“US government debt is a safe haven the way Pearl Harbor was a safe haven in 1941.” Niall Ferguson

The idea that our debt is somehow a safe-haven is a sad reflection on the rest of the world. Europe may be in a pickle with the Greece (and more generally, PIGS) problem, but it is not unique. All western economies suffer from overleverage, which itself brings risk. All are interdependent with one another.

A problem in Greece affects Europe more directly than it does the US. But it would be wrong to assume that the US is immune to such “noise!” In an unstable world, a grain of sand can start an avalanche that swallows the entire system. In the the late 1990s the Asian Contagion that threatened the world’s financial system was started by just such a grain of sand — the Thai baht.

The interconnectedness of countries via an unstable currency system makes us and everyone else potentially vulnerable to seemingly “insignificant” events in galaxies far, far away. The amount of debt around the world is especially conducive to what might seem like small change triggering major events. The metaphor of a butterfly flapping its wings 10,000 miles away affecting outcomes locally is probably more correct today than any other time in history.

Niall Ferguson in “A Greek Crisis Coming to America” states:

It began in Athens. It is spreading to Lisbon and Madrid. But it would be a grave mistake to assume that the sovereign debt crisis that is unfolding will remain confined to the weaker eurozone economies. For this is more than just a Mediterranean problem with a farmyard acronym. It is a fiscal crisis of the western world. Its ramifications are far more profound than most investors currently appreciate.

Despite the propaganda coming out of Washington that the crisis is over, the economy is recovering and jobs will be created soon, we are nowhere near an ending. The hubbub in Europe may even strengthen the hand of the political propagandists for a time as the dollar gains strength versus the Euro. But, as Ferguson points out:

The worse things get in the eurozone, the more the US dollar rallies as nervous investors park their cash in the “safe haven” of American government debt. This effect may persist for some months, just as the dollar and Treasuries rallied in the depths of the banking panic in late 2008.

A couple of quarters of (reported) economic growth and a strengthing dollar should not lull investors into complacency or believing this crisis has passed.

Indeed, worse days are ahead of us, not in the rear-view mirror.

Related articles by Zemanta