I’m getting on a bit these days, but the recent spat between the EU and US over Greenland reminded me of one of those rather boring microeconomic lectures I suffered decades ago about the difference between complements and substitutes. For those who have not suffered similarly, substitutes \are perceived as alternatives, meaning that increased consumption of one is typically associated with reduced use of the other. For example, if the price of coffee rises, consumers may choose to buy tea instead. Complementary goods are the opposite of substitutes, in that increased use of one complement leads to increased demand for another: like tea and biscuits (aka cookies). I mention this because of the recent fuss about Greenland. President Trump has recently expressed an interest in acquiring Greenland. Greenland’s strategic importance has been a theme in National Security circles for some time. It’s the obvious place to put long-range early warning radars. Naval and airbases located there would (and do) command Arctic sea lanes, which are increasingly ice-free, and it would even be a good potential location for US missiles, if future Presidents were so inclined. And then there is the mineral wealth, although much of that is speculative: logistics would be a nightmare.
So, Trump’s interest in the place isn’t at all peculiar. However, his approach to raising the question was definitely disconcerting to Denmark and its European neighbours. They raised vociferous objections to Trump’s undiplomatic diplomacy, which then prompted Trump to raise the tariff stick again in a way which reminded me of Seinfeld. Stock markets swooned, but I was struck by the price action of gold and US treasuries: Gold rallied while U.S. treasuries sold off (extending softness which had been apparent for weeks). Bonds and equities are sometimes described as complements (“risk-on”) and sometimes as substitutes (“flight to safety”). The truth is conditional: they can behave as either, depending on the context. In this case, they traded like direct substitutes, which I suppose they are for central bank reserve managers. Some have asked what might happen to gold should the dollar lose its reserve currency status, which I will admit to thinking is silly: the dollar isn’t going to lose its reserve currency status because we need a reserve currency, and there is no viable alternative. However, that does not mean that we can’t hold fewer dollars in reserves. Precious metals are performing well because of buying (both official sector and retail) from the current account surplus countries in Asia: China, Japan, Korea, et al. Retail investors in the US are actually selling gold, which you can see because PM premia are very low. I hadn’t really thought of gold as a direct substitute for US treasuries in the microeconomic sense, because while I am bullish PMs, and I am not a “gold bug” which is why I found the price action so striking, And it was accompanied by a story about a Scandinavian pension fund choosing to dump its US treasuries, although they didn’t link it to the US pressure to hand over Greenland. I think the journalists ran the story because they linked Denmark’s outrage with the sale of USTs, although that idea is also silly. I will let Izabella explain why.
There is a touch of irony about the current situation. The U.S. purchased the Danish West Indies in 1917 for $25mn in gold and renamed them the US Virgin Islands (even back then, the Danes were skeptical of treasuries). Amusingly, as part of the diplomatic context around that sale, the United States formally acknowledged Danish sovereignty over all of Greenland.
There is also quite a topical example of a complementary good: data centers and power generation capacity. You cannot meaningfully expand one without the other. AI training clusters, cloud computing, and hyperscale server farms don’t just need electricity — they need absolutely reliable, redundant, baseload power. When demand for data centers rises, demand for power rises with it. That’s why announcements of new data-center campuses are now followed almost immediately by announcements of accompanying gas-fired plants, nuclear deals, grid upgrades, and long-term power purchase agreements.
More computing means more power, which means a higher marginal value of generation assets. No one “switches away” from electricity because data centers become expensive. If anything, the opposite occurs: the value of firm power capacity rises precisely because compute demand is accelerating. This has caused some friction between consumers, who are the down leg of the K-shaped economy, and companies investing in AI, who are the upward-pointing leg of the K. This is precisely why Trump proposed power auctions for the additional power needed.
The divide between substitutes and complements isn’t just academic. It tells you where competition exists and where bottlenecks will emerge. In a world racing toward ever more compute, the binding constraint right now is not silicon but power generation. And unlike reserve assets, there is no substitute for that. However, in my long struggle with cynicism, I can’t help but think the two are linked in this case. I think Trump “negotiates” with “allies” like he does because it wins votes domestically. And I also think he recognizes who have been big winners from his policies and can afford to contribute a little to the common good to help him in the coming Midterms.
And while I can’t find a good excuse to link to this comment from UST Bessent, I just had to include it. “Patrick Batemen meets Sparkle Beach Ken”!!!
