Where is the next crash coming from?

SUMMARY

Richard Murphy, political economist, warns that the next major financial crisis is unlikely to originate from government debt, but rather from the unprecedented concentration of global investment in US stock markets. He highlights the systemic risks posed by foreign holdings, AI-driven capital surges, and the exposure of pension funds worldwide, particularly in the UK.

MAIN POINTS

• UK government debt is not a crash risk due to its ability to issue currency, but systemic risk is building in US stock markets through massive foreign investment. [1:01]
• Foreign investors now hold $22 trillion in US shares, with UK pension funds and global portfolios increasingly concentrated in American equities. [3:02]
• AI investment has fueled a surge in US equity issuance, creating dangerous levels of ownership concentration and raising the risk of a severe market correction. [5:02]
• A US stock market crash would disproportionately affect global investors, especially pension funds, through direct losses and secondary banking exposures. [8:01]
• Countries like Japan, Germany, and Canada are redirecting capital to domestic markets, while the UK remains exposed due to lack of policy response and continued reliance on US assets. [11:01]
• Murphy concludes that the real crash risk lies in private financial markets, not public debt, and urges individuals to review their pension exposure to US equities. [14:01]

DETAILED ANALYSIS

The current narrative in financial media often centers on the dangers posed by government debt, particularly in the UK, with some commentators even speculating about the need for an International Monetary Fund bailout. However, this perspective overlooks a fundamental monetary reality: the UK government issues debt in its own currency and retains the exclusive authority to create pounds, eliminating the risk of involuntary default. The real systemic risk, according to Richard Murphy, has shifted to the US stock market, where foreign ownership has reached historic highs.

Since 2015, non-US investors have tripled their holdings in American equities, now totaling over $22 trillion. This surge has been driven by global enthusiasm for US capitalism, particularly in the technology and artificial intelligence sectors.

The SpaceX IPO exemplified this trend, attracting investors from the UK, Asia, and sovereign wealth funds worldwide. Despite initial excitement, many have already suffered losses as SpaceX's valuation declined post-IPO. The broader pattern is clear: the US has become the primary venue for global risk-taking, with foreign investors allocating an increasing share of their portfolios to American stocks.

A decade ago, only about a quarter of non-US portfolios were invested in US equities; today, that figure is nearly two-fifths. The AI boom has accelerated this concentration, with companies like Alphabet, Anthropic, Meta, and OpenAI collectively raising hundreds of billions in new equity. Notably, while 55% of global asset management cash is raised outside the US, 70% of it is funneled into US markets, highlighting a growing imbalance.

This concentration has yielded extraordinary returns—non-American investors have realized approximately $13 trillion in profits from US shares since 2015. However, such gains have also created dangerous vulnerabilities. The overvaluation of US markets is widely acknowledged by financial commentators, and recent events, such as the decline in SpaceX's value and Meta's retrenchment from AI-driven operations due to high costs, signal potential cracks in the foundation.

If a correction on the scale of 2008 were to occur, Murphy estimates a $50 trillion loss in global equity value, with $35 trillion of that impacting investors outside the US. The transmission mechanism for such a crisis would differ from 2008: rather than mortgage debt and bank failures, the shock would pass through equity markets, pension funds, and secondary banking channels that have financed leveraged stock purchases.

UK pension funds, life insurers, and household savings are particularly exposed, as are banks that have lent against US equities. The old logic of globalization—that capital could flow freely and neutrally across borders—has been undermined by the rise of the AI bubble and US government restrictions on technology exports. The US is increasingly using its technological dominance as a tool of economic leverage, restricting access to AI and satellite technologies and potentially limiting the benefits of share ownership for foreign investors.

This weaponization of technology and capital flows marks a shift from globalization to a form of financial and technological subordination.

In response, countries such as Japan, Germany, and Canada are taking steps to redirect investment into their domestic markets, seeking to reduce vulnerability to US market shocks. The UK, by contrast, has not enacted similar measures, leaving its pension system and broader economy exposed to a potential US-led downturn. Murphy argues that the UK government's focus on public debt metrics is misplaced, as the real danger lies in the private sector's exposure to volatile US assets.

He urges individuals to review their pension allocations and consider reducing their reliance on US equities, while calling for policymakers to recognize and address these emerging risks.

LINKS

• Poll on the next financial crash location.
• Transcript and further analysis at Richard Murphy's Funding the Future blog.
• ChatGPT prompt and instructions for writing to your MP about these issues.
• Donation link to support Richard Murphy's work.
• Richard Murphy's Bluesky profile.
• Richard Murphy's Funding the Future blog.
• The Wealth Series playlist.
• Ecenomics playlist.
• Britain playlist.
• Tax playlist.
• MMT playlist.
• Money playlist.
• Climate Change playlist.
• USA playlist.
• Labour playlist.
• The Trump Administration playlist.
• Channel introduction video.

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