When I began my Ph.D. research in German macroeconomics in 1989, German economic theory still adhered to the principles of a social market economy, despite the popularity of the Hayekian Freiburg School of Economics—the mainstream of Western economic theory. However, the idea that a free-market economy might suffer from permanent deficits and require social intervention by the government was largely ignored by the main defenders of free-market economics. They simply overlooked the fact that free-market competition inevitably creates vulnerable groups in need of social assistance, as was empirically demonstrated by the collapse of the Weimar Republic’s economy. The catastrophic inflation of that period could not be reasonably explained by abstract, orthodox, neoclassical models that considered only the interaction between labor and goods markets.
My two German Ph.D. supervisors—Prof. Schmitt-Rink, a master of macroeconomic theoretical modeling with a background in real-world business management, and Prof. Bender, one of Germany’s leading scholars in foreign trade economics—assigned me the task of solving a theoretical modeling problem that had previously ignored investment and money markets. I was to complete my dissertation by developing a three-dimensional macroeconomic model in order to obtain my Ph.D. They trusted my capacity for abstract thinking, demonstrated by my top performance in Operations Research during my German master’s exams.
It was a highly challenging task, as I had to build a comprehensive macroeconomic model incorporating labor, goods, and money markets. Only a macroanalysis that includes investment activities can provide a dynamic, long-term understanding of whether a free market can sustain full employment and prevent demand shortages and industrial overcapacity without government intervention.
My Ph.D. research revealed that demand shortages, unemployment, and overcapacity—especially in maturing industries—are permanent macroeconomic features of any free-market economy.
For example, if tariff barriers in the United States lead to supply shortages, rising prices will naturally attract capital to the sectors experiencing those shortages. However, given the persistent lack of domestic savings in the U.S., such capital must come from overseas. But if there is already global overcapacity, no foreign funds will be available to increase capacity in the U.S., especially due to the short-term political maneuvering behind Trump’s tariffs.
Potential investment in U.S. businesses will be deterred by continued competitiveness from Chinese goods in the short term and by emerging regions with low labor costs building more capacity in the medium to long term. The immediate consequence of tariff barriers is a contraction in the overseas supply of U.S. dollars. As a result, foreign buyers of U.S. debt (both government and corporate) may choose to cover their dollar losses caused by lost exports to America rather than reinvest in the U.S. real economy through globalized Wall Street capital markets.
Given the significance of my doctoral dissertation’s contribution to national economic theory, both of my supervisors deeply valued the results of my research, which I completed in just over two years. They agreed to award me a Ph.D. in macroeconomics—a degree that typically requires four to six years to earn in Germany. However, since my research was published in a German-language book rather than an English-language economic journal, mainstream American economists remain largely unaware of this breakthrough in analytic modeling.
American economists were once surprised by stagflation—economic stagnation combined with inflation. Yet, this phenomenon is easily explained by my comprehensive theoretical analysis, which integrates interactions among all three core markets. Peter Navarro (economic adviser to President Trump) and his team appear to base their analysis of the U.S. economy and trade deficits primarily on only two markets: goods and labor. This limited perspective led to their surprise at the bond market turbulence triggered by tariffs. The dollar’s value declined, while interest rates on U.S. Treasury bonds spiked amid Trump’s trade war.
On May 7, U.S. Treasury Secretary Scott Bessent stated that the Treasury Department was nearing the limits of its ability to remain under the federal debt ceiling. The U.S. government had already hit the ceiling back in January, forcing the Treasury to rely on special accounting measures to make payments. Wall Street analysts expect that Congress will need to raise or suspend the debt ceiling again between August and October. The Congressional Budget Office also projects that the Treasury will be able to meet its obligations only until the end of summer.
However, both Trump’s economic team and policymakers on Capitol Hill have failed to understand the causal relationship between the tariff war and the volatility in the U.S. debt rollover market. They do not grasp that a sharp decline in U.S. import demand—triggered by tariffs—leads directly to a sharp decline in foreign purchases of U.S. federal and corporate debt. The current restrictions on currency exchanges by mainland Chinese residents are a direct manifestation of this market effect. The global supply of U.S. dollars is beginning to contract.
The shock caused by the bond market’s reaction led Trump to pause the imposition of new tariffs. His team now appears to be seeking a way out through a stablecoin initiative. A recently passed law in the U.S. Senate will likely provide an additional $2–3 trillion in purchasing power for the bond market, according to HSBC estimates. This is the amount needed to cover the expected budget gap resulting from Trump’s “big, beautiful bill.”
To conclude my speech, let me summarize my economic “Newton’s Law”:
Due to the U.S. dollar’s dominance in global capital markets, the American trade deficit is essential for creating capital inflows into Wall Street and the U.S. bond market from surplus countries. My analysis of the gap between GDP and effective domestic demand in major global economies during 2021 and 2022 shows that 30–40% of Chinese wealth leaves China annually, much of it flowing into the United States, often via Singapore. This is the true macroeconomic cause of China’s demand shortfall and overcapacity.