Will Trump (and Musk) Break the Greatest Investment Platform Ever Built?

Drift Signal #250

Feb 19, 2025

America occupies a unique position in global finance. Think of it as an investment behemoth operating in—and controlling access to—the world's most dynamic business ecosystem. Call it America Capital Partners.

This ecosystem is so vibrant that it consistently runs hot: Americans buy more than they sell, creating persistent trade deficits. But these deficits are merely the flip side of the ecosystem's extraordinary investment opportunities. Those who profit from selling to American consumers naturally want to reinvest their earnings where the returns are highest—right back into the American ecosystem.

America Capital Partners thus operates a remarkable model: it manages the world's access to these investment opportunities, attracting massive capital inflows from the very parties enriched by American consumption. When properly invested, these inflows generate substantial returns, a portion of which accrues to America as carried interest.

In this edition, I examine how this ‘investment platform’ works, why it has been so successful over the past decades, and whether it can survive the radical changes proposed by its new management team. Through 10 key questions, I'll explore everything from the basic mechanics of dollar recycling to the sophisticated strategies being considered to maintain American dominance in an increasingly multipolar world.

1/ How does the global dollar journey work?

At the heart of America's economic might lies a paradox: its trade deficits generate a powerful system of global dollar recycling, as dollars sent abroad for goods flow back as investments in American assets.

Think of it as a circular flow. When Americans purchase foreign goods—whether it's Japanese electronics, German cars, or Chinese manufactured goods—billions of dollars flow overseas. However, these dollars don't simply disappear into foreign bank vaults. They make their way back into the American economy through investments, creating what economists describe as an investment surplus.

As economist Kyla Scanlon explains in her analysis of this dynamic,

The US relies on the rest of the world for crude oil, semiconductors, cars, fruit, beer, and clothing, etc - we run a trade deficit, meaning we buy more from other countries than we sell to them. And Americans like buying things!

This consumer-driven dynamic creates a powerful economic engine. When foreign sellers accumulate US dollars, they typically reinvest them back into American assets—Treasury bonds, stocks, real estate, and infrastructure projects. This recycling mechanism enables America to borrow at remarkably low rates and maintain its high standard of living.

Yet, as Kyla astutely observes, there's growing political tension around this arrangement: “There's a belief that the US has been too generous for too long - that it spends too much on other countries while neglecting its own.” However, she argues this viewpoint misses a crucial point: “The trade deficit is not just about trade, it's really about debt. And America is a country that runs on other people's money (about $14T worth of other people's money).”

In other words, the very system that some politicians criticise as American weakness is actually the foundation of American financial power.

2/ Why do dollars always come back home?

When dollars flow overseas through America's trade deficit, why do they reliably return as investments in US assets? After all, couldn't these dollars be invested anywhere in the world where attractive returns beckon?

In practice, a powerful combination of structural factors ensures that dollars earned abroad consistently flow back into US markets. Here are the five key dynamics at work:

First, the sheer depth and liquidity of US financial markets make them irresistible to global investors. As pointed out by Byrne Hobart, whom I often quote on this, no other market offers the same combination of scale, sophistication, and security. The US Treasury market alone, with its unparalleled depth, serves as the world's risk-free benchmark and primary safe haven.
Second, US Treasuries maintain their status as the ultimate safe-haven asset, particularly during periods of global uncertainty. This creates a paradoxical situation where even concerns about US stability often drive more capital into US assets, not less.
Third, the limited options for dollar investments outside the US naturally channel funds back to American markets. While dollar-denominated assets exist globally, they typically offer either lower liquidity or higher risk than their US counterparts.
Fourth, countries running large trade surpluses with the US face a crucial dilemma: if they don't recycle their dollar earnings back into US assets, their own currencies would appreciate, potentially harming their export-driven economies. This creates a powerful incentive to maintain the cycle.
Finally, the dollar's reserve currency status ensures that even when private actors invest dollars abroad, these funds often eventually find their way back into US assets through the global banking system.

Together, these forces create a self-reinforcing system that channels dollars back to their source, cementing America's position at the heart of global finance even as it runs persistent trade deficits.

3/ America Capital Partners: What if America was an investment firm?

Imagine the US as a colossal investment management firm (America Capital Partners) operating in—and controlling access to—the world's most successful business ecosystem. This ecosystem is so dynamic that it constantly runs hot: American consumers and businesses, empowered by innovation and high productivity, generate demand that constantly exceeds domestic supply, creating persistent trade deficits. These deficits aren't a bug but a feature: they reflect the ecosystem's dynamism and purchasing power, which in turn makes it so attractive to foreign investors. And it’s this very vibrancy that enables America Capital Partners to attract such a large volume of Assets Under Management (AUM).

The mechanics are elegant: when Americans buy more than they sell abroad, they export dollars. Those foreign sellers, enriched by American consumption, then face a crucial choice about what to do with these dollars. Given America's unmatched investment opportunities, sophisticated financial markets, and strong property rights, they typically choose to reinvest right back into the American ecosystem.

This dynamic extends even to overseas investments. When foreign dollar holders (the Limited Partners) invest in non-US assets through America Capital Partners, a significant portion of the value still accrues to the US. Consider when Blackstone or Silver Lake acquires a French or Japanese company: while both the capital source (foreign Limited Partners) and the investment target are overseas, the management fees and carried interest flow to American-headquartered firms. Thus, America's position as the world's investment manager allows it to capture value from global capital flows even when the ultimate investment destination lies elsewhere.

This structure mirrors the classic '2 and 20' model of investment management, but with a uniquely American twist. Instead of explicit management fees, America extracts a small, steady 'fee' through mild dollar depreciation and inflation—typically 2-3% annually. Foreign holders of USD assets accept this gradual erosion of purchasing power, just as investment firm clients accept management fees eating into their AUM, because they expect higher returns, value the liquidity and security of US markets, and often lack better alternatives. And rather than a contractual 20% carried interest, America captures outsized returns through multiple channels: the local realisation of capital gains on its assets, its dominant position in global finance and technology, its control of key platforms and networks, and its ability to innovate and scale new industries.

The ‘inflation fee’ is possible because of America's monetary sovereignty—its ability to influence inflation through monetary policy—just as investment firms can set management fees because they control access to their investment expertise. In both cases, participants accept these costs as reasonable in exchange for accessing a valuable system that promises larger benefits through asset appreciation and other advantages.

The dollar's reserve currency status functions as an unmatched brand, continually attracting fresh capital despite constant outgoing cash flows. Just as blue-chip investment firms can raise capital in almost any market environment, America's perceived stability ensures steady capital inflows even during periods of stress.

This arrangement creates a remarkably stable equilibrium. Foreign nations, acting as Limited Partners in America Capital Partners, gain access to liquid investments, stable stores of value, and exposure to American innovation and growth. Meanwhile, America secures the capital needed to fund its innovation engine while capturing substantial carried interest through asset appreciation.

There's only one key difference from traditional investment firms. America Capital Partners doesn’t have any limited partnership agreement spelling out terms. Instead, the rules are implicit in market structures, international relations, and the global financial architecture that America built and maintains. It's perhaps the world's most successful investment management platform—operating at national scale, with global reach, and an indefinite fund life.

4/ Why does capital arrive just when America needs it?

Perhaps the most remarkable aspect of America's global financial position has been its ability to attract abundant foreign capital at crucial historical junctures. Under the form of what my mentor Bill Janeway calls “Productive Bubbles”, this capital has consistently funded transformative developments that have maintained US technological and economic leadership, creating a series of revolutionary waves that have repeatedly reshaped the global economy to America's advantage.

Consider the dotcom boom of the late 1990s. While many remember it for its eventual bust, the period left behind crucial digital infrastructure that formed the foundation of American dominance in the Age of Computing and Networks. Foreign capital helped build extensive fibre optic networks and data centres that would later enable cloud computing and the platform economy. Companies like Amazon (1994) and Google (1998) emerged from this era to become global giants, while the technical expertise developed during this period cemented America's leadership in internet technologies.

Even more striking was the fracking revolution of the 2010s. Funded significantly by foreign investment through high-yield bonds, this capital-intensive transformation might have been impossible to finance purely domestically. Yet it fundamentally altered global energy markets in America's favour, achieving energy independence and developing crucial technical expertise that changed global geopolitical dynamics.

Likewise, the mobile/cloud revolution, beginning with the iPhone's launch in 2007, saw massive foreign capital inflows funding the development of America's platform economy. This period witnessed the buildout of cloud infrastructure, the emergence of the mobile app ecosystem, and the development of artificial intelligence capabilities. The result was a period of unprecedented digital dominance that lasted until 2022, with only China briefly challenging America's dominance around 2018-2019.

Now, as artificial intelligence emerges as the next iteration of the Age of Computing and Networks, foreign capital is once again playing a crucial role. It's funding the massive computational infrastructure required for AI development, supporting talent concentration, enabling expensive research programmes, and building specialised chip capacity. The scale of investment needed for these developments would be challenging to source purely domestically.

In each case, the abundance of foreign capital helped America move faster than other countries, build at necessary scale, take bigger risks, attract global talent, and establish lasting competitive advantages. It's a powerful reminder that America's position as a capital magnet has been crucial to its continued technological and economic leadership.

5/ Is foreign capital better than domestic savings?

If America's trade deficit were eliminated tomorrow, it would mean higher domestic income from local production—but also significantly lower capital inflows from abroad. This raises a critical question: would domestic income be allocated as efficiently to productive investment as foreign capital currently is?

The present system channels foreign capital into US investment through sophisticated financial markets that fund innovation and R&D, support business formation, finance infrastructure, enable scale-ups of successful ventures, provide venture, private equity and growth capital, and support real estate development. If this were replaced by domestic income, there's a risk that a larger portion might be directed to pure consumption rather than investment, less productive investments (due to home bias), less ambitious projects (due to more limited capital pools), or more conservative allocations reflecting individual risk preferences rather than institutional investment strategies.

So while the trade balance would look better on paper, the dynamic efficiency of capital allocation might suffer if the sophisticated US financial infrastructure had less total capital to allocate, individual consumption preferences dominated over institutional investment strategies, and the scale advantages and discipline of global capital markets were reduced.

But there's an even more fundamental aspect to consider: the system's sustainability depends crucially on its ability to create new jobs to compensate for those lost to trade deficits. On the trade deficit side, manufacturing jobs are lost to imports, local production is displaced by foreign competition, and there's potential downward pressure on wages in affected sectors. However, the capital inflow side creates new construction jobs from real estate investment, tech sector jobs from venture capital, financial sector jobs from managing foreign capital, service jobs from wealth effects (as documented in Enrico Moretti's landmark work on employment multipliers), infrastructure jobs from foreign investment, and R&D positions from capital availability.

As long as this job creation/transformation balance holds, the system can be sustainable and even beneficial because the new jobs are often higher-paying and higher-skilled than lost manufacturing jobs, the US captures more value-add in the global supply chain through design, IP, and services, US consumers benefit from lower prices on imported goods, and the financial sector's global role creates high-paying jobs and technological leadership.

Yet this transformation raises important questions about geographic distribution (lost manufacturing jobs might be in different regions than new jobs), skill matching (can displaced workers transition to new sectors?), and income inequality (financial/tech jobs often pay more but are less accessible).

Overall, the sustainability of America's global financial position has thus depended crucially on its ability to create new, high-value jobs to offset those lost to trade deficits. This transformation has been largely successful at the macro level, though it has created significant regional and social dislocations. When the balance holds, the system creates a virtuous cycle: foreign capital funds innovation, which creates high-paying jobs, which maintains domestic political support for the system.

6/ Will Trump's policies trigger inflation?

The policies promoted in Trump's 2024 campaign raise important questions about inflation and America's position as a global investment destination. His proposed combination of tariffs, immigration restrictions, and tax cuts—which would likely increase the national debt substantially—could create significant inflationary pressures. But would this make the US more or less attractive to foreign capital?

The answer depends crucially on the type of inflation and its impact on real returns. Just as investment firms can sometimes justify higher management fees if they deliver superior performance, controlled inflation could actually enhance America's appeal to foreign investors. Rising prices often drive asset appreciation, with real estate values climbing, equity valuations increasing alongside nominal earnings, and hard assets becoming more valuable. Higher nominal interest rates, implemented in response to inflation, might attract yield-seeking capital. Moderate inflation could even help deflate the real value of America's substantial debt burden, as happened during the Biden administration, improving the platform's overall financial position.

The appointment of Elon Musk to head the newly created Department of Government Efficiency (DOGE) signals another potential inflationary risk: the concentration of power in the hands of a few tech giants who are close to the administration. This could lead to reduced competition and higher prices in key sectors of the economy, particularly in areas where Musk's companies dominate—from electric vehicles to space technology to social media platforms.

Even more worryingly, there are signs that Trump might seek control of the Federal Reserve to force interest rates down, further fueling inflation. As Paul Krugman notes, the real danger isn't just the inflation itself, but how a populist administration might handle it. Just as Argentina admitted in 2014 that it had been deliberately understating inflation for seven years, Trump's disdain for expertise and recent suppression of unfavorable data in other areas suggest he might be tempted to simply lie about inflation figures.

The broader risks are significant. Inflation creates uncertainty about future monetary policy, economic stability, and potential political responses. If real returns turn negative—because nominal yields fail to compensate for inflation or currency depreciation exceeds asset appreciation—foreign investors might seek alternatives. More fundamentally, inflation could signal a loss of monetary discipline and credibility, potentially triggering an aggressive Federal Reserve response that might cause recession.

The key factor is relative performance. What matters most is how US inflation compares to other investment destinations, whether real returns remain attractive versus alternatives, if America maintains a credible policy response, and whether the inflation is seen as transitory or structural.

Interestingly, Trump's team appears to recognise these challenges. They're reportedly developing strategies to mitigate inflation's impact—suggesting a more sophisticated approach than in previous years. These potential countermeasures, which I’ll explore in subsequent sections, could be crucial to maintaining America's position as a premier destination for global capital.

7/ Could deregulation counter inflation?

As explained in a previous edition, Trump's potential second term presents an intriguing historical parallel: if his first term echoed Nixon's presidency and Biden mirrors Ford, then his next act might resemble the late Jimmy Carter's unexpectedly deregulatory presidency—albeit with a crucial difference in the international context.

In the late 1970s, particularly after 1978, Carter faced a similar challenge: how to combat inflation while maintaining American economic dynamism. His response, which surprised many given he was a Democrat, was to launch an ambitious deregulation programme. Under his administration, the airline, trucking, railroad, and financial services industries were substantially deregulated. This created new competitive dynamics that helped contain prices even as they transformed these sectors.

Trump's team appears to be studying this precedent closely. As Peter Navarro recently told the Financial Times, they believe that “reduced regulatory costs will help fight inflation.” This would be combined with an aggressive energy policy (“Drill, baby, drill”) to create what Navarro calls “the essence of Maganomics.”

The strategy, as outlined by Navarro, appears to be taking shape: use tariffs to protect and rebuild American industry, while simultaneously unleashing domestic competition through deregulation to counter inflationary pressures. It's a delicate balance, but one that the Trump team believes can work. “Net tariffs will lower the US trade deficit and thereby boost real GDP growth while slowing the transfer of US assets into foreign hands,” Navarro argues, while deregulation would help ensure that “as domestic investment and production increases and supply chains become more stable and resilient, real wages will rise, inflation will fall.”

This creates a new economic doctrine: American dominance through a mix of protectionism and deregulation. Unlike previous administrations that sought mutual benefits in international trade, Trump's agenda would focus explicitly on making America less reliant on foreign capital without triggering inflation.

8/ How will Trump use America's leverage?

Another element of Trump's strategy for managing inflation while pursuing protectionism is emerging: using America's immense power and leverage, including tariff threats, to secure cheaper commodity imports. This approach aims to offset potential inflationary pressures from tariffs on manufactured goods by reducing input costs for American industry.

As Alex Danco recently observed in his intermittent newsletter, the goal likely “goes quite a ways beyond 'we're gonna use tariffs to protect American manufacturers'; it's probably more like, 'We're gonna use tariffs as leverage to change how we enjoy the exorbitant privilege of the US dollar; specifically, in a way that gives American companies not only protection, but a genuine competitive advantage in making things over the rest of the world.'”

Recent events support this analysis. Consider the reported negotiations with Ukraine, where military support was allegedly linked to preferential access to mineral resources. Or Trump's renewed interest in acquiring Greenland, rich in rare earth minerals crucial for modern technology. As Alex notes, “Oil, metals, commodities, all the stuff that really matters in a balance-of-power world: that's what Trump really wants; and it's what he's going to get.”

As with the deregulation, the strategy appears to be taking shape: impose or threaten tariffs on manufactured goods while simultaneously negotiating privileged access to raw materials and energy resources. This would create what Alex calls a “cheaper floor on input costs” for American industry, even if it comes “to the dismay of American resource producers”—whom, as Alex pointedly notes, are not one of Trump's key constituencies—he's a New York real estate developer, not a Texas oilman!

This approach represents a sophisticated understanding of how to maintain American industrial competitiveness while pursuing protectionist policies. By securing cheaper inputs through strategic pressure on trading partners, the Trump administration hopes to offset the inflationary effects of tariffs on finished goods consumed in the US. As Alex observes, “If we could start sucking those things into the country at a massive rate, not only do we flood American business with a cheaper floor on input costs... we also start accumulating the kind of stuff that could actually back Dollars.”

This strategy also explains why early tariff threats have targeted close allies like Canada and Mexico. As Alex notes, getting these neighbours “to do a song-and-dance... in order to postpone tariffs and negotiate concedes the most valuable point in the negotiation right off the bat - that this is somehow an American domestic issue, and will be framed as such.”

The implications for global markets could be transformative: a US that uses its leverage to secure preferential access to commodities while protecting its finished goods markets would represent a fundamental shift in global trade dynamics.

9/ How is America Capital Partners’ new strategy taking shape?

Let's review how America Capital Partners' new investment strategy is taking shape, with both promising elements and significant risks.

First, the firm's core model remains fundamentally unchanged: it aims at still running operational losses (trade deficits), albeit lower ones, while keeping on attracting massive capital inflows that, when properly invested, will generate substantial domestic returns. The new management team (that is, Trump and his administration) has vowed to protect the status of the dollar (the exorbitant privilege), therefore dollars exported through trade would continue to return as investments, maintaining the firm's position as the world's premier investment platform.
Second, the new management team aims to reduce reliance on foreign capital without sacrificing returns. This involves protecting portfolio companies (US manufacturers) from external competition through tariffs, while maintaining the firm's ability to attract capital through its unmatched market depth and the dollar's reserve status.
Third, to counter the inflationary impact of tariffs and other new policies (immigration crackdown, higher national debt)—effectively a higher management fee on Limited Partners—the firm is pursuing an aggressive deregulation strategy reminiscent of the late 1970s. The thesis is that reduced regulatory costs and increased domestic competition will boost returns enough to compensate LPs for the higher fees.
Fourth, the firm is leveraging its market power to secure privileged access to key inputs—commodities and raw materials—for its portfolio companies. Like a venture capital firm securing exclusive access to top engineering talent, this strategy aims to enhance portfolio performance despite higher costs.

However, as Nobel laureate Daron Acemoglu warns in a recent Financial Times piece, this high-risk strategy could backfire spectacularly. In an essay presented as written in the distant future, he particularly highlights the danger of a tech bubble in a context of rising cronyism and corruption. Elon Musk exemplifies this risk: as head of DOGE, Acemoglu describes him focusing more on intimidating civil servants than improving competitiveness. His simultaneous role as a major tech CEO, social media platform owner, and government official suggests a troubling fusion of political power and tech sector dominance. “After Trump lifted all roadblocks ahead of AI acceleration and cryptocurrency speculation,” Acemoglu writes, “there was initially a boom in the tech sector. But within a few years the industry had become even more consolidated than before, and both insiders and outsiders came to realise that only companies favoured by the administration could survive.”

The risks to this strategy are mounting on multiple fronts. First, the new management team's track record raises alarming questions about America's long-term creditworthiness. When an administration is led by figures with a history of defaulting on obligations, mistreating suppliers and employees, and reneging on commitments—from Trump's multiple bankruptcies to Musk's handling of Twitter's liabilities and employees—it sends a troubling signal about America's reliability as an investment destination. Just as a private equity firm's reputation suffers when its principals show disregard for financial obligations, America's position as the world's premier investment platform requires maintaining impeccable creditworthiness.

Second, the growing persecution of various groups—civil servants, academics, minorities, political opponents—creates another layer of institutional risk. History shows that societies that turn on their own citizens typically see rapid erosion of property rights and contract enforcement. Foreign investors, particularly institutional ones with long time horizons, may question whether a US gripped by internal purges can maintain the stable, predictable environment that capital investment requires.

10/ Could America Capital Partners collapse?

But perhaps the greatest threat lies in how the new management might handle economic data itself. As Paul Krugman warns, Treasury Inflation-Protected Securities (TIPS) only protect against inflation “that the U.S. government admits is happening.” While America has never cooked its economic books, the combination of Trump's disregard for institutions and Musk's tendency to label critics as anti-American suggests this could change. In terms of our investment firm analogy, this would be like America Capital Partners charging its Limited Partners higher management fees than reported—effectively misappropriating capital rather than investing it. In the private investment world, such practices (as seen in scandals like the Abraaj case) inevitably trigger massive capital flight once discovered. The stakes here are even higher: we're talking about the world's largest investment platform potentially misleading its global Limited Partners about their real returns.

All in all, the risk is that America Capital Partners' aggressive strategy—combining protectionism, deregulation, and strategic resource acquisition, all while waging brutal culture wars at home—could undermine the very institutions that made it successful in the first place. As Acemoglu warns in his imagined view from 2050, “America's collapse thus followed Hemingway's famous line on bankruptcy. It happened gradually, as shared prosperity, high-quality public services and the operation of democratic institutions weakened, and then suddenly, as Americans stopped believing in those institutions.”

The ultimate irony might be that in trying to maximise returns and reduce foreign dependence, America Capital Partners could destroy the global compact and institutional framework that made it the world's most successful investment platform. The firm's new strategy might deliver short-term gains but at the cost of long-term sustainability—the cardinal sin in investment management.

11/ Go further

Profits of Doom (J. Bradford Delong, Wired, April 2003)
How America's 'most reckless' billionaire created the fracking boom (Bethany McLean, The Guardian, August 2018)
Adieu to Old America (me, Drift Signal, April 2020)
American Exceptionalism (Byrne Hobart, The Diff, December 2020)
Productive Bubbles (Bill Janeway, NOEMA Magazine, July 2021)
Much of what you've heard about Carter and Reagan is wrong (Noah Smith, Noahpinion, November 2021)
‘That is Maganomics’: where Trump is taking America on trade (Gilian Tett, The Financial Times, January 2025)
The Great Reset: From Startups to What's Next (me, Drift Signal, January 2025)
FAFOnomics: How Chaos Became America's Economic Strategy (Kyla Scanlon, Kyla’s Newsletter, February 2025)
Manifest Destiny Returns (Alex Danco, Alex Danco’s Newsletter, February 2025)
The real threat to American prosperity (Daron Acemoglu, The Financial Times, February 2025)
Trump's economy is already in trouble ($) (Noah Smith, Noahpinion, February 2025)
Lies, Damned Lies and Trumpflation (Paul Krugman, February 2025)

From Paris, France 🇫🇷

Nicolas