The demise of the US dollar and US Treasuries as safe haven assets would have profound global consequences, potentially exceeding those of the 2008 credit crisis and 2019 COVID crisis. Without a reliable safe haven asset, markets would face substantial instability:
- Gold, the most obvious alternative, would need to increase dramatically in price due to its scarcity to accommodate global demand for safe haven assets.
- US Treasuries, particularly long-dated bonds, would suffer a crisis of confidence that would negatively impact all US assets and, to a lesser extent, non-US assets.
- The US dollar would depreciate broadly, triggering an emerging market crisis in the reserve currency. This would threaten dollar hegemony, creating global uncertainty similar to when the British pound lost its dominance to the US dollar after World War II.
- China’s reluctance to position the yuan as the next reserve currency would reshape global trade patterns. The Special Drawing Rights (SDR) might reemerge as a solution. The immediate impact would likely be reduced trade volumes and lower equilibrium global growth.
- Non-US government bonds would eventually decouple from US government bonds. German bonds would likely become the premier safe haven in fixed income, though they face capacity constraints similar to gold.
- While non-US assets may perform comparatively better, countries with superior twin deficit positions would ultimately attract the most capital flows. However, these inflows would create domestic asset bubbles and currency appreciation issues due to these countries’ smaller asset bases relative to the US. Switzerland’s experience before breaking its currency peg in 2015 offers a useful comparison