by DEAN BAKER
Before I go further here, let me qualify everything I’m saying here with a warning: I have no crystal ball from which to give people investment advice. However, I do know logic and arithmetic, apparently unlike Donald Trump, so I can draw out some hypothetical situations, which is what I do below.
There has been much discussion, both here and around the world, of the possibility of a flight from the dollar. This has always been a serious risk since Donald Trump took office, but the risk increased enormously from his deranged rant at the World Economic Forum in Davos last week.
Virtually everyone who was not on Trump’s payroll acknowledged that the speech was both scary and incoherent. He made threats to our allies, boasted about imposing tariffs based on personal whims, and displayed an extraordinary ignorance of major world events. With Trump commanding extraordinary powers as president as a result of a docile Republican Congress and servile Supreme Court the United States does not look like a good place to park your money.
There have already been some prominent instances of pension funds pulling their holdings out of Treasury bonds and other US assets, but this is the less important part of the story. Most of the money at risk of leaving the United States is not held by public pension funds which may announce their decision to make a political point.
Rather, most of the money at risk of fleeing is held by private corporations and banks, and wealthy individuals, who would pull their money out of the United States because they think that Donald Trump’s America is a bad investment. There are literally trillions of dollars that could be leaving.
To correct one of the silly things often said by people who should know better: No individual, bank, or corporation is asking where to park one, two, or three trillion dollars. This scenario is supposed to leave them paralyzed in any effort to leave dollar assets, because there is no good alternative country where they can park $4 trillion.
But that is not how the financial system works. The big investors are asking where they can park $10 billion, $50 billion, or $200 billion, and the answer is there are plenty of places where this sort of money can be placed with reasonable safety, including the European Union, Brazil, China, India, the United Kingdom and Canada. A flight from the dollar running into the trillions would be the result of tens of thousands of decisions to pull millions or billions of dollars out of dollar denominated assets.
I don’t know if we are seeing the beginning of this sort of flight, but if we are, we can say with some degree of confidence that the dollar, along with the US stock and bond markets, are headed lower. If that is the case, there is an obvious strategy for people in the United States: join the flight
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