“A time of turbulence is a dangerous time, but its greatest danger is a temptation to deny reality.”
— Peter F. Drucker, PhD, Professor of Management, Educator, Author (1909-2005)
DRUCKER’S PARADOX: WHY DEBTOR NATIONS HOLD THE CARDS
He is best known as a management guru, but Peter Drucker also studied economics, regularly attended John Maynard Keynes’ seminars at Cambridge, and spent years arguing that mid-20th century macroeconomic theory was fundamentally flawed. His belief that corporations exist to serve customers, not to maximize profits, made him a polarizing figure in American business: admired by middle- and senior-level managers but viewed skeptically by executives such as Alfred P. Sloan, the founder and Chair- man of General Motors, who once dismissed Peter Druck- er’s ideas as “dead wrong.”
What makes Drucker’s thinking relevant today was his ability to reduce complex global developments to clear and memorable commentary. In an October 11, 1985, Wall Street Journal article he wrote, “Never before has a major debtor country owed its foreign creditors in its own currency as the U.S. does today.” That observation remains valid four decades later. At the time, Japan was the leading foreign holder of U.S. Treasuries, a spot it continues to hold with more than $1.1 trillion in U.S. debt (see Chart 1). Since then, China has risen rapidly from virtually no holdings to more than $1 trillion at its peak. According to recent data, China dropped to third place, holding around $765 billion.
Traditional economic theory suggests that countries with large trade deficits put themselves at the mercy of their trading partners. The idea is that foreign producers can disrupt supply, raise tariffs, or otherwise shift terms at will.
Drucker saw things differently. If a debtor’s obligations are denominated in its own currency, then the creditors carry more of the risk. In his WSJ article, Drucker noted that foreign credit can effectively be expropriated. “It takes no legal action, no default, no debt repudiation. It can be done without asking the creditors, indeed without telling them. All it requires is devaluation of the dollar.”
Drucker’s article was published just weeks after the signing of the Plaza Accord, an agreement among the finance ministers of the U.S., Japan, West Germany, France, and the U.K. to intentionally weaken the U.S. dollar. The Accord made front-page news in 1985 and was hailed in financial circles as a bold and coordinated move to weaken the dollar. Yet outside of Wall Street and central banks, relatively few Americans fully grasped the mechanics or long-term consequences, and it would be years before the full economic effects became clear.
At the time of the agreement, one U.S. dollar bought 215 Japanese yen. Two years later, the exchange rate had dropped by one-third to 142 yen, roughly where it trades today (see Chart 2).
Depending on how the tariff battles unfold, Treasury Secretary Scott Bessent may well consider a currency devaluation strategy to address trade imbalances, follow- ing a playbook similar to the one James Baker used under President Reagan. And, as Drucker noted, creditor nations don’t need to be told or asked.
IMPLICATIONS OF DRUCKER’S PARADOX FOR INVESTORS TODAY
Politicians often treat trade deficits as unqualified negatives. Drucker suggested there are more options to consider, as noted above, and that being a debtor in one’s own currency offers strategic flexibility, particu- larly in global markets.
Beyond geopolitics, his insights also have potential implications for current-day portfolio construction. International exposure isn’t only about the relative strength of trade flows; it also reflects currency dynamics. For instance, if the dollar were to weaken against the euro, and all else remained equal, assets priced in euros would rise in dollar terms.
Mariner Chief Economist Bill Greiner recently noted that net trade balances with specific countries matter significantly, as do sectors with high sensitivity to trade policy which can respond differently to macro shifts, as Drucker observed during the 1980s (see Chart 3). “So, it’s going to be June before you really see if the economy is materially slowing, and right now it’s not. You want offense and defense in the overall portfolio. You want balance. I think that you should make sure you’ve got a little bit of international in there.”
Jeff Krumpelman, Mariner’s Chief Investment Strate- gist and Head of Equities, echoed this sentiment. “How many folks were saying, by definition, we’re going to have a recession back in 2022 because the yield curve inverted? It’s not a time for platitudes or siloed thinking. This market is a mosaic, and you’ve got to let the mosaic develop. Mariner’s going to be watching trends in bond yields, profit margins, and credit spreads. We’ve got great fixed income disci- pline here, also. In Kentucky, there’s an old saying, ‘What’s the definition of elegant? Simple, but effective.’ That’s what we’re aiming for.”
Krumpelman and Greiner stressed that 2025 may continue to be a turbulent year for investors. “Our theme has been ‘clear air turbulence,’ and I think that’s been a marvelous message to the market- place,” said Krumpelman. “We’re not scrambling to change (S&P 500) targets, like others that were way more euphoric. We said, ‘Get ready for 10 to 15 per- cent pullbacks. I think you’re going to get this whip- sawing.’ Whipsawing news is okay; you can live with that. But you don’t want whipsaw results, where you get caught in whiplash, sell at the bottom, and miss everything on the other side.” In short, Drucker’s advice about facing uncomfortable truths remains as valuable now as it was in 1985. A clear-eyed view of economic realities supports Mari- ner’s philosophy of measured, balanced, and intentional investing. Or, to borrow a famous line attributed to Mark Twain, “History doesn’t repeat itself, but it often rhymes.”
This newsletter was written by Mariner Approved for advisor use and for use with the retail public. Chart 1 Source: pgpf.org, May 13, 2025 Chart 2 Source: macrotrends.net, April 21, 2025 Chart 3 Source: eyeonhousing.org, December 16, 2024
The opinions voiced in this material are for general information only and are not intended to provide or be construed as providing specific investment advice or recommendations for your clients. All performance referenced is historical and is no guarantee of future results. All indexes are unmanaged and cannot be invested into directly. The S&P 500 is a capitalization-weighted index designed to measure the performance of the broad domestic economy through changes in the aggregate market value of 500 stocks representing all major industries. Economic forecasts set forth may not develop as predicted.Investing in stock includes numerous specific risks, including potential loss of principal. Because of their narrow focus, specialty sector investing will be subject to greater volatility than investing more broadly across many sectors and companies. Investing in foreign and emerging markets securities involves special additional risks, including currency risk, political risk, and risk associated with varying accounting standards. Investing in emerging markets may accentuate these risks. Municipal bonds are subject to availability and change in price. Interest income may be subject to the alternative minimum tax. Municipal bonds are federally tax-free but other state and local taxes may apply. If sold prior to maturity, capital gains tax could apply. Government bonds and Treasury bills are guaranteed by the U.S. government as to the timely payment of principal and interest and, if held to maturity, offer a fixed rate of return and fixed principal value. No strategy assures success or protects against a loss. Bonds are subject to market and interest rate risk if sold prior to maturity. Bond values will decline as interest rates rise and bonds are subject to availability and change in price. High yield/junk bonds (grade BB or below) are not investment grade securities, and are subject to higher interest rate, credit, and liquidity risks than those graded BBB and above. They generally should be part of a diversified portfolio for sophisticated investors. Floating rate bank loans are loans issued by below investment grade companies for short-term funding purposes with higher yield than short-term debt and involve risk. Alternative investments may not be suitable for all investors and should be considered as an investment for the risk capital portion of the investor’s portfolio. The strategies employed in the management of alternative investments may accelerate the velocity of potential losses. Investing in bond funds and ETFs involves risk, including the possible loss of principal. Bond fund and ETF prices will fluctuate due to changes in interest rates and the credit quality of the underlying securities. Due to fees and other factors, bond funds and ETFs may not perform as well as direct investments in the underlying bonds. Investing in mutual funds involves risk, including possible loss of principal. Diversification and asset allocation strategies do not guarantee profits or protection against loss. Investments in securities and other instruments involve risk and will not always be profitable. Loss of principal is possible. Real estate investment trusts (REITs) are subject to changes in economic conditions, credit risk, and interest rate fluctuations, and may not be suitable for all investors. Private and direct real estate investments may be illiquid and subject to unique risks not present in publicly traded securities. The tax treatment of real estate investments and REITs can be complex. Consultation with a tax advisor about specific situations is recommended. Any company names noted herein are for educational purposes only and not an indication of trading intent or a solicitation of their products or services. Mariner is the marketing name for the financial services businesses of Mariner Wealth Advisors, LLC and its subsidiaries. Investment advisory services are provided through the brands Mariner Wealth, Mariner Independent, Mariner Institutional, Mariner Ultra, and Mariner Workplace, each of which is a business name of the registered investment advisory entities of Mariner. For additional information about each of the registered investment advisory entities of Mariner, including fees and services, please contact Mariner or refer to each entity’s Form ADV Part 2A, which is available on the Investment Adviser Public Disclosure website (www.adviserinfo.sec.gov). Registration of an investment adviser does not imply a certain level of skill or training.
