The media thinks government debt will cause the next financial crash.

I think they're looking in entirely the wrong place.

The UK government cannot run out of pounds to repay debt denominated in pounds, so government debt is not where I believe the real systemic risk now lies. Instead, I think the danger has been quietly building in US stock markets, where global investor concentration is now higher than at any point in modern history.

Foreign investors now own around $22 trillion of US shares. Pension funds, insurance companies and investment funds across the world have become increasingly dependent upon rising American stock prices. The AI boom has accelerated this trend, drawing ever more money into a relatively small number of companies and creating a level of concentration that should concern us all.

If those markets suffer a major correction, the consequences will not be confined to the United States. The effects could spread rapidly through pension funds, household savings, and banks and financial institutions around the world, including here in the UK.

In this video I explain:

• why government debt is not the financial threat many people imagine
• where I think the real systemic financial risk now lies
• why US stock markets have become so dominant
• how AI investment has fuelled an unprecedented concentration of capital
• why UK pension funds are much more exposed than many people realise
• why the next financial crisis, if it comes, is likely to look very different from 2008
• what this could mean for your savings, your pension and the wider economy.

Whether you agree with my analysis or not, these are risks that deserve far more attention than they are currently receiving.

This is the audio version:

The Debate Ammunition for this video is available here.

This is the transcript:

As you know, I've been sick for more than a week, and during that period the world has reportedly changed.

We have peace in the Gulf, if you believe what is being said by Donald Trump, and you would be very naive if you believe anything he has to say. The reality is that the war there is ongoing, but despite that, oil prices are down, almost at pre-war levels; government debt costs are down, not as much, but down; and stock markets are falling. So the question is: are we still on for a crash?

I've talked about the possibility of a crash on this channel several times, and I think the risk is still enormous and high. But the fact is, the risk we should be looking at is being ignored right now.

People are obsessing about government debt and saying that's where we're going to see a crash arise. And in the UK, they talk about the fact that UK government debt is vulnerable and we might even have to go to the IMF for a bailout, which ignores the absolutely certain fact that the UK can always repay its debt because it's denominated in pounds. And the only body who has the legal right to create more pounds to repay the debt is the government who owes the money. There is therefore no risk with regard to UK government debt when it comes to a crash.

But there is a very real economic risk in the world right now, and it needs to be talked about because it's so enormous. And that risk is in US equity or stock markets and the explosion of foreign holdings in that market.

Right now, non-US investors in US equity markets hold $22 trillion worth of American shares. This is where the systemic risk in the global economy now lies. The real problem is that the media is looking the wrong way. It's trying to find a crisis, and it's not looking at where it might emerge.

The real problem, if Trump ends his war, but which runs in parallel with it if he does not, is that the world has bet on American capitalism on an extraordinary scale. The foreign holdings of US shares have tripled since 2015 and now amount to over $22 trillion.

The SpaceX IPO share issue triggered a real global stampede to buy further new American shares. Over 100,000 people in the UK bought shares in that issue alone. And people from South Korea, Japan, Australia, and Gulf sovereign funds all piled in as well. Even Chinese stock exchange investors managed to get shares in SpaceX, even though they were barred from doing so. And the point is, all those people have already lost money.

SpaceX has already declined significantly in value, and we know that this is the big issue that we are really facing. America has become the world's primary venue for risk-taking and not safe saving.

It's become the place where people who want to take risks go to find it. Countries outside the US and China now hold 38% of their share portfolios in US shares. And let's be clear: that includes people in the UK. So if you have a share-based portfolio in your pension fund, it's likely that around 38% of it, more than a third, coming on for two fifths, is going to be in US shares. And this is a significant increase. A decade ago, that figure was around a quarter, 25%. And now, around 65% of all new shares issued are in the USA. So this concentration of share-based savings in the USA is only going to rise.

The AI boom has driven this, of course, in an extraordinary way, and that is still ongoing. Alphabet, the owner of Google, raised a record $85 billion in new shares in early June this year. Anthropic, Meta and OpenAI are all looking at the same ideas, pushing US equity raising to above $600 billion this year. AI investment is the driver of this capital surge.

And meanwhile, as The Financial Times has noted, the global asset management industry is raising 55% of its cash outside the US.

We have a disparity, therefore. 55% of the cash is raised outside the US, but 70% of that money heads into US stock markets. It is on that cusp between non-US and US money that the fault line now lies in the world economy.

And let's not deny the fact. The largely paper profits that have arisen from US equity investment have been real so far. Non-American investors have, again according to the FT, made around $13 trillion in profits from US shares since 2015. The returns have been extraordinary by any historical measure. This is why stock markets feel like such a good place to put money at present, but that exposure also makes rational, safe people feel dangerously exposed by what is going on.

This is because past returns have created dangerous levels of concentration of share ownership in certain types of asset, in certain markets. And that could be the consequence of the buildup of systemic risk. And systemic risk gives rise to the possibility of a crash.

Few now doubt that the US stock market is overvalued and the risks of correction are real. Every serious commentator I read in the UK, and the USA, in all the major papers and some journalists are saying exactly the same thing. Read The Financial Times, read the Washington Post, read the Wall Street Journal, read the New York Times, read other newspapers, read The Economist. The stories are all the same: when is the crash going to happen? There are clear signs that the US market is stretched beyond sustainable limits. And SpaceX is a clear sign of that. It's already fallen significantly in value since its share launch. And Musk, who was a trillionaire as a result, is no longer.

Even companies like Meta, which owns Facebook, are beginning to question the value of their use of AI. Not their investment in AI; their use of AI in their day-to-day operations. And in fact, they're cutting back. They're saying the cost of buying the tokens which drive their use of AI is too high. They are actually driving their businesses into, well, not insolvency, obviously, but into less profitable positions because their staff are making such heavy use of AI. And so they're telling them, you can't use this stuff. If people like Meta are saying, “Don't use AI”, the rest of the world is going to take note.

AI does not come cheap. The moment the world realises that is the case, and the initial deals to bring people into AI cease to be available, and people have to pay the true cost of this stuff, there really is going to be a rout. People are going to see the value of AI as being constrained by the fact that its burden on their businesses will be too high. And as a consequence, the future earning potentials of these companies is going to decline significantly, and we could then get a stock market rout.

This is what I think is going to happen, and let's put this in context. If that rout is as severe as the 2008 decline in stock market values, and it's easy to imagine that possibility, then it could cost at least $50 trillion in terms of the fall of the value of the market.

Now, some of that will be in the USA, but given the balance in the way in which shares are now owned, only $15 trillion of that will hit the USA. $35 trillion will hit the rest of the world, including the UK, and we are heavily exposed to these markets in the way in which we save for pensions.

This is not a remote risk. It is a plausible near-term scenario.

This is a new kind of crash risk, different in character from anything we've seen before. It's on top of everything that Donald Trump is doing with regard to Iran, and it's quite unlike 2008.

In that year, the crash came through mortgage debt and bank balance sheets.

This time, the transmission mechanism runs through equity markets and pension funds, but also through secondary banking, where large amounts of money have been borrowed to buy these shares in the USA.

UK pension funds, life insurance companies and household savings are all exposed, as is the entire banking system through that lending through the secondary banking arrangements to fund this bubble.

A US market crash would hit financial stability and simultaneously hit retirement wealth directly and immediately. You are at risk if you haven't taken your pension as yet, and most people watching this will not have done. We are structurally more vulnerable than in any previous economic cycle, and that's what is worrying me.

Financialisation has broken the old logic of globalisation and its assumed neutrality. That's what's created this risk. I've already pointed out so much money is mismatched. It's not invested where it originates.

The assumption was that capital flows were neutral and that this was okay; we could invest across borders. But this is no longer true. The logic used to be that location did not matter when it came to investing. You could own Google shares. You could use Google as a search engine. You could do that anywhere, and that would be all right. But that neutrality is now gone. It's been shattered by the AI bubble.

US products are not now equally available to all countries. The US is now withholding consent for new versions of AI to be used until the US government has approved them, and are saying it is possible they will not be rolled out worldwide, giving the US an unfair competitive advantage. And at the same time, creating these barriers to investment returns that are going to make this type of cross-border investing much more difficult.

And that's also true with regard to things like SpaceX. The market for satellites may be restricted deliberately by the US government to provide them with their own defence mechanisms. Owning shares in a company will no longer guarantee access to what those companies produce. That is the key point here. There is going to be a real division that is not being reflected as yet in financial markets, and it is that risk that is going to create the basis for a crash.

America is now weaponising access to its own technology against the rest of the world, and that could create an enormous consequence, because this is not globalisation. It is a form of financial and technological subordination, and the risks are changing as a result, and massively so.

Other countries are starting to respond by redirecting their own capital investment back into their own domestic economies. We are seeing a form of protectionism here, which is unprecedented since the Second World War.

Japan is starting to invest $2.3 trillion in AI and semiconductors within its own economy because it needs them.

Germany is backing a new national pension system to redirect domestic capital towards German financial markets.

And Canada is doing very much the same sort of thing with its pension funds.

Meanwhile, South Korea is making noises about similar moves.

Here in the UK, I have long argued that the government should use the fact that it provides pension subsidies to pension funds to allow it to direct the use of those monies for social benefit, but so far, Britain is not responding to this global threat. That leaves us even more exposed than we would otherwise be to this potential risk arising within global financial markets.

Our pension funds are protesting their right to continue to allocate heavily the money entrusted to their care abroad, and especially to the US, and there is very little weighting on their part in UK shares now. The government is obsessing, meanwhile, about gilt yields and debt ratios, but it is not asking where British savings are going or what risk they carry.

This is a political and economic failure hiding in plain sight. The danger is that we will actually get this situation wrong. We won't anticipate the fact that there is a real financial war breaking out, as well as a trade war and a real physical war. Add the three together, and we could create all sorts of forms of misallocation of capital as a result of triggering retaliatory financial measures from the USA. That's what we are beginning to see. That is happening. And the global asset management system has still not got its head around this, partly because it is entirely dominated by American-owned institutions.

Every attempt to invest domestically in the UK, then, is often subverted by the fact that US managers are in charge of our pension fund monies, and we are therefore not seeing the benefits of those funds here in the UK. We are reducing our independence. We're becoming increasingly financially dependent upon the USA, and it is not a reliable partner anymore. That is glaringly obvious.

So we are watching the wrong risk. My belief is that the risk of a crash in the stock markets is now as big as ever. It's exacerbated by what Trump is doing in trade wars and what he's doing with regard to physical wars, but we're also facing financial warfare.

The financial risk should concern us, but it's in equity markets, in stock markets. It's not in government debt. The world has outsourced its risk-taking to an increasingly unreliable United States, and a US market correction would now tear through UK pension funds and savings globally.

The UK government can always pay its debt. That is not true of the ability of UK pension funds to service their pension obligations. The crisis, if it comes, will arrive through private financial markets and not through public borrowing, and that could hit you very directly indeed.

My suggestion is to take pension advice now. Review your portfolio if you've got any control over it. Decide whether you really want to be so exposed to US markets. Do decide whether you want to go for caution. And let's add a little rider to that: pray that whoever our new chancellor might be, they have the sense to realise all this. But will they? I don't know.

You have to decide for yourself on this issue. I'm worried, but there's a poll down below. Let us know your opinion as usual. Let us have your comments. Please like this video if that's what you do, and please share it with whoever you want because this is important stuff; people need to know about this.

And thanks for watching; we really do appreciate it. If you want us to make more videos like this, please also think about making a donation. Some people do. We're incredibly grateful. There's a link to a Ko-fi button down below, and that would help as well.

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