Author: Wu Zhijian

As the world's number one power, the United States is declining at a speed visible to the naked eye. Some friends may ask, the US stock market is the world's largest market value, and the stock index has repeatedly hit record highs. American companies are still domineering around the world and have almost monopolized cutting-edge technologies such as artificial intelligence and high-energy chips. Where did you mean the decline come from? This is a good question. The key to the decline of the United States mentioned here is the decline of its democracy and rule of law.

Source: Economist

For example, the above figure shows changes in the global historical rankings of the EIU Democracy Index from some developed (US, Germany, Japan, the United Kingdom, France) between 2010 and 2024. The U.S. ranking dropped from 18th place in 2010 to 26th place in 2024. In fact, the United States is the only development in the past 15 years that has seen such a significant regression. Currently, the United States' democracy index ranking has lagged behind France and Japan.

Source of Data: WJP Rule of Law

Next, let's take a look at the global ranking changes in the WJP Rule of Law Index since 2010. From the chart above, we can see that Western Europe (France, Germany, and the United Kingdom) ranked relatively stable in the top ten, but the United States rankings dropped significantly, from 19th place in 2010 (better than Japan) to 26th place in 2024 (lagging behind Japan). If a rule of law index continues to decline, it is very worrying. The most typical example of this is that before leaving office, former US President Biden "preventively" pardoned his family, and on December 1, 2024, Biden also pardoned his son Hunter Biden for illegal gun possession and tax crimes involved. If a former president specifically pardons the most important people in his life (his own blood relatives) before leaving office, it means that he has no confidence in his legal system, he does not believe that his court can guarantee justice, and does not believe that his family will not be persecuted. If a former president thinks so, then what reason do we foreigners have to believe in the legal system of the United States, which is fair and just? If a legal system cannot be givenIf people are confident, they cannot believe that everyone is equal before the law, so in the long run, this will lack competitiveness. In my opinion, the decline in the degree of democracy and rule of law in the United States will directly affect the long-term value of US stocks and Treasury bonds. Let’s talk about national debt first. In essence, bonds are IOUs written by a country to investors. If any person or institution wants to borrow money from others, the key is to rely on his own credit, that is, others need to believe that you can borrow and repay, and have the ability and willingness to repay interest and principal. So for a person, how to prove his credit? There are several key points: First, there are mutual checks and balances between power institutions, rather than any individual has the final say. This kind of checks and balances of power is very important and can avoid high-risk mutations due to an individual's decision, such as launching a war. To put it bluntly, investors need to see a responsible person so that they can dare to lend her money (that is, to buy the bonds she issued). Secondly, the country's legislature (Congress) and judiciary (court) can maintain independence, rather than succumb to the deterrence of the executive branch (White House) and obey the White House to make irresponsible decisions, such as excessive debt resulting in defaults or hyperinflation. Therefore, if a democracy and rule of law decline, bond investors should be vigilant and pay close attention to their future trends. Next, let’s talk about stocks. One, if you want a long-term healthy stock market, you need to meet a key condition, that is, the country has an effective capitalist market economy. Specifically, she needs to meet the following conditions: First of all, the market is free and fair, and is not controlled by some monopoly monopolists. Secondly, there is a high-quality legal level, that is, everyone is equal before the law, rather than big fish eating small fish and small fish eating shrimps. Third, there is a healthy legal and cultural environment to encourage innovation and reward entrepreneurs. Fourth, taxation and supervision are friendly to enterprises, rather than competing with enterprises or plundering enterprises' resources. The current US ecology shows signs of oligopoly. The billionaires represented by technology giants (such as Amazon's Bezos, Tesla's Musk, Apple's Cook, etc.) obviously have a huge influence beyond their business scope. Trump is highly bound to the interests of technology giants. Trump needs them to show allegiance and stay consistent with Trump on issues such as public opinion control and opposition to DEI. While technology giants need the United States to protect these giants on antitrust issues, from litigation of antitrust bills, and undermine their monopoly position in their own advantageous industries. This situation is a bit similar to the "Robber Baron" era in the second half of the 19th century: every industry is dominated by a wealthy bigwig, maintaining their monopoly through cruel business competition and exploitation, and a large number of rich tycoons were produced: such as steel king Carnegie, railway tycoon Vanderbilt, oil king Rockefeller, financial tycoon Morgan, etc. It is no exaggeration to say that today's Musk, Bezos,Zuckerberg and others have their wealth and influence comparable to Rockefeller and Carnegie in the 19th century. The decline of the degree of American power and the rule of law mentioned above has enough reason for us investors to start worrying about the US stock and bond market. Of course, no empire can collapse overnight, and the United States is no exception. In the past 100 years, after a long period of accumulation, especially two world wars that took place outside the country, the United States has accumulated a lot of wealth, talent and technological advantages, so even if the United States begins to decline, it will not fall apart overnight. The United States' world ranking in terms of democracy and rule of law is currently only falling from more than a dozen to more than twenty. There are about 38 developed countries in the world (OECD member states), so the decline in the US ranking only means a decline from top to moderately developed. However, due to the huge economic scale of the United States and the huge capital market, this change deserves the attention of our investors. If the decline trend continues and cannot be reversed, investors should prepare early and make timely adjustments to protect their assets and investment security.