A safe haven is an investment that is expected to retain or increase in value during times of market turbulence. Safe havens are sought by investors to limit their exposure to losses in the event of market downturns. The demand for safe haven assets has understandably been amplified amid swirling concerns over the coronavirus outbreak. The outbreak, now a global health crisis, has seen investors put money into safer bets, including the US dollar, as well as gold and US Treasury Bonds. The US Dollar Index hit the cent mark because of the fear among investors to own safe assets. The question is whether USA will continue to remain a flight to quality.
The World Order is such that the USA has been the largest economy and a safe haven for a long time now. USA has always promoted international trade through WTO & GAAT. The USA became a technological and innovation hub and invested heavily into future technology and R&D. Being a promoter of international trade, it shifted its focus more into technology and innovation, and imported goods at cheap rates from China, India, Mexico and other BRIC economies. These developing countries seized the opportunity and their GDP grew. China became the global manufacturing hub and showed the world what their economies of scale can achieve. In India, the service industry benefitted. However, for the last 15 years, the USA has been losing its shine, as evident by the 2008 subprime crisis.
The USA has been living beyond its means, and it’s imbibed in their culture to spend much more than they save. In the USA, almost every household is levered – they want to live a luxurious life, and debt helps them achieve it. Today, the world is funding the USA, which is evident by the fact that the USA has such a big current account deficit and such a big fiscal deficit. As of April 13, 2020, federal debt held by the public was $18.2 trillion and intragovernmental holdings were $6.0 trillion, for a total national debt of $24.2 trillion. It’s unlikely America will ever pay off its national debt. It doesn’t need to when creditors remain confident they will be repaid. Despite all this, the USA is bringing trillions of dollars of fiscal and monetary stimulus to fight the coronavirus pandemic, as it has no better option.
Rating agencies like Moody’s don’t have the power to doubt the US economy. But if things continue this way, a day will come when people realise that there’s a doubt whether the USA will honour its obligation towards the rest of the world.
I expect a downward rating of the US economy by the rating agencies within a couple of years from now. That will be the biggest shock to the world as everyone views the USA as a safe haven, as the flight to quality whenever a global crisis takes place. Even though the dollar has appreciated against INR and other currencies during this coronavirus pandemic, I don’t see the same continuing into the future. The World Order is changing.
Written by : Raghav Agarwal
Citations:
Bohn, H. (2011). The Economic Consequences of Rising U.S. Government Debt: Privileges at Risk. FinanzArchiv / Public Finance Analysis, 67(3), 282-302. Retrieved May 2, 2020, from http://www.jstor.org/stable/41303592
•Schwarcz, Steven L., Rollover Risk: Ideating a U.S. Debt Default (January 30, 2014). Boston College Law Review, Vol. 55, No. 1, p.1 2014. Available at SSRN: https://ssrn.com/abstract=2307569 or http://dx.doi.org/10.2139/ssrn.2307569
•Vuletic, Dominik, Next Global Crisis: Greatest Recession in the History of Capitalism is at the Doorstep (September 21, 2015). Available at SSRN: https://ssrn.com/abstract=2663630 or http://dx.doi.org/10.2139/ssrn.2663630
•Lo Duca, Marco and Nicoletti, Giulio and Martinez, Ariadna, Global Corporate Bond Issuance: What Role for US Quantitative Easing? (February 18, 2014). ECB Working Paper No. 1649. Available at SSRN: https://ssrn.com/abstract=2397787
