global reserve currency.
America, on the other hand, does have this special benefit; every foreign government and central bank on the planet has to own US dollars… which is why the US government gets away with the fiscal equivalent of murder.
America’s government runs multi-trillion-dollar deficits year after year, yet does nothing about it.
They borrowed trillions of dollars to pay people to stay home and NOT go to work. They have constant threats of government shutdowns and debt ceiling crises. They spend more money each year paying interest than they spend on national defense. And the extreme level of waste is simply appalling.
No other country in the world would get away with all of these shenanigans.
So, if we’re intellectually honest, Europe has a point. The rest of the world willingly ignores the US government’s dismal financial condition… and in exchange they expect Uncle Sam to take care of the Houthis.
In a way, both sides are right. Both sides have valid points. Yet each side also believes the other to be completely wrong and irrational. There doesn’t seem to be any room for compromise or mutual understanding.
In divorce court this is known as “irreconcilable differences”. And it’s getting messy.
The US and Europe have spent decades as the world’s ultimate ‘power couple’; they enjoyed a massive trade relationship, an iron-clad military alliance, top secret intelligence-sharing, industrial cooperation… you name it. Europe and the US have been in bed together for quite some time.
But this relationship is clearly fractured, and it’s declining at a rate not seen since World War II.
The US may still be hoping that Europe will eventually come around. And this seems to be the strategy: threaten them with tariffs until Europe’s weak leadership buckles and bends the knee.
But that doesn’t seem to be happening. Europe is finding its legs. And its backbone.
Friedrich Merz, for example, the presumptive German Chancellor, recently scored a major victory by amending his country’s Constitutional requirement to maintain a balanced budget.
He had to sell his soul and betray voters to get it done. But Merz stated (after the election, of course) that he was willing to do “whatever it takes” to Make Europe Great Again and fend off the threat of Russian invasion.
He’s now planning close to $1 trillion in government spending, almost all of it financed by more debt. It will include a massive defense buildup, plus a bonanza of the Green party’s climate initiatives.
For his part, French President Emmanuel Macron has also been planning “a new paradigm”, as he calls it.
In a recent speech, Macron spelled out Europe’s obvious problems. The border has been overrun, and their security is in shambles.
“We have delegated everything that is strategic,” Macron complained. “our energy to Russia. Our security . . . to the United States. And equally critical perspectives [like rare earth minerals] to China.”
Even Europe’s food supplies are being imported from foreign nations, Macron laments. “Who would be foolish enough to outsource their food?”
“We must take them back. This is what strategic autonomy is all about,” he says. Bottom line, Europe is too dependent on foreign nations, including and especially the US.
He goes on to challenge Europe to fight against US “competition” and become a world leader in AI, quantum computing, space, biotechnology, and nuclear energy within five years… and to get there by deregulating and investing heavily in innovation.
Where will they get this investment capital? Well, he mused that “every year, our savings amounting to around 300 billion euros a year go to finance the Americans. . . This is absurd.” Macron believes that money should remain in Europe to fund R&D.
None of this sounds like Europe willing to accede to US demands… nor a Europe that will submit to the “Mar-a-Lago Accords” (which would, among other things, force Europe to hold 100-year US government bonds).
It looks very clearly like Europe is preparing to stand on its own… which, again, looks a lot like a divorce. And potentially quite a messy one. It’s also unfolding very rapidly, right in front of us.
Bottom line, if even Europe thinks it’s “absurd” to buy hundreds of billions of euros each year worth of US government bonds, I can only imagine what China must think.
And this leads me to believe that a new global financial system could be here sooner than anyone realizes.
