The 4 Biggest Threats to the West, According to Historian Ferguson | At Barron's
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"I don't believe in the 'soft landing' story," said historian and author Niall Ferguson in a conversation on Sept. 12, 2023.
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Ferguson argues the U.S. faces multiple compounding risks—economic (soft landing unlikely, recession probable, fiscal crisis mounting), political (polarized 2024 election with constitutional stakes), social (mental health and opioid epidemics), and geopolitical (Cold War II with China poses hot war risk)—that markets and policymakers are systematically underpricing.
- Real interest rate hikes will force recession despite consensus optimism, given leverage in the economy
- Cold War II with China carries unpriced risk of hot conflict in early phases, as in original Cold War
- Fiscal deficits at 8% of GDP during full employment signal structural crisis, not temporary cyclical effects
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For most of U.S. history, the country spent more on defense than on debt service; by the end of the current year, it will be paying more on debt service than on defense—a structural problem for a country in major geopolitical rivalry with China.
“for most of its history the United States has comfortably spent more on defense than on debt service that is no longer true uh by the end of this year it will certainly be paying much more Debt Service or somewhat more Debt Service than uh defense uh and that's a problem for a country that is in a major geopolitical rivalry with China”
The first Trump administration (2017-2021) was characterized by organizational chaos, lack of preparation, weak ideological coherence, and significant restraining influence from establishment figures like Secretary of Defense James Mattis and National Security Advisor H.R. McMaster.
“if Trump is reelected the second Trump Administration will be very different firstly they are planning for power by they I mean the Trump supporters in the America First Think Tank...in Trump's first term it was improvisation uh it was quite chaotic if if you look back uh and there was also quite a lot of continuity because he didn't really have a stable of people to put in all the different uh departments and agencies and those continuities were most obvious in the form of generals uh like my Hoover colleagues Jim Mattis an natur McMaster”
The United States has profound social problems out of sight—including mental health epidemics and opioid epidemics—that compound the economic and political risks.
“there are major social problems in the United States that are kind of out of sight out of mind but whether it's the mental health uh epidemic or the opioid uh epidemic the United States has a whole range of very profound social problems that I worry about a good deal”
The U.S.-China relationship is not good; despite Biden's talks of détente and visits by administration members to China, Beijing's sentiment remains that the U.S. is pursuing conscious policy of technological and economic containment to keep China in second place in the Indo-Pacific.
“the relationship is not in a good St despite President Biden's talk of a Thor Hiroshima not so long ago the visits that have been made by members of uh his administration to China have really not gone terribly well uh haven't really achieved terribly much haven't changed the the sentiment in Beijing which is that the US is pursuing a conscious policy of technological and economic containment that is designed to keep China firmly in second place in the Indo Pacific”
Globalization's shape is shifting due to both conscious policy (U.S. reducing China exposure, Supply chains moving) and structural shifts (Chinese labor costs no longer competitive; Mexico now outpaces China in U.S. trade due to proximity and competitiveness).
“it's shifting in response to a variety of things some of which are conscious like the US government is consciously trying to reduce its exposure to China Supply chains are consciously be moved away from China there are other things that would be happening anyway the fact that Chinese labor costs are no longer uh particularly attractive you know Mexico's now overtaken China in its trade with the US there's a reason for that it's it's close and it's actually pretty competitive”
The idea that manufacturing can be brought back entirely to the United States is implausible because production is much more expensive domestically; microchip production is substantially more expensive in the U.S. than in Taiwan or South Korea.
“the idea that we can somehow bring it all back home we can somehow bring all manufacturing uh back to the United States isn't very plausible because it's just much more expensive to make microchips in the US”
Jack Ma was brought low by Xi Jinping, exemplifying how the CCP reasserted control over big tech companies, reducing Chinese economic dynamism.
“Jack marah was essentially brought Low by cesan ping”
The Fed kept monetary accommodation despite flashing red light signals of inflation shock emerging in 2021-2022, continuing accommodative policy into 2022 despite warnings.
“there wasn't really a change of monetary stance until into 2022 despite the fact that there were flashing red light signaling an inflation uh shock”
From Ukraine's perspective, Putin is a mortal enemy who is killing significant numbers of Ukrainian soldiers and civilians monthly; from the U.S. perspective, it's a long way away and not American soldiers fighting, but the U.S. has publicly and morally backed Ukraine making it a strategic commitment.
“from the point of view uh of ukrainians uh he is a mortal enemy who is killing uh significant numbers of Ukrainian soldiers and civilians uh every month... uh one level no it's a long way away and it's not American soldiers who are doing the fighting the problem is that we've backed Ukraine uh not only financially not only in terms of Weaponry but we publicly morally backed Ukraine”
Monetary policy acts with long and variable lags; the average lag is ~9 months from tightening to slowdown, but it could be considerably longer under current circumstances, so it's premature for the 'transitory' team to declare victory.
“the old phrase that I'm sure we were all taught at some point in economics classes is that monetary policy acts with long and variable lags uh that that variation is the key here I mean if the average is sort of nine months from tightening to to the Slowdown uh that's the average question is uh could it in fact be quite a bit longer than that and the answer is yeah it could actually under the circumstances”
The U.S. and China are in Cold War II, which carries significant risk of hot war in its early phases; this is the biggest risk underpriced by markets and policymakers.
“the US and China are in Cold War II I don't think everybody has fully digested what that implies uh but in the early Cold War there is a significant risk of hot war and that's probably the biggest risk that is underpriced right now”
Globalization is not dead; international trade and capital flows have been dialed back from their 2007 peak but are nowhere near the retreat seen after 1929; decoupling between U.S. and China is exaggerated because Apple still produces ~80% of hardware in China, not 100%, but still concentrated.
“globalization has been pronounced dead rather often recently it's not that dead actually when you look at the resilience of international trade and capital flows uh it's it's dialed back a bit since the high point which was 2007 before the global financial crisis but we're not looking at a huge Retreat uh from globalization of the sort that we saw after 1929”
Putin is closely allied with Xi Jinping in a partnership of extreme importance to the Chinese leader; China will not let Russia lose the war in Ukraine, making the conflict part of a broader geopolitical struggle between U.S./allies and the China-Russia-Iran axis.
“Putin is closely allied with xinping this is a partnership of extreme importance to the Chinese leader China isn't about to let Russia lose this war so we can't just see the war in ukra ukine in isolation it is part of a broader geopolitical struggle in which the US and Europeans and other allies support Ukraine and China and Iran support Russia”
Cold Wars between societies believing in freedom and democracy versus those believing in dictatorship tend to see the democratic society prevail due to greater dynamism; if historical pattern holds, China's growth will slow, its threat diminish, and its leadership may change.
“I'm an optimist about cold Wars haven't had a lot of them but if the last one's anything to go by uh the society that believes in freedom and democracy tends to be more Dynamic than the society that believes in the opposite so I think what ultimately will happen is that the problems and pathologies of one party government will manifest themselves and China's growth rate will slow and its threat will diminish and perhaps its leadership will change”
If the Russian army suddenly unraveled and Ukraine won the war, that would be great but it feels less likely than a year ago when the Russians were in flight from Artyomovsk and Kherson.
“it would be great uh if the Russian army suddenly unraveled uh lay down and died and Ukraine won the war that would be terrific but it feels less likely than a year ago when the Russians were in flight from Ar and then from Hans”
The U.S. fiscal deficit is now projected at 8% of GDP for the current year—far larger than previously thought—which is extraordinary for an economy at full employment and signals a major structural fiscal crisis.
“the Congressional budget office just uh did its math and decided that actually the deficit is going to be far larger this year than it previously thought just a few months ago so we're looking at 8% of gross domestic product that's kind of a huge deficit for an economy that's at full employment”
The Ukrainian offensive of summer 2023 has not achieved anything like what President Zelinski hoped for; the Russian army is dug in, has laid minefields, and created nearly impregnable defenses in southern Ukraine territory.
“anybody who was hoping that the Russian army would fall apart at the time of the progan Mutiny I think has been disappointed they are dug in they have managed to uh lay minefields uh they have made almost impregnable defense of the territory that they hold in southern Ukraine and the truth is that the Ukrainian offensive uh of this summer has not achieved anything like uh what president zalinski hoped for”
A second Trump administration would be radically different from his first term: planners in the America First movement have a plan, it does not include establishment restraining figures like Mattis and McMaster, and the priorities will shock many people—beginning with protectionism and a purge of the Department of Justice and anti-Trump bureaucratic elements.
“if Trump is reelected the second Trump Administration will be very different firstly they are planning for power by they I mean the Trump supporters in the America First Think Tank uh they have a plan uh which I think will be very very different from what we saw in 2017 uh and secondly that plan does not include establishment people so there won't be those restraining influences that were such a characteristic feature of Trump's first term”
The U.S. and allies are publicly committed to supporting Ukraine 'for as long as it takes,' but Germany's planning horizon extends to 2032, meaning the war is much longer than the U.S. thinks it has committed to and will absorb more financial and military resources than Biden anticipated.
“we say as Secretary of State blinken said in Kiev just about a week ago that you know we'll be there for as long as it takes but that could be a long time uh a German general who was in keev at the weekend said that the German planning Horizon was out until 2032 that is a much longer War than anybody in the United States thinks they've got involved in so I think the problem in the short run is that we're stuck in a war that doesn't have an OB VI end in sight and that means that resources are going to be absorbed uh Financial Resources uh Hardware from uh military Stocks by this war for I think longer than Joe Biden expected”
It would be beneficial if China's economic troubles translated into a political crisis, as Xi Jinping's reassertion of one-party rule dictatorship is dangerous not only for China but for the world.
“it would be great if China's economic troubles translated into some kind of political crisis there uh because I think xiin Ping's attempt to reassert one party rule the dictatorship of the party is dangerous not only for China uh but for the world”
If there is a recession and Joe Biden is the Democratic nominee, he will lose the election; historically, no U.S. president has been reelected after a recession in 100 years except Coolidge in 1924, and Biden's current polling mirrors Gerald Ford and George H.W. Bush at similar points in their presidencies.
“I think if there's a recession uh which I think is more likely than the street thinks uh he will lose if he is the candidate”
Early 2021, Larry Summers and Ferguson argued an inflationary accident was happening due to massive fiscal overshoot—the stimulus continued even after the economy would heal naturally with vaccines—and the Fed accommodated this by purchasing a very large proportion of new Treasury debt in 2021-22.
“if you go back to early 2021 uh a small number of people uh notably Larry Summers argued that an inflationary accident was happening that was also my view at the time uh I wrote that for for Bloomberg and uh if you read Larry summers's original piece which came out in the Washington Post it's all about fiscal policy he barely mentions monetary policy”
Unless there is a productivity miracle or Congress reforms the tax system and brings entitlements under control—which Ferguson thinks highly unlikely—debt will grow very fast over coming decades according to CBO forecasts.
“if you look at the CBO forecasts out decades not just years it could get really very high very fast and unless there's some kind of productivity Miracle or unless Congress does what it hasn't done for a long time and that and that is actually to reform the tax system and bring and bring entitlements under control which I think is highly unlikely”
The combination of fiscal and monetary policy error created 9% inflation in the middle of 2022, not merely transitory pandemic-driven effects.
“I think it was a combination of fiscal and monetary policy error that got us to 9% inflation uh in the middle uh of last year”
Xi Jinping explicitly committed to achieving strategic parity with the United States—something previous Chinese leaders had avoided announcing—which was strategically unwise as it signaled hostile intent and accelerated U.S. countermeasures.
“one explicitly aiming at strategic well equality or parity with the United States uh which I think was a silly thing to to to explicitly say you're going to do that was like sending a warning uh something that previous Chinese leaders had avoided doing since dening they sort of kept their light under a bushel”
Robert Lighthizer, Trump's trade representative, when asked what Trump would have done if he'd won in 2020, answered that he would have raised tariffs, confirming Trump's sustained commitment to protectionism.
“I recently asked uh Robert lighthiser who was his uh trade representative who just published a biography uh what did he think Trump would have done if he'd won in 2020 and his answer was raise those tariffs”
Corporations and households will face 'terrible shock' as they refinance debt in the higher interest rate environment, with significant refinancing set to occur in the coming 12 months.
“it's plausible that as uh corporations and households have to refinance they're going to get a terrible shock uh and you can see how that sequence of events plays out if you look at when refinancing is going to happen in the coming let's say the coming 12 months”
The probability of a recession in the next year is much higher than market consensus believes because real interest rates have risen tremendously, and the economy is more leveraged now than it was in Paul Volcker's era despite the size of monetary tightening being comparable.
“I don't believe in the soft landing story because I think we've seen a tremendous hike in real interest rates and that is going to have its consequences uh I would say the probability of a recession next year is much higher than Market consensus”
The Democratic Party is fielding a very elderly candidate with a weak running mate against Donald Trump, who in many other countries would not be able to run given his conduct on January 6, 2021, creating an amazing potential constitutional crisis.
“the Democrats are Fielding a very elderly candidate with a weak running mate against Donald Trump uh a candidate who uh in many another country would not be uh able to run for election given his conduct on January the 6th of 2021 so this is an amazing potential constitutional crisis given all the indictments that Trump currently faces”
Breakthroughs in artificial intelligence could drive massive productivity gains for the U.S. economy; widespread AI adoption (like ChatGPT) might generate higher growth than expected, invalidating Ferguson's recession and crisis warnings.
“all the things that are currently going on in the realm of Technology particularly the breakthroughs in artificial intelligence might turn out to be really good for the US economy maybe there's a huge productivity shock coming as we all start using chat GPT to prepare our interviews or whatever it is um and the next thing you know the US economy achieves higher growth than anybody expected”
Biden's base case is not that Biden will be the Democratic nominee, because as the primaries approach, many Democrats will become seriously concerned about his poor polling against Trump, and another candidate may replace him as the nominee.
“my my base case is that if there's a recession uh which I think is more likely than the street thinks uh he will lose if he is the candidate I'm not sure he will ultimately be the candidate because I think as we get closer to the primaries uh many Democrats are going to get quite seriously worried about how poorly Joe Biden is polling against the likely Republican nominee Donald Trump uh so I would not rule out another candidate actually being uh the Democratic nominee in 2024”
People in Europe and the UK are more worried about American politics than Americans are, particularly over the prospect of Trump withdrawing support from Ukraine.
“people there are more worried about American politics than people here as far as I can see and that is true in Europe generally I was just in ke uh last weekend and there's great concern there uh that if Donald Trump gets reelected uh he'll pull the plug on Ukraine”
Ferguson puts the probability of the Republican nominee (likely Trump) winning the 2024 election at close to 60% if a recession occurs—a forecast he believes most people have not processed.
“if there's a recession which I do think is more likely than the consensus then I think it'd be really hard for Joe Biden to get reelected I'd actually put the Republican a nominee and it seems likely to be Donald Trump but maybe close to 60% probability of winning I don't think many people have have processed those odds yet”
Ferguson's bullish scenario is that the U.S. economy achieves higher growth than expected, making the fiscal crisis, recession warnings, and other concerns 'mere Phantoms,' though he notes 'there's always somebody who's bullish' in New York.
“and all those things that I was worrying about earlier turn out to have been mere Phantoms so there is an optimistic uh bullish case uh there always is in this town New York there'll always be somebody who's bullish but that would be my my bullish scenario”