Bessent's Wager and Why the World is Calling America's Bluff | Henry Farrell

0:00What's up, everybody? My name is Demetri Kofinas, and you're listening to Hidden Forces, a podcast that inspires investors, entrepreneurs, and everyday citizens to challenge consensus narratives and learn how to think critically about the systems of power shaping our world. My guest on this episode of Hidden Forces is Henry Farrell, a political scientist, the originator, alongside his co-author Abraham Newman, of the concept of weaponized interdependence, and the co-author of Underground Empire, How America Weaponized the World Economy. By the end of today's conversation, you will have a much deeper understanding of not only how America built its empire, including the financial, military, and technological infrastructure undergirding its power, but how that scaffolding is buckling under the weight of a compounding series of domestic and foreign policy errors that have eroded the political consensus that made this empire possible, and the consequences of its collapse for the global economy and the world over which Washington has presided unconditionally.

1:03tested for most of the last 35 years. Henry and I devote the first hour of our conversation to examining two recent and very important events. The first being Canadian Prime Minister Mark Carney's speech announcing the breakdown in the latest trade negotiations between the United States and Canada, wherein he claimed his country was under attack by the United States. And the second being US Treasury Secretary Scott Besson's Financial Times op-ed declaring an economic D-Day, which reads more like a veiled threat aimed at America's allies than a defense of the world Washington sought to liberate in 1944.

1:39We explore the implications of these two announcements, how they fit into a pattern of behavior by an administration that seems intent on converting the once liberal, rules-based international order into a more overt and darker form of American imperial power, why that process is failing, and what that failure means for the global economy, international security, and the lives of billions of people. The episode's second hour builds on these insights through a comprehensive exploration of the hidden infrastructure that underwrites U.S. hegemony, the financial messaging systems, dollar clearing networks, and the internet surveillance architecture that quietly became instruments of American coercion.

2:21We trace how this underground empire was slowly built and eventually adopted by much of the rest of the world. When it began to become weaponized, against America's enemies and eventually against its own allies and partners, and why that weaponization has led to a deterioration of American power and where we see uncontroverted evidence of its depreciation and decline. We examine how a world once held together by an establishment of lies and hypocrisies is quickly giving way to one organized around clans, cartels, and naked self-interest, the role being played by technologies like AI and social media in facilitating the breakdown and refashioning of traditional political coalitions, and the deeper sources of Western insecurity, specifically the risk of a new kind of world war that may soon arrive on our shores, embedded in our systems of communication and control, and where Henry still finds grounds for optimism in what is otherwise a frightening new world.

3:18If you want access to all of this conversation, go to hiddenforces.io slash subscribe and join our premium feed, which you can listen to on your mobile device using your favorite podcast app, just like you're listening to this episode right now. If you want to join in on the conversation, become a member of the Hidden Forces Genius Community, which includes Q &A calls with guests, discounted access to third-party research and analysis, and in-person events like our intimate dinners and weekend retreats, you can also do that on our subscriber page. And if you still questions, feel free to send an email to info at hiddenforces.io and I or someone from our team will get right back to you.

4:01And with that, please enjoy this incredibly timely, wide ranging and deeply insightful conversation with my guest, Henry Farrell.

4:14Henry Farrell, welcome to Hidden Forces. Thank you. I'm delighted to be here. It's my pleasure to have you here. I feel very fortunate that we scheduled this ahead of time. I didn't have any foresight into Mark Carney's speech, the breakdown in trade negotiations, or Scott Besson's economic D-Day news piece in the Financial Times, but it's going to converge perfectly with what today's conversation is supposed to be about. Before we get into that, as well as your book, Underground Empire, which is what inspired today's conversation, Henry, tell me a little bit about you. What got you started in political science?

4:52What's your background? I'm from Ireland originally. I was interested in political science and economics. I was not quite smart enough at math to be a good economist, but I was always very interested in the politics of the economy. That is, not thinking about the economy as a place in which you see all of these optimizing decisions happening and markets producing their wonderful things, which they do produce, but the politics that goes along with that, the ways in which actors try to use fair means and foul to gain position, to gain advantage, and to really shape the economy and shape markets in ways that suit their own particular self-interest, even if they do not suit the self-interest of others.

5:35So that is the kind of place that I think that Abe Newman, my colleague, and I have been playing in for the last couple of decades. So I want to also reference another conversation you had with Ezra Klein about six months ago, where the two of you discussed Mark Carney's speech delivered at Davos. And he has since delivered another speech, the one that happened a few days ago, announcing the breakdown in trade negotiations between the United States and Canada, in which he reiterated many of the same sentiments and also essentially said that Canada was under attack and under attack from Washington.

6:09And that was followed up by a very curious article in the Financial Times written by Secretary of the Treasury, Scott Besant, in which he essentially compares the decision that foreign countries and US allies in particular need to make to Pascal's wager. And it comes across very much as a threat against America's allies. And so I'm curious, before we get into the book, what do you make of these two latest pieces of information. And what do you feel like is really happening to the global system, the global economy, and to the world? So I think, well, those are two very, very big questions, of course, and I think we'll probably get into them in different ways during the rest of the conversation.

6:53But I think if you look at this debate, I think Carney is expressing a sense of reality that is really building on what he said in Davos, where he made it clear that the old world system had gone. He is very fond of saying that nostalgia is not a strategy. We cannot just assume that the old world is going to come back. We need to face up to the world that we're in. And I think that really what we're seeing at the moment is a second stage of that strategy where Carney has looked at the trade negotiations that are happening between the US and Canada, has looked at the way in which the United States really wants to create a permanently subservient position for Canada in which it would accept its subservience.

7:35And Carney has decided that Canada simply doesn't have any advantage from dealing with that and is prepared to endure, at least for the moment, the short-term costs that are associated with Donald Trump getting mad at you and deciding to tariff the hell out of all of your industries and using whatever other forms of pressure he can use. So I think that's the Carney side of it. The Bessel side is very interesting. And this is a deeply weird op-ed because really what he's doing, I think the part that I find fascinating, which you pointed out to me when we were talking as we were setting up, is this comparison between Pascal's wager and the situation of other countries in the international system.

8:17And really what I think that Bessent seems to be saying here is you've got to think about the United States as if it were God. You have to think about the United States as if you need to do everything you possibly can in order to appease this wrathful deity before it decides to smite you with lightning bolts. Because if you don't, you do not know what is likely to happen to you except that it is likely to be horrible. So Pascal's wager is more or less an argument that even if you don't believe in God, you ought to behave as if you do, because if you don't, the odds are that if God does exist, that you're going to spend the entirety of eternity burning in the fires of perdition.

8:57So therefore, you ought to believe it. And so I think what Besant is saying is you need to believe in the United States the same way, because if the United States decides to get angry with you, you are going to find yourself in this situation in which you would wish that you would be in hell, because that is going to be much, much better than what Donald Trump has in store for you. So this is really, it feels to me like one of the 17th century Puritan preachers, you know, sort of sinners in the hands of an angry God, except that the sinners are the recalcitrant countries of the rest of the world.

9:30And the angry God is the United States of America with Donald Trump as its prophet and also as its enforcer. Yeah, it feels as though what he's saying is that the realization of Trump's worst instincts represent tail risk, and there is no premium that you shouldn't pay to insure yourself against the possibility of that tail risk actualizing. And that's essentially the wager. Well, the other thing that this makes me feel like, it feels like it is a angry fundamentals preacher who is losing his congregation, who is losing his audience, and is upping the rhetoric in order to try and keep the few fearful parishioners who are still there in the benches.

10:11So there's a famous phrase that Teddy Roosevelt used, which is that the United States ought to, what was it, speak softly and carry a big stick. In other words, that it ought to moderate its rhetoric, but keep its genuine threat in reserve. And so I think what we're seeing here is that Scott Bessent is adhering to an approach to U.S. foreign policy, which is speak bigly and carry a soft stick. So these are big, angry words, but everybody knows that the follow-through is not particularly obvious. The key question for Basant here is that the actor, the country which is doing the most to support Iran or is capable of doing the most to support Iran, is China.

10:54So the question that Basant does not really want to have answered, and you see some soft foot maneuvering happening around this, is if China continues to import oil from Iran, if China continues to provide a lot of support to Iran, is the United States going to want to try and visit the wrath of God on China's head? And I think that the markets and everybody else are betting, no, absolutely it does not. This is an empty threat. And in a certain sense, I think Besant, by using this kind of ridiculous rhetoric, is really exposing how the United States is playing from an empty deck. So his mentor, Stanley Druckenmiller, wrote an op-ed for the Wall Street Journal, which I just want to point out was also partly written by AI, which is very disappointing because Druckenmiller is a brilliant person who can afford a copy editor, and we should be doing better than that.

11:45But that aside, the substance was, I think, important. And I read a lot of things, so maybe I'm conflating what he wrote with something else I read. But I remember him essentially suggesting that what Besant wrote was more of a sign of panic than it was of strength, to your point. Well, we certainly saw a lot of panicking happening, I think, back during Davos, where it was really interesting to watch the commentary coming from Besant and from Lutnik, who I think are the Tweedledum and the Tweedledee of this particular administration, where they begin going into Davos, more or less saying that the entire world is going to fall at our feet, that the resistance of Europeans is ridiculous.

12:27And then you see over time, you see a genuine sense of panic beginning to set in when they realize that the Europeans are going to push back and they start talking about how the Europeans really ought to do this. It is not in everybody's best interest. Can we just get along with each other? And so I feel like something similar is happening here. And my read of this, and I don't know percent from Adam, but my sense is that he is not a particularly stupid individual. And so he is playing a extremely, he doesn't have very many cards to play with. He's doing the best that he can. But I think at a certain point where you've been coasting on empty for a long while, you do begin to panic.

13:07you do begin to press all of the buttons that you can at random in the hope that something magically will come along and will save you from this awful dire position that you and your colleagues have found yourself in. So I think another, before we get into the book and some other questions I have about what's happening to the international system, it seems to me that many of us are still struggling to interpret the actions of this administration and to understand whether or not there's an actual deeper strategy at work. And in my mind, there isn't. In my mind, there is essentially a capricious leader, a series of fiefdoms underneath him, whose lords are each competing for the attention and audience of the king, during which time they hope to achieve certain objectives that in some cases, in many cases are graft related.

13:57In other cases, like Skampasen's case, I don't know what they are. Maybe they are. And I think this is also true of this administration, it certainly was of Trump's first term, you have cabinet members who essentially come into the administration thinking, okay, I'm going to do what I can to appease Trump. I feel like I have a good idea of what he wants to hear. I'll tell him what he wants to hear. I'll bend over backwards if I have to. But at the end of the day, I'll be able to shift the vector just enough so that I make a positive difference on the country and in the world. And I feel like what we're seeing with this administration is that no amount of backbending is enough.

14:33No amount of chaos is enough. And the percussion of these incidents of Trump lashing out, of waging wars, trade wars, real wars, is shortening and shortening. And it feels like we are running up against some kind of wall. And I don't know what that's going to look like, But I'm curious, how do you go about trying to interpret the actions of this administration? And what is the framework that you apply to understanding them? So I think that that is more or less right. And you see various attempts to try and cover over the chaos. So there is, of course, in the national security strategy, we saw the articulation of this new doctrine called, quote, flexible realism, unquote.

15:16And as far as I can make out, flexible realism does nothing more than to say the United States is going to do what it wants and everybody else had better react accordingly. So I think it is less a serious strategy than an effort in your terms to try and cover up the fact that there isn't really a strategic position here. And so I think that the comparison you make to a court with all of these fiefdoms and these different squabbling barons and court officials, each trying to get its own interests, his or her own interests, each trying to, perhaps some of them trying to do a little bit of good for the country, trying to fulfill some previous vision that they have had.

15:55I think that is absolutely right. And I think that the way that I think about this, there's a famous article among political scientists and sociologists by these two sociologists and political scientists, Chris Ansell and John Padgett, which looks at the Medici. And more or less, it looks at this guy called Cosimo Medici, who was really, really good at making sure that every time everybody else did something, that he always had the last words, that everybody was trying to orient themselves towards him and towards his ideas. And so he manages to do this. He manages to create this spider's web in which he is always maintaining the flexibility to do what he wants, and everybody has to pay attention to him.

16:38And he manages to get his way a lot. And so I think that what Donald Trump is doing is a really stupid version of that. And I don't think that this is a strategy. I think this is just he wants people to pay attention to him. And he wants always to be the person who everybody is reacting to. And even if this leads him to do some incredibly wildly stupid things in the long term, and even in the medium and short term, it doesn't matter to him as long as he is the center of people's attention. And this really creates a world in which at a certain point, I think other countries, they just shrug their shoulders and they start looking at this as a exercise in damage limitations.

17:17So I think that countries have not fled from the United States, but they are looking insofar as they can to really build their long-term strategies around the expectation and the assumption that the United States does not have a long-term strategy, that it is flailing around, that it is capable of doing huge damage to them, as well as enormous colossal self-damage. And so the best way forward is to figure out how do you insulate yourself? How do you cut yourself off from the chaos as much as you possibly can? Which is, of course, is the exact opposite of what Besant is saying. Besant is saying, you better stick with America's systems and you have no choice but to stick to America's systems.

17:56And I think other countries are beginning to figure out, well, if this is America and if this is how these systems are likely to be used, we're going to look to see what other options we have. Yeah. I think also, I think Besant is especially attuned to and concerned about perception as a guy who has spent his lifetime working in financial markets. And there's an effort to manage the perceptions of America's competency and its imperial strength while also struggling to bring the war in Iran to some kind of conclusion, fulfill his promises to end the war in Ukraine, all the things that this administration has talked about doing, I think there's a concern that the rest of the world is going to call Washington's bluff.

18:40Does that resonate with you? Yes, very much. And I think you see that happening, of course, a lot in the last week or so, where there clearly is a lot of worry about bonds and a lot of worry about what is happening to people's beliefs in the full face and credit of the United States of America. And here, I think on the one hand, the United States still has a lot going for it. I think back to Bismarck back in the 19th century saying that God loves fools, drunks, and the United States of America, which is perhaps its own weird version of Pascal's wager in reverse, you know, the United States manages to get away with a lot.

19:14And I think that is much more true now than it was in the 19th century, because the United States still plays a very central role in the global financial system. It still has an enormously powerful army, even if huge amounts of the ammunition and the materiel that it needs have been dissipated away in this foolish war against Iran. So the United States still has a lot that is going in its favor. But as you say, there is also a lot that the United States gets not from its material power, but from other actors' belief in that material power and other actors' belief in the continued centrality of the United States.

19:52So in a certain sense, I think, you know, the danger that the U.S. faces is that at a certain point, sometimes beliefs can become self-fulfilling. That is, if everybody gets nervous, if you're in an increasingly panicky environment, then suddenly you get perhaps the version of a financial crisis, which you have when it is not so much a financial crisis in the standard sense as it is a political crisis, where what you are beginning to lose face in is not whether or not your counterparties are going to do what it is they signed up to do, but you're beginning to lose faith that the United States is capable of behaving in a way that supports its own interests, an enlightened version of its self-interest with respect to the rest of the world.

20:36And you begin to sort of start figuring out, you know, so you begin to find yourself in a world where people's and countries' efforts to protect themselves against that may begin to compound upon each other in unexpected ways, leading to crises, leading to panics, leading to all of these problems which come from the fact that nobody believes that the United States is really capable of getting its act together on stuff. And so we get things like the efforts to try and spend over the last week, which are like trying to put a sticking plaster on top of a separating and festering wound and telling people, just ignore all of the nasty stuff that is dripping out.

21:14Just pay attention. Please, everybody pay attention to the sticking plaster. I feel like there was a broad consensus that was held not just among Trump's detractors, but also his supporters, that the institutions would restrain him. What we have found is that is not the case. I'm curious what that can tell us about the state of American institutional representative democracy, the state of the country? What lessons can we draw from Trump's success and his ability to shape policy and to remain in office? So I think here, in a certain sense, this points to some of the flaws or the problems in the U.S.

21:54constitution and the efforts that the framers of that constitution, who of course were extraordinary people, but were also, like all of us, were limited in their understanding of what could happen, the efforts that they tried to counter that have turned out not to be successful. So here, I think in particular, a Federalist paper number 10, which is a place where you see some of the key people who write the Constitution talking about how the best way to deal with political ambition, and here I'm being very crude and simplifying, is to set ambition against ambition. In other words, if you are in a world where nobody has complete control or a country where nobody has complete control, where everybody is trying to vie with each other for power, that to some extent, my vying for power is going to be counteracted by your vying.

22:40And so you end up, if you create a system that is sufficiently good at doing this, you end up in a system where the different powers exhaust themselves and where you get something which roughly corresponds perhaps to the common good emerging. And so I think what we see with Donald Trump is the fundamental problem that we have is, crudely speaking, it is the Republican Party. And that is that typically sort of the United States system, and it has many flaws which go together with this, has been a system of factionalism in which presidents have always had to contend not just with the opposition, but with the fact that many people in their own party have different interests, don't necessarily want to go along with what the president wants.

23:21And so the president is forced perpetually to compromise. I think this has been the standard way in which you think about things. Furthermore, we have within the government, there also has been, within the federal government, there also have been sort of various different power bases. And this also has created, as the administrative state has grown, it has created its own separate independent source of opposition, which makes things much more difficult to do, but also ensures that a single deeply stupid person cannot actually sort of override everything. So I think we're in a world now where both of these things have been greatly weakened.

23:56On the one hand, the Republican Party, it works much more closely in lockstep with the president than past parties have done. And even people who clearly are deeply opposed to the president, which in the senators typically have had a lot more power, have been extremely reluctant to confront him directly, even when is doing obviously stupid things. And when you have a lock on all three parts of the government, that means that a lot of the opposition disappears. And secondly, we see also a effort within the federal government, which has been encouraged by the Supreme Court to move towards some version of the unitary executive.

24:33And here the theory is very, very crudely that the president has been elected, that the job of the executive is to do the president's will. This is what the current majority on the Supreme Court believes and has embraced. And that means that when the president does really, really stupid things, some of the internal sources of opposition, some of the internal drags that prevent really stupid ideas from becoming implemented in policy, all of that begins to disappear as well. Because you have a bunch of people appointed who are yes men. You have things such as the inspectors general who are supposed to ensure that different departments are behaving above board.

25:11You have them being either fired or terrorized. And you have, and this is the reforms that are going through at the moment, you have ordinary civil servants suddenly being classified effectively as at-will employees so that if they do not jump five feet when the president tells them to jump five feet, they are in danger of getting fired. And so this then creates, I think, almost this perfect storm in which if you put somebody who is fundamentally not competent at the top of the system, you begin to get all of the crazy bad stuff happening that we see happening right now. It's interesting that you brought up the theory of the unitary executive because 25 years ago, we had an administration whose vice president in particular pushed that theory and many of whose members of the administration lamented the loss of executive power that followed Watergate.

26:01How far back do we need to go to understand the sources of institutional weakening? How much of it can we point to as things like the unitary executive and the desire to enhance the power of the executive and what Schlesinger called the imperial presidency? And how much of it is a result of other things that have led to the loss of institutional trust on the part of the public? Okay, this is really, you know, this is a huge, huge question. And, you know, I guess, you know, so if this is something like where all of us as political scientists, as commentators, as politicians, we're all trying to figure out the answer to these big questions.

26:36There's a lot of stuff that is happening here. And I think that if you want to get into those other questions about loss of public trust, you would want to get into some general problems of, I think, government incapacity to deal with a more complex world, and also the increased inability of government to really pay attention to ordinary people. So I think that we're in a world now, and this is not just a problem in the United States. So I think that we can talk about the problems, the particular problems of the U.S. Constitution, of the U.S. design of institutions. But I think across the developed world, we are seeing a lot of people who are suddenly becoming very angry because they see these massive problems coming down the pipeline.