Global financial markets are a complex system
We don’t fully understand the vast web of connections inside it. But we know the sandpile collapses every so often and it’s never fun.
Our efforts to prevent these collapses simply let the pile grow larger, making the inevitable breakdowns even more damaging. There’s no way around this. All we can do is prepare for it.
I have tried in these letters to explain how trade deficits work in a way anyone can understand. It’s actually quite difficult, mainly because a proper description requires more space than I have.
My friend Lyn Alden’s latest newsletter is the best layman’s explanation I’ve seen.
It is about 20 pages, and I highly recommend you read it—even if you think you already know how it all works. I promise you’ll learn something.
Sometimes when I describe this trade structure, people ask me why the world needs an ever-growing number of dollars. Can’t it make due with the number of dollars it already has?
In a fiat currency system, the short answer is no.
https://www.lynalden.com/investing-newsletter/
“A one-week 65 basis point increase in US long-term interest rates in the face of a dramatic global growth slowdown is an impossible thing.
Impossible, that is, if global capital believes that the United States is good for its debts. Impossible, that is, if global capital believes that US debt obligations provide the risk-free rate for the world.
“But it wasn’t impossible. It happened.
The US Treasury market—the touchstone of every loan in the world, every insurance policy in the world, every equity valuation in the world—broke last month, and it broke because the full faith and credit of the United States came into question.
John Mauldin 9 May 2025
https://www.mauldineconomics.com/frontlinethoughts/tension-in-the-sandpile
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