As these words come to page we are six days away from August 2, the supposed drop-dead date for the US government’s running out of money and, for the first time since 1790, being unable to meet all its financial obligations. Right now it is hard to see the entrenched pig-headedness of vested interests giving way to compromise for the common good – but stranger things have happened I suppose. Perhaps there will be an eleventh-hour-and-fifty-ninth-minute solution. Another distinct possibility is that August 2 comes and goes, no deal is on the table but markets and the economy keep hobbling along anyway. If nothing else, we have become remarkably skilled at kicking the can down the road, putting Band-Aids on the ailing patient and foregoing tough choices. I would still be more willing to bet on some patchwork fix that holds the wolves at bay rather than immediate financial Armageddon.
Regardless of how the next six days turn out, however, one thing seems to be fairly evident – we are at the dawn of a new age of Safe Haven Economics. The concept of a “safe haven” investment is probably as old as finance itself – a place to park your hard-earned capital and sleep a bit easier when the storms rage. So why have we chosen to call this version 3.0? We could go back further, but for the purposes of this post it is sufficient to think of the age of the gold standard and the pound sterling – from the late 18th to the early 20th century – as version 1.0. That era hung on life support for a brief time after the First World War and then fell apart as the clouds of the Great Depression gathered. After the dust had settled from the turbulent ‘30s and the Second World War the United States held the undisputed mantle to version 2.0. The US dollar and Treasury bonds would be the dominant safe haven investments for the next sixty years. Even the financial crisis of 2008 – a meltdown largely caused by US financial institutions – failed to dislodge the dollar and the T-bond from their caché as the go-to port in a raging storm.
This time around things are different. I think the writing was on the wall in 2008 that dollar-denominated hegemony was in its waning days, but investors as much as any human genus are creatures of habit, slow to change. Make no mistake – the transition from version 2.0 to 3.0 looks different from the last go-around. There is nothing on the financial stage today to compare to the clear leadership role the US dollar played when the world went off the gold standard. Rather, what we are seeing is the emergence of something like a safe haven basket – a collection of assets that can play the role of “risk off” trades when capital goes a-scurrying. The Swiss franc, the Japanese yen and gold (some things never change) clearly appear to be part of that basket. Arguably certain other currencies such as the Aussie dollar may be included as well. How about other AAA-rated debt? One of the many possible curiosities of the fallout from a downgrade of US government debt is that the safest domestic corporate bonds remain AAA-rated. Why not? After all, the companies that issue those bonds are citizens of the world much more than they are distinctly American.
In finance we have long been used to thinking in terms of the “risk-free asset”. Perhaps it is time to start recasting this as the “risk-free basket”, the defining characteristic of Safe Haven Economics, v3.0.