Broadsheet

For all my interviews and more, subscribe on YouTube.

I’m spending a lot of time thinking about high interest rates, both for obvious reasons and because I’m reconsidering some of my own long-held views. So I thought I’d have a long talk with someone who has really studied these issues and now, I believe, may have been more right than I was. This may be even wonkier than usual, but trust me, it’s important.

. . .

TRANSCRIPT:
Paul Krugman in Conversation with Ricardo Caballero

(recorded 8/25/26)

Paul Krugman: I’m talking today with a very, very serious economist, Ricardo Caballero, who is one of the most important macroeconomic thinkers of modern times. I was going to say of my generation, but actually, I’m an older generation—but of the currently, still vital creative generation. We’ve had discussions about a lot of events over the past 25 years that have involved some disputes that I hope we can get into in a way that people understand. And recent events, including the rise in long-term interest rates, have really brought all of those issues to the fore. So I thought I’d talk with Ricardo, who is the Ford International Professor of Economics at MIT, a position I once held. But anyway, hi.

Ricardo Caballero: Hi, Paul. So wonderful to see you again. We still miss you at MIT.

Krugman: Well, I miss the days when actually getting at the truth was what mattered, as opposed to dealing with all of the obvious lies. But anyway, I guess there are different stages in one’s life. But so, I will want to get into recent events. But one thing that really struck me is that there’s this long-running discussion basically around interest rates and international movements of capital where there are kind of, as I see it, two rival ways of thinking about it. It could be some of both—but one was about returns to capital and investment opportunities, and one was about people looking for safety and security in assets. And for the most part, I was on one side of that and you were on the other. And I’m starting to think that you were probably right. So, first off, how would you portray this discussion? And maybe we can go back and forth.

Caballero: I don’t know whether they’re really different views because, you know, my view at least was always, when I say “a shortage of a store-of-value,” if you will, investment opportunities create those store-of-value opportunities and so on. So I never saw it as very contradictory. I thought there was an imbalance: lots of needs for savings, in particular in a very specific kind of saving—safe saving. And the productive structure wasn’t able to generate enough assets, especially safe assets. And that’s, I think, what led to the sort of “shortage of safe assets” type of literature, and that naturally depresses safe interest rates. If you look at the return on capital, actually, it was fairly stable. It was all absorbed by the opportunity risk premium, if you will. And so you can see returns both on safe and risky capital sort of declining in tandem since 2000, or earlier than that. And then somewhere around 2000, you can see that the safe interest rate keeps coming down, while the return to capital is sort of paralyzed. And what starts widening is the equity risk premium.

Krugman: So let me just break in here. A kind of crude, simplistic view—probably my view at a certain point—was that there’s capital and then there are returns on capital. And when we start to see interest rates get really low circa 2000, that’s telling you that returns to capital are going down. And if we see a lot of money coming to the United States, it’s because, well, America had faster population growth than other rich countries, and we were leading the technology revolution. But you’re saying there’s a really big difference between buying stock—corporate investment—and buying U.S. government debt, which is safe. And that the United States was sort of better than the rest of the world at supplying these safe assets.

Caballero: Absolutely.

Krugman: And just going way back—the financial crisis, which seems to me like yesterday, but was in fact almost 20 years ago—involved all of these exotic financial instruments, the asset-backed mortgage-backed securities, which you interpreted as a response, to a large extent; not just fraudulent, but a response to a real demand. Right?

Caballero: Absolutely. I thought there was a shortage of ultra-safe assets. So financial engineering got to work and they created sort of “synthetic safe assets.” Now, they were safe assets from the point of view of idiosyncratic shocks, but they weren’t from the point of view of systemic shocks. And to me, that was quite important in generating the financial crisis.

Krugman: Yeah. And so idiosyncratic shocks are like, well, okay: a particular housing development turns out to be a bust, but a collapse of the entire housing bubble is... And so fancy math was used to create assets that were supposedly safe because you were pooling all this stuff. And so, in your view, it wasn’t just that you had evil, fraudulent financial types—though that too—but that they were responding. There basically just weren’t enough Treasury bills and stuff like that out there.

Caballero: I mean, they realized there was a spread to be earned by creating these assets, and then there were regulatory failures that allowed them to hold them on their own balance sheets. And I think that’s when the really toxic mixture was developed, because you had these very low-capital-charge assets which weren’t really safe. But you’re right, it was this spread that sort of created the opportunity and then the regulatory arbitrage, if you will, that brought them into the balance sheets.

Krugman: Okay. I’m going to be self-indulgent and tell you a quick story. Robin and I bought our New York apartment in early 2009, which turns out to have been perfect timing, although that was purely an accident. We had come into a slug of money courtesy of the Swedes. But as we were looking at places and I was looking at the bookshelves of people who were selling their apartments, and a whole lot of them had books on the Gaussian copula and stuff like that, which, as you know, was a technique that was used to justify the claim that these synthetic assets were safe. And so we were clearly getting a preview: there were a lot of apartments on sale from Wall Street quants who’d been fired because everything was about to fall apart.

And so, in some sense, the setting for the financial crisis was that people wanted safe assets, and excessively clever guys on Wall Street invented seemingly safe assets. But then everything went to hell, and we had the financial crisis. And then we had this long period of really, really low interest rates. And your story would be basically, as I understood it, that all of these fake safe assets had been revealed as fake, and now there was a sort of piling into Treasury bills, piling into actually safe assets.

Caballero: Indeed, and also partly the supply of sovereign safe assets—Italian bonds and the like—those also went away. And so we had a massive shortage.

Krugman: Okay. Now, there was an alternative story. And believe it or not, listeners, we are going to get to where we are now as a result. But there was an alternative story that I guess Larry Summers came out with at first, but I actually had been toying with the same thing, which was that what was actually happening was a real lack of investment opportunities. This was the “secular stagnation” view.

Caballero: You know, we were both at that conference. It was IMF, I think, and you may not remember, but that’s when Larry sort of came up with this theory. And you may not remember, but I stood up and I said, “Look, I buy a part of that story. But what you’re missing is that the return on capital hasn’t declined nearly as much as the safe interest rate.” And that’s what I was describing before—the equity risk premium increased enormously. But the return to capital, regardless of whether you measure it with national accounts or return on financial investment, did not decline nearly as much.

Krugman: That’s right. So, national accounts being corporate profits divided by the value of corporate assets. And there really wasn’t a big decline in the profit rate.

Caballero: Of course, in the recession itself, it did. But I’m saying afterwards it recovered.

Krugman: Yeah. By like 2015, the recession is over and basically the interest rate on federal debt is lower than the rate of inflation. And so it’s basically free money for governments to borrow. One interpretation of that is, well, population growth has slowed and technology is maybe not as exciting as we thought it was going to be, and so there weren’t these opportunities. And you were saying that the numbers never supported that.

Caballero: I don’t think so. I mean, elements of these stories are obviously correct, but I mean, there’s like 400 or 500 basis points that really came from widening in the equity risk premium.

Krugman: By the way, the equity risk premium is when stocks historically pay a higher rate of return than bonds—certainly more than government bonds. And it’s always been a little bit of a puzzle why it’s so large.

Caballero: Not for long, though.

Krugman: Yeah.

Caballero: Not so much now.

Krugman: But it was more that people trusted the U.S. government and didn’t quite exactly trust corporate investments. And so that’s why the government was able to borrow so cheaply.

Caballero: I think so. And also the demographic cycle helped on that dimension because, you know, older people tend to demand safer assets. So that’s also changing that composition.

Krugman: Yeah. I wasn’t even thinking about that. So I have to say, I think we were kind of, in some ways, living in a fool’s paradise where governments can borrow essentially for free—certainly the U.S. government could borrow essentially for free.

The case that a lot of us used to justify secular stagnation—and for some reason, the words here are all completely meaningless to a normal human being—but to justify this idea that we just had low returns, a lot of us talked about Japan. Have you spent time on the Japanese story?

Caballero: I wrote a paper on Zombie Lending.

Krugman: Oh, yes you did. Why don’t you tell us about that? Because that’s also an interesting thing that was a consequence.

Caballero: That was a consequence. I mean, essentially, in Argentina, if you have a financial crisis, you just blow up. But in Japan, they had the resources to essentially keep banks alive and the like. And so that led to a process of evergreening loans. And we show that that reduced productivity growth. So it did have a real impact eventually.

But there were other things at play in Japan as well. They had a massive financial crisis which certainly took away their mojo. It took many years, and then they responded. The fiscal policy sort of reacted too soon to the incipient recovery. So they fumbled on multiple occasions.

Krugman: Yeah. And the story that we used was that, you know, the collapse of fertility happened there first. So there was a shortage of Japanese, which should have reduced returns on investment and maybe led to low interest rates, but maybe that wasn’t even the story for Japan.

Caballero: I mean, I think it is part of the story, definitely. I mean, they certainly experienced a very acute demographic cycle. They were not very inclined to allow massive migration. So they had all the ingredients; there is no doubt. But on top of that, you had the financial crisis and this supporting of sort of zombie loans. And so they did terrible things to the productivity environment.

Krugman: Given all of that, you might think that Japan would have fallen way behind on productivity. And they have lower productivity than we do, but not...

Caballero: Well, labor, because they have lots of capital.

Krugman: True. Okay. So this is a vision of kind of the history of the past 25 years as a search for perceived safety, investments where you can’t go wrong, and an abortive attempt to cater to that demand by providing a lot of clever things that looked safe, but weren’t really. And then a collapse of that. And then you enter this long period, because the financial crisis is 2008 and interest rates are still very low, at least as of just three years ago. And now all of a sudden, or so it seems, that’s gone away. So, what do you think happened? We kind of had a glut of safe assets instead of a shortage. What do you think happened there?

Caballero: Well, I think it’s a combination of things. I think that first, there’s the COVID shock for sure, that affected the supply of assets all around the world. So now we have a lot more competition than we used to have as well. That’s one aspect. Second, it brought sort of the inflation monster into play. And that also complicated the life of bonds. And then markets became very bullish. So the equity risk premium we’re talking about essentially went away.

So, to me, a lot of the movement that we have seen is really the equity risk premium up and down. The question is whether it’s structural or temporary. We also saw a compression of the equity risk premiums right before the dot-com bubble. And so the burst of the bubble also led to lower interest rates. So, in struggling with this, the question becomes: How much of this is structural versus how much of this is just some temporary phenomenon or not? So that’s one issue. That’s sort of the financial issue.

And then the second one, which is not unrelated to this issue of the compression in the equity risk premium, is the AI boom. I mean, this is a massive investment and wealth boom, which is very important. So the wealth boom has boosted aggregate demand and that has increased equilibrium interest rates. We talk about the K-shaped economy; I call it financial Dutch disease. We have this enormous amount of wealth creation and therefore the interest rates have to be high. And then anything that is affected by high interest rates is struggling.

Krugman: By the way, people won’t know this, but Dutch disease is a very long ago story, but it stuck. This was when the Netherlands discovered natural gas, and suddenly they were selling lots of natural gas, which made the—I guess they still had the guilder then. They still had their own currency. So this made the guilder strong, which actually was kind of devastating for Dutch manufacturing because they weren’t competitive anymore. And so this is a case where good news is actually bad news for large parts of the economy. And actually, I happen to know, the Dutch stopped pumping out the gas a few years back because the land, which was already below sea level, is subsiding further. But we still use that term.

So you’re saying when people think the second coming of wealth has arrived because of a new technology, they pile into that, and then they’re not so interested in parking their money in safe government bonds.

Caballero: Indeed, yeah. I mean, even without the secondary effect, you still get a boost in aggregate demand that comes from the wealth. Before the productivity of the AI boom arrives, you get the demand. You don’t get the productivity. That requires higher interest rates.

Krugman: That’s right. That was very much the opposite, by the way, of what Kevin Warsh has been trying to argue. He’s been saying, “Well, because of AI, interest rates can come down because it’s anti-inflationary.” But the problem is, if the anti-inflationary stuff arrives, that may yet be some years down the pike. And meanwhile all the spending and the wealth that’s driving the stock market valuation... In a way, you’re saying that a lot of what’s happening should be good news, right? We have this technology, which is pretty impressive.

Caballero: Yeah, it’s extremely impressive. Yeah, I wrote a little paper. It’s called Speculative Growth and the AI “Bubble.” I’m very optimistic about this technology. Now, whether I’m optimistic about the current valuations, that’s another story. But I’m optimistic about the technology. And I think there’s a good future ahead. But the good future, to get there at a reasonable speed, I think we do need a little bit of bubbly markets. And that’s the nature of the story. But it’s a fragile story because, you know, bubbles are fragile.

Krugman: Yeah. And by the way, I don’t know if you saw this, but Stan Druckenmiller, sort of George Soros’s right-hand man and also Scott Bessent’s mentor, published an opinion piece in the Financial Times about how Bessent is all wrong to believe he can bring down long-term interest rates with his little bits of financial engineering, which was an interesting piece and interesting given the source and all that, but it appears, based upon the detectors, to have been entirely written by AI.

Caballero: I see!

Krugman: It seems Druckenmiller knew what he wanted to say, but couldn’t be bothered to actually write it. So he actually told Claude to write it.

Caballero: I’m sure he wanted to blame somebody if it didn’t work well.

Krugman: Now, it’s good news, we think. There’s this technology, which is amazing. It really is. I have to say, I’m using it for pretty nerdy stuff like, “Here’s this published table, but it’s a PDF. Can you please convert it into an Excel spreadsheet for me?” You know, that kind of thing. But it’s amazing how much time that saves.

But it’s actually having this effect, where suddenly interest rates on federal borrowing are way up. Again, this is going to be a lot of nerdy questions because I’m really trying to scope this out, and I can’t think of a better person to talk to about it. It’s also true that a lot of interest rates beyond that and government debt are also up. Right? So does that make sense? If it’s a search for safety, should we be seeing home mortgage rates also going up by the same or similar amounts? Maybe they are.

Caballero: They are in the sense that spreads are being compressed at the moment. So that’s consistent with the fact that there isn’t a lot of concern with risk. And so all the spreads are coming down. That sometimes has to do with “reach for yield” type phenomena. It’s pretty standard. The benchmark rate, which is the Treasury rate, tends to move more than the other ones outside of a financial crisis. But the spreads are being compressed. And mortgage rates are, in fact, rising—not one-to-one, but they are rising.

Krugman: Okay. But it’s not one-to-one.

Caballero: No. I haven’t checked, but I suspect mortgage rates are not rising one-to-one. But corporate spreads are being compressed.

Krugman: Yeah, and that’s actually kind of how you are measuring. Explain to me, because I didn’t quite get it: You have quite a new paper on basically the elimination of the safety premium on U.S. government debt. How did you go about measuring that?

Caballero: It’s a combination of things. I mean, the concept I have in the paper is one of the marginal costs of debt issuance. And that has two components. One is the spread, which we’ll discuss—the spread relative to a safe interest rate; think of it as the front-end monetary policy rate. And another one is the cost of rolling over the old debt at the new higher premium.

So, my estimate is that these costs have increased by about 110 basis points, of which 50 basis points are the result of an increase in the premium—the spread—and 60 basis points is a result of these rollover costs. And the rollover costs come from the fact that now we have so much more debt that every time you get a little bit more of a spread, eventually when you end up rolling over all the old debt, that is going to cost you a lot more from the point of view of the fiscal deficit.

Now, the most commonly understood term is the spread, the premium component. And that has two components. One is the rollover premium, if you will. That one I measured by the Treasury basis trade, essentially. You can probably explain it better than I can.

Krugman: Yeah, I’m not sure I can do that either. But it’s essentially from how much more a Treasury bond pays over a swap that doesn’t use the same amount of balance sheet. And we call that the convenience yield, that Treasury bonds would actually sell at a higher price than the implicit price in a swap of corresponding maturity. And the swap is a swap on corporate debt, right?

Caballero: No, no, no. It’s on safe interest rates. Just think of a futures contract. It’s the fixed rate of a future, of a swap. So think of a futures contract.

Krugman: Okay. But essentially, people were willing to accept a lower interest rate if they were just buying U.S. government debt, rather than doing something more complicated.

Caballero: Yeah, actually it’s not necessarily more complicated. But it happens that the Treasury bonds have a lot of other advantages. You could use them for so many things: collateral and so on. And that was worth a lot. And that’s an interesting angle, actually. It was worth a lot also because the marginal holder was a very different holder from the current one—central banks and so on. For a central bank, like the Bank of Japan, it’s not very useful to have duration through swaps and the like. They like to hold the Treasury bonds.

Now it’s a bit different. The marginal holder may not be the Bank of Japan. It may be some levered agent in the economy, and for that agent, balance sheet and so on is very important. So if you look across all the maturities, that spread was on the order of -18 basis points before COVID, if you will. And now it’s around, I don’t know, zero.

And the other one is the duration component. And if you look across all the maturities, essentially the U.S. didn’t pay much for duration exposure and now it’s paying like 40 basis points for that. So that’s the way you get to 60 basis points.

Krugman: So yeah, people are demanding a higher interest rate basically to tie their stock up in long-term stability.

Caballero: Yeah, I mean, they’re demanding a higher premium because the safe interest rate goes up for the kind of things we were talking about before—wealth and the like. And the question is, what about on top of that?

Krugman: Okay. And so, I should have these numbers in my head, but a few years back, the U.S. Treasury could issue 30-year bonds—so basically lock in financing for the next 30 years—for several hundred basis points, several interest percentage points lower. And it’s now 5-point-something, which is just way, way higher than before. It basically means the federal government was paying hardly more, if anything more, than the inflation rate, and in fact less, and then if you subtract growth in the economy, basically no burden of debt.

Caballero: Yeah. I mean, in real terms, we went from zero or negative for the 30-year bond to plus 2% or 2.5%. So it’s quite significant. And what I’m saying is that perhaps maybe one-third of that is a result of the fact that there is a little bit of a glut of all these assets.

Krugman: And just going back, what happened was that the United States and other countries that also issue stuff that is perceived as safe just sold a lot of bonds, and a lot of that was because of COVID, right?

Caballero: Absolutely. That was a big thing. And nowadays corporates are issuing a lot of bonds as well because we’re in the middle of this investment boom. And so, I think corporates in the U.S. are going to issue on the order of $2 trillion this year. That’s an enormous amount of competition.

Krugman: Yeah. And probably people think of Microsoft bonds as being very nearly as safe as U.S. government debt.

Caballero: For a while, Apple bonds sold at a higher price than Treasury bonds. I think it was a very brief moment, but I think it did happen.

Krugman: I do see where sometimes people say, “I’m going to get you something that’s safer than U.S. government debt.” And I always wonder, what do you think anything is going to be worth if the U.S. government goes bankrupt? Who’s going to enforce the contracts?

Caballero: I assume they are talking about price risk more than the default risk. And by the way, I wrote this paper on a lot of debt, if you will, and what that does to aggregate demand. But I’m not predicting any sort of crisis; I don’t see that. I think there’s nothing that can substitute for U.S. Treasury bonds. I always say, you know, there isn’t enough French real estate you can move to if you want to get out of the U.S. So the paper I wrote says precisely, “No, no, no. Assume that this will remain safe.” I don’t think that this is the issue. The issue is that it becomes more costly to issue this safe debt and that begins to become a big drag on aggregate demand.

Krugman: In some ways you answered the question already. But I’ve been wondering, how much of what we’re seeing is just that there’s a lot of debt out there and you basically have to reward people more to get them to absorb it, and how much of it is an actual loss of faith in the safety of the stuff?

I’m seeing back and forth on this, by the way. I’m reading Robin Brooks, and he’s talking about the debasement trade and people worried about the security of U.S. debt. And I think you are not worried. But the question of whether you are worried and whether somebody out there might be worried are not the same question.

Caballero: Of course.

Krugman: Do you see any signs that people are, in fact, losing faith in the safety of U.S. debt as opposed to just that they don’t really want all that much of it?

Caballero: I think inflation risk is something that is a bigger concern. That’s a debasement risk more than, I think, a default—I would assume. I mean, I don’t know what’s on some people’s minds. But I think there is a much bigger concern out there about inflation, and particularly with the current Fed and, you know, interaction there is not very good. But I suspect it’s that kind of thing.

Having said this, you are seeing a little bit of a change. You remember we talked about corporate bond spreads having shrunk. But not in the hyperscalers. Now, you have seen a little bit of concern there that didn’t exist at all a few months back.

Krugman: Yeah, I have to say, if you go back just a few years and you looked at the big established tech quasi-monopolies, they had this enormous cash flow and these huge business technological moats around their quasi-monopoly positions. And how could they ever be in financial problems? And the answer is, well, if they’re going to spend $3 trillion on a technology that, however great it is, may or may not actually be profitable for the people who spend on it... That could do it. So, yeah.

It’s at least arguable—I mean, you don’t have to get particularly political to say that the U.S. government doesn’t sound the way it used to sound. Maybe you can help me here. I’ve been trying to wrap my mind around what a loss of confidence in U.S. debt would mean. How would that even play out? When people say, “Oh, people are going to dump their U.S. bonds,” I always ask, “And buy what?” And you’re in that same camp?

Caballero: Mostly, yeah. I mean, again, local is different. With a small scare, you can see lost revenue. There was an episode when inflation was a little higher than now and people perceived, for the reasons you just described, equity in this hyperscale assets hypothesis. And I think part of the reason the equity risk premium was so low—and now it’s been increasing a little—it was exactly that. Treasuries were perceived relative to the main shocks that we were experiencing—inflation, if you like—Treasuries were perceived as riskier than some AI-related equities. So you could see for local shocks and so on, depending on the nature of the shock, something going into equities and the like. But otherwise I just think there is nothing that can be done in size, in very significant size.

But we can get a spike. Remember in March of 2020, I think it was, there was a moment in which foreign central banks wanted to sell Treasuries and the Treasury swap spread got unwound because of margin calls, and we did see big spikes in treasuries. And I think the swap lines that were created by the U.S., by the Fed and the like, were mechanisms to try to stabilize episodic things. But I call them episodic. I just don’t see anything that can hang in there for a long time without creating a matching mess.

Krugman: Yeah. One of the marks of really, really effective financial policy is that nobody even notices that you did it.

Caballero: Exactly. Absolutely. That was very well managed.

Krugman: March 2020, for a couple of days, was absolutely terrifying. But they responded effectively. Although, actually, even then, what were people buying?

Caballero: Cash.

Krugman: Ah yes, they were piling into cash. And of course, the thing about that is we can print cash.

Caballero: True, eventually. But first you have to go through a spike and then it happens.

Krugman: Yeah.

Caballero: But effectively that’s what they did. When you create a swap line, it’s just like printing cash.

Krugman: Yeah, that’s right. I’d say I probably get about 15 emails a morning saying, “Here’s how the dollar is going to collapse. It’s the great American financial crisis.” And it usually starts with how irresponsible U.S. policymakers are. All of which is true. But how does this happen? You know, give me the mechanics of the crisis. And I’ve never been able to get an answer on that.

Caballero: Yeah, I don’t see it either, but I do see a drift. I do see a drift. People can be very creative. You give them time. If you tell me now I have to relocate $40 trillion of debt somewhere else, there’s nothing I can do. But, I mean, give them enough time. People start finding certain things that they use, to find sort of safe and appealing, or more appealing [places to put their money]. So I think drift can do a lot more damage than events.

Krugman: Yeah. I mean, I’ve been on a kind of related subject: the international role of the dollar in the global payments system. And it’s really, really hard to see anything replacing the dollar, but workarounds that people manage to do—you know, we’re witnessing that in the Persian Gulf as we speak. People can find their way around it.

Financially, what keeps you up at night? I mean, we’ve both lived through and were very attentive during two inconceivable financial crises. Although the one in 2020 got solved very quickly. But I remember 2008. I actually had a relative who was working at the New York Fed and that weekend, the 13th, 14th of September, he wasn’t answering his phone and we said something must be up. And it sure as hell was.

Caballero: That was a long weekend there.

Krugman: Yeah, it was. He had bags under his eyes big enough to pack your luggage in. But anyway, are there scenarios out there that you worry about now?

Caballero: More than a crisis, I worry about the fragility of the current boom. Precisely for the reasons we have been discussing. I think that high valuations are a needed ingredient in the development of this wonderful technology nowadays. But at the same time, we’re quite fragile to that. I mean, the good thing is that we have a lot of space to cut interest rates very, very rapidly if something goes wrong. But I think things are fragile.

I’m exaggerating here but, you know, Venezuela did great under Chavez for a long time because the price of oil was rising a lot. And I feel that a lot of what is happening that is good has to do with AI covering up a lot of stuff. So I’m a little afraid about something that depends on high valuations that could come down very abruptly, and then we don’t do that great.

Krugman: Yeah, I mean, you’re younger than me, but old enough to remember the late ‘90s. And I remember how everything seemed wonderful. Although that was a bubble during which people were happy. We’re now managing to have something different: It may be a bubble, but somehow everybody hates it.

Caballero: A lot of people are very happy with the current bubble.

Krugman: That’s true.

Caballero: But it is also true that there’s a negative side as well. Now, having said that—this may be very optimistic, but I think that the current story is—there’s more alignment between the high valuations and the people that are really involved in generating this revolution. I think the fragility comes from different things. The Chinese may come out with some technologies that wipe out a big part of the competitive advantage we have and things of that kind. Sort of creative destruction-type things can be quite bad for financial wealth temporarily.

Krugman: So, last question: What do you think of Scott Bessent’s attempt to push those top rates down?

Caballero: I suspect they got very nervous, and I think that they wanted to cut a tail. I think he’s smart enough to know that he cannot change fundamentals, but I think precisely because of the fragility—I mean, I think they’re very worried that financial conditions can tighten very abruptly with a spike of that long end and then crash precisely the equity market and the like. And I think to me, this was a sort of “put”-type policy for financial conditions, which is quite important, obviously, for all the developments, political and economic.

Krugman: Interesting times. This discussion will be posted four days after we’re having it, and given the way things are, it may be totally out of date by then. But I’m actually feeling somewhat more relaxed after this discussion, because I was a little bit worried that you were going to tell us that there are no safe assets anymore and the world is doomed.

Caballero: Currently I don’t believe that. We shall see whether that’s naivete or wisdom.

Krugman: Well, thanks so much for talking with me.

Caballero: It was a pleasure.

Even better would be an option to swap in the local radio broadcasts, like bringing a portable radio to the ballpark. Go skeuomorphic with the UI and make it look like an old handheld Sony or Panasonic transistor radio, and make the toggle “click” on and off. Go skeuomorphic with the audio too — make it sound like it’s coming out of a little speaker or a little earpiece and have the tuner play static as you switch between home/away (and English/Spanish) stations. That’d be so fun. And the regular old flat Friday Night Baseball telecast already supports swapping in local radio broadcasts — they’ve already got the rights. Bring that to these immersive games! ↩︎

This week we’re doing another one of our series of military theory primers, this time focusing on a fairly simple contention: that the United States Navy is a load-bearing component of the global economy. I considered attempting to work in A.T. Mahan and the concept of command of the seas in here but simply outlining the basic argument about the navy’s role in sustaining global standards of living has run out more than 10,000 words, so a primer on Mahan will have to wait for another day.¹

The argument here is actually quite easy to state as a series of propositions: global trade is an important part of the global economy, necessary to maintain our standards of living (and in many cases, essential for the survival of people in poorer countries) and seaborne trade makes up the overwhelmingly vast majority of all trade. Moreover, in history to this point it has been a relative constant that in the absence of major naval powers committed to freedom of navigation, pirates and states at maritime choke-points tend to emerge and seriously disrupt maritime trade. Finally, at current, only the United States maintains the kind of navy that traditionally has been necessary to keep sea lanes open, thus making the US Navy at present a ‘load bearing’ component of the global economy. Consequently, this makes the United States’ apparent turn away from freedom of navigation troubling – a move likely to be bad for Americans but also bad for everyone else.

If you nodded your head through all of those points, you are good to go. Hit the tip jar on the way out. But I find that many folks want to contest at least one of those points – they don’t think trade is important (or that it only enriches ‘big corporations’) or don’t realize how substantial sea trade is, or don’t expect sea commerce to break down in the absence of naval power, or don’t understand the kind of navy necessary to provide that sort of power. So the rest of this far-too-many-words-long post (it turned out to be 10,430) is going to belabor each point, one by one, in order to explain why the United States Navy – which I should stress is very much an imperfect institution; we are not here to uncritically glaze the USN, just to describe its function – is configured the way it is and why there is not currently a replacement for it on offer.

Also, let me note at the beginning: if you want regular updates on global shipping as well as good explainers about how global shipping works, I cannot recommend Sal Mercogliano’s What’s Going On With Shipping channel enough.

But first, as always, building navies is expensive. Really expensive. Absurdly expensive. If you want to help keep this ship afloat, you can help by spreading the word to new readers and by supporting this project over at Patreon. If you want updates whenever a new post appears or want to hear my more bite-sized musings on history, security affairs and current events, you can follow me on Bluesky (@bretdevereaux.bsky.social). I am also active on Threads (bretdevereaux) and maintain a de minimis presence on Twitter (@bretdevereaux).

A World With Trade

Now I want to start by talking about what global trade really is and its role in the global economy, because in many cases before I can get to anything about shipping lanes and choke points and pirates and so on, I find many regular folks have already immediately objected that they do not care about global trade. They think of global trade as a thing which mostly benefits big corporations or ‘cosmopolitan globalist’ elites. But, you must pardon me, they are wrong: they do not yet know that they care about global trade. When global trade is disrupted – even just a relatively little bit! – and the price of a barrel of oil nearly doubles, leading to a one-third surge in the price of gasoline and a 50% jump in the price of diesel, it turns out they care a great deal.

They often just don’t think about that in terms of global trade, because global trade is one of the key things that makes modern prosperity possible, mostly invisibly. That very invisibility, as we’ll see in the end, is part of what poses real political problems, but let us first make trade a bit more visible.

The first mistake that folks make here is to assume that trade is a relatively small part of the global economy. It is an easier mistake to make in a place like the USA, which is very big and thus trades with itself more than most, but globally trade makes up between a quarter to a third of all economy activity.² That is, it turns out, quite a lot. If your household income fell by a third, that would be very difficult for you. If every household’s income fell by a third, the resulting economic contraction would be double the size of the Great Depression (which reduced global GDP by roughly 15%) and have all sorts of knock-on effects as those households themselves had to cut back on other, non-imported goods and services.³

The second potential mistake here is to assume that all of this trade is mostly a luxury: that it just accrues to the rich or to rich countries or to big corporations. We may remove the ‘rich countries’ here right off: a lot of the countries with very high trade-to-gdp ratios (imports+exports, thus the ability to exceed 100%) are poor countries (the other big group are small, rich countries): countries like Vietnam (190%), Djibouti (206%), Namibia (108%), Somalia (128%), Libya (137%), Guinea (103%) and so on. We’ll come back to this in a moment, but a breakdown in global trade is actually especially bad for poorer, developing countries.

Likewise, while big corporations surely profit off of trade – no poor man ever owned a freighter – they’re not the only ones. We can think about this by thinking about the most staple of all bulk staples: food.

In the developing world, access to global food markets is an essential lifeline. Most developing countries, especially across Africa, are net-food importers, some quite substantially so. Moreover, whereas food imports in developed countries are often ‘exotic’ foods that grow in other climates (think bananas away from the equator), for developing countries, these are often bulk staples. As we saw in 2008-2010 and again in 2022 and may grimly see again soon, increases in the price of bulk stable foods are associated with political instability and suffering in the developing world. Because if the price of bread goes up by 25% in the United States, for most Americans that is annoying, but in many developing countries it means people go hungry because they cannot afford food.

Developing countries are also more likely to have agricultural systems that are exposed to more variability (drought, pests, blight, etc.) as compared to developed countries. And fundamentally everyone relies on trade to insure against famine in the event of a local failure in food production. Trade is what allows us to even out a freak drought in one country or a flood in the other to keep everyone fed. That trade may be in the form of market interactions or it may arrive as foreign aid or disaster relief, but it is still the movement of goods from one place, from one country, to another.

Trade is also important for the developing part of developing countries. Doing the industrial revolution from scratch – designing and building better steam engines, creating factories, developing precision tools, steadily expanding production as all of that industrial capital accrues – took Great Britain something like a century and a half (roughly 1750 to 1900 – we’re being quite approximate here) to hit an economic standard we might define as ‘middle income’ today.⁴ But developing countries today that have access to trade – and here we mean not just the movement of goods (but also that) but also people – can go through that transformation much faster. The classic interaction is that developing countries sell raw materials⁵ to import the machinery and experts to build basic manufacturing industries (think steel, concrete, agricultural goods processing and so on) and then sell those goods to be able to afford to important the experts (including educators) and advanced equipment to make more complex finished goods. Because manufacturing, say, a car requires not just raw materials, but the ability to craft high quality materials (like very precise steel alloys) as well as very complex components and very precise parts within low tolerances and that both requires really fancy manufacturing equipment (which also requires those same high quality materials, complexity and low tolerance components to build) and very skilled workers, designers and engineers.

Trade allows developing countries to jump-start progress on each rung of that ladder, importing the experts who already know how to do these things (and can teach more) and importing the machines that can do these things (with which more may be built), ideally resulting in a high-income, more self-sufficient economy achieved in decades rather than centuries. And you can see any number of countries that either have accomplished this (China, Japan and South Korea, for instance) or are now accomplishing it (India, Vietnam), often from very low initial industrial ‘baselines’ (frequently as a result of tremendous neglect or malice at the hands of European imperial masters).

As those developing countries work their way up the value chain from raw materials to basic goods (often textiles) to low-cost, low-complexity consumer goods (e.g. plastic toys) to higher complexity consumer goods (cars, washing machines) to the very top of the value chain (software, aircraft, etc.), their standard of living improves, but equally because the cost of labor in those countries is lower, they provide much cheaper goods to developed countries. Those cheaper goods in turn lower the cost of living in developed countries, making the sort of ‘American Dream’ middle-class lifestyle available to more people.

Of course even among developed countries, trade does not lose its value – there are forms of comparative advantage that have nothing to do with labor costs. Some industries are so large, technical and expensive that few countries are big enough to absorb the entire demand of it – aeronautics is a classic example. It might make sense for some countries to specialize in aircraft production, but most countries are too small to have a domestic aircraft manufacturer just for the heck of it – they’d be better off specializing in something else and using that product to buy the planes. Meanwhile, some goods are simply hard to produce in certain places: Norway is never going to grow many bananas, Japan is probably not going to ever be a major producer of oil, Mali is not going to export much in the way of fish.

All of which is to say that trade directly improves the living standards of regular people in both developed and developing countries and equally, we do a lot of it, with trade representing something approaching a third of the global economy.

All of which now brings us to the key observation: 80% of all goods transported globally move by sea. That is a figure which is too big for bold, so let’s step it up a bit:

80% of All Good Transported Globally Move By Sea

There we go.

So not only do more goods move by ship than by aircraft, railway or truck or river barge or what have you, four times more goods move by ship than by every other alternative system of transportation combined. And if roughly 30% of global GDP is goods being traded, that means that about a quarter of global GDP moves by ship each year. That is a very big part of the global economy!

The main reason for this is simple: it is much cheaper to move goods by sea than by any other method. For the cost of sending one shipping container across the United States by land (truck or rail; when I checked in 2023 around $2,500-7,500, with some variation by weight and exact route) you could also ship that same shipping container from an American cargo port to any port in the world at all (around $6,000). Shipping by sea is (this is the rule of thumb I was given a few years back when I asked) around three times cheaper than rail, five times cheaper than truck and eight or more times cheaper than air freight. That is an enormous cost difference.

Believe it or not, that huge difference in cost is actually less than it was before railways and internal combustion engines made bulk overland transport somewhat affordable. In antiquity, the ratio of cost (derived from Diocletian’s Price Edict) for transport between land, river and sea was 20:4:1, with land transport for a given quantity of bulk staples being twenty times as expensive as land transport. With the miracles of the industrial revolution, we’ve brought down ‘twenty times as expensive’ to merely! three to five times as expensive, per ton-mile.

There are two basic reasons for this. One is that it simply takes less energy to move things over water than it does to move them through the air or overland. But the other reason, that I think is worth stressing here is ships can be really, really big.

Via Wikipedia, a pair of Maersk Line container ships, showing just how much cargo they can handle. Each of these ships, which are Triple E-class container ships, can carry around the equivalent of 18,000 to 20,000 semi-trucks worth of cargo.

A truck can move a single cargo container. A typical freight train might have 100 or so freight cars each moving about a cargo container. A large Suez canal capable container ship, by contrast, might carry upwards of 20,000 TEUs (twenty-foot equivalent units, the size of a cargo container). That means a single container ship might match the cargo capacity of hundreds of trains or tens of thousands of trucks. That holds true for other kinds of freight: a tanker truck can move about 200 barrels (bbls) of liquid, like oil. Suezmax tankers can get up to a million bbls and Very Large Crude Carriers (VLCCs) are often in excess of two million.

So the scale that sea shipping can operate on is simply much greater than what is currently possible on land. Even pipelines for oil generally move less than active major shipping lanes (as we’ve seen demonstrated in the Strait of Hormuz) and of course you cannot move iron ore or consumer goods or grain via pipeline but you can move them in large freighters. As a result, nearly all long-distance trade moves as far as it can by ship before transferring to truck or rail for the ‘first mile’ and ‘last mile’ of its transit. It is thus far to say that global trade – which, as we’ve established, is an important part of the global economy which enables rich countries to eat well and poor countries to eat at all – is mostly about shipping on the water.

Strait Up Piracy

All of that seaborne trade, however, is the product of a long period since 1945 in which there have been relatively minimal disruptions of the security of civilian ships moving over the world’s oceans. What I want to note is that this is not automatic, it is an outcome that has been produced. Instead, the historical pattern has generally been that in the absence of major powers exerting themselves to keep sea lanes open (because it benefits them to do so), what we see is that sea trade fragments, with polities sitting on maritime choke-points moving to exploit that control (at the expense of everyone else) and both pirates and privateers disrupting shipping more generally.

Piracy, of course, is extremely old: it is treated as a well-established and perfectly normal thing to be doing in Homer, for instance. We actually have references to sea raiders and pirates even farther back, including in the Amarna tablets (c. 1350 BC). Now I should note that while we generally think about piracy as ships attacking ships, there is a land based component to it: piracy often also includes the raiding of coastal settlements and at the same time pirates themselves need coastal bases (often with friendly local populations) in order to operate out of.

Notably, a lot of this early evidence for Mediterranean piracy comes in the context of the Late Bronze Age Collapse and the period immediately following it (the latter including piracy’s place in Homer’s conception of maritime activity, where it is a normal and regular thing to be doing), periods of state fragmentation where there weren’t any major naval powers in the Eastern Mediterranean capable or willing to enforce freedom of navigation. That changes as we move into the Late Archaic and Classical periods (as reckoned in Greece, so c. 550 BC onwards): the Achaemenid Persians are able to dominate effectively the entire litoral of the Levantine Sea (the part of the Mediterranean between Egypt and Anatolia) and maintained a strong navy – and we hear a lot less about piracy in this period. Later emerging Greek naval powers (particularly the Athenian navy after 483) also had an interest in piracy suppression – Athens was reliant on imported grain and timber and also profited immensely from trade.

That state of affairs continues broadly until the death of Alexander, where we get a resurgence in our evidence for piracy in the context of the Wars of the Diadochoi. Our visibility here is better and one thing worth noting is that piracy here dovetails with what we might term privateering – state-sanctioned piracy – as some of the Macedonians scrapping for control (Demetrius Poliorcetes most notably) hired pirates and mercenaries to harass their enemies. Men might move smoothly from being mercenary sailors in the service of a king to ‘pirates’ and back again while doing effectively the same things on the water. That said, these states also had an interest in trade (especially Rhodes) and so alongside the piracy were efforts in piracy suppression.

Via Wikipedia, a map of the territory of the diadochoi, including the Ptolemaic Kingdom with its fairly expansive naval holdings, mostly lost by the 160s. Rome crippled these key powers without replacing them and got a serious pirate problem in the bargain.

This system famously gets out of hand when the Romans in the mid-second century destroyed or crippled most of the major maritime powers of the Eastern Mediterranean (Macedon, the Seleucid Kingdom, the Ptolemaic Kingdom, Rhodes, Pergamum) but didn’t move into the region to replace them. This ends up leading to a series of relatively Roman commands against pirates in various parts of the eastern and central Mediterranean: L. Fabius Labeo in 189, M. Antonius in 102, L. Licinius Lucullus in 86, P. Servilius Vatia in 78, M. Antonius Creticus in 74, L. Caecilius Metellus in 70. This eventually culminates in Cn. Pompeius (Pompey)’s famous command against the pirates in 69, where he was given unprecedented authority to operate basically everywhere in the Mediterranean (using subordinates to coordinate distant activity), a command whose overweening scale is one of the major marker points in the emergence of the Late Republican ‘rogue general’ in Roman history.

Pompey’s success here is, as far as I can tell, actually emblematic of how anti-piracy campaigns succeed: he targeted the pirate’s coastal bases, not their boats and used the coercive threat of force to negotiate rather than just trying to wipe out all pirates. In the end, Pompey smashed some strongholds and used the leverage the threat of that gave him to resettle the pirates (and their supportive populace) inland, away from the coast. Roman piracy suppression after Pompey is much more successful: as Roman controlled effectively the whole Mediterranean litoral, it could deny pirates bases everywhere – although through the imperial period the Romans still had to maintain a navy to keep the trade lanes, upon which their empire’s prosperity relied, open.

To simplify greatly, we see a similar set of processes in the ‘Golden Age of Piracy’ (c. 1650 to c. 1730). It was enabled by state fragmentation and warfare, particularly the rivalries between England and France to one side and Spain on the other. It ended in part because those wars ended, but notably also with the application of the same mix of coercion and negotiation, perhaps most famously with the destruction of the ‘Republic of Pirates’ at Nassau – many pirates took the offered ‘King’s Pardon’ leaving the remainder isolated enough to be destroyed in detail and for British power over the Bahamas to remove the coastal bases necessary for piracy.

And we see a similar interaction with the Barbary Pirates in the Mediterranean. The activities of the Barbary pirates also arose out of a kind of fragmentation, as the Barbary states were weakly controlled vassals of larger Muslim states (most notably from the 1500s on, the Ottoman Empire). To greatly simplify, initially European (and later, American) states found it most expedient to simply pay off these states, but as the balance of power shifted in their favor in the 1800s, they shifted towards coercion. The United States famously ended most Barbary raiding of its commerce with the Second Barbary War (1815), a major achievement for its young navy, with Britain and the Netherlands following suit the next year with the Bombardment of Algiers (1816). Once again the ultimate resolution came when naval powers were able to demonstrate their ability not just to strike pirate ships but to project power inland either by bombardment or the landing of troops. It is the ability to shut down the bases which suppresses piracy successfully in the long term.

Via Wikipedia, a painting, Bombardment of Algiers by George Chambers (1836), depicting, somewhat dramatically, the nine-hour bombardment of Algiers by the Royal and Dutch Navies in 1816. An example of power projection ashore as the Anglo-Dutch fleet could credibly threaten to essentially destroy the city (which is coastal) from the water.
Ironically, the fleet was able to effectively bluff a surrender out of Omar Agha, the Dey of Algiers, by announcing they would continue their bombardment if he did not surrender, despite being almost totally out of ammunition. The Dey, unaware of this, surrendered rather than endure a continued bombardment – a useful reminder that the effective window for negotiation may often be narrow and easily missed.

Now alongside pirates, states and other larger polities can also be a problem for maritime trade if they sit on major choke-points. As you can see on the trade-route map below, most trade moves through one or more ‘choke points’ – narrow sea passages where alternative routes are either much longer or simply unavailable. Some of these are major canals (Panama, Suez) or narrow straits or channels (the English Channel, the Strait of Hormuz, the Bab el-Mandeb, the Strait of Malacca, the Öresund, the strait of Gibraltar, the Turkish straits and so on).

Via Wikipedia, a map showing the density of commercial shipping on the world’s oceans.

While most countries globally have an interest in relatively free movement through these shipping channels, the countries directly on these choke-points may have an interest in extracting value from their control. The classic example of this is the Sound Tolls, the toll that Denmark extracted from ships passing the Öresund until 1857, which at points made up the majority of the Danish state’s revenue. While any one such ‘closed’ or tolled strait may be little more than an inconvenience globally (although notice just how much of an inconvenience restricts on the Strait of Hormuz have been!), because nearly all shipping moves through at least one if not more of these choke-points, if other countries were to follow suit and every country on a choke-point tried to maximize extraction off of it, the result would be a major drop in global trade, which, as discussed above, would lead to a sharp decline in living standards in rich and poor countries alike. Everyone would be worse off.

The current global system, which assumes freedom of navigation in nearly all of these waterways and only allows fees to be charged to the degree that ships require active assistance to navigate a given choke-point (canals have to be maintained and some straits – though not the Hormuz – are narrow enough that safe passage requires help (‘pilotage’); the Turkish straits are the classic example of the latter) is largely a product of the 1800s eventually codified in the 1982 United Nations Convention of the Law of the Sea (UNCLOS), a result of imperial maritime powers (first Britain, later the United States) twisting arms in order to establish a global standard of “innocent passage.” That said, this standard was always backed up, implicitly or explicitly, by force: countries agreed to these limitations in part because everyone understood that if they didn’t, the imperial powers would make them because those imperial powers relied heavily on the free movement of goods and people over the water.

And we should be clear here: that this state of affairs – few-to-no pirates, open choke-points – benefited humanity as a whole was for the most part a happy side benefit of imperial maritime powers (initially mostly Britain, then later the United States and Britain, then later mostly the United States) pursuing their own interests. I want to stress that very clearly for any ‘America First’ers still sticking around: while this system benefits most people globally, we built this system because it benefits us in particular. As we’re going to see in a moment when we get to blockades, we wrote the rules to favor us, to favor the kind of naval power we have and the kind of trade we engage in.

A good example of this are the rules for when it is legal for a country to disrupt trade. On the one hand, unilaterally closing a shipping lane (as Iran has done) is illegal, as is unannounced attacks on shipping (which is to say, piracy). However, blockades are legal as part of war, assuming the blockading country declares the blockade, declares what goods are contraband (they need to be at least thinly connected to military activity) and provides any ship attempting to run the blockade a change to turn around before being engaged. In practice, that means that international law bans all disruptions of maritime trade except the kind only countries with large power-projection surface fleets (of the kind Britain and the United States, who largely wrote the rules (along with, post-1945, the USSR), have) can perform.⁶ Instead of writing international law to say, “only the United States, Great Britain and maybe the Soviet Union can cut off trade” the solution was to say, “you can only cut off trade via this specific method which only the United States, Great Britain and maybe the Soviet Union can actually perform.”

But maintaining and enforcing those rules remains reliant on naval power or more correctly it remains reliant on a certain specific kind of naval power.

Power Projection Navies

The distinction I want to draw here is the specific subset of navies able to project power over the oceans. Navies, after all, come in different sorts. One distinction you will hear quite often is between a blue water navy (a navy capable of operations on the oceans, the ‘high seas’) and a ‘brown water navy’ (which only operates along the rivers and coastlines of its country) or ‘green water navy’ (not capable of global projection, but able to push out into local oceans and seas). But not all blue water navies are made equal either.

As noted above, effectively suppressing piracy long-term generally requires the ability not merely to get to the body of water in question, but to have the ability to project power ashore, because the ultimate piracy suppression requires removing the coastal bases that pirates operate on. Likewise, the kind of coercion that can compel potentially truculent countries sitting on maritime choke-points to allow unhindered traffic generally also requires the ability to project power ashore. It isn’t enough to threaten to sink that country’s navy (especially if they don’t have much of one), you need to be able to threaten to bombard key cities or deliver a seaborne invasion (we’ll come back to why this is such a problem in the Strait of Hormuz in a moment).

Since trade is global, maintaining global maritime networks means we either need one navy with global projection (which is generally how this works) or a consortium of regional navies that maintain these capabilities in their neighborhood. In practice for the last few centuries, relying on one or a few big navies with global projection has been the norm.

So we need a navy capable of global projection, which includes the ability to get to any key choke-point. It has to, once on station, be able not only to defend itself against other ships but also project power ashore. Since projecting power ashore is a process that invariably takes time it also needs to be able to sustain itself at any key choke-point.

The first requirement alone actually already rules out most of the world’s navies: only a handful of relatively large, relatively wealthy countries maintain navies with a significant number of large warships (generally destroyers and bigger) that can actually do oceanic operations on the regular. Most smaller countries instead operate a mix of smaller frigates, corvettes and cutters which are perfectly serviceable for defending and policing their own territorial waters, but are not suitable for long distance operations. You can actually see this distinction with remarkable clarity because the United States doesn’t operate just one navy – it operates two: the US Coast Guard would, for most countries, be the navy. But for blue water operations, we’re generally going to want larger ships: both because larger ships are more capable (they can carry more weapons, munitions and supplies) but also simply because open ocean travel often demands bigger ships due to more intense weather and longer time at sea. Of course, bigger ocean-going warships are going to be more expensive (which is why countries that have no designs on creating a blue water navy tend to prefer smaller, cheaper coastal ships).

But blue water isn’t enough: we need to be able to project power ashore. Historically, the right ship for this kind of power projection has varied, but since 1945 the ship type for power projection ashore has been the aircraft carrier, particularly a fleet carrier. Many navies operate smaller carriers that mostly carry helicopters and maybe a handful of vertical take-off-and-landing (VTOL) platforms, but if you want to actually project power ashore, you need a large airwing of full-sized capable fixed-wing aircraft. You can actually see this distinction in the US Navy as well. When we say ‘the United States has 11 aircraft carriers’ we’re only counting the CVNs, the fleet carriers. The United States also maintains a bunch of amphibious warfare ships – 2 America-class LHA (landing helicopter assault) and 7 Wasp-class LHD (landing helicopter dock) – which in any other navy would be treated as aircraft carriers, given that they can both operate fixed-wing aircraft. But while these ships exist to support amphibious operations, you wouldn’t want to rely on them exclusively to project air power, especially against an enemy who can actually shoot back. You want the much larger air wing of a CVN (40+ strike aircraft, as compared to half a dozen on an LHA/LHD).

Via Wikipedia, a United States Navy carrier strike group, organized around the USS George Washington (CVN-73), taken in 2003. The supply ship is in the back, while the carrier is supported by what looks to be three Ticonderoga-class cruisers and three Arleigh Burke class destroyers. I don’t immediately recognize the ship to the far right (maybe a Whidbey Island-class dock landing ship? Let me know in the comments).

Now there has been a lot of chatter lately about if aircraft carriers are actually obsolete, most of it being about the ways in which modern anti-ship missiles make aircraft carriers vulnerable. But aircraft carriers have always been vulnerable – look how many of them the RN, USN and IJN lost in WWII! The question is not ‘is the carrier vulnerable?’ but ‘what role does the carrier serve and can any other ship perform it?’ And the answer is that a (fleet) carrier is the striking arm of a fleet, able to project a lot of combat power out a long distance and no, no other ship is able to do that. Yes, you can throw missiles out of VLS (vertical launch system) cells on a destroyer or a frigate, but you are quite limited as to how many of those missiles you can carry and missiles are a lot more expensive than bombs. A carrier can, over time, output a lot more ‘boom’ at a lot greater distance using its air wing (while its air wing also protects the fleet as well).

And that’s really relevant for us because we’re interesting in projecting a lot of combat power ashore, often while keeping our vulnerable ships reasonably far away from any coastal weapons. The big carrier is the sine qua non of doing this sustainably over a long period, which is why countries continue to build them: China’s People’s Liberation Army Navy (PLAN) certainly doesn’t think that carriers are obsolete! A carrier thus is the modern form of a ship doing shore bombardment – able to throw a lot of boom at coastal (and inland) targets – and also required if you intend to actually put troops on land (where they will require both air cover and air support).

A carrier thus makes the threat to drop the marines (US Marines, Royal Marines, etc.) on someone credible. Of course you also need marines available to be dropped and the shipping and landing infrastructure to get them to the theater and onto land. The US Navy does this via the combination of Marine Expeditionary Unit (MEU) with a Expeditionary Strike Group (ESG); the former being what you are putting ashore and the latter being the ships to support doing so. Prior to that, of course, this task was done by the British; as Lord Edward Grey famously put it, “the British army should be a projectile to be fired by the Royal Navy.”

Of course, once you have that fleet, capable of moving to any given choke-point or sea lane and projecting power (including power ashore), you also need to be able to potentially sustain it there, keeping ships in supply and rotating them as necessary to maintain a continual presence until those operations ashore are complete. And that requires more than just ships, it requires a global network of logistics bases. In the Age of Steam, these were coaling stations – places where a navy could stockpile coal and other necessary supplies to resupply fleets. Of course, one coaling station wasn’t enough, you needed a connected network of them so ships traveling to distant oceans could sail from one station to the next, refilling their coal bunkers at each point. The British, of course, maintained the most expensive such network in the late 1800s and early 1900s, enabling the royal navy to operate in effectively any ocean.

During the 1900s, the United States undertook to set up a similar network and indeed one of the exercises I sometimes do with my students is noting how neatly many of the United States’ key naval bases parallel neatly the older British network, with the United States in some cases sharing or taking over the exact bases the Royal Navy had once used. That network of bases let you run supplies short distances to your fleet on station, rather than having to do shuttle runs all the way from the home country or – worse yet – be in a situation where the fleet only has the supplies it can bring with it when it departs, operating with a fixed ‘timer’ for its operations.

That said, the problem of logistics combined with how big full-sized carriers (even sub-super-carrier) are brings in another implication: you probably want nuclear-powered carriers. Fuel is one of the largest logistics needs for a fleet that is on the move or actively doing an operation and these ships need a lot of it. But the thing is, for a carrier-centered task force, the carrier is probably at least half of the total displacement of the force. A USN carrier strike group (CSG)’s displacement is around 100,000 tons of carrier, around 40,000 tons of surface ship and around 20,000 tons of submarine. The carrier and the submarines are nuclear powered, so the force is roughly 75% nuclear by weight. The advantage here is that on a practical, operational scale, nuclear carriers and submarines can operate almost indefinitely without refueling. You will run out of munitions, out of food, out of sailor’s sanity long before you need to change out the reactor fuel. Having your carriers be nucleared powered is really expensive (it requires a large body of trained nuclear technicians and engineers), but it makes global power projection much easier.

What those ingredients – a blue water navy with power-projection assets (read: carriers and amphibious warfare capability) supported by a network of logistics bases allowing them to operate globally – what those ingredients let you do is threaten force on anyone who would close down the global shipping lanes (closures that would, to be clear, violate international law under UNCLOS). Historically speaking, once this hammer is in hand, while it may have to be demonstrated form time to time, for the most part it exists as latent force. If you are doing it right, your navy should not actually be doing a lot of fighting, because everyone involved should understand you would drop the hammer if they made you, so they don’t make you.

It’s deterrence, but using a conventional military force (a navy) rather than nuclear weapons.

So if we want to stand back for a moment, we can say one of the main purposes of large power-projection navies is to deter disruptions to shipping. It isn’t their only purpose, of course, but it is perhaps their chief purpose.

The Unique Role of the United States Navy

So to recap before moving forward: global trade is essential for providing for modern living standards and most of that trade must move by sea. Sea lanes do not keep themselves open, historically they must by kept open, typically by a particular form of naval power, which I’ve termed a ‘power projection’ navy – one which is able to logistically sustain itself at long distances and project combat power ashore (via bombardment, air strikes and landing troops).

Doing that mission, in turn requires a navy that has a substantial supply of larger surface warships (destroyers, cruisers, as opposed to corvettes, cutters and frigates), as well as larger aircraft carriers (which provide the modern shore strike capability), supported by a robust global network of supply bases. Since no country maintains a worldwide colonial empire anymore, that robust global network of bases has to be predicated on a robust global network of allies and security partners.

And I’ll cut to the chase: at present, only the United States Navy can do this. No other country is even really on the verge of doing it, though one country may be moving in that general direction.

The first angle we can think about this through, of course, is power projection assets, which is to say, “which countries have fleet carriers, anyway?” Not very many, it turns out. The People’s Republic of China currently has three aircraft carriers, all diesel based; a fourth, rumored to be nuclear-powered and super-carrier sized, is on the way. The United Kingdom maintains two fleet carriers (the Queen Elizabeth class), which are fairly large and robust, but diesel powered. France has the Charles de Gaulle, the only other large nuclear-powered carrier deployed globally outside of the United States navy.

After that, the pickings get slim quick. India has a pair of diesel-powered carriers, but they’re both quite small. Russia had a diesel powered carrier, which it did use for power projection in the Syrian Civil War, but the Kuznetsov is both not a very good carrier and also has been inoperative and in need of repairs for almost a decade now. Then we have navies which operate some small carriers that are basically on the scale of a USN LHD or LHA: Italy and Japan have two each, Spain has one. Frankly, all of the carriers in this paragraph are too small to do serious power projection on their own (the Kuznetsov’s Mediterranean operations were in support of the former Syrian Assad regime, which also offered the Russians land bases). They can enhance a fleet which already includes a powerful air component (indeed, this is a key part of the mission for the smaller NATO carriers – they can assume that in a big operation, they’ll have a friendly Nimitz, Ford, Queen Lizzie or Chuck d’G to support), but they cannot offer the necessary combat power on their own.

Via Wikipedia, an image from 2024 of the USS Dwight D. Eisenhower (CVN-69) operating alongside the USS Laboon (DDG-58), the French Horizon-class frigate Forbin (D620) and the Italian carrier Cavour.
A lot of European naval procurement has assumed that in any fight, NATO navies would be fighting alongside the United States Navy, and so what ships they have built are often aimed at supplementing that core capability, rather than replicating it. One manifestation of this is that a number of European navies have better minesweeping capabilities than the USN, a sensible burden-sharing arrangement that proved awkward when the United States unilaterally went to war with Iran without consulting any of our allies.
**It turns out that it is good to have allies and even better to consult them with your plans**.

When the current crisis in the Hormuz began, I saw people asking why European or Chinese navies didn’t intervene to keep the shipping lanes open, especially given that it was their oil being blocked. And the answer here is quite simple: they couldn’t. It is one thing to have a military capability at home. It is something very different to be able to project that power overseas and right now the only country that has a full suite of power projection assets is the United States.

We’ve already discussed above the limitations imposed by non-nuclear-powered carriers: maintaining them at sea for long periods is a lot more logistically intensive, which is why countries that think they might be doing power projection missions with carriers tend to at least think really hard about having them be nuclear powered. That said, the travails of the Royal Navy really speak to how hard this is to do – and why so few small countries do it. Maintaining a bespoke military nuclear program that can design and maintain a meaningful number of compact nuclear reactors is no small task. For four decades the Royal Navy has struggled to actually decommission old nuclear-powered submarines⁷ in part because they have a hard time getting enough nuclear technicians to supervise removing and safely disposing of the reactors in them.

The United States Navy pours a tremendous amount of resources into training nuclear propulsion specialists. Indeed, this is something I’ve interacted with directly, because I teach at a university that has both a Navy ROTC program and a research reactor. When I taught US Naval History, required by the NROTC program, a lot (more than half, I think) of my NROTC students were nuclear engineering majors. Smaller countries are simply going to struggle to generate enough nuclear technicians and engineers to sustain such a program without a huge, dedicated national effort.

Nevertheless, not (currently) having nuclear-powered carriers puts meaningful limits on China and the UK’s ability to employ their carriers on power projection missions. That, of course, interacts with the systems of global basing. Here, I think China’s experience in anti-piracy operations off of Somalia is actually really instructive. The PLAN has been sending task forces to operate in the Gulf of Aden since 2008 when the issues there became acute. But despite the fact that there are signs that the People’s Republic of China is trying to assemble a network of bases through the Indian Ocean (termed by western analysts a ‘string of pearls’), the structure of PLAN missions was pretty consistent: each force was one frigate, one destroyer and one supply ship. Each mission lasts about 180 days, including travel time from China, time on station and the return trip.

Via Wikipedia, the Fujian, China’s current largest aircraft carrier, displacing some 80,000 tons (about 80% of a Ford-class super-carrier. It is currently China’s only CATOBAR (catapult-assisted take-off, barrier arrested recovery) carrier, a capability which lets it launch heavier and more capable fighters more rapidly than older ‘ski jump’ designs. It’s air wing is still meaningfully smaller than a Nimitz or Ford-class carrier (52 aircraft compared to c. 75), but still quite formidable.

That short duration is pretty striking, because the c. 15,000 ton displacement (not including the support ship) PLAN squadrons here have roughly the same amount of support ship (one ship, in the 20,000 tons displacement range) as many American carrier strike groups (as noted above, a CSG is 160,000 tons displacement – ten times the size; it has far more combat power), but these exercises remain small and comparatively short. The suspicion one has is that what is happening here is that each of these squadrons is leaving the Chinese mainland with most of the supplies they are going to get on their one supply ship (which represents more than half of the total displacement of the squadron!) and so they have to transit all the way back home when that runs out. There is a Chinese naval base in Djibouti that must also be playing a key logistics role here, but the short duration and small size of the PLAN forces really is suggestive of the approach here. This approach, of course, is hardly sufficient to allow the PLAN to deploy basically anything in the Atlantic or Eastern Pacific or basically anywhere except the west Pacific and Indian Ocean.

At that scale, for the PLAN to deploy the combat-power equivalent of an American CSG to the western Indian Ocean (which, because their flight decks are smaller, would require basically all of them) would probably require nearly the entire PLAN logistics fleet and strain PLAN logistics such that the fleet couldn’t be kept there long and would be very vulnerable if it did not accomplish its objective very rapidly. In naval warfare, you do not want to be caught in a fight at the ragged end of your logistics tether with low fuel or munitions.

Now the PLAN apparently is building a nuclear-powered carrier. They are trying to begin setting up networks of logistics bases. That suggests at least some interest in the PRC in moving towards a global power projection navy, though I would note that history is replete with countries that started to invest in that kind of navy only to revert back to regional defense navies when it became clear just how jaw-droppingly expensive such a navy would be. In either case naval strategy is built strategy and the PLAN probably has at least a decade to go before they have the rudiments of a truly global power projection navy, even if they steamed there at full speed.

Which brings us to a key conclusion: at present, only the United States Navy is capable of performing the kind of power projection which sustained maritime commerce and at present, no other navy is particularly close to being able to replicate that capability. The two most obvious candidates to replace the United States would presumably be China or some kind of combined EU Navy, but it is not clear that China is actually interested in maintaining global maritime commerce beyond their own and a combined EU Navy on the USN’s scale would face tremendous political and economic hurdles, to say the least.

For now, the United States Navy is the only game in town.

Which, it turns out, may be a problem.

Implications

You may have noticed that the infrastructure of global maritime security is fraying lately. Indeed, I would argue, it has been fraying for quite some time.

Although establishing a direct causation is impossible, the fact that the beginnings of these issues correlate to the point at which the United States’ Global War on Terror began to go south and thus the American public began (understandably) decisively souring on America’s traditional role as the guarantor of the global system does not seem like an accident.⁸ Instead, it has led to the current baleful condition where in the United States is the only state capable of actually sustaining the global maritime system but at the same time is anywhere from indifferent to actively hostile to it.

The earliest of the current woes back back to the mid-aughts with the rise of piracy off of the coast of Somalia. That piracy intensified dramatically in 2008 and 2009, though by 2013 or so a robust international effort had largely clamped down on pirate activity. Starting in 2023, however, the United States was not able to fully restore shipping through the Bab-el-Mandeb, a crucial maritime choke-point (it’s where traffic moving through the Suez and the Red Sea gets to the Indian Ocean). Traditionally, the American response – all the way since the First Barbary War (1801-1805) to a state (and the Houthis are, in practice, the government of large parts of Yemen) disrupting its shipping in this manner would be to invade and topple that regime. Instead, for very obvious reasons, the political will to land the marines in Yemen simply didn’t exist, so the response was instead Operation Prosperity Guardian, an effort to accomplish the mission through ship defense and air strikes.

Then, of course, early in 2026, the United States started a major regional war with Iran which resulted in the closure of the Strait of Hormuz. What is striking about this decision is that deciding to go to war with Iran required disregarding freedom of navigation – traditionally an overriding American strategic interest – as unimportant. Of course some of that was simply because the war’s planners – being dumb as hell – assumed they would accomplish a quick and easy victory. But equally it is hard not to notice that the decision to disregard freedom of navigation – at least until the oil price spike reminded everyone why it was important – came from an administration that is also the first American presidency to be openly hostile to global trade since the 1930s. Moreover, once again the political will in the United States for ground operations which might restore trade simply does not exist.⁹

I want to note something actually quite important here: the war in Iran does not represent a failure of US maritime deterrence, but an abandonment of it. Prior to the decision to launch a massive decapitation and regime-change strike on the Iranian Regime, the United States was deterring Iran from doing the very obvious thing and using its geographic leverage over the strait as a tool against its regional rivals (the Arab Gulf states). The Iranian Regime operated under the quite reasonable conclusion that if it did try to shut down shipping in that region, the United States might respond with overwhelming strikes, perhaps aimed at regime change. That threat was sufficient to achieve deterrence.

The problem, of course is that once you do those attacks anyway they no longer have deterrence value: you cannot threaten someone with something you are already doing. You especially cannot threaten someone with a bullet you have already fired and cannot fire again. Once the Iranian Regime was placed in an existential (for it) war, they had no reason not to close the strait or assert their control over it and so of course they promptly did so. Iran didn’t decide it could ‘take’ the American retaliation and thus decide to close the straight, it realized it was already taking the maximum American retaliation and so would pay no greater cost for closing the strait. The United States, in attempting regime change in Iran abandoned its maritime deterrence.

But the crisis in the Strait of Hormuz isn’t even the only current maritime crisis. There have also been renewed attacks on shipping in the Bab-el-Mandeb but even more than this, Putin’s War in Ukraine has taken dramatically to the waves with Ukrainian efforts to shut down Russian exports to strangle the Russian war economy and Russian retaliation. While Iranian disruptions of shipping in the Strait of Hormuz have involved striking a few ships here or there (adding up to more the 70 such attacks since the war began), Ukraine is operating on a much larger scale, having struck more than 200 ships in just a couple of months.

The United States is retrenching and in some cases is even becoming actively hostile to the global international order. Consequently, every other country in the world must confront the possibility of a future in which the United States Navy does not guarantee the global maritime system. In the period from 1914 to 1945, as Great Britain increasingly found that it lacks the economic resources to maintain its role as the global guarantor of that system, the United States was both ready and willing to act, first as a partner (from 1918 to 1945) and eventually as the primary guarantor. There was a country to pass the baton to.

What the above analysis is meant, in part, to show is that there is no country to pass the baton to now, nor does one appear likely to emerge soon. The PLAN is, as noted, likely many years away from being able to pick of the mantle, but more to the point it is not clear that the PRC is interested in doing so. The PRC’s policy in its nearer seas has not been ‘a rising tide lifts all boats,’ but a mix of dominance politics and beggar-thy-neighbor revanchism. When disaster strikes coastlines, the United States Navy has, historically, been a key player in humanitarian relief efforts, the PLAN much less so. When in 2013 a major typhoon hit the Philippines, the United States sent $37m in disaster relief and a humanitarian relief force that included numerous ships including a complete carrier-strike group. Those fleet carriers are useful for projecting firepower ashore, but they’re also really useful for delivering humanitarian aid in conditions where ports, roads and railroads may be inoperative. By comparison, the PRC sent $200,000 and one hospital ship.

The thing is, there is no way to build a power-projection navy quickly and there really is no way to build it cheaply. Modern warships take time to build and cost a lot of money and effectively projecting power globally hinges on the most expensive and difficult to build platforms. Starting a naval buildup from nothing is not too hard – because you are not carrying the running costs of existing ships – but that stops being the case as your fleet expands. The United States Navy costs on the order of $230-280bn per year. Another country might do it cheaper, but even something like half that cost would require even the wealthiest countries to massively increase their military budget. China may be building up to this kind of navy, but they are years (probably decades) away and likely would need to expand their capital ship fleet something like three-fold, which is hardly a trivial expense.

But as we’ve established, the United States Navy is effectively a load-bearing component of the global economy. While obviously not all trade would cease if the United States dissembled its fleets, the crisis in Hormuz seems to make it fairly clear that maritime trade would be both reduced and quite a bit more expensive. And the economics of long-distance bulk transport mean that land- and air-based options simply cannot replace maritime shipping. If the trade lanes are not kept open, they may not close completely, but history suggests they will narrow.

One counter-argument here is to assert that, unlike in previous centuries, there simply aren’t enough states on major choke-points with an incentive to close them down to make this a problem. I think the last few years have thrown up considerable challenges to this notion, as we see states and non-state actors doing exactly that in the Black Sea, the Red Sea, the Indian Ocean and the Persian Gulf – and regional powers unable to resolve the problem. As we saw above, that is the normal historical pattern, slowly reasserting itself and I think, if American retrenchment continues, we ought to expect that to continue.

Now of course even in that future, global trade doesn’t simply stop altogether. It simply becomes more constrained, more limited and more expensive. Some goods become less available, ships have to take the long way around or pay expensive tolls, perhaps in some areas they have to mount greater security precautions and all of those costs get passed to the consumer. Armed merchantmen were common in some periods of history, but it is worth noting that arming merchant ships has never been sufficient to fully protect a merchant marine, for the obvious reason that the defending country must split their defenses across their many, many ships whereas the pirates or rogue states may concentrate all of their force on a single ship of their choosing.

In that world of constrained global trade, we wouldn’t expect some apocalyptic total economic collapse. But some goods that are commonly available – out-of-season or out-of-climate fruit, for instance – might mostly vanish from store shelves. Goods in advanced economies would become more expensive and living standards would decline, as wealthy countries would – on the margin – have to ‘on-shore’ low value-added industries which would pay worse wages, while at the same time the products themselves (imported or domestically made) got more expensive. Autarky – the effort to make most or all of a country’s needed goods domestically – is and always will be a losing economic strategy, because it forgoes comparative advantage. But a marked increase in the cost of trade, a reduction in the availability of imported goods will push wealthy countries in that direction and their economic growth will slow as a result.

What is inconvenient for rich countries, however, will arrive as catastrophe to poor countries who, as noted above, will find their opportunities for development curtailed and their access to affordable necessities limited.

Thus my assessment is that the American voter is making a terrible mistake. On the waves, there is at present no alternative to American naval power and the result of its absence will be a poorer United States. Indeed, Americans are right now living through a small taste of what that world looks like, as the current administration’s decision to abandon freedom of navigation as a priority brings almost immediate karma in the form of higher prices for crude oil, diesel and gasoline.¹⁰ Of course a lot of oil has been re-routed around the blockage in Hormuz either via pipelines or sneaking it through via ship-to-ship transfers, but all of that entails additional costs which raises prices.

The problem, of course, is that it has taken me 10,000 words to walk through why this is so – why global trade matters, why specifically maritime trade matters, what the USN’s role in that is and why we cannot simply easily ‘burden shift’ to another country. And the median voter does not have the time in their day to take in a 10,000 word lecture on naval strategy and economics. This was always a policy that relied upon the unified commitment of the elite, for the folks actually running these things to present a collective understanding to their voters that these capabilities were essential.¹¹ Although the facts on the ground have not meaningfully changed, that elite consensus has broken and so here we are.

It is worth remembering that a worse, poorer world is possible, so that we do not become its authors.