The End Times for Strategic Ambiguity

Strategic ambiguity is defined as a condition where various parties say something similar but believe something entirely different. A good example of this is U.S. and Chinese policy toward Taiwan. Both nations say Taiwan is part of China. The U.S. believes that Taiwan’s democratic government should become the model for the mainland, whereas China believes Taiwan should be part of its nation as it is currently structured. Because both nations say the same thing, the policy difference is not publicly obvious and thus not a problem, at least as long as the ambiguity lasts.

However, strategic ambiguity can potentially fail when the parties involved are confronted with a situation which forces clarification. In such conditions, the prior consensus can unravel, leading to a new consensus. The process of evolving into a new consensus is fraught with risk and can lead to war, new political arrangements, revolution, etc.

It is our position that the U.S. superpower role, adopted after WWII, was built on a structure of strategic ambiguity. This ambiguity allowed the American political system, built for an empire-abhorrent republic, to actually perform the superpower role. The superpower role often required the U.S. to act in ways that diverged from the republic ideals that is the founding narrative of the United States.

For the most part, the political class and the American populace managed to adapt to this divergence because the threat of communism was so great that loosening the principles of the founders was deemed acceptable.

However, the conclusion of the Cold War ended the communist threat, and since then the U.S. political class has struggled to restructure the superpower role in a unipolar environment. Recent events, including Eric Snowden’s revelations of NSA activity (see WGR, The Snowden Affair, 6/17/2013) and President Obama’s struggles with American policy toward Syria (see WGR, Syria and the Red Line, 5/6/2013), are rapidly breaking down the previous strategic ambiguity and forcing the nation to reflect on, redefine and re-decide its evolving global role.

In this report, we will review the requirements of a superpower, highlighting how this role diverges from the idealized American narrative. To understand how the political class managed this divergence, we will use Walter Russell Meade’s archetypes of American foreign policy (for review, see WGR, The Archetypes of American Foreign Policy, 1/9/2012); using Meade’s classifications, we will further examine how the policy consensus is breaking down. From this point, we will discuss how policy choice may evolve and conclude, as always, with potential market ramifications.

What Does the Superpower Do?

The superpower essentially plays two major roles. First, it is the world’s preeminent military power; it ensures that there is a workable peace in the world. This means that the superpower ensures the sea lanes are open and free, and that no threat evolves that can cause a global conflict or oust the existing superpower from its position. Second, it plays the role of global financier; it provides (or defends) the global reserve currency, which means the superpower also acts as the global importer of last resort. It also coordinates responses to major financial crises.

The following two charts probably exhibit the clearest explanation of these two roles.

This chart shows U.S. defense spending as a percent of GDP going back to 1792. We have placed a vertical line at 1950. In the period prior to 1950, there are obvious spikes in spending tied to wars. Note that there was a rapid demobilization after the wars ended. In fact, in the period from 1792 to 1940, excluding the wars, American defense spending averaged 1.2% of GDP per year, a level typically seen in small European nations today. After 1950, U.S. defense spending averaged 7.2% of GDP. Simply put, the defense spending witnessed in the U.S. before 1940 was consistent with a republic. Defense spending is usually restrained in a republic that has no immediate enemies because it does not need a standing army to defend itself and does not need to project power.

This chart shows federal government spending as a percentage of GDP. Prior to 1930, outside of wars, U.S. government spending rarely exceeded 5% of GDP. Prior to 1930, excluding wars, the federal government didn’t do very much—it defended the shores (as we noted above, rather cheaply) and delivered the mail. Even with the increase in regulation during the Progressive Period, which brought us the Food and Drug Administration and national parks, spending wasn’t very high. It wasn’t until the Great Depression that spending exceeded 10% in peacetime. However, after the war, spending continued to rise. There are numerous reasons for this spending but there are two critical ones. First, a superpower, in its financial role, must absorb all the imports the world wants to sell it in order to acquire the reserve currency. To fulfill the superpower role, consumption must be constantly supported to prevent a contraction of dollars in world markets. This isn’t to say that how the spending occurs is dependent upon the superpower role. Governments spend money mostly due to political concerns. Second, the defense requirements, which call for a constant war footing, mean that defense spending will always be elevated. Simply put, a superpower has to have a large government to fulfill both its financial and security roles. One cannot be a small government superpower.

The evolution to America’s superpower role began after WWI. After the Great War, Britain, who had been the global superpower since the early 1800s, was becoming unable to maintain the role. Its economy was not large enough to manage the importer of last resort responsibility and the war had drained its wealth. It tried to draw the U.S. into sharing the role; although Woodrow Wilson was open to accepting that challenge, Warren Harding, Wilson’s successor, ran on a platform of a “return to normalcy.”

The U.S. took an isolationist position that was mostly maintained until Pearl Harbor. In fact, one of the most formidable political movements in the late 1930s, the “America First Committee,” was stridently isolationist. At its peak it had 800,000 members and 650 chapters. Its members included Charles Lindbergh, Robert Wood (chairman of Sears-Roebuck), Sterling Morton (Morton Salt), Walt Disney, Lillian Gish and Sinclair Lewis. Student chapters included Gerald Ford and Sargent Shriver. However, Franklin Roosevelt, seeing the dangers that Nazism presented and worried about the fall of Britain, began to support the war effort. Pearl Harbor ended the America First Committee and threw the U.S. into WWII.

The political leadership after the war became convinced that the power vacuum caused by U.S. isolationism was partly to blame for the rise of authoritarianism and WWII. Thus, the thinking was that the U.S. needed to stay involved in the world or WWIII was inevitable. With the decline of Britain, the U.S. became the next global superpower, sharing the role with the Soviet Union.

Meade’s Archetypes

Students of foreign policy have struggled to describe the various models of American foreign policy. Invariably, they settle into “realist,” “idealist” or “isolationist” schools. Unfortunately, these broad generalizations fail to fully express the subtleties of American foreign policy.

Perhaps the best expression of American foreign policy was captured by Walter Russell Meade in his 2002 book, Special Providence. Instead of discussing various schools of thought, Meade characterized the major policy archetypes by historical figures. He used these historical figures as the primary examples of the policy inclination.

Meade named four archetypes: Hamiltonian, Wilsonian, Jeffersonian and Jacksonian. Each one of these archetypes has specific characteristics that describe the viewpoint and behavior of a policymaker of that certain type. The power of using real historical figures instead of concepts is that it gives flesh to these archetypes. In addition, these archetypes can span the political spectrum whereas the common positions tend to be tied to right or left-wing positions.

To review in simple terms, the Hamiltonians support a strong alliance between big business and government and want foreign policy designed to further such ends. The Hamiltonians want to boost commerce and the standing of U.S. companies in world markets. Most analysts would place the Hamiltonians in the sphere of foreign policy “realists.” However, the particular American twist is that Hamiltonians tend to see business and trade as good for global growth instead of a zero-sum game. In other words, even when they supported tariffs, they were not mercantilists. They also tend to oppose wars that don’t directly affect the U.S. or open areas for global trade.

The Wilsonians are the idealists of American foreign policy. Coming out of the Protestant missionary tradition, the Wilsonians hold that the U.S. has a moral obligation to spread American democratic and social values to the world. The goal of the Wilsonians is to create a peaceful planet based on the rule of law. They take almost a religious view of American values and thus believe they should be spread to civilize the world. They believe that foreign policy is a moral undertaking and that wars should be fought to further the aims of democracy and protect the innocent against violence and genocide. This obligation often requires a muscular military response.

The Jeffersonians, like the Wilsonians, also believe that American values are special. However, unlike the Wilsonians, they believe those values are so precious that they should be protected by avoiding interaction with other nations. The Jeffersonians are, for the most part, libertarian isolationists. The Jeffersonians are uncomfortable with the Hamiltonians’ willingness to deal with unsavory foreign governments and recoil at the Wilsonians openness to use military power to spread the “gospel” of American democracy. Jeffersonians believe, like the Wilsonians, that the world would be a better place if American values were adopted; however, they have little expectation that corrupt foreigners will ever do so. Instead, the goal of Jeffersonian foreign policy is to protect U.S. values from foreign corruption.

The Jacksonians believe that the most important goal of foreign policy is the physical security and economic well-being of the American people. Thus, they oppose the Hamiltonian approach to policy as too willing to support business to the detriment of American workers. They also find the Wilsonian position on fighting moral wars repugnant. Why risk American lives because some dictator is abusing his own people? That problem is someone else’s worry.

The Jacksonians are most similar to the Jeffersonians. Both oppose big government and support broad democracy. What separates the Jacksonians from the Jeffersonians is the role of national honor. That sense comes from the Jacksonians’ Scot-Irish heritage, a legacy of militarism that really doesn’t exist in the other three archetypes. According to the Jacksonians, it is dishonorable to back down from a real threat to American freedom and security.

Jacksonians generally oppose war; however, once war is deemed necessary, the Jacksonians show no quarter. Wars for Jacksonians end with unconditional surrenders by the enemy. Limited wars are of no use. If the government decides to commit itself to a war, then the enemy must be destroyed; anything short of this goal dishonors the fallen that fought in these conflicts.

The Jeffersonians and Jacksonians are the more uniquely American of the four archetypes. Strains of the other two can be found in the foreign policy of other states. And, of the Jeffersonians and Jacksonians, the latter is the one that probably most confounds foreigners.

The Cold War

In general, the Cold War was the triumph of the Hamiltonians. Because the post-WWII period to 1990 was bipolar, policy could be designed to address allies and enemies. Although the U.S. would prefer liberal democracies as allies, they tolerated authoritarian regimes that were friendly to isolate the Soviets. Jeffersonians, who mostly existed in the GOP after WWII, were generally isolated by Eisenhower’s nomination over the isolationist Robert Taft in 1952. The Jeffersonians became inconsequential during this period; some left the GOP to become the anti-war left in the Democratic Party while the Libertarian movement sat uncomfortably (and mostly ignored) within the GOP. Wilsonians existed in both parties but were mainly co-opted by the Hamiltonians by framing the Wilsonians as rabid anti-communists. They too existed in both parties; in fact, disaffected liberal hawks, who were disturbed by the anti-war Jeffersonians in the Democratic Party, switched to the GOP and became neo-conservatives after Vietnam. While they agitated for wars and confrontations with the Soviets, the Hamiltonians would ensure such fights failed to occur.

The management of the Jacksonians was perhaps the most interesting. All the wars during the Cold War were limited by design. In a world with thermonuclear weapons, unconditional surrender between nuclear powers is impossible. Faced with conditions of unconditional surrender, the losing power would be tempted to launch nuclear weapons in defense of the realm. However, as noted above, a limited war is an anathema for Jacksonians. Thus, to get the Jacksonians to fight (a precondition for any successful U.S. military operation), each limited conflict would have to be framed as another WWII. In every skirmish, be it Korea, Vietnam or Iraq, the nation was faced with a tyrannical regime that, if not stopped, would create another Hitler. Of course, this wasn’t the case and Jacksonians would be persistently used and subsequently disappointed by the war’s outcome.

Jacksonians don’t understand the limited wars that a superpower fights; a superpower doesn’t need to “win” every war if win is defined as total destruction. It just needs to fight enough to prove that it is the global superpower and maintain some semblance of global order. Just as a policeman on a beat may tolerate a certain level of criminal activity to maintain a degree of overall peace, a superpower does not need to annihilate every enemy. As noted above, for Jacksonians, leaving before the enemy is vanquished is besmirching the fallen who have given their lives for the cause of the war. Although Jacksonians were mostly Democrats after WWII, they steadily moved to the GOP after Vietnam and moved wholesale to the Republicans during the Reagan years.

After the Cold War

The end of the Cold War caused a serious disruption in the status of these four classes. Although the Hamiltonians managed the Gulf War, their influence diminished rapidly. In its place, the Wilsonians became ascendant. The neo-conservatives were highly critical of the end of the Gulf War. They felt the U.S. should have ousted Saddam Hussein due to his murderous behaviors. On the left, the Wilsonians who supported “humanitarian wars” agitated for the U.S. to intervene in the genocide. The actions in Somalia in 1992 and Bosnia in 1995 were supported by the Wilsonian left. President George W. Bush’s Iraq War was mostly a neo-conservative conflict; Brent Scowcroft, the Hamiltonian who was the National Security Director under the first President Bush, wrote a scathing editorial in the Wall Street Journal in 20021 before the Iraq War, arguing against an invasion.

However, what the Wilsonians failed to understand is that it is mostly Jacksonians who actually fight these wars. They don’t fight wars for the good of mankind. They fight to protect America…period. The Iraq and Afghan conflicts have left the Jacksonians, who populate our armed forces, feeling duped. Although the governments that were in place were ousted, neither Iraq nor Afghanistan has seen significant improvement. These conflicts appear to be ending or have ended indecisively.

Perhaps the archetype showing the most rapid gains recently is the Jeffersonians. The anti-war left and the Libertarian right are making their common cause to redefine America’s role in the world. It is the rise of the Jeffersonians that perhaps carries the most significant ramifications for foreign policy.

America, the Superpower?

Americans are clearly worried and confused. The country keeps fighting wars with mixed results and disappointing outcomes. Few of these conflicts involve a clear national security threat to the United States. In the name of preventing terrorism, the intelligence agencies are engaging in an enormous data-gathering effort of questionable Constitutionality. It appears that nearly all internet traffic can “legally” be captured for analysis.

What appears to be occurring is the strategic ambiguity that allowed the U.S. to act as a superpower without admitting as much is unraveling. The Jacksonians and Jeffersonians, who mostly support small government and avoidance of foreign entanglements, are in the ascendancy. The Hamiltonians, who mostly ran the Cold War foreign policy apparatus, have mostly disappeared. The stars of this group, Kissinger, Brzezinski and Scowcroft, are all old and mostly off the policy stage. Hamiltonians still exist as part of the “Davos man,” the supporters of globalized economics, but no longer seem to guide foreign policy. The Wilsonians, who had been on the rise, are now finding they cannot generate support from the people who actually fight wars, the Jacksonians. For example, in the recent Syrian situation, Jacksonian hawks have opposed the president’s measures because they felt the proposed attack wasn’t designed to oust the Assad regime. Thus, there has been a high level of rejection among what we would classify as Jacksonians, who opposed the president’s limited military strikes as inadequate; in addition, they failed to see how U.S. security was threatened by Syria’s chemical weapons attack. Polls within the military show high opposition to the president’s plan.

But, at heart, 24 years after the fall of the Berlin Wall, Americans are grappling with the reality of being a superpower and wondering if it is worth it. It does seem that the requirements of being a superpower are often in opposition to being a republic. When communism represented a mortal threat, Americans were willing to overlook the limited wars, domestic spying and the expansion of government that was required to meet that threat. But with that threat eliminated, Americans are rethinking the superpower role.

The debate over the Snowden revelations and the reluctance to act against Syria reflect the growing disillusionment with the superpower role. As the debate over these issues evolves, the world faces the possibility that the U.S. may decide its turn as superpower has come to an end. Or, the U.S. may redefine the role to make it fit better with its republic roots, although it is quite unclear how exactly that would occur. The debate over these issues is indicating that the era of strategic ambiguity is probably coming to a close.


We believe the superpower issue is at the root of much of America’s current struggles. For those familiar with our research in other areas, we believe the current secular bear market in equities is due to the uncertainty about the superpower role. And, we believe that the ultimate resolution of this issue could very possibly end this secular bear.

Essentially, the U.S. faces a crossroads. It must either choose to maintain its superpower role and adjust its domestic situation to meet the requirements of that role, or return to its republic roots and become isolationist.

To some extent, this decision may reflect a generational issue. It has always struck us that the Glass-Steagall law which separated investment banking from commercial banking could not be repealed until nearly all the people who knew why it was put in place had died. The people who lived through the Great Depression and their children saw what happened when the financial services industry was structured without maximum safety in mind. In essence, we had to relearn that lesson (and thus far, not very well).

The generation that accepted the superpower role firmly believed that returning to isolationism would result in WWIII. That if the U.S. retreated from the world, bad things would develop that would eventually land on our shores. And so, that generation and their children were willing to accept the repeated wars, the large government and intrusive spying that went along with not retreating to a republic. Now that generation has left this earthy veil and without their experience to guide policymakers, the temptation of isolationism appears very attractive. However, a world without the power of the United States could easily devolve into regional chaos.

The world without the U.S. acting in the superpower role would likely be a very dangerous one. On the other hand, how would the U.S. fare? A recent Financial Times editorial perhaps best frames the situation:

The central irony of the present debate, however, is that the nation calling for intervention is also the one best equipped to prosper in a world without rules. Uniquely favorable geography, abundant natural resources, economic resilience and unrivalled military power offer the U.S. the option of disengagement. Sure, it would suffer from a breakdown in the global order, but the U.S. is as close as it gets to a self-sufficient superpower. Today’s champions of undiluted sovereignty would be the big losers.2

From a market perspective, a U.S. retreat from the superpower role would favor U.S. assets and commodities. Foreign asset risk would rise considerably.

Bill O’Grady

September 16, 2013

This report was prepared by Bill O’Grady of Confluence Investment Management LLC and reflects the current opinion of the author. It is based upon sources and data believed to be accurate and reliable. Opinions and forward looking statements expressed are subject to change without notice. This information does not constitute a solicitation or an offer to buy or sell any security.


2Financial Times, Sept. 6, 2013, Philip Stephens.

© Confluence Investment Management

© Confluence Investment Management

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