Who would have thought that we would ever see a time during our lives in which it could be possible for the United States, the world’s commercial and economic superpower since the industrial revolution, to potentially run out of money?
Perhaps even more of a stretch of imagination would be needed to comprehend that the United States national coffers would run up a debt so high that it would not be able to service the repayments, despite the country’s almost 250-year long history of hard work, ingenuity and commercial marketing genius.
Nowadays the American Dream is made in China, and the overall cost of operations is at an all-time high, whilst competition from almost every corner of the earth is rife and has been challenging American corporate hegemony for a while now.
A national economy which now survives on debt means that at some point, the borrowing needs to be repaid, and in the case of the United States, there is a ‘debt ceiling’ in place which is an actual law which limits the amount that the US government is allowed to borrow, which currently stands at $31 trillion.
National debt is now at such a high point that the debt ceiling has been almost approached, and the government is weighing up making plans to raise it so that it can borrow more money.
Every few years, a government can, according to the law, bring in a vote to increase the debt ceiling, however, at a time during which the country is on paper heading toward bankruptcy, is borrowing more a good idea?
During the discussions within the US Congress over recent days, many have observed that the United States government could run out of money as soon as June 1 this year.
That may well be an alarming prospect, but rather interestingly, there are swathes of reports which depict a very calm approach by investors and traders.
The question remains: which assets will likely be affected?
1: American big tech: The FAANG stocks
During the past two years, the ‘big tech’ arena of American stocks listed on the NASDAQ and New York Stock Exchange have been surprisingly volatile.
These days, ‘big tech’ does not refer to engineering or physical hardware manufacturers, but largely to internet companies which either offer e-commerce such as Amazon, search & SEO giants like Google, social media platforms such as Facebook (Meta), or online video streaming such as Netflix.
These tend to dominate the American stock markets, and their Silicon Valley base tends to dominate the entire tech development for the world.
During the lockdowns of 2020 and 2021, the American government along with many western allies attempted to change the behaviour of the population, largely succeeding to do so, and tens of millions of people moved their social life and work life online. These platforms boomed.
Then in 2021 and 2022, they crashed. There was a US tech stock downturn, which lasted almost a year.
Now, with costs up and a national debt which is becoming unserviceable in their homeland, will Chinese, Indian and Eastern European locations become favourable for global tech giants?
If so, the tremendously high cost of operating in Silicon Valley may be looked at.
We saw Israeli-owned American high tech firms pull over $30 billion in operating funds out of Israel when the new government took office earlier this year, resulting in a downgrading of the entire country’s credit rating. $30 billion is a lot for a small country but is nothing for the US. Imagine what may happen if large, borderless multinationals become concerned about the fluidity of the US economy and move their business to Mexico, India, Brazil, China or a combination of all of these.
Right now, nobody is panicking, but who knows what decisions will be made if the credit crunch arrives.
2: The US Dollar
Aside from corporate concerns in the boardrooms of American publicly listed giants, there is a simpler aspect to consider: The US Dollar.
America’s sovereign currency has for many decades been the de facto major currency against which everything, everywhere in the world is measured.
It is regarded as the most stable, most traded and most circulated currency in the world. Everyone is safe with Dollars, right?
Well….
Since September last year, the British Pound, which was on a road to oblivion during most of 2022, has been gaining significant ground against the US Dollar.
On September 16, 2022, the British Pound was at 1.16 against the US Dollar, whereas today, a few US bank demises, billions spent on overseas wars, and a credit catastrophe later, the British Pound is at 1.25 against the US Dollar.
Fluctuations that great are usually reserved for exotic currencies and it is very rare that majors would experience such a degree of volatility, but here we are in May, with a strong Pound against the US Dollar despite the UK’s own economic problems including high inflation, an energy price crisis and 12 years of ‘austerity’.
The US Dollar would perhaps be worth watching if a default does actually happen, as it may well be the first time in decades that its standing as the de facto currency has been challenged. After all, if its own central bank and central government is bankrupt, it would be being issued by an insolvent institution.
3: Credit Default Swaps
What is a Credit Default Swap? These are relatively unheard of by many mainstream traders, and of course are less relevant to the everyday lives of most currency and commodity traders, however, they’re worth a quick mention here.
A Credit Default Swap is a derivative which allows one investor to swap a default on a debt with another investor. To swap the risk of default, the lender buys this particular product from another investor who agrees to reimburse them if the borrower defaults.
These have been spiking as traders head toward betting on the possibility of a default and attempting to profit from it.
Therefore, the popularity of these swaps is a demonstration of the sentiment that many people are considering that a default by the US government on its debt could actually happen.
4: FTSE 100
The good, old-fashioned London Stock Exchange. What do you mean old fashioned? You may ask. Well, the London Stock Exchange may indeed be state of the art in its execution and electronic trading prowess, but the companies listed on it, especially the top drawer, blue-chip companies, are very much of the old school.
Compared to the NASDAQ’s straight-to-market, out-of-the-blue SPAC-listed startups with valuations of several billion dollars, many of which have barely distributed a product, London Stock Exchange is a bastion of established, well-rounded companies which rarely take risks and are evergreen.
The FTSE 100 index is the basket of stocks which make up the 100 most prestigious, large-cap companies on the London Stock Exchange, many of which are in traditional sectors such as pharmaceuticals, mineral extraction and mining, air and rail travel, shipping, retail and commercial banking, entertainment and leisure, and supermarkets and food distribution.
Should the US government default on its debts and destabilise the US economy, investors may look toward the steady, tortoise-like FTSE 100 index for its age-old corporations with histories as long as most people can remember, and eschew the Silicon Valley crowd, both established or SPAC listed, across the pond on New York’s trading venues.
Whichever way, this is a very turbulent time and will be regarded as an historic moment on the US commercial landscape.
Will the default take place or will America get even deeper into debt?
We shall soon find out…
