This has been a big week for numbers in the U.S. - consumer sentiment, personal consumption expenditures, the second quarter GDP report, and a jobs report. All of them seem to flash orange - the economy is resilient but it is also in a holding pattern, awaiting a bump in prices from the tariff tax incorporated into the products we buy, and contemplating how economic allies will work together in the wake of beggar-thy-neighbor policies. The most significant data this week should not be surprising. The consumer sentiment index remains very pessimistic. The various measures of prices are increasing, now well above the 2% Fed goal, and approaching a 3% average we have been hovering around since February. A weakening global economy, which causes reduced energy demand and lower gas prices, is the primary force keeping inflation barely below 3% on average. The unemployment rate ticked up, most notably for those who have been searching for work for more than six months. There are 10% more of those desperately unemployed, which now represent a quarter of all unemployed. Unemployment from the past few months has also been revised downward. In combination, we see a labor market beginning to stagnate and strain, with factories laying people off as they face the higher costs of imported factors of production because of the new tariff regimes. We saw a significant drop in imports, arising from high tariffs and a weakened US dollar, which contribute to GDP because purchases abroad reduce GDP. This follows a rush to import in the first quarter to beat the implementation of high tariffs. This profound change in trade patterns was enough to overwhelm a drop in exports and investment. A fall in investment is not surprising, given that a deterioration of relations with trading partners means fewer US dollars flowing abroad for imports also translates into fewer dollars returning in the form of investment. When the two quarters are averaged, we see an anemic economy arising from trade uncertainty. More disconcerting is the fall in exports, which would normally increase as the dollar weakens. Trade allies are moving away from buying American, which further isolates the United States. Its isolation means it cannot take best advantage of sectors in which it does well, nor benefit consumers from products that can be produced more efficiently elsewhere. In both ways, America loses. These numbers show that producers and consumers are changing our behavior. We travel abroad less, are precluded from purchasing goods from other countries as their after-tariff prices rise, and producers cannot obtain the steel, aluminum, and copper needed to manufacture domestically, unless we are willing to pay a 50% premium, and pass those costs onto consumers. It will take quite a while to see the net effects of changes in policies and what these numbers mean. Fed Chairman Powell is now in a real bind. The Fed’s vote this week to keep the discount rate constant showed the most significant split in generations. The two Trump appointees voted to lower the discount rate, as at least one of them appears to be campaigning to be nominated by Trump to replace Powell. The Fed is caught between accelerating inflation and a decelerating economy, the classic curse of stagflation. The Fed won’t reconsider its discount rate until September, but it seems likely that it will have to reduce its key interest rate by a quarter point then, in a Solomonic deal with the twin devils of worsening inflation and unemployment. My more immediate concern, though, is whether the numbers mean what they have historically. You sports fans are probably as annoyed as I am about asterisks. These are symbols beside a statistic of dubious significance. Lance Armstrong’s Tour de France records have asterisks after his admission to using performance enhancing drugs. So do the home run records of McGwire, Sosa, and Bonds during the steroid era. Lewis Hamilton’s seven winning seasons should be a record-breaking eight, were it not for some tilting of the playing field by an errant race director call. We all want consistency in statistics so we can judge apples to apples. While the stakes may be low for sports, they can be very far-reaching if we can no longer rely on the validity, consistency, completeness, and transparency of economic statistics. One of the casualties of Musk’s DOGE and President Trump’s policies is the gutting of economic statistics agencies on the one hand and on the government’s declining willingness to release to the public information on the other. All economists share a belief in the importance of timely, accurate, and complete information. Adam Smith spoke about the marketplace as an institution that ferrets out value and prizes information. Indeed, an essential premise of the competitive model that Smith championed was the requirement that information be freely and costlessly available. Markets do not perform as well as they should when information is obscured or distorted. Even worse results occur economically when bad information replaces good information. More recently, an economist named George Akerlof won a Nobel Prize on his paper “The Market for Lemons” that shows how bad information can cause entire markets to fail. Consider a pledge, say by a foreign government, to invest in new U.S. plants as a way to avoid punishing tariffs. Any such investment will be designed to provide a fair rate of return. But, in an atmosphere of on-again, off-again tariffs, or escalating tariffs, or equally whimsical policy, any investor will drag their feet. If there is market volatility, they could earn a greater return than they had anticipated, or they can lose more than they can afford. In the latter case, they may have to close up operations and sell their factory for pennies on the dollar. Under uncertainty, investment is just too risky. Expect so see little new investment beyond what was already planned before the tariff regime changes. It's not hard to wait out three more years. In general, high levels of market uncertainty and volatility reduce financial market returns. That is why we prize the good work government agencies perform when they keep financial and economic markets informed about the level of prices, unemployment, production, interest rates, and other critical data. It is also why we are so troubled when government then censors or distorts such information and, presumably, prefers to release information when it is good for elected officials, but not when it is bad. For instance, this week saw a release of some bad economic data that shows inflation is accelerating somewhat and unemployment is rising, including a downward revision in labor market data for the previous couple of months. Yet, as I read the Friday press release on unemployment, I was struck by how the author kept stating that the data is largely unchanged. Well, that was some soft-pedaling, I thought. Later in the day it was reported that President Trump is demanding the Bureau of Labor Statistics (BLS) Commissioner be fired. Well, that is one messenger who shall be shot. Poor sod. Certainly the data analysis division has nothing to do with actual job creation, but I guess someone has to take the hit each time there is bad news to send a message across government to not be transparent when the news is negative. Cutbacks in consumer price surveys at the BLS, release of critical weather and climate data to farmers, monitoring of pollution and methane emissions, and a growing number of other data release shortcomings makes information less reliable, more suspicious, and more volatile. In turn, markets absorb more risk than necessary. And taking on more risk always erodes returns. Some of the decisions to not release data to the public are simply embarrassing. Every morning I look at the state of the Arctic and Antarctic sea ice. This data has traditionally been provided to researchers worldwide by the U.S. government from a number of their monitoring satellites. These satellites remain healthy and continue to download data. The difference is that the U.S. government all of a sudden decided to stop revealing that data, just as it has decided to no longer survey price increases in more rural areas of the country. Release of data the government accumulates is one of the factors that made the U.S. very productive. Much of that data comes from the BLS, which performs an admirable service to the economy, and upon which I rely almost daily in my research. Information makes the economy run more efficiently. Data may cost a little bit to collect, but once tabulated, it is incredibly cheap to disseminate. To decide to no longer pursue a policy of information transparency is not only at odds with good economics. It also flies in the face of democracy that depends critically on the marketplace of ideas and information. Such transparency is important to me. My Ph.D. thesis was on the ways that information enhances economic efficiency, and how reduced or misinformation imposes significant inefficiencies and economic inequalities. Invariably, when one filters, limits, or taints information, it is to gain some sort of personal or institutional advantage at a cost to us all in economic efficiency. Economists may at times disagree, but that is one point which garners pretty much universal agreement. There has never been as much information at our fingertips but now mixed in with so much disinformation or distortion that a huge chunk of the population cannot easily discern the truth from deception. Unfortunately, too many retreat to echo chambers that provide to them information from only one angle, as a very human strategy to reduce the amount of conflicting information they must sort. Such a division into Fox viewers and MSNBC viewers has created a gulf between us all. We each retreat to one side or the other of every issue, rather than probe to discern our own truth. With misinformation and distortion overload, that is a natural coping mechanism. We all once thought that at least the government would come clean with us. They were a reliable source, a sort of Walter Cronkite for markets. But with the cynical clouding of government data, with political pressure to suppress scientific positions at odds with political whim, and with some Machiavellian belief that the public “can’t handle the truth,” we each become a bit more cynical, a bit more conspiratorial, and a lot less the citizen contemplated by Plato, Smith, and our Founding Fathers. That is way too high a price to pay for politics.

You may recall those humorous commercials from a few years ago. They depicted a skit something like this: The flight attendant comes on the PA system of a fully loaded Boeing 747 and asks if anybody knows how to fly the plane in the case of an emergency. Someone in Row 7 puts up his hand. The attendant asks, really, you know how to fly the plane under extreme stress. The passenger responds, “well, no, but I did stay at a Holiday Inn Express last night.” That’s what I hear every time our president demands that the Federal Reserve lower the interest rate. I’m afraid our chief executive must have slept his way through economics classes in college. Let me explain. President Trump realizes that $3 trillion of federal debt (of a total nearing $40 trillion) comes due next year and must be reissued because the government does not have a snowball’s chance in H E double hockey sticks of paying it down. In fact, the federal government will also have to issue another $2 trillion in debt just to cover new expenses and pay interest on old debt. Of course, you and I could not borrow from Peter to pay Paul, but the government seems confident it can do such a Wall Street Shuffle in perpetuity, apparently. With upwards of $5 trillion of new debt issued, every one percentage point reduction in interest rates can save the country $50 billion. If by waving some sort of magic wand Jay Powell of the Federal Reserve could lower interest rates from 5% or 6% to President Trump’s preferred 1%, that could reduce interest payments by a cool quarter trillion dollars each year. Of course, President Trump claims the Federal Government will save far more than a quarter trillion each year through such magical thinking, but then again he claims he has big hands too. Male exaggeration aside, he believes the number he could save is close to a trillion a year, four times what even an economist prone to magical thinking actually believes. However, even a quarter of that is still nothing to be sneezed at. But even that is nonsense. I know economics is scary boring, but can’t somebody just stand up and demand that numbers so important as interest on our national debt not be drawn out of a magician’s hat, without any basis in reality? Today’s graph shows the difference between the rate government can borrow net of the Federal Reserve rate. This correspondence is highly variable. Powell of the Fed is no magician. His most powerful tool is to set the interest rate to banks that need to temporarily shore up its reserves. A high interest rate means banks prefer to keep more reserves than necessary for fear of paying such a penalty if they fall short. A 1% interest rate encourages banks to be marginally more aggressive in lending, maybe even to the government. The Fed’s interest rate today is about in line with historical trends. Even if it lowered the rate to the 1% Trump demands, that does not mean there will suddenly be a bunch of people, foreign or domestic, willing to lend to our government. In fact, some of those people have left the building - as Trump insists the US exports more than it imports, there are less dollars leaving our country that in more normal times returned to purchase our government debt. In fact, if Powell became the interest rate setter the President believes he is, the government and others would clamor to borrow at 1%. But borrowers need savers. Nobody wants to lend at 1%. Borrowing pressure goes up, and savings go down. The equation does not balance. The Fed can make up the difference for a short while. It could lend to government by buying government bonds, which would help lower the interest rate, not by fiat, but by increased supply of loanable funds. As always, increased supply over demand tends to lower prices, in this case the interest rate. In doing so, the Fed must mint money, in effect, without actually printing money. Such so-called quantitative easing following the Great Recession in 2008 and more recently in the Covid Crisis resulted in about $5 trillion of monetary expansion on the Fed’s books. Such an injection of that magnitude is ground-shakingly huge for any central bank, anywhere in the world. But, it only provides enough new debt to fuel the federal government’s profligate spending for one year. Such is a proverbial drop in the bucket compared to the needs to run government unwilling to reduce spending and afraid to increase taxes. Let me give you another example why it is ridiculous to imagine the Fed can simply decree a lower interest rate. There is a housing crisis. The average rent is approaching $1700. What if the secretary of Housing and Urban Development (wait, does HUD still exist?) decrees that nobody can charge more than $350 per month? That’s a similar ratio as President Trump is cajoling for the interest rate. Wow, at $350/month, sign me up for a loft in Manhattan. The problem is that the rental market would probably shrink by 80% or more if those who own housing stock could only rent out their properties for twenty cents on the dollar. Thirty or forty million households would likely become homeless as landlords realize they can’t take on the risk and the losses that would incur if they could only charge 20% of their business costs. Whether one is a liberal or conservative economist matters little in one dimension. We cannot wish away the law of supply and demand, as much as we don’t want to pay $1700/month for rent, 6% on a mortgage, or 5% on government debt. Such prices must be high enough to induce the providers to meet the needs of the demanders. Yes, the Fed can lower the broad set of interest rates consumers, producers, and government access. But, it is not by lowering the discount rate as the President states. It is instead by massive quantitative easing, in effect putting trillions of dollars of new money onto the Fed’s ledger. In effect, the Federal Reserve must go into heavy debt to bail out poor fiscal management on the part of the federal government. Now, that really is borrowing from Peter to pay Paul. Powell just does not want to invoke expensive and irresponsible monetary policy, with all its inflationary potential, just to bail out incredibly irresponsible fiscal policy that diverts trillions to billionaires. Go figure. Now, Powell is the first Fed chairman in two generations without a Ph.D. in economics. But he is no fool. As a central banker, he understands how markets work. Maybe we should have more central bankers as our national political leaders. No, wait, we do. Canada elected a Ph.D. economist who was not just the head of the central bank in Canada. He also ran the central bank of England. Lucky Canada. When he talks about economics, I listen. He knows of what he speaks. It’s funny, though, just how rare it is for economists to run for office. Maybe it’s their intrinsic belief in synergies, the premise of positive-sum games, rather than the zero- or negative-sum game of politics as-usual.

I usually wait until near the end of the month for my economic update so that all the monthly data can be surveyed. This blog is arriving a bit early. Consumer and producer inflation figures were recently published, and you have inquiring minds. You want to know how that may affect the economy. Our big number won’t come out until the end of the month. On July 30, the U.S. second quarter Gross Domestic Product (GDP) will tell us whether we followed up a first quarter drop with a second quarter. Traditionally, two consecutive quarters of waning GDP results in a recession declaration by the National Bureau of Economic Research. Combine that with rising prices, and we have stagflation. However, while unemployment is rising, its rise is moderated by a fall in the size of the labor force as migrants flee the nation, one way or another. Such labor market dynamics sometimes prevents the NBER from calling a recession. The other piece of information probably won’t be news. I doubt the Fed will lower their discount rate later this month, despite the unrelenting pressure President Trump is applying. Trump wants to stimulate the economy to ameliorate the economic suffering induced by his tariff policies. I’d be incredibly surprised if the Fed budged, though, especially in the wake of the news this week. Last Tuesday, the June Consumer Price Index (CPI) came out, followed by the Producer Price Index (PPI) the following day. While the Fed also looks closely at the Personal Consumption Expenditures survey that comes out July 30, that data comes out only at the end of their next meeting, along with the second quarter GDP report. Meanwhile, the CPI and PPI don’t bode well for any rate reduction. Today's graph shows inflation is renewing its ugly head. Recall that we focus in this blog on a particular version of the CPI and PPI that is more predictive. We can all speak endlessly on what has happened. That is of little value, especially when we are already facing information overload. What happens more - what has happened, or what is happening? For this reason, to look at prices over the entire last year is far less indicative of what will happen over the next few months than what is happening over the last few months. Hence, we focus here on how much prices have risen over the last quarter. In this case, the data is now out for April through June. When compared to January through March, the most common consumer price index rose at an annualized rate of 3.7% over the last quarter. That is significant, and shows a return to the inflation that President Trump campaigned to end. Another index that more closely measures price stress on working class households living in urban areas, called the CPI-W, rose by 3.5%. By all indications, the inflation most economists predicted arising from the new tariff taxes are starting to take root. Producers too are feeling the pinch. Their annualized prices rose by 3.8% in the last quarter. While such an increase in producer prices are somewhat alarming in themselves, the actual data is actually worse. There has been a significant dropoff of people travelling to the United States. his has forced hotels and airlines to cut prices. The drop in hospitality and travel services masks the significant increase in other producer and wholesale prices as factor imports in steel, aluminum, and copper are now bearing high tariffs. If consumer demand were not also tapering off in the wake of inflation and economic uncertainty, such producer price inflation would likely be alarmingly high. It is much easier to determine a change in economic trajectories when the course is steady. All the self-induced volatility creates so much noise that it is far more difficult to discern the signal in the data. To compound these challenges, the government has decided to not release some data in a way consistent with past datat, to limit the scope of their surveys, and, in some cases, to not release critical data at all. On top of that, when government changes policies, there is always a human effort to neutralize ourselves from such policies. For instance, in the long run, the tariff tax consumers now pay will also afford domestic producers to raise their prices to take advantage of less competitive foreign goods, and will unambiguously decrease demand. However, this slowdown is actually led by a temporary acceleration of demand as consumers try to get their orders in before the full brunt of the tariff taxes kick in on them. It should be very interesting to see which of these forces win out over the second quarter. Will higher prices, uncertainty and volatility, and decreased demand for US hospitality services result in a lower Gross Domestic Product, or will the temporary rush to buy before the tariff tax inflation kicks in provide sufficient demand to reverse the first quarter downturn? And, even if July 30 shows a second straight quarterly GDP decline, will the NBER be confident enough to declare a recession, given all the noise in the data? These will be an interesting two weeks in an interesting month, quarter, and six months since the inauguration. What is that Chinese curse? “May you live in interesting times.” Meanwhile, the Chinese economy is doing well. Its GDP growth just came in very strong, at above 4%, and at the upper range of expectations. Factory and public infrastructure spending is accelerating, as are exports to nations other than the U.S. They are diverting the reluctance for nations to purchase goods from the U.S. to exports from China. America’s loss is China’s gain. While China’s trade deficit suffered a bit from the tariff turmoil, the U.S. trade deficit worsened significantly. This is profound, especially in light of the unprecedented decrease in the value of the U.S. dollar, which would normally make U.S. exports more attractive.

(courtesy of https://www.adamasintel.com/charts-china-global-electric-car-dominance/) There is a revolution going on in most every country. The revolution is fomented in China, in an ambitious industrial policy, in rural fields as far as the eye can see covered with solar panels, in innovative battery storage facilities, and in cars that leave Ferraris in the dust. They have names like BYD, Xiaomi, NIO, and some others that may be unfamiliar to you, but attract aficionados and techies around the world. These innovations are not only in the electric vehicles made mostly in China, but also in the entire ecosystem of support technologies, from sustainable energy and storage to new motors, high voltage electronics, AI, and supercomputers that support them. Let us begin with names in this space for which we are familiar. Half a dozen years ago, Tesla was the world leader in electric vehicle innovation and production, and on course to being the biggest car manufacturer in the world. That collapsed with Elon Musk’s foray into political causes and then politics itself. General Motors, Ford, Lucid, and Rivian also produce cars that are now out-innovating Teslas in many key ways, and even outselling them in the U.S. and Canada. However, these competitors are not really selling anywhere else. They have enjoyed deep protectionist policies in the U.S., and, through some serious arm-twisting by the U.S., in Canada as well. But, while these brands have some innovative aspects, they don’t compete worldwide, in technology, comfort, or price, anywhere but in the U.S. and Canada. It goes to show how profound, entrenched, and destructive protectionism can be. I’ve driven a plug-in electric vehicle for years and would not go back to a purely gas-fueled vehicle. I’d like to replace my seven year old car, but I can’t buy the car I want. I’m only temporarily displaced by that limitation and curtailing of competition, though. I am really waiting for technologies that will come to market in another couple of years. Then, there will be almost no valid reason to buy a gas vehicle again, except perhaps to appease every public policy effort in the U.S. to discourage innovation and competitiveness. Before I delve into the innovations we won’t see in the U.S., but perhaps in Canada, for another three and a half years, let’s first discuss the evolving ecosystem around EVs. Of course, electric cars need electric power. It does not have to be the AC power upon which our current (no pun intended) electricity grid is built. It could be the DC power generated by solar panels or wind generators, which is ideal because the batteries and controllers in our EVs are DC as well. When we fully modernize the electric grid to take into account not only the most efficient ways to produce electricity, but also to transport it to us, and to power what are now mostly DC devices in our homes, the EV ecosystem will be ideal to optimize. Meanwhile, we will tolerate the conversion of DC sourced from solar panels, what is now the most efficient (and sustainable) way to generate electricity into the AC to which we have grown accustomed. EVs can handle that conversion, even if it means a loss of efficiency by a few points. The other ideal nature of an EV-based economy is that cars can be charged when it is most convenient. Most miles by households are commuting for work, and most people work when the sun is shining. Hence, we don’t need to go through the step of storing solar electricity - much of the new capacity we will need can go right into our vehicle batteries rather than into a large battery storage facility, just to be used at some other time. This takes care of the heightened electricity needs of an EV economy. Of course, this infrastructure is not in place yet in the US and Canada. Countries such as China are far ahead in adopting what is a far more efficient way to both increase transportation efficiency and decrease costs. They know that, in ten years, solar cells will generate more power than all other sources, combined; natural gas, coal, hydroelectricity, nuclear, wind, tidal, and geothermal. The issue is one of storage. Already, solar energy is by far and away the cheapest mass source of energy, but it operates only when the sun is out. Recent advances in battery storage is key. For transportation, we must also address range anxiety. One firm, named NIO, has mastered and built out thousands of stations in which one can swap out a discharged car battery for a fully charged one faster than it takes to fill up your car with gas. Other companies have figured out how to add another 300 miles to your EV range in about the same amount of time it takes for you to fill up your car and grab a cup of coffee-to-go at the local gas station. In other words, the technology is ready for prime time, if such is measured by a range of around 400 miles, refueling in minutes, and a cost on par with gasoline in the worst case, or in places like the City of Plattsburgh, a quarter of what it costs to fuel a gas vehicle. In the U.S., protectionist and sustainability-hostile legislation is holding up adoption of these technologies, in addition to the six inches between our ears, but they are sweeping the planet and someday will revolutionize our markets as well. This brings me back to the Chinese Revolution. If I could buy any car in the world right now, and if my criteria were cost, performance, reliability, comfort, and convenience, my choice would be the Xiaomi SU7. Some Xiaomi models are in the $20,000-$30,000 range, but if I were afforded a mid-life crisis, I’d buy the Ultra version. Its 1,527 horsepower can accelerate from zero to 60 mph in about 2.5 seconds, or, if you wish, to 125 mph in about 10.5 seconds, all for around $70,000. If you are willing to put some upgraded tires, brakes, and seats in it, and do a bit of factory-approved improvements, you can take it to the famed Nurburgring track in Germany and it will beat any production car ever built, including Porsche, Ferrari, or whatever you want to throw at it. Tesla, duct tape your door, because Xiaomi just blew them off. That’s all for a tiny fraction of the supercars it leaves in the dust. Meanwhile, cars by Xiaomi, BYD, and others now have batteries that can take them more than 600 miles, with some batteries being perfected that can go more than twice that far. Imagine going all the way across the country and only have to stop for a charge once. There are even cars popular in China that are selling for around $10,000 to $15,000 with enough range to still take me a couple of hundred miles. You can’t buy similar performance in the US at even twice the price people in South America, Europe, Asia, and Africa enjoy because U.S. and Canadian consumers must pay a 100% tax on Chinese EVs. That tariff is designed to protect a U.S. industry that is unable to sell its cars in the volume of a BYD anywhere but here. With China’s help, we could make much better cars here, develop leading edge technologies too, and save our consumers a huge chunk of the $600 billion Americans spend on new vehicles each year. In turn, we will receive a better car that will last longer and be far cheaper to operate to boot. The potent combination of the most technologically advanced and cost-effective EVs, batteries, and solar panels make China's lead tough to beat. World class competitors are motivated by such challenges. But let’s not let innovation, efficiency, sustainability, and cost savings get in the way. We can suppress better mousetraps for a while, but we can’t do it forever. The problem is that those who are slow to adopt new technologies are forever playing catchup. I don’t recall any previous era when the U.S. shunned innovation that is so plainly understood and adopted worldwide. In fact, the U.S. hung its hat on an ability to see the future more clearly and invest in it more intensely. Our universities attracted researchers from around the world to ensure we were always on the leading edge. Corporations wanted to do business in the U.S. not because they had to, or because they were protected from competition. Heck, a few years ago, the previous incarnation of Elon Musk proclaimed that he did not want Telsas protected. That would only discourage innovation and competition. The Earth seems to have shifted on its axis since then. Ah, for an enlightened industrial policy….

The Federal Reserve has lowered the interest rate without doing anything at all. You might proclaim that’s an absurd statement. After all, the Fed has refused to lower their key interest rate, called the discount rate, since last fall, despite all the profound and scary events that have occurred since then. Let me explain. Last week we discussed the dual mandates of central banks like the U.S. Federal Reserve or the Bank of Canada. The one that has garnered the most attention is their inflation fighting obligation throughout the high inflation period arising from excessive budget deficits over the past half dozen years. We also noted that central banks must also help ensure enough economic growth so that there are jobs for an expanding labor force. These goals are summarized by efforts to keep the inflation rate in the 2% range and growth sufficient to keep the unemployment rate around 4%. The Fed has managed to do so without doing anything at all. Inflation has been hovering a little above 2% for about the past year, and unemployment is now at 4.1% in the U.S., with little Fed intervention. There is a third central bank mandate that is much harder to describe, though. Of course, their overarching goal is to steady the economy, despite all the destabilizing external, internal, and self-induced economic crises that foment around them. They can’t control fiscal policy, trade policy, budget deficits, or the mounting public debt. They have but a couple of tools, the determination of the interest rate they charge banks for short term borrowing, and their willingness to buy and sell their huge stock of government bonds to stabilize the economy. They focus on their interest rate policy to do one more thing. They constantly ask how their policy might affect a nation’s exchange rate. After all, our economy depends critically on demand for our export goods and the price of our imports. Millions of people are employed by corporations who sell goods and services abroad and we all buy goods from elsewhere and don’t want those prices to rise artificially. Corporations are really good at producing stuff. They sweat over pennies in factor prices or on the price they can sell their product. A 1% change in these prices or costs is big. A 10% change in the terms they rely on to trade is gigantic. If you are a company that depends on exports or imports, you watch the exchange rate very closely. This is why trade-oriented companies are so concerned about the dramatic changes in U.S. tariff policies. Whatever you might think about the desirability of an executive branch distorting the terms of trade through dramatically higher tariffs, we can all agree that any such change is a huge curveball in the planning of corporations that must look a year or two into the future to make decisions today. Artificially induced trade distortions screw up that planning. Up until lately, the Fed did not have to worry alone about exchange rate destabilization. For instance, the vast majority of U.S. trade is with Canada, Mexico, and China. Canada’s trade imbalance is not large. Its net exports to the US of goods is almost equalized by its net imports from the U.S. in services, such as financial services, consulting, entertainment, and engineering. The other major traders are not quite so intertwined with the US in terms of services trade, but these, and the EU and Japan, all have a strong stake in their exchange rate with the United States since the U.S. is (still) the world’s biggest trading nation. These major G7 nations, and China, have for long made an effort to adjust their economic policies to keep their exchange rate with the U.S. within a narrow and predictable band. If the U.S. exchange rate becomes weak, these nations would, until recently, have their central banks sell stocks of their currencies to buy U.S dollar-denominated government bonds. This delicately balanced dance was good for all these mutual trading partners. That is what we mean by having the U.S. dollar be the reserve currency. Nations hold reserves of U.S. dollars, and buy more if the U.S. dollar weakens, or sell some if the U.S. dollar strengthens too much, until recently. Nations and companies don’t invest in U.S. government bonds. Central banks trade in them to keep exchange rates constant, and companies temporarily hold what has until recently been considered a very safe asset to park money until they need it. The U.S. dollar as the reserve currency is a huge boon for the U.S. It means there has always been a robust market to sell their newly issued government debt. That keeps the interest rate on U.S. treasuries low and predictable, and, in turn, the interest rates you and I face that are often pegged in relation to the U.S. treasury interest rate. I recall in 1987 how this mutually-interdependent relationship broke down temporarily. Back in the fall of 1987, Japan, then the major exporter to the U.S., began to doubt the ability of the U.S. to honor its debts. Then, as now, the U.S. was borrowing a lot of money to fund President Reagan’s effort to outspend the former Soviet Union is armaments until the USSR cries uncle. This rising federal debt scared Japan so much that they refused, for a week or two, to buy U.S. bonds and stabilize the U.S. exchange rate. The stock market plunged almost 23% in a single day until its trading partners decided they would bail out the U.S. by resuming their parking of reserves into U.S. government securities. Scarily, the federal deficit that precipitated the 1987 panic was nothing compared to the overspending today that continues to increase as a result of the Big Beautiful Bill. And, America's trading partners are no longer in any mood to bail out the reserve currency. They have to use billions of their own assets to exchange for US dollars and buy US government securities. What's the point in investing in a sound U.S. dollar if the U.S. is not particularly interested in these countries as reliable economic partners anymore? If the U.S. does not want to be the hub by which other nations' trade revolves around, countries seek out other trading partners and invest in stable exchange rates with them instead. The recent wave of tariffs is creating this Trumpster fire. Let’s say an American buys a $10,000 item from abroad. Let’s consider a 25% tariff. Of the purchase price, $2,000 is a domestic tax and $8,000 goes to the exporting country, to be converted to their currency to purchase their export. Compare that to a 25% export tax instead of an import tariff. In that case, the full $10,000 is converted to the foreign currency. In other words, the U.S.-style import tariff means that fewer US dollars are converted to the foreign currency for each car purchased. Of course, fewer foreign items are purchased in any case, so imports are down in either case, as we have seen in the sharp drop in imports of late, but at higher effective prices. The difference is that, for the same volume of imports, President Trump’s import tariff scheme creates lower demand for the foreign currency than does export tariffs imposed by other countries. This translates into a relatively stronger US dollar compared either to the exporting nation imposing an export tariff, or with free trade, even though the volume of trade has been dropping of late. Yet, the U.S. exchange rate has plunged faster lately than at any other point in modern economic history. The value of the U.S. dollar had dropped by 10% in just a few short months, something that has not happened in more than half a century. Why? Because the corporations and central banks of other nations do not want to hold U.S. government securities, even for a short while. Those willing to park their excess cash temporarily in U.S. securities six months ago might have netted them a 4% interest rate, but they lose 10% when they exchange those U.S. dollars to bring their funds back home at some point. Foreigners who once willingly parked funds temporarily in U.S. treasuries are running for the hills. To get these funds back to fuel a now perpetual federal deficit will require an increase in the interest rate. This is what the Fed must keep an eye on in its interest rate policies. Yes, it uses interest rates to stabilize the U.S. economy, but it must also use them to stabilize terms of trade between the U.S. and the world. That is why the Federal Reserve has, in essence, lowered the interest rate without doing anything at all. It has not been willing to raise the interest rate enough to stabilize the U.S. exchange rate. The President has put the Fed into an untenable position. It could accede to presidential pressure and lower the interest rate to give the economy a nice little push, but, in doing so, it will worsen what has already been the worst exchange rate downgrade in recent memory. If the Fed can’t lower their interest rate without further damaging the exchange rate, and cannot raise the interest rate to fix that but face further pressure from the president, short of the president relenting on his unique economic theory of tariffs and federal debt, then it remains in a wait-and-see mode even as the ship is sinking. Now, I admit there are a lot of moving parts to this economic quandary. The Fed has been trusted to balance these various forces, with the cooperation of the Congress and executive branch. Now that these and other major economic relationships are in tatters, it will be interesting (troubling?) to see how it proceeds. Meanwhile, in the path the U.S. is currently on, federal debt is ballooning and, in a half dozen years, interest we must all pay on this debt will represent the largest drain of federal funds, more than social security outlays, Medicare and Medicaid, defense spending, and the last category, everything else.

As I write, the U.S. Senate just scraped up barely enough votes to begin debate on a set of spending cuts combined with making permanent tax reductions, primarily for the wealthy. A coalition of senators concerned about reductions in Medicaid for the poor, Obamacare for the working poor, and hospital care in rural areas and senators troubled by how the Big Beautiful Bill will add $4 Trillion to the national debt over ten years caved and pushed the package through. Already, interest payments on the debt is the second biggest spending category, after social security, and shall be the largest category, approaching $1.5 trillion per year, within half a dozen years. It appears, though, that political threats can induce even the most principled senators to favor reduction in short term pain at the expense of long term national debt passed on to our children. This economic mismanagement is problematic in the medium and long term, but much of the financial media seems preoccupied on the short term. President Trump is trash-talking the Federal Reserve Chair, Jerome Powell, and trying to brow-beat the Fed into lowering interest rates to reduce the government’s interest payments and perhaps stimulate the economy. This unprecedented pressure shows a great deal of economic naivete, though. As we saw last fall when the Fed lowered the rate they lend to member banks by a full percentage point, even very large Fed discount rate reductions aren’t matched by similar reductions in the treasury rate that affects government borrowing. As you know from this blog and elsewhere, the Fed does not set interest rates, just the rate of short term borrowing by and between banks. Even if the Fed could magically lower interest rates, the historically gargantuan federal debt is usurping much of the domestic investment capital, so low interest rates won’t translate into increased domestic investment and productivity as it might when the economy is less fragile. Finally, the dramatic decline in US imports of late means that trade surplus countries no longer have the American dollars to reinvest in the U.S. economy. We track the interest rate to some degree in these blogs. They are a measure of a nation’s willingness to invest in itself, either because optimistic savers are willing to accept a low interest rate in return for long term industrial productivity improvements, or because the Fed is working hard to realize one of its dual mandates. These mandates are to keep inflation around 2% and to maintain healthy economic growth to draw in our growing labor force without significant unemployment. Every month we document inflation, are have been seeing that the measures on today’s graph are now converging toward the magical 2% point. Recall we focus on the annualized inflation rate from the last three months of data because we are most interested in what it might portend for the future, not what it did over the past year. The data do not really measure the effects of Trump’s tariff taxes as these higher import prices and shortages are only just now working their way through the supply chain. The Fed and most all economists don’t expect the upward pressure on prices to be measured in consumer prices for another month or two. Only now, at the end of June, the complete set of consumer and producer prices, and personal consumption expenditures for May. The Fed recently said they want to hold tight and not prematurely stimulate the economy until the data become clear. That will take another month at least. Today’s graph includes a couple more economic series so we can up our analytic game a bit. I have included the trend of the consumer sentiment index, a measure that typically ranges below a high of about 100 and a low of around 50. The CSI has only hit 50 a couple of times, most recently in April. Before that, we have to go back more than 75 years to find a similar low. The CSI rebounded slightly in the May data, but it is still very weak. This low is now causing consumers to pull back in spending quite dramatically, which portends to worsening Gross Domestic Product, given consumption is usually around 70% of national spending. This weak domestic spending may well compound itself into negative growth in the second quarter once real (inflation-adjusted) GDP figures come out on July 30. Last week they revised first quarter downward, which means our first negative growth quarter since COVID just got worse. A second consecutive negative growth datum will induce economists to officially call a recession. If prices begin to pop due to tariffs, this combination of higher prices and a recession may push us into stagflation. That is why we are including on today’s graph the big bold real GDP growth line and, on the right hand axis, the Consumer Sentiment Index. To understand the economy, economists watch inflation to avoid the inflation expectation disease, but also watch for consumer pessimism and for recessions. These are troubled economic times, and with the U.S. enjoying fewer allies with each passing weak. Too many allies are secretly harboring schadenfreude, a pleasure enjoyed by one nation when another nation faces economic misfortune. Critics of the Fed argue that Powell wants the economy to fail. I do not believe that for a moment. Members of the Fed are professionals who cherish their dual mandate. However, they are devoted to keep the economy on a steady long term path, even if politicians prefer to hijack the Fed’s powers for short term political gain.

This week the US Senate passed what they ironically call the Genius Act. A strong majority voted in favor of it, which makes the Act veto-proof. It now goes to the House, where it will likely pass with equivalent bipartisan support. Of course, there is also no possibility of veto, given how the president who once condemned cryptocurrencies is now a huge backer, issuer, and profiteer from the crypto industry, In fact, while Elon Musk may claim he got Trump elected and flipped the Senate, it is far more likely that the many hundreds of millions more pumped into the election (for both sides of the aisle) by the crypto industry was what determined the present political circumstance. The first major payback to the crypto industry for the dollars and crypto bros they brought along is the Genius Act. It will unleash a Wild West in monetary policy, shilling, financial system destabilization, the repeat of FTX-style meltdowns, and mega-wealth for some, along with mega-losses for far more. The U.S. has a history of monetary debasement that most other comparable countries managed to avoid. In the 1800s, there was no central currency nor a Federal Reserve designed to ensure monetary stability. Instead, individual banks issued their own notes, which were really no more than IOUs backed (presumably) by deposits at their branches. These IOUs could be exchanged as tender for purchases, at least for those who believed they could easily convert the IOIUs they accept to something more tangible. Throughout this wild and wooly era, the nation faced waves of bankruptcies, with thousands of banks disappearing, along with any sort of value that underpinned the IOUs trusting citizens held. Eventually, the nation realized that it needed a national currency backed by the full faith and credit of the United States Government rather than faith in the local bank of shaky solvency. This faith in the U.S. dollar underpinned the nation’s ascendancy as the premier economic superpower. Now, the Congress and President is willing to squander this success and threaten its monetary system by embracing cryptocurrencies that are designed to compete with the U.S. dollar. Surely, beyond the digital coins that have been shilled by wannabe crypto billionaires, we should expect many major retailers and financial houses creating their own corporate script. Of course, even a well-compensated (I mean grateful recipient of campaign donations) congressperson needs at least a plausible plan before they vote in favor of reverting back to 1800s monetary policy. The promise is that the new crypto enabled by the Genius Act must be stablecoins. That means for every dollar of crypto coin, there must be a dollar of hard currency (dollars, gold, bonds, perhaps) to ensure their value. Almost 200 years ago, a public skeptical of government encouraged President Jackson to disband the Bank of the United States and the federal currency it wished to administer. The public feared that large financial corporations would co-opt the central bank and instead believed that local banks, and the script they create, is far safer. Well, dozens of bank-failure-induced recessions eventually convinced even the banking industry that it could not be trusted to be the regulator and issuer of a domestic currency. But let’s not let history, nor the waves of bank failures and millions lost by ordinary citizens, get in our way. We are again embarking on a system in which anybody can start a stablecoin, including our President, of course. And, such a stablecoin that has backing of less than ten billion dollars will not even need to face federal oversight or regulation. To put that oversight threshold in perspective, only 3% of banks have assets more than $10 billion, but many times more are regulated by national agencies and insured by the Federal Depository Insurance Corporation. Yet, despite such a lax oversight regime, stablecoin will compete directly for the public’s deposits with the highly regulated domestic banking industry. Even the largest stablecoins, with the most potential to do damage if they fail like their predecessors, will be regulated far more lightly than the banks with which they compete. We have already seen spectacular collapses of stablecoins that promised to back each dollar of coin with a dollar of hard assets. Terra, Basis, Diem and others have failed, leaving those who subscribed to them to lose billions. We witnessed Silicon Valley Bank fail in 2023, with the American public paying the price by having to bail out depositors in a bank that chose to keep crypto on its books. These ventures are run by true believers who do not think that such financial carnage could ever happen to them. I’m sure the owners of Terra and Sam Bankman-Fried of FTX infamy also felt they were safe because they were so much smarter than the usual Wall Street types. What they fail to understand is what banks already know. You can’t earn a rate of return if you must collateralize 100% of your liabilities with low return assets. You can only make billions by taking chances, cooking books, or running Ponzi schemes, as we have witnessed. To now, though, we have let the crypto industry cannibalize itself, with little repercussions on those outside of the crypto bros world. But, with the President now sponsoring crypto, and with a grateful Congress endorsing the idea, (un)stablecoins are now going mainstream in competition for our deposits with the much more regulated banking industry. What could go wrong? It seems that we are determined to turn the clock back to economies of the 1800s, with tariff policies and now with competing currencies cloaked in corruption or incompetency. Greed ruled the Gilded Age, and greed is back. What could go wrong?

The U.S. House of Representatives has passed to the Senate a bill that will set the budget goals for the coming year. It is perhaps the most profound piece of legislation in a decade, but, to economists, perhaps not in good ways. Notice the distinction I made. I’m sure many people look at the provisions in the bill and say “It’s about time fraud and abuse is curbed” even though economists don’t believe there is significant fraud and abuse. It is certainly true that people have different preferences for what government programs and agencies do, and whether the money is well-spent. We are each somewhere on the spectrum grom a compassionate society with many protections to the other extreme in which people are self-reliant, do not believe government can help in any but a few narrow categories, and prefer to be able to keep earned income rather than have to share it with people perceived to not work so hard for it. Most economists have faith in a free market system, and a growing number are expressing concern that our system is anything but the competitive ideal espoused by Adam Smith a quarter millennium ago. Hence, most economists would agree that there is a role for government to ensure a level playing field. The Big Beautiful Bill does not address the concerns the market is departing too far from the competitive ideal. In fact, of late the economy seems more fragile, more manipulated by politics and oligarchs than any of us could have imagined until recently. These flashing red lights alarming even the traditionally conservative bond traders are increasing economic volatility and hence domestic investment. A budget is designed to accomplish two goals. One is to raise sufficient revenue to provide the level of services only government can fairly administer to ensure that our nation serves all people and keeps each of us engaged in the national dream. The other is to ensure that the burden of these functions is spread fairly among all residents based on our capacity to pay. Again, this notion of fairness ensures we all share in the burden in a way we all agree is fair. Those that benefit the most from the fruits of a productive society hence pay a greater share of their income because they have a greater capacity to pay without dramatically affecting their quality of life. Of course, we have noted in past blogs that while the middle class pays the lion's share of taxes, many of the wealthiest can use loopholes in the tax code to defer or eliminate much of their burden. This year we saw a return to tariffs that were used to raise much of the revenue up to the 1800s before the U.S. instituted a broad-based income tax. An uninformed belief that tariffs force foreigners to pay for our nation's programs has been debunked as we realize now that it's the consumers of imported goods that pay such taxes. Tariffs are a limited consumption tax paid mostly by those who depend on goods consumption because they don't have the income to consume the services (banking, legal, finance, medical, home services, massages, entertainment, maids, restaurant services, etc.) that better-healed households can afford. Hence tariffs are regressive, with the lowest income earners paying the greatest share of their incomes to cover this mercantilist cost to provide for government. In this blog we have discussed some subtleties of foreign trade markets. While all the tariff rhetoric has been about goods, which translates into commodities, agriculture, and manufacturing, this category is not what America does. The U.S. is indeed a goods net importer, but it is a vast services exporter. The U.S. become the economic superpower by shifting away from the low margin industry of goods production because such production either requires abundant excess natural resources or low labor costs. Henry Ford realized that domestic manufacturing cannot be competitive if it can’t afford to pay a wage sufficient for its workers to purchase its products. Domestic manufacturing of inexpensive goods will not support sufficiently low goods prices American consumers demand or wages American workers require. Let Bangladesh and Vietnam make our t-shirts. We’d rather have our children working as professors, doctors, scientists and engineers, and, sometimes, lawyers. The problem is that America adheres to a faith in the private sector only when it is convenient. President Reagan was renowned for his free market principles, but manufacturing began to disappear on his watch because he put little thought into what to do with throngs of people who lose jobs when t-shirt production moves from South Carolina to South Korea. Despite the huge displacements and the generations excluded from the American Dream as a result, there still seems to be little appetite to retrain redundant workers in 21st century skills. The Big Beautiful Bill does not correct this fatal lack of a national economic policy. Indeed, as today’s graph shows, it bleeds the increasingly unemployable even more, while it showers the wealthiest with the biggest income largesse in perhaps ever. The poorest 10% of the population will see resources decline by $1,600 according to Congress’ own estimates, while the wealthiest 10% will see their annual resources grow by $15,000 in the Big, Beautiful Bill. If these manufacturing jobs lost by the poorest Americans are simply not going to return, despite the silly AI- and robotics-denying realities we all know is inevitable, then what are we doing to seed future productivity and affluence? Simply allowing more wealthy people to keep their money does little to promote the middle class dream. President Trump’s personal philosophy of beggar-thy-neighbor policies is fatally flawed, even if some find it satisfying to poke friends and foes, domestic and international, in their eyes with hot sticks. These are not economic wars, as most economists agree. These are culture wars, a focus on decreasing the size of the economic pie but receiving a bigger share, rather than the universal economic goal of increasing the economic pie in the belief that a rising tide lifts all boats. Our allies have somewhat given up on the U.S. and realize they must go it together, without the U.S. The G7 economic superpowers group is now being called the G6+1 in recognition that the U.S. no longer shares the rising tide theory. NATO countries are organizing a European coalition (and Canada) due to lack of faith in American leadership and principles. The improving American trade deficit is fueled by trade among one another rather than with the U.S. This also means that fewer countries rely on the dollar as the global currency, and nations are left with fewer such dollars that they would then reinvest in the U.S. or in its treasury bonds. It is also now U.S. policy to not invest in itself either. More than 80 years ago, America embarked on an experiment never before witnessed that created untold wealth for Americans and cemented its position as the leading global economy. The innovation was the Manhattan Project, ironically enough. It was a project that was so grand, so demanding of every bit of American scientific intellect, and so massive that no oligarch, not even an Elon Musk, could have possibly pulled off. Instead, it was a partnership with society and universities, and heralded an era in which the public invests in basic research, the universities produce innovations that improve our quality of life (well, except maybe the atomic bomb, if you lived in Hiroshima or Nagasaki), and these innovations are spun off into patents that benefit myriad new corporations that would not have existed but for the investments we all made. This system, well-protected by our patent system, worked well until now. For some reason, again related to culture wars, has caused this pipeline of basic research money to dry up at our major research universities. Meanwhile, China is doubling- and trebling-up in their investments in Science, Technology, Engineering, and Mathematics (STEM) infrastructure, and are being rewarded with more patents and products than their American counterparts. This drying up of foreign and domestic investment, instead redirected to the purchase of more and more U.S. bonds at higher and higher interest rates to support ever-growing federal budget deficits, is sucking the vitality out of the U.S. economy when it needs revitalization the most. Meanwhile, federal deficits and debt continue to grow dramatically to afford even greater tax breaks for the wealthy. The economy is not an energizer bunny. It grows in fits and starts. I liken it to training for long distance bicycle racing. A popular training regimen is to take a long ride, perhaps 50 miles, with hard slogging punctuated with sprints for a telephone pole or two. The economy is like that too. We succeed when we push very hard as a united nation, and then regroup for a while before the next investment and innovation wave. We are willing to sacrifice consumption today for more current investment in the promise that we will all share in greater quality of life tomorrow. That is the American promise that held us all together, at least until the culture wars turned our gaze to our differences rather than all we have in common. Now, it’s natural for nations to compete with each other, even if nations recognized and fostered their mutual dependence ever since World War II. This is why free trade is such an embodiment of the rising tide economic theory. But, never in my lifetime have I witnessed Americans looking so askance at each other. While Americans scream domestically, our adversaries are laughing and “tapping us along”. I still harbor some hope that we will recognize the great bounty of working together to produce that better mousetrap, cure cancer, harness AI in a way that helps us all, not just the oligarchs, and demonstrate pride in our respective countries without trying to diminish each other. It begins by showing we care for each other, differences aside, warts and all. Those who don’t want America to succeed will tap us along, poison our social media, sow discontent, and challenge our democracies. They won’t succeed if we think of each other as ourselves rather than others. I know it is possible. Canada had to face an existential threat from President Trump of late, but it created their Manhattan moment. Canada is rebuilding its domestic economy, renewing its relationships with Europe and Asia, and reinvesting in basic research to attract disaffected American academics. Canada is so busy uniting itself that old quarrels between provinces are dissolving away. The Cold War was America’s existential reason to reinvent itself. President Trump is Canada’s reason. I’ll be watching closely Canada’s progress. Meanwhile, what can America do to reestablish its eminence in patentable innovations? It should redouble efforts and investment in basic research at universities for projects that could lead to commercial superiority. These include AI, medical research, next generation semiconductors, quantum computing, and sustainable energy sources. It should not spend money for the sake of investment. Instead, investment must be part of a thoughtful industrial policy with the clear goal of technological innovation and greater economic efficiency through sustainability.

In the 1980s, the great America’s Cup skipper Dennis Conner earned an unprecedented string of victories piloting the most advanced America’s Cup sailboats. Back then, and ever since Queen Victoria exclaimed “It’s America’s Cup Now,” U.S. sailing teams won the cup repeatedly by designing the best boats, assembling the best crews, developing the best strategies, and running the best races in the history of 12-meter sailboat racing. When asked to summarize his winning strategy, Conner offered a simple motto. “There’s No Excuse to Lose.” To not win meant one did not plan enough, work hard enough, execute well enough, or bring to the game every last bit of competitive spirit. Excellence was in Conner’s control, and he was not prepared to relinquish his success to the hands of others. And if he did not prevail in a race, no excuse to lose means there is no explanation, no finger pointing or blame. There was simply an acknowledgement that he was bested and he’d have to be better next time. That is the second stage of success. Of course, the first stage is simply acknowledging that winning is within the realm of the possible. At sixty-five years of age, I’m not going to earn a spot on the Olympic downhill ski team or swim team. But, there are younger, highly skilled and motivated, and ambitious enough athletes to vie to win at the highest level. They have ascended to the second stage, the realm in which winning is possible. Conner knew what all elite athletes embrace. Winning is within their control, and depends on their conditioning, will to win, endurance, and competitiveness. That’s the amazing thing about the competitive model of economics. If each participant strives to be the best, the energy and innovation of each ends up motivating all others. Conner grew up in the period of American exceptionalism when an entire nation believed just about anything was possible. Following the First World War, also known as the war to end all wars, the U.S. built up a military industrial complex that supplied its allies before the U.S. itself joined the war in its latter months. With oceans distancing it from its adversaries, the U.S. was left intact. As the last nation still standing, it enjoyed more than most the opportunity to capitalize on civilian uses for military innovations - factories to design and build new cars, new airplanes, new armaments, and new innovations in radio, television, electricity, and mass production. The U.S. immediately surpassed Great Britain as the economic superpower. Its position was cemented when it repeated the exercise a generation later in World War II. While other nations had to rebuild after WWII, the U.S. could further consolidate its manufacturing base into another wave of economic superiority. It had no peers, or at least that is what America thought. This is the world of Conner’s formative years. Born in 1942, he was a business school student when America had its Sputnik moment. It was not the first to orbit a satellite nor the first to send someone to space. Yet, America did not claim the USSR was competing unfairly, using trickery, or stealing its ideas. Instead, it redoubled its efforts, with President Kennedy proclaiming "We choose to go to the Moon in this decade and do the other things, not because they are easy, but because they are hard." With the same sort of no excuse to lose spirit that motivated Conner, Kennedy vaulted the U.S. into space, and secured its economic superpower status for another generation. With America undoubtedly at the apex of economic superiority well into the 1970s, and with President Reagan aspiring to keep America “the shining city on the hill,” American exceptionalism was at its apex as well. What comes next seems almost inevitable. As I described in my 2010 book “The Rise and Fall of an Economic Empire,” the third stage of economic success transcends from innovation into consolidation. Success breeds complacency and entitlement. With Machiavellian enthusiasm, the winners get to make the rules, and these rules are destined to preserve rather than advance the status quo. More energy is devoted to preventing others from innovating than from innovating ourselves. In the antithesis of “No Excuse to Lose,” others are blamed for the economic regression by the apex nation. To prevent those competitors wishing to someday reach the apex themselves, in sailboat racing or in nation-building, the apex entity enlists its allies to help hold back its enemies. Even in America’s Cup racing, victors attempting to hold onto the cup were accused of tipping the playing field in their own favor rather than building a better boat. And if one’s allies are unwilling to play unfairly, the apex entity may even turn on them and try to translate their fleeting might into concessions from all, designed solely to savor victory and ascendancy for just a moment longer. That third phase of consolidation cannot last long though. While ascendancy can prevail for decades, other competitors grow weary of other’s consolidation of power rather quickly. This may induce a victor to commit ever greater efforts to tip the playing field in their favor to the point others don’t want to compete with them anymore and instead cooperate to compete amongst themselves instead. People tire of hitmen kneecapping Nancy Kerrigan, elite athletes doping, a rival runner recently hitting a competitor with a baton, or Ayrton Senna taking out Alain Prost to ensure the title of the 1980 Formula One Championship. Competition should always bring out the best of us, not the worst. Now, one can always cry foul and claim they are on the verge of losing their apex position because someone else cheated. Such arguments might hold sway for awhile, but as hard as one tries to penalize another, humankind cannot hold back innovation and will not long tolerate consolidation. That is why the third phase of success can’t last long, even as it becomes increasingly desperate. Either it generates into the fourth phase, one of complete irrelevancy, or it reverts back to a renewed competitive drive that led to its successes in the first place. Even Dennis Conner eventually lost his competitive edge. The difference between a sailboat racer and a nation, though, is that a nation can produce another wave of innovators every generation. The key is to continue to look inward to discover the best of ourselves rather than constantly cry foul outward and attempt to punish others for their better mousetraps. In other words, there is no excuse to lose.