Monday, November 28, 2022

Is The US A "Safe Haven" Or A "Powder Keg"?

Every time there is some sort of global upheaval in markets or geopolitics the US benefits from a stronger dollar and a rally in Treasury bond prices.  It has been thus for decades, as the US is viewed as a safe haven for capital from all over the world. 

Is this view still valid?

In my opinion, no it is not.  The US should no longer be taken for granted as a safe haven;  instead, it should be viewed more as a risk factor than anything else, a powder keg that could potentially blow up spectacularly. This is not a recent development, it has been a long time in the making.

  • For one, it was the US itself that caused the Great Credit Crisis in 2007-10.  Yes, there were other economies that followed the same unsound path: loose money, substandard lending practices, real estate excesses and unbridled securitization of loans and derivatives.  But, it was the US that was the main culprit and it was the US that subsequently "printed" trillions to save its banks, brokers, funds and insurance companies from default - well, most of them anyway. The deleterious effects of that massive QE are still with us, even if the even more massive COVID era QE has far outdistanced it.
  • The US is now amongst the most highly indebted nations in the world, with public debt to GDP at 121%, an enormous increase from just 30% in 1980.  The debt ratio has accelerated the most during the Great Debt Crisis (see chart below), precisely because the government "saved" the private sector banks, investment banks, etc. by assuming their debt - foolishly, in my opinion.

  • Going back further, the US economy has become emasculated, wasting away its manufacturing muscle by shifting it abroad, mostly to China.  As I said before, manufacturing is the fountainhead of all technology, of all high value-added economic processes. According to the Bureau of Economic Analysis, US manufacturing now accounts for 11.5% of GDP, down from 27% in 1960.  Crucially, manufacturing employment is now a mere 7% of total, down from 30% in 1960.  US manufacturing leadership is now limited to aircraft (Boeing) and military equipment.  Not good.
  • The loss of manufacturing jobs has all but eliminated the solid American middle class, creating a socio-economic chasm between the working poor and the ultra rich.  The political consequence of this divide are becoming apparent (Trump/MAGA) and dangerous (storming of the Capitol, rise of the far right).  Unthinkable previously, the US can no longer be considered a politically stable nation.
  • As is common in nations, societies and economies that are losing their leadership edge, financial speculation in the US has increasingly replaced healthy, productive economic activity.  American tycoons are now mostly owners and top executives of hedge funds, investment banks, and until recently, all manner of crypto/NFT firms.  That's not a healthy sign, it marks an economy that makes money from trading paper, instead of innovating and producing. 
  • One final observation: a sure sign of an Empire in decline is that its supremacy is increasingly challenged by second or even third rate powers, who would never dare do so before. Iraq, Venezuela, Afghanistan, North Korea, Turkey and, of course, Russia are nipping at Uncle Sam’s heels with increasing frequency, if with questionable success. But the mere fact that they are doing so speaks volumes.
So, yeah, the US is no longer a safe haven in my book.  And unless American leaders wake up soon, they will end up wondering why the proud nation has become a has-been.


  1. Yes, the US has "issues", but every developed country faces similar, if not more serious, issues. Germany? Japan? UK?

    1. By H.
      But the US having “issues” is a whole different ballgame. It’s one thing for Parthia to have issues, and an entire different one for Rome. It’s a matter of scale.

  2. Fortunately, for the US, China is a backward thinking autocracy with enough hubris as to refrain from importing effective Covid vaccines which forces them into ridiculous policy-making measures. When Mao ordered all the birds to be killed comes to mind... The US remains the 'cleanest dirty shirt' it seems. Though it sure is getting dirtier politically as of 2016 inded.

  3. the Chinese have a saying: "Water can carry a boat; water can bury a boat". China's dictatorship is heavily tempered by the power of the people... and anyone who rules China knows that...

    The problem in the past, was that the Chinese people thought they had "made it", even when most of their advances came from stealing technology.... From that perspective, things are getting better. There is an increasing recognition across society that whatever this is, it is not it... Seeds of change...

    Dun get me wrong, there is going to be a lot of pain and probably quite a few dead bodies over the next fifty years... but if that is the price, so be it... =)

    1. btw, just gut feeling.... but I feel the stock markets are predicting an imminent QE3..

    2. By H.

      No way, no how is there a QE in the works. If anything, a tighter QT is a possibility, though still a small one (less than 50%).

      Unless inflation is killed ASAP and interest rates come down there is an existential threat to the US. Thus far, people think that high inflation won’t last past mid 2023 and therefore long bond rates are still low vs current inflation.

      But if this scenario is negated by, say, another QE rates will zoom and the US (and EU) will not be able to service its massive debt.

      The Treasury bond secondary market is already sending out very troubling signals, only understood by those who are intimately familiar with its daily operation (low liquidity and low daily trading volume). If a whole new mass of paper were to suddenly hit it via QE… the unthinkable would very likely happen.

    3. "No way, no how is there a QE in the works.".... famous last words?... =)

      Nah, I kid you .... If the West were Chinese, I would almost guarantee a QE... but you guys are made of sterner stuff.... Yeehaw cowboy.. its going to be fun times all round...