No More Kings: Time to End Sovereign Immunity

The Suez crisis in 1957 was the end of the road for Britain’s 200-year role as a global rule-maker. From then on, it became a rule-taker. The recent political nostalgia for a different England pedalled by Brexiteers, that elegiac world of warm beer, sandwiches and Spitfires, was the world before Suez. The crisis was a monumental cock-up involving Britain, France and Israel, and a botched attack on Egypt to ensure European control over the critical Suez Canal. The fiasco resulted in the Egyptian nationalist leader, Gamal Nasser, having full authority over the canal.

Following a dressing down by new kid on the block the US, Britain and France withdrew with their tails between their imperialist legs. In the story of the global fight against colonialism, Suez was a famed victory for the colonised. It constituted the ultimate asymmetric war story where, like Iran and the Straits of Hormuz today, possession is nine-tenths of the law. Geography was on the Egyptian side.

Suez changed the global view of Britain for good. From then on, the risk of being associated with or adjacent to Britain in everything from geopolitics to finance increased. For more than 100 years, the UK had been a sure thing: the City of London was the epicentre of global finance; sterling was the world’s reserve currency; and the interest rates on UK gilts—the interest at which the UK government borrowed—was regarded as the global risk-free rate of return.

This meant that whatever else happened in the world, the UK government was seen as always good for its money, and would never default. With sterling pre-eminent, investors could shove their money into UK gilts and go on holiday, safe in the knowledge that it was a risk-free bet. In short, the UK manufactured sterling assets and the rest of world bought them, without question.

In finance, this extraordinary privilege is called credibility. After Suez, UK credibility gradually eroded, politically and financially—not overnight, but slowly and surely.

Could something similar happen to the US following Donald Trump’s war on Iran?

Let’s focus on finance.

Over the past few decades, despite all this talk of trade wars and the US’s inability to manufacture merchandise that the world wants, there is one product, made in the US, which the world wants in huge quantities: the American dollar. The Americans know the rest of the world wants American assets – stocks, bonds, companies and real estate. All of these are priced in dollars, so the Yanks are simply printing dollars and the world is buying those greenbacks. The process works like a resource find.

Other countries find oil that the rest of the world wants. The Americans have dollars, which they print for free and the world buys. Manufacturing these dollars is similar to turning on an oil spigot. Foreign money buys dollars to buy US assets, in the same way as foreign money flows into Saudi Arabia to buy oil. US government debt is above $31 trillion (€26.5 trillion), and foreigners hold about $9.5 trillion of US Treasuries. In order to get their hands on these American assets, foreigners must keep dollars handy, and therefore the US dollar still makes up 56.77 per cent of all official reserves all over the world.

After Suez, UK credibility gradually eroded, politically and financially—not overnight, but slowly and surely. Could something similar happen to the US following Donald Trump’s war on Iran?

Over a few decades, this process has led the dollar to be higher in value than it would otherwise be, plus it means the returns to US financial assets and its adjacent industries rise relative to other American industries. In time, finance elbows out manufacturing at home, while the expensive dollar makes it profitable for corporate America to relocate its industry overseas to cheaper and more tax-friendly locations, such as Ireland. Everyone wins—from the finance bros to the corporate leaders, the shareholders, and the real estate owners in urban America where the finance industry is based. Everyone, that is, but the blue-collar workers made redundant in the hollowed-out rust belt cities. They reacted slowly, but when they did a new political movement was born.

MAGA was birthed by the death of American manufacturing, itself destroyed by the expensive dollar, itself the result of foreigners’ insatiable demand for particular American assets and successive US administrations preferring to bet on things rather than make things. The US swapped manufacturing stuff for manufacturing dollars. The end result is that the US is both strong and weak, robust and fragile, stable and unstable, at the same time. A huge amount of the world’s capital is now over-concentrated in the US, as it used to be in Britain, and it remains there based on the assumption that American credibility will remain unimpeached.

The world has bet big time on the US. But as anyone who knows the form will attest, when you get an overconcentration of bets on one horse, your risk increases exponentially, while your potential return also diminishes significantly.

All this money flowing into the US, and all that buying of American dollars has led to the unsustainable situation whereby the US accounts for about 60 per cent of global listed equities, about half of private capital and 40 per cent of global bond markets. Yet it represents only about 4 per cent of the world’s population, 2 per cent of the global population under the age of 18, about 9 per cent of global growth, 13 per cent of world trade and one-sixth of world GDP. Something must give.

It is not that the finance world will turn on the US, but any risk assessment suggests that not having all your eggs in one basket is a good idea. Even before the Iran war, the supportive reasons for betting big on the US were beginning to wane. For years, the country was supported by falling interest rates, lower taxes, quantitative easing and falling wages relative to profits. All these factors made the US a place to park money. Profits rose and valuations soared, attracting in yet more capital. All this drove the return on US equities above US GDP, seducing foreign investors. In the years since 2008, foreigners have tripled down on US stocks, investing about $20 trillion in US companies. As the dollar rose on foreign exchanges, profits from the US expressed in foreign currencies exploded.

At the same time as foreigners increased their bets on the US in general, the country increased its bets on a particular domestic sector: tech. We have seen a doubling concentration of global risk in a few companies. Since the end of the pandemic, just seven companies account for more than half of total US stock market returns. The top 10 stocks now make up 40 per cent of the index.

One of the central assumptions underlying all this movement of money into the US was that the people who are making the big decisions about where the US is going are sensible, rational and informed. They wouldn’t start an unwinnable war without clear objectives or an extra strategy. They wouldn’t be accused of insider trading, betting personally on the timing of an airstrike that they were about to order. They wouldn’t risk the US’s military reputation by being seen to do another country’s dirty work. When they start a war, surely they’d win it? And if they didn’t, would they blame their staunchest allies, against whom they have already started a trade war?

When such questions are being asked, with so much foreign capital overinvested in America, the US’s credibility begins to erode. Once this starts, as the UK experienced after Suez, it’s almost impossible to recover.