Decision Time: A Letter from the Dean

Decision Time: A Letter from the Dean

Dear members and friends of the Agora Strategy Institute:

World affairs are at a critical juncture. Seemingly endless wars in Ukraine and Iran, soaring global debt and growing concern about the rapid advance of artificial intelligence are converging and reinforcing one another. Companies increasingly risk becoming innocent bystanders, steamrollered by a new era of reckless geopolitics.

At the centre of this storm are the increasingly authoritarian presidencies of Donald Trump and Vladimir Putin. For both leaders, decision time is approaching. Like his false friend Putin, Trump is trapped in a quagmire, struggling to find a way forward in a deeply unpopular, seemingly endless war of his own choosing. Both men will soon have to decide whether to escalate militarily or retreat.

Whichever course they choose, the domestic political consequences could be profound. If Putin loses the war, he may have to fear for his physical survival. Trump, meanwhile, could face a new wave of investigations into his conduct, including his crypto dealings, once a future Department of Justice is freed from political constraints under a possible Democratic administration in 2029. In extremis, that could even mean prison. Both men seem to be dancing a dubious pas de deux, haunted by similar fears.

The coming midterm elections will shape the final two years of Trump’s presidency. Elected on promises of “no more wars” and lower living costs, the U.S. president has become deeply unpopular. The MAGA movement, once built around draining the swamp of corruption in Washington, has lost much of its mojo. Trump is also losing support among Hispanic voters and the struggling white middle class. His poll numbers have hit historic lows, even though the Democratic Party is hardly popular either, divided between a young, radical left and a supposedly corrupt gerontocracy.

At present, Republicans appear likely to lose their House majority and may lose the Senate as well. Trump is unlikely to take defeat gracefully. If the result is close, he may use every means at his disposal—including his influence over the Justice Department and FBI—to challenge or overturn it. Outgoing Speaker Mike Johnson could be tempted to obstruct the orderly organisation of the newly elected House, prevent duly elected members from taking their seats or delay recognition of their credentials.

If the verdict is unmistakable, however, Trump may lose his grip on an increasingly rebellious Republican Party. To preserve his influence, he will seek to remain the kingmaker who chooses the next Republican presidential candidate: isolationist J. D. Vance, or Secretary of State Marco Rubio, whose recent Athens speech outlined a vision of Western civilisation’s dominance, unconstrained by international institutions.

Confronted by a hostile Congress, Trump would face a barrage of investigations and possible impeachment initiatives from powerful committees under Democratic control. Yet he would retain considerable scope to govern by executive order, particularly in foreign policy, where presidents can act more independently of Congress. Unwilling to become a lame duck, he may test the limits of the “unitary executive theory”, which holds that executive power is concentrated in the president.

Much will depend on whether the Supreme Court, whose majority leans Republican, restrains him from crossing lines that could trigger a constitutional crisis. In my view, however, scenarios such as civil war or a military coup remain unthinkable.

With inflation stubbornly high, Trump’s economic strategy has so far failed to deliver. Import tariffs have done little to close the huge fiscal gap, while his efforts to extract what amounts to protection money from America’s allies—particularly the Gulf states—have yielded little more than promises. His tariff confrontation with China has ended, at best, in a stalemate and perhaps a win for Beijing.

Trump may well turn to an even more adventurous foreign policy to distract attention from troubles at home. But the underlying economic and financial problems will not disappear. Bond markets are already signaling concern about America’s soaring deficit, with no obvious remedy in sight, pushing long-term interest rates to levels not seen for decades.

U.S. growth is hovering around 3 per cent, making America the strongest performer among the G7. But much of this strength rests on two pillars: the AI hyperscalers’ investment boom in data centres, expected to reach $1 trillion next year, and massive fiscal stimulus, reflected in a deficit of around $2 trillion.

The crunch may come in spring or early summer 2027, when the United States is expected to reach its statutory debt limit. Fiscal maneuvers could postpone the moment until early 2028. Ultimately, however, Trump will need Congress to act to avert a funding crisis. Political arm-twisting, possible government shutdowns and pork-barrel deals are likely along the way. A 50 per cent increase in an already enormous defence budget seems fanciful in peacetime, although the proposal itself may prove politically useful.

But spiraling debt is not an American problem alone. Across the world, excessive government deficits are raising the risk of another financial crisis.

Large public and private deficits are absorbing an ever-growing share of global savings. Meanwhile, the supply of capital from traditional surplus countries, including the Gulf states, is declining. Higher oil and gas prices will further squeeze household savings around the world.

The era of cheap money is therefore drawing to a close, making it harder for the United States—and everyone else—to service rapidly growing debt. Worse, government bonds issued during the low-interest-rate era are now maturing and must be refinanced at much higher rates.

Nor is this problem confined to America.

In Europe, French politics are making it increasingly difficult to put public spending and social benefits on a sustainable footing. The ECB will face a particularly difficult test if the far right or far left prevails in next spring’s French presidential election.

China continues to face deflationary pressures in sectors such as automobiles and is responding by pushing exports even harder. The result is a trade surplus of more than $1 trillion—an imbalance the rest of the world is unlikely to tolerate indefinitely.

Breaking the global debt spiral would require growth rates that currently seem unattainable—or inflation high enough to be politically unacceptable. Unless, of course, an AI-driven miracle overturns the traditional economic calculus.

The historical parallel is the nineteenth-century railway boom, which connected America’s East and West Coasts and helped lay the foundations for extraordinary economic expansion.

For AI to deliver a comparable miracle in America, U.S. AI companies and hyperscalers will need massive returns on their already extraordinary investments to service their debt. That, in turn, may require them to establish a dominant oligopoly in the global AI market. As China catches up, the United States will have a strong incentive to shape AI regulation in ways that keep fast followers at bay.

There is no simple formula for companies or governments navigating this increasingly complex and often violent environment. The globalised, relatively peaceful, rules-based world in which we grew up is giving way to something very different: a more fragmented and violent order in which governments compete for control of strategic chokepoints in geography, technology and military power.

Companies will need a strategic understanding of global affairs more than ever!

With kind regards and best wishes

Peter Ammon

Ambassador (ret.) Dr. Peter Ammon is a former State Secretary of the Federal Foreign Office.He holds a doctorate in economics and was previously the Economic Director of the Federal Foreign Office for many years and subsequently the German Ambassador to France, the United Kingdom and the USA (2011-2014).Dr. Ammon joined the Agora Strategy Institute as Dean at the beginning of 2024.