Extract from ABC News
Analysis
Donald Trump boasts about the amount of money his tariffs are pulling in as America continues to rack up debt. (Reuters: Kevin Lamarque)
Mark Carney summed it up neatly. The "rules-based global order" was no more and it was time to wake up, Canada's prime minister told the annual gathering of the rich and richer in the Swiss ski resort of Davos.
America's worldview has shifted. Rather than rely upon a network of staunch allies, as it has done for the past eight decades, it has reverted to an ethos more akin to the law of the jungle, where the strongest impose their will at their pleasure.
The US attacks on Venezuela, the kidnapping of its president and the unrelenting demands for Denmark to hand over Greenland have stunned those in diplomatic circles in recent weeks.
That's paralleled the vicious attacks on the US Federal Reserve and its leadership, which have rattled global investors.
"Call the system what it is: a period where the most powerful pursue their interests using economic integration as a weapon of coercion," the Canadian leader told the World Economic Forum.
Carney knows, more than most, exactly how that system works.
As the former head of the Bank of Canada and the Bank of England, he's well aware of the geopolitical threat US President Donald Trump's dramatic policy shifts impose on global stability.
But Carney is also acutely aware of America's great vulnerability. That's why he is prepared to face up to Trump.
The US is in debt, hugely in debt, to the tune of $56 trillion ($US38 trillion). When you're that far in the hole, and you are racking up an extra $3 trillion ($US2 trillion) a year, you need all the friends you can get.
That's especially the case when your tax cut policy is making that problem worse by the day.
The annual interest bill alone on that debt pile is close to $1.5 trillion ($US1 trillion). It is now the second-biggest annual expense in the US budget and even outweighs defence spending.
Investors are losing faith
There's another global order rule book that's in danger of being chucked out the window. It's the unofficial one global investors have stuck to for decades.
Rule 1 goes something like this: "When things turn pear-shaped, head for safety. Head to America. Buy US government debt, especially 10-year government bonds."
Rule 2 says: "Refer to rule 1."
Bonds essentially are IOUs. And US government IOUs are considered the global benchmark.
Even when America has been the root cause of the problem, such as during the global financial crisis, the entire world of finance has held fast to this playbook.
Why? Because America has been viewed as the ultimate safe haven, the bedrock of global finance.
US government bonds are considered risk-free because, no matter what happens, Uncle Sam will never default. You'll always get your money back.
It's hard to pinpoint exactly when the change began.
You could point to China's deliberate efforts to reduce its reliance on US government debt in about 2016. But that was more a case of Beijing sniffing the wind, sensing a change in the world order and trying to limit its US dollar dependence.
In the past year, however, and especially the past six months, there's been a noticeable change in investor attitude.
Despite wars in the Middle East, Europe and Africa, the US dollar has been weakening and appetite for US government debt waning.
This week, as the NATO alliance began to fracture, it was on full display.
Weaker demand for US government debt has suddenly forced American interest rates higher, something that should have alarm bells ringing in the White House.
Should that trend continue, the Trump administration will face ever higher interest bills, which ultimately could threaten America's financial domination.
The interest rate on 10-year government bonds is now much higher than last September. It has risen from 4 per cent to 4.27 per cent. And that's despite three interest rate cuts from the US Federal Reserve during this period.
The US dollar, meanwhile, has been sinking for months while Wall Street stocks, already jittery given the incredible three-year boom that has pushed them into a valuation stratosphere, took a pounding on Tuesday night.
When friends become debtors
The greenback still reigns supreme when it comes to global finance. But a line was crossed last year. It didn't grab the headlines, but it has sparked a massive boom in precious metals.
For the first time since 1996, global central banks added more gold to their reserve holdings than US government debt. Led by China and India, they are shifting away from paper assets to hard assets.
America's allies, by contrast, have kept the faith.
The UK, France, Japan, Canada, Belgium, Ireland and others have all increased their holdings of US Treasuries during the past few years.
Between them, European investors, and especially central banks, own about $12 trillion ($US8 trillion) worth of US government debt.
That could deliver America's one-time allies some leverage.
Dumping it all at once would cripple America financially. US interest rates would soar, and America would find it difficult to recover economically.
But it would be a case of mutual self-destruction. European lenders would torch their investment as the world descended into a financial crisis of unfathomable proportions.
But it does highlight just how tightly America's fortunes are tied to the rest of the world and, ultimately, its Achilles heel.
For decades, America has lived the high life, enjoying the fruits of having the global reserve currency.
Cash has flooded in from around the world, keeping US interest rates low, while its strong dollar has allowed it to buy whatever it wants from anywhere in the world.
Trump and his MAGA followers interpret that sunny state of affairs as being ripped off and are actively pushing to unravel the complex global interconnections that mystify even those who work within.
For all Trump's boasting about the amount of money his tariffs are pulling in, America continues to rack up deficits and debt at an ever faster pace.
America's deficits are funded by debt, and Trump's ability to service that debt relies upon global investors, including central banks, to keep buying bonds and keep the US afloat.
Carney knows. At some point, he might just have to remind the Donald exactly who is holding all those IOUs.
No comments:
Post a Comment