How much more dysfunctional and unstable does the United States need to get for global investors to lose confidence in the country’s economy and markets? If the performance of the US stock market – which is up nearly 540 per cent since January 2009 and currently stands at a record high – is anything to go by, an awful lot more.
Although volatile equity markets are a poor gauge of the underlying vulnerabilities of economies, investors have never taken political risks in the US seriously. This refusal to acknowledge political dysfunction and the threats to the rule of law and democracy stems from the role of the US dollar as the world’s pre-eminent reserve currency and the dominance of the US Treasury bond market, the bedrock of the global financial system.
Part of the “exorbitant privilege” of being able to issue staggering amounts of debt in its own currency – which accounts for nearly 60 per cent of global foreign reserves and is involved in almost 90 per cent of the world’s foreign exchange transactions – is that the US is regarded as a safe haven. In fact, not only does the US benefit in times of uncertainty, it does so even when it is the source of the uncertainty.
A good example is when S&P Global Ratings unexpectedly stripped the US of its coveted triple A credit rating in August 2011, partly because of the willingness of US politicians to play fast and loose with the country’s strained public finances. Almost immediately after the downgrade, US government bonds rallied as investors continued to view Treasuries as a refuge in volatile markets.
Although the haven credentials of US assets are still quite strong, advanced economies are riskier than they were 15-20 years ago.
Read More: Opinion | Why won’t markets take threat of US political chaos seriously?