A provocative article in the FT, "Avoiding the Kindelberger's Trap," is starting to represent the current thinking about financial and trade statecraft. Traditional diplomacy can be considered, but currently, more of the action is associated with implementing economic policy—financial and trade variations. The Kindleberger trap is the problem between the hegemon of the past falling from power or showing a lack of will without a new hegemon to take its place because of an unwillingness to fill the void. Who will be the world leader who will guide our global institutions and rules?
The US is now an unwilling leader, and no one can enter the void. Hence, if there is a worldwide decline and a need for liquidity or a safe asset, it is unclear who will fill the breach. The big void was in the 1930s after the stock market crash 1929.
During both the 2008 crisis and the 2020 pandemic, the US, or more specifically, the Fed, provided liquidity and was the lender of last resort. We are currently seeing cracks in market liquidity, which begs the question of whether the Fed will be the willing provider of liquidity. This is a scary environment for a global system conditioned on leverage and short-term financing.
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