The free world is on the brink of a financial crisis

I’m not big on making predictions. At the very least, I’d rather avoid making predictions about what happens in the future in any system that involves humans.

It’s much safer to work with a list of plausible scenarios, and evaluate ideas for possible strategies and concrete actions in relation to all of those scenarios.

When I’m now writing that we’re “on the brink of a financial crisis”, what I mean is that the possibility of a financial crisis now must be included in any realistic list of plausible scenarios.

I’m not putting a date on when that possible financial crisis would happen. It might happen today, or in a week, or in a month, or in a year, or two.

But let me explain why I think that is now quite a plausible scenario:

In a nutshell, I would suggest that much of the world of international investments is addicted to the US being a good location for such investments, but that addiction is now likely to lead (sooner or later) to a crash.

For a long time, the US has been a magnet for international investments. To many investors, investing in the US was attractive because of good investment opportunities, and for many also for reasons of weak trust in the economic future and/or stability of their own countries.

Now however, as Trump is “venezuelifying the US” (for anyone who might not know who Paul Krugman is: He is a Nobel Prize-winning economist and he also has some personal direct central bank experience — he definitely knows what he’s talking about), objectively the US is no longer a good location for international investments.

The one main counterargument is that a lot of investors want to be invested in major AI companies, and there isn’t yet much of an alternative for such investments in the free world outside the US.

But being personally involved with AI, I believe that I know what I’m talking about when I claim that the return on investment for further investments in those companies is likely to be disappointing at best. (AI will continue to be important, as far as it goes the technology is real, and it will continue to be developed, but what those companies can do isn’t that much more powerful that what I can do for clients using open-weight AI. Hence those fantastic company valuations IMO have no basis in reality. And don’t get me started on the pretence that they might be able to create “artificial general intelligence”. That’s IMO pure conmanship.)

Hence I would insist that at the very least, it must be considered a very realistic scenario that eventually the faith in the US as a good location for investments will decline.

In order to understand what will happen when such a realisation becomes widespread among international investors, let’s consider currency markets and how they relate to international investments.

I’m in Switzerland. Suppose that I had a significant amount of Swiss Francs that I wanted to invest in the US. Very likely, the investment opportunities that I would consider in the US would all be in US dollars, so my investment would involve “exchanging my Swiss Francs for US dollars”. That would be possible, because there are for example banks which are willing to sell me US dollars in exchange for Swiss Francs.

Now look at the bigger picture: In total, the amount of US dollars that are sold for non-US currencies is always equal to the amount of US dollars that are bought with non-US currencies.

As long as the US is attractive for international investors, there is a significant overall demand for US dollars. That is balanced by a demand for non-US currencies which results from the US trade deficit: When goods are imported to the US (and on balance, more goods are imported to the US than vice versa) those goods are eventually paid for with US dollars, while most of the workers in foreign countries who produce those goods pay for their living expenses in their local currencies. Hence somewhere along that value chain, those non-US local currencies are bought with US dollars.

But how can it happen that the amounts of US dollars that are sold for non-US currencies is mathematically exactly equal to the amount of US dollars that are sold for non-US currencies? That requires financial intermediaries (like e.g. banks) and currency markets which can adjust exchange rates. So if the US starts being seen as somewhat less attractive for foreign investments, the value of the US dollar will fall in comparison to other major currencies. For example, the USD/EUR rate has fallen by 11.77% over the year 2025; most of that decline has happened from March to June. (cf. e.g. https://www.exchange-rates.org/exchange-rate-history/usd-eur-2025 )

A lower USD/EUR exchange rate means that international investors can get more of whatever they’re buying (for example, shares of US companies) for any given amount in their own currency. But I don’t see that as making shares in US companies significantly more attractive to international investors. On the contrary, if the value of the US dollar is seen to be declining, international investors will consider that to be a trend that might continue, which would be bad for the value of their

investments.

The analysis is different if for example an international company considers building a factory in the US, then the corresponding cost will be lower when expressed in a non-US currency. But actual foreign direct investment in the US isn’t all that significant compared to other kinds of investments and compared to the trade deficit.

In my view, the main adjustment mechanism is the trade balance: When the value of the US dollar decreases, imports become more expensive for buyers in the US. Also, then US exports become more attractive for buyers outside the US. Now decreasing consumption of imported goods (because they’re becoming too expensive) can happen faster than increasing exports (which for all kinds of goods requires marketing, and time for buyers to respond to the changed prices, while for physical goods it may also require increasing production capacities).

Therefore, if/when the US becomes less attractive for international investments, IMO the main balancing mechanism which can act fast is for prices in the US to rise for goods which the US imports. Then imports will decline, reducing the US trade deficit, or potentially even leading to a US trade surplus (if imports decline strongly and fast, while exports decline much less or much more slowly).

There is however a hard limit to how much imports can decrease: they absolutely cannot fall below zero. They cannot balance a dramatic loss of confidence in US investments by international investors who might on balance, in total, behave worse than only reducing the investment of additional capital in the US; they might eventually rather want to take capital back out.

I won’t try to predict what exactly would happen in the US then. But I think that it’d certainly be a major financial crisis that would also severely affect all other countries, with central banks worldwide (with the exceptions of Russia and North Korea) scrambling to save their national banking systems from collapsing due to contagion from whatever happens to the US financial system.