We Are Very Close to a Serious Recession

Q1

The China Academy: There is speculation in the capital market that Trump stepped back on reciprocal tariffs due to the sell-off of U.S. Treasuries. How urgent is the U.S. debt issue?

Richard Wolff: I think, here in the United States, it is widely understood that the level of debt is too high and unsustainable. That was the consensus even before last Monday’s sell-off of U.S. Treasuries in the bond market by Japan, as well as by American and other holders of large quantities of U.S. Treasuries. This sell-off is definitely part of the calculus regarding what needs to be done at this point.

Now, it is not at all clear—not to me and not to many others—that Mr. Trump’s tariff program is in any way a solution to this issue. In fact, many believe that the entire tariff operation, especially its extraordinary inconsistency (being raised, then lowered, then raised again—now focused on electronic items and so forth), is not addressing the core problem. Instead, it seems to be a distraction.

What Mr. Trump is likely doing is using these tariffs as a bargaining tool to extract concessions or gifts during negotiations with various countries. This allows him to showcase achievements to the American public, saying, “I got this from Vietnam, I got this from China, I got this from Nigeria.” It doesn’t really matter what these “achievements” are; most Americans won’t understand whether they are significant or not. However, the spectacle of “getting something” will resonate with the public.

The real issue here, however, is the unsustainable growth of debt, which means reducing deficits. Many conservative business groups and others are advocating for this. They are likely to use last Monday’s Treasury sell-off by Japan as evidence of a growing problem. These groups argue that more and more creditors—including major holders like the People’s Republic of China (the second largest after Japan)—are becoming anxious. They worry the U.S. could reach a point where it is internally torn between two priorities:

Such a conflict could create a crisis, which would be very dangerous for creditors.

There is also anxiety about proposals to reduce government spending. For instance, efforts by figures like Elon Musk to fire large numbers of public employees and shut down government programs are aimed at lowering the need for borrowing. But even with these measures, the reality is that the combination of worker layoffs and tariff uncertainty is pushing the U.S. dangerously close to a serious economic recession.

While a recession might still be avoided, the situation is precarious. This morning, here in New York, Mark Zandi of Moody’s publicly stated that, in his view, we are only weeks away from an economic recession. At this point in American history, such a recession would be extremely dangerous.

Q2

The China Academy: And if U.S. Treasuries are no longer viewed as risk-free assets, global demand for the U.S. dollar could collapse, and America’s financial hegemony could face disintegration. Could this potentially escalate into a war?

Richard Wolff: It’s always a potential in history. Trade wars have sometimes turned into military wars, so it wouldn’t make sense to say this couldn’t happen. However, at this point, I’m still hopeful that if it begins to look like there is a serious pullback in confidence in the U.S. Treasury market, steps will be taken. There are all kinds of measures they can adopt, including new types of treasury obligations.

Let me give you an example. A few years ago, a British Prime Minister, Liz Truss, attempted to implement a Conservative Party program that would have significantly increased Britain’s national debt. The London bond market collapsed on her, and she was forced out of office in a matter of days. That incident served as a warning to the British government, prompting them to explore alternative solutions.

UK Prime Minister Liz Truss resigns after failed budget and market turmoil

Unfortunately, those solutions have brought bad news for the British working class, as the Labour Party has been tasked with implementing austerity measures to address the government’s debt problem.

This is why I’m wondering whether the firing of public employees in the U.S. is an attempt to reduce the deficit.

At the beginning of this year, in January, the projected U.S. deficit was nearly $2 trillion, which is a dangerous level. They are now undertaking a crash program to address it.

But here’s the key point: one of the reasons for the large deficits and rapidly growing debt is what President Trump did during his first term. The tax cut passed in December 2017 is set to expire this year. If Trump wants to prevent that expiration, he must extend the law. If he doesn’t, then at the end of the year, corporations and wealthy Americans will face higher taxes, as rates revert to pre-2017 levels.

Those wealthy individuals and corporations are his political base, his core supporters. Losing their support would be a major blow to him. But by continuing the tax cuts, Trump exacerbates the deficit, which is already dangerously high. This creates a dilemma.

That’s where tariffs and the attack on public employees come in—they are strategies aimed at addressing the deficit. However, it’s not yet clear whether these measures will be enough to resolve the issue.

Q3

The China Academy: Trump is a businessman—does he not realize that his policies are breaking the very mechanism that sustains dollar hegemony?

Richard Wolff: Yes, but his advisers also understand that over the last 15 years, not taking dramatic steps has led to a decline in the relative position of the United States. There is no way that the people at the top don’t see this. They see it, but they don’t speak about it. This is what psychologists call denial—when you have a problem and deal with it by pretending it doesn’t exist. Children do this, and adults do it too when they’re in a tough spot.

The United States has had to face, over the last 15 to 20 years, that the system you just described—running massive deficits, providing global liquidity to the world trade system based on the dollar, with oil priced in dollars—is no longer building U.S. power. Instead, it’s shrinking U.S. power. If they stick with the same approach, the decline will continue.

The added problem is that while the U.S. position is shrinking, China’s position is rising. As part of the BRICS countries, China is growing in influence. This creates an urgent need for change, but there aren’t many options. What we’re seeing now is an experiment—a strategy being pursued by one group of American capitalists who believe their approach can solve the problem.

If Trump is defeated in the next election and the Democrats return to power, the same fundamental problem will remain, and the same reality will slowly dawn: something has to change. The Democrats may take a different approach. For example, they might shift alliances, making China less of an enemy and turning Russia back into the primary adversary. Everyone is hoping for some kind of solution to alleviate the situation.

What’s happening now, in my view, is that the United States is trying to cope with the fact that it cannot maintain the existing system. The results of that system are no longer acceptable. The dollar’s importance was already declining even before the Ukraine war. The Ukraine war has only accelerated this decline, forcing faster decisions and adjustments.

This is why Trump’s policies, such as tariffs, feel experimental. Even Trump doesn’t fully know what the tariffs will do. For example, when he imposes tariffs, certain industries push back, warning that these measures will cause significant problems.

Take the U.S. high-tech industry as an example—companies like Apple, Intel, and IBM. These companies rely on parts from China. When Trump imposes tariffs, they tell him, ‘We can’t operate like this—it will destroy the leading industries.’ These industries, often referred to as the ‘Magnificent Seven’ (the seven major electronics, computer, and artificial intelligence corporations), are critical. They hold up the U.S. stock market.

Even if the broader economy can manage, a shaken stock market has major consequences. Around one-fifth of stocks in the U.S. market are owned by non-Americans. If the stock market is destabilized, it makes the dollar less attractive, as foreign investors lose confidence.

So, what we’re seeing are the problems of a declining empire—problems that are not easily solved. The U.S. is experimenting in an attempt to slow or reverse the decline, but the challenges are immense, and the outcomes are uncertain.
Q4

The China Academy: And in this current situation, where do you see opportunities for China and also opportunities for RMB internationalization?

Richard Wolff: Here’s the irony: people here in the United States just do not want to face the reality—although I suspect they understand it on some level. If the United States attacks virtually every other country, as it does with these tariffs, it makes it harder for countries like China, Vietnam, and others to export to the U.S. Since the U.S. is one of the largest and wealthiest markets in the world, this immediately damages export industries in those countries.

What does this mean for the U.S.? The U.S. is teaching every exporting business in Vietnam, China, Cambodia, Brazil, and elsewhere that America is no longer a secure export market. Businesses that once expanded, hired more workers, and took risks assuming they could sell to the U.S. are now learning that maybe they can’t.

If I were a businessperson—and I’ve advised many businesses throughout my life—I would be the first to say: you need to look for secure export markets elsewhere to compensate for the U.S. becoming an unreliable one.

As a result, the U.S. will have to face the fact that businesses unable to access the American market will look elsewhere. They’ll certainly consider Europe, but they will also look toward China. China is now rich enough, with a substantial portion of its population having disposable income, to become an attractive market.

In this way, the Trump tariff policy backfires. Rather than helping the U.S., it ironically helps China, which wasn’t supposed to benefit but will. The Chinese will find opportunities because of the effects of American tariffs on other countries.

This should have been taken into account, but I don’t think it has been. In the weeks ahead, I believe we’ll see a slow recognition of this here in the U.S. It’s part of a larger trend—a fading recognition of America as a declining empire. The denial is still strong, but it’s slowly fading.

Editor: huyueyue