From Insurer to Racketeer: How America Lost the World's Trust

For eighty years, America ran the world's best protection business—the legitimate kind. It kept the seas safe, backstopped the dollar, and kept its markets open. In return, the world paid its premiums: holding US Treasuries, pricing oil in dollars, and sending their brightest students to American universities. It was, by any measure, a remarkably good deal for everyone involved.

That deal is now in serious jeopardy.

In a wide-ranging conversation on The David Frum Show, Adam Posen, president of the Peterson Institute for International Economics, offered one of the most unflinching assessments yet of where the global economy stands—and where it's headed. His verdict isn't just about tariffs or oil prices. It's about something harder to quantify and harder to rebuild: trust.

The Energy Shock Nobody in Washington Understands

President Trump's reassurance has been consistent: America is a net energy exporter, so the Iran war's disruption to Persian Gulf oil flows is someone else's problem. On the surface, the arithmetic seems to support him. Roughly 20% of the world's oil transits the Strait of Hormuz, but 80% of that flows to Asian markets. America imports relatively little from the Gulf.

Posen dismantles this logic with a single observation: there is one global energy market. When Japan, South Korea, Germany, and the UK scramble to secure supply and bid up prices, those prices travel. They show up at American gas stations, in American manufacturing costs, in American inflation figures. "You can't export energy and then claim you're insulated from world prices," Posen argues. "The moment you sell into the global market, you import its price signals too."

The downstream consequences are already visible. Developing economies—across South Asia, sub-Saharan Africa, and Latin America—face a brutal triple squeeze: energy import costs spike, their currencies weaken as capital flees to dollar-denominated assets, and credit conditions tighten. The cruel irony Posen identifies is that money rushing into US markets during the crisis isn't a vote of confidence in America's future. It's a panic response—parking cash in the least dirty shirt in the laundry bag, as he puts it—while the underlying damage compounds.

For the United States itself, the blowback comes more slowly but just as surely. Posen warns that inflation is already building, and the Federal Reserve faces an increasingly uncomfortable position: an economy that needs support, but price pressures that demand restraint.

The Invisible Tax of Uncertainty

The tariff story of 2025 is instructive in ways that go beyond the tariffs themselves. When the Trump administration launched its sweeping trade measures on "Liberation Day" in April of last year, something unexpected happened: business investment outside the AI sector simply stopped. Not slowed—stopped. That flatline has persisted for 12 to 14 months.

What makes this striking is the counterfactual. The administration had assembled nearly every ingredient for an investment boom: tax cuts favorable to capital, aggressive deregulation, lower energy prices, relaxed merger enforcement. None of it translated into investment activity. The reason, Posen argues, is that uncertainty is itself a cost—and the Trump administration generated it in industrial quantities.

"They were bullying and bargaining and threatening China, then suddenly attacking Japan for no particular reason, then back and forth," he says. "That's not an abstract concept. It shows up in the data."

The scale matters here. Annual business investment in the US economy normally runs $4 to $5 trillion. When it flatlines, you're effectively running at half that. The direct cost of tariffs—affecting roughly 10% of the value of 18% of the economy—is real but bounded. The confidence shock from unpredictability spreads across every sector, every horizon, every boardroom trying to plan three years out.

The Supreme Court's ruling that the bulk of those tariffs were unconstitutional offered some relief. But Posen is careful not to overstate it. The ruling removed one hammer, he says. It didn't remove the threat of future hammers. And as long as businesses believe the next arbitrary intervention is possible, the investment freeze continues.

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When the Insurer Becomes the Racketeer

The deepest argument in Posen's analysis isn't about any specific policy. It's about a structural transformation in America's role in the global economy—and what happens when that role changes.

For decades after World War II, the United States functioned as what Posen calls a genuine insurer of the global system. It provided safety on the seas so goods could move. It maintained liquid Treasury markets so countries could store and retrieve wealth without discrimination. It established standards, enforced intellectual property, and opened its own markets as a destination for the world's exports. Countries paid premiums—in the form of dollar dependence, US market access, and deference to American standards—and received genuine insurance in return.

The arrangement generated enormous benefits for America that often went unadvertised. The dollar's reserve currency status meant the US government borrowed at rates no other country could match. The 30-year fixed mortgage—a uniquely American product—exists because of the cheap capital that flows from global dollar demand. Americans don't need to learn foreign languages to participate in global commerce. These are real, substantial advantages that accrued from running the system honestly.

"Trump has sold people on the idea that the US was getting ripped off," Posen says. "The US wasn't getting ripped off. It was running a very good business."

What's changed isn't just the policies. It's the business model. The shift, as Posen describes it, is from insurance to a protection racket: "You have a nice economy there. It would be a shame if anything happened to it." The difference matters enormously. Insurance companies have clients who want to stay. Protection rackets have victims who want to escape.

The escape is already underway. European officials are actively planning to reduce dependence on US liquefied natural gas—the same LNG infrastructure they built partly at American invitation after Russia's 2022 energy squeeze. The UK, Japan, and Italy are jointly developing a fighter aircraft as an alternative to the F-35. Canada discovered it routes virtually all its internet traffic through American cables or satellites, and is now asking what to do about that vulnerability. These aren't abstract policy discussions. They're structural decisions with decade-long consequences.

The Historical Pattern That Should Worry Washington

Frum and Posen invoke two historical frames that deserve serious attention.

The first is Charles Kindleberger's famous chart of world trade during the Great Depression—a spiral that traces how, after the 1929 crash, nations began cutting each other off. The Fed failed to act, banks collapsed, and then the trust breakdown did the rest. When every country has to manufacture its own screws because it no longer trusts foreign suppliers, the efficiency gains of specialization evaporate. Everyone gets poorer faster, in the same way they got richer faster when trade expanded.

The second is a 500-year pattern of hegemonic decline. Every dominant power in modern history—the Habsburgs, the Bourbons, the British—eventually faced a coalition of second-tier powers that found common cause against the hegemon. The coalition always won, because powers 2 through 10 combined outweigh power number 1.

America cracked this puzzle after 1945 with a counterintuitive move: it used its dominant position in ways that made powers 3 through 10 want to align with it rather than against it. The system was genuinely beneficial enough that the coalition never formed.

"When Trump says America will behave like a traditional great power," Frum observes, "he doesn't think through what that means—that it will unleash the traditional reaction to a great power acting alone."

Posen's assessment is sobering: China remains such a problematic actor that a unified anti-American coalition is unlikely to form soon. But that calculation depends on American behavior as much as Chinese behavior. And the window may be narrowing.

What the Best Case Actually Looks Like

Asked for an optimistic scenario on the Iran conflict, Posen offers one—and it's instructive precisely because of how limited it is.

Best case: Trump declares victory. Iran's dispersed Revolutionary Guard Corps comes under enough domestic control to stop threatening Gulf shipping. Within weeks, energy flows normalize and prices begin retreating—though not all the way back. The war's legacy is an Iran with fewer offensive weapons and a world that has learned it needs to self-provision.

That last part is the catch. Even the best-case outcome leaves behind a global energy market where every major importer has concluded it cannot rely on the United States as a stable supplier. Gulf states hedge against being dragged into future American military adventures. Europeans accelerate their transition away from gas dependence. Developing nations absorb a recession caused by a conflict they had no part in and no say over.

"It's not a good legacy," Posen says, "even before you get to the foreign policy."