It is no secret that the rich world has a government debt problem.

Since the pandemic, yields have steadily climbed across the G7 as high levels of government spending - and the borrowing required to fund it - have become the default. But, in late August, these pressures came to a head. A global bond sell-off began, with yields on long-dated government debt surging in tandem, as investor confidence deteriorated. In the UK, the 30-year gilt yield reached 5.86%, within touching distance of its highest levels since 1998, while in Japan, 30-year yields rose to 4.14% - close to their highest ever level on record.

The situation was particularly acute for treasuries, where yields spiked to an unprecedented 5.33%, prompting intervention. On August 19th, Mr Bessent set out plans for the Treasury to double the rate of long-dated government debt buybacks - increasing operations from $2bn to at least $4bn for securities maturing in 10 to 30 years. However, this attempt to soothe investor nerves was short-lived ; yields declined by 0.09% following the announcement, but were up again by 0.06% the next day, reversing most of the drop.

Even now, yields remain relatively elevated, underlining the ineffectiveness of the intervention. But, what was behind the sell-off that obliged it in the first place?

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Dissecting the Sell-Off

There are three factors driving investor fears regarding government debt:

The Cyclical Factor: The Iran War

Oil price fluctuation are one thing; absolute uncertainty is another. Inflationary pressures, an absence of a clear timeline and regular, capricious decisions have weighed heavily on sentiment. This has manifested in higher yields that reflect grim perceptions of the economic outlook, as interest rates are projected to track higher worldwide.

The Dynamic Factor: Increased Corporate Debt Issuance

Dynamic because this is a factor evolving in real time. As AI companies take on huge amounts of debt to fund spending on data centres, this accumulating supply of investment grade bonds is driving prices down and yields up - essentially crowding out public spending if governments struggle to sustain it amidst higher borrowing costs. The significance of the AI industry has long been prominent in equity markets. But its growing influence over bond markets - and thus government borrowing - reflects the sector’s expanding economic weight, demonstrating just how consequential its decisions have become.

However, while this may be a contributor in the short term, if AI delivers its expected productivity gains, then investment could eventually push yields back down. Higher productivity would fuel real economic growth, helping to alleviate pressures driving the structural factor behind rising yields.

The Structural Factor: Mounting Public Debt

This is the root of the problem: countries across the developed world are facing massive fiscal deficits and showing little willingness to address them. This is particularly true in the US, where the budget deficit sits at 6% of GDP and national debt passed a staggering $40trn in late August.

This creates a two-way effect on yields; higher borrowing costs force governments to borrow more, simply to keep up with escalating debt payments. In turn, higher levels of borrowing amidst an already burgeoning national debt further fuel investor concerns, pushing yields even higher and culminating in a self-reinforcing feedback loop that is difficult to break.

Taken together, the cyclical and dynamic factors suggest that the recent bond rout was the consequence of an accumulation of fear from a variety of sources. However, the variable nature of these first two factors point to a potential stabilisation of the government bond market over the long term, leaving the structural debt problem as the primary concern - just as it was before. Yet, if cyclical and dynamic pressures become permanently priced due to a constantly changing global landscape, true stabilisation may become far harder to achieve.

Ultimately, while higher interest rates and corporate borrowing have helped elevate yields on long-dated Treasuries, a longstanding and growing fiscal deficit remains the root cause, as unsustainable borrowing continues to stoke fear about the sustainability of America’s fiscal trajectory.

A Series of Signals

Bessent’s intervention failed because it did not target any of the three underlying causes of the problem. Furthermore, such interventions tend to produce only short-term effects: rather than shrinking the total debt, they merely reorganise it from long-term bonds into short-term ones. Crucially, the scale of the intervention was minimal relative to the sheer magnitude of both the US debt burden and the size of the bond market itself.

Though its direct effects were inconsequential, the signal sent by the intervention is highly significant. It reveals just how concerned the administration is about the trajectory of government debt. This becomes even clearer when taking into account the recent yen market intervention. While the US framed the action as a move to support Japan during a time of severe currency weakness, it failed to mask the self-interest driving the decision.

To appreciate the yen, the Bank of Japan has two options: raise interest rates, or sell-off massive amounts of treasuries to push up the currency against the dollar - a move that would destabilise US debt. The fact that Washington used euros, rather than dollars, is another sign that the administration wants to avoid any negative impact on American assets at all costs.

This concern may well be a response to the fast-approaching November midterms. With heavy political pressure to push down yields, the highly unpopular administration stands to benefit from a temporary boost in public perception. Consequently, these short-term interventions may not actually be aimed at achieving long-term stabilisation; rather, they serve to simply conceal the problem.

Markets, however, are wise. These band-aid strategies only further erode the Treasury’s credibility as an institution - a decline exacerbated by its direct conflict of interest with the Federal Reserve on two fronts. Kevin Warsh has signalled a commitment to tackling inflation through an upward rate trajectory, whilst his clampdown on Fed communications forces investors to rely more directly on market prices and economic data.

By artificially suppressing yields and distorting price signals, these Treasury interventions project institutional discord, rather than unity, undermining the credibility of both bodies. This renders even short-term policies ineffective as investors, fully aware of the underlying fundamentals that should dictate bond pricing, simply refuse to take the bait. Ironically, this loss of trust only risks pushing yields even higher, encouraging further sell-offs as the credibility that once underpinned Treasuries begins to crumble.

Future Implications

All this raises broader questions about the changing role of Treasuries. The sheer scale and liquidity of the US government bond market - alongside its status as a traditional safe haven asset - have allowed fiscal indiscipline to persist because there was ready demand to absorb it. However, as this reputation erodes under growing credibility concerns and as private-sector debt emerges as a viable alternative, the prestigious position Treasuries have long held is gradually shifting. A stark sign of this transition is the changing investor base: dominance has moved away from traditional, buy-and-hold institutions like pension and sovereign wealth funds, towards short-term, price-sensitive actors seeking to exploit volatility for higher returns.

If status quo trends continue, inherent demand for Treasuries risks eroding, intensifying upward pressure on yields. This trajectory may ultimately force the administration to rein in spending and raise revenue - targeting the structural deficit to stabilise the bond market over the long term. While politically difficult, addressing these root causes is necessary; inaction ensures recurring volatility along an upward yield trajectory, whereas continuous intervention offers only surface-level correction while allowing the core problem to fester.

Bessent chose to apply a band-aid; the markets quickly ripped it off. Regardless of the path the administration ultimately chooses, the intervention - and its broader implications - won’t be forgotten any time soon.

Hope I made you think,

Ananyaa

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Late July brought a sharp end to the months-long chip stock rally. Triggered by South Korean chip giant SK Hynix - whose shares dropped nearly 20% after earnings missed market expectations - the downturn quickly spilled across the broader semiconductor sector.

Though some selling was taking place ahead of market restrictions coming into effect on the KOSPI on Friday, the rout quickly spread to the US, with the Nasdaq briefly entering correction territory.

Source: Financial Times

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This upheaval was something to be expected given the cyclical nature of the semiconductor industry, a topic explored in my piece AI is here to stay, exceptional returns may not be:

The recent volatility in chip stocks evidences this dynamic. Pressure on chipmakers is mounting as soaring memory costs risk curbing demand as consumers are forced to cut usage or seek cheaper alternatives. Fears of potential chip shortages have sparked massive investment plans to expand capacity, paradoxically fuelling worries of future oversupply.

Yet, while chips may have triggered the initial downturn, the broader sell-off in global tech stocks ultimately stems from a single underlying concern: the long-term sustainability of the AI boom.

Hyperscaler Revenue vs Spending

The four major hyperscalers have poured more than $1trn into capital expenditures since the race to dominate AI began three and a half years ago.

Source: Financial Times

Total AI investment for 2026 is projected at roughly $900bn - with $400bn funded by debt -before climbing to an estimated $1.4trn next year. Against this, combined hyperscaler revenues sit at just $150bn , illustrating the stark divergence undermining investor sentiment.

Reconciling revenue and spending is the only way to restore confidence. In the short term, focus must centre on boosting revenue by expanding both the ‘extensive margin’ (user growth) and the ‘intensive margin’ (deeper AI usage).

Whilst infrastructure demand may maintain current investment levels, spending value could fall as hardware transitions from specialised to commoditised, and improved efficiencies lower advancement costs. However, it will take time before this shift fully materialises to meaningfully reduce the gap.

AI is a long-term play, making the balance between spending and revenue difficult to achieve; but China shows it doesn’t have to be this way.

China’s Cost Advantage

In 2026, Chinese tech firms are forecast to invest less than a tenth of what their American counterparts spend on data centres.

Source: The Economist

Lower capital expenditure is only part of the story. From land to equipment to labour - ranging from construction workers to AI specialists - operational inputs are significantly cheaper in China, yielding production costs that are marginal compared to the US.

Model distillation also plays a key role. China is often accused of training its models on the outputs of expensive American systems, allowing “Chinese AI developers (to) free ride on American spending” - another factor driving down costs. Meanwhile, US export controls have unwittingly helped by restricting the expensive inputs Chinese firms can buy. In response, Beijing regulators now actively discourage using second rate Nvidia chips, aiming to sanction-proof China’s AI infrastructure by pushing far cheaper, domestic alternatives.

Yet, lower costs do not mean AI is any less of a priority - if anything, state backing is emphasis is even more pronounced. The ‘Two Sessions’ conference outlined the 15th Five-year Plan (2026-30), reemphasising China’s focus on technology and innovation. This push is underpinned by ambitious new targets: China aims to increase R&D spending by over 7% per year and plans to raise the digital economy’s share from 10.5% to roughly 12.5% of GDP by 2030, all whilst keeping labour productivity growth above overall GDP growth.

This final point is crucial: it highlights a top-down push for AI to drive real productivity gains. This ambition is evident in China’s focus on technology diffusion. Around Lunar New Year, a cluster of major models was deliberately released, leveraging the holiday to boost mass AI adoption and literacy. Consumer-aligned incentives - such as gamified ‘red packets’ and features embedded in everyday apps and telecom services - actively drive engagement. This strategy directly parallels Tencent’s 2014 WeChat campaign, which successfully normalised mobile payments and revolutionised China’s payment infrastructure.

Low production costs paired with domestic open-source models have made agentic technology available at a fraction of the price. This means effective AI integration is no longer a luxury reserved for top-tier firms, but a daily utility accessible to all. Combined with a population primed for adoption, this affordability and scale drive rapid growth at the extensive margin, paving a clear path toward commercialisation and revenue-spending reconciliation. This stands in stark contrast with American firms, where closing that gap remains far out of reach.

Competition at the frontier

It is often heard that the US leads the frontier race, whilst China leads the adoption race. And, indeed, the Communist Party’s AI ambitions focus on diffusion “rather than creating ever cleverer systems that require ever more powerful semiconductors in ever more data centres.” This highlights the core divergence in strategy: Chinese firms concentrate their funding on maximising performance from less advanced inputs, while investing in techniques that reduce compute demand. Ultimately, China invests for efficiency, whilst the US invests for capacity.

The distinction between the “frontier race” and the “adoption race” suggests Chinese technology lags behind the US. Whilst this may have once been true; the gap is swiftly closing. Moonshot AI’s Kimi K3 matches top US models, whilst ByteDance’s Seedance 2.0 leads in video generation - outperforming both Open AI’s Sora 2 and Google’s Veo 3 across key metrics. Furthermore, China is pulling ahead in the “agent revolution” , fielding multiple agentic models that match or exceed their American counterparts.

Though America remains further along in the pursuit of Artificial General Intelligence (AGI) , this is largely because AGI is not Beijing’s primary focus. Ultimately, the rapid advancement of Chinese models demonstrates a nation can effectively compete at the frontier without needing to stretch to the absolute edge.

Conclusion

America’s AI push reveals a strategy focused on the intensive margin over the extensive one. But with spiralling infrastructure costs and struggling revenues, it is becoming increasingly clear that - from a commercial standpoint - this focus on capital intensity over broad accessibility may have been the wrong strategy to prioritise.

China’s strategy demonstrates why: pushing advancement past the point of diminishing returns yields little value compared to focusing on technology that can be scaled and commercialised. Technology built for practical impact will always generate more revenue than tech at the absolute frontier - no matter how incredible frontier models may be, if they aren’t useful to businesses and the broader public, their commercial potential remains limited.

The stark cost differential suggests that China is honing a comparative advantage in AI. Perhaps outsourcing development to the country would maximise global efficiency building and deploying the technology. But the geopolitical stakes mean that the US - and by extension the broader West - will never allow it.

Though AI regulation demand multilateral cooperation, the technology is increasingly splitting into two parallel dimensions - developed, deployed, and dominated by opposite sides of the globe. Far from signalling the end of the AI race, this bifurcation ensures its continuation as geopolitical tensions intensify.

If the American hyperscalers fail to address their structural strategy and spending issues quickly, global capital, sentiment and power may all begin to diffuse eastward.

Washington certainly doesn’t want that to happen.

Hope I made you think,

Ananyaa

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This was a piece I wrote back when Warsh just stepped into the role of Fed chair. I used to be a big advocate for central bank transparency, but after reading arguments from Gillian Tett and Kevin Warsh himself, I found myself warming to his quieter approach.

I thought it would be interesting to revisit this following his tight-lipped stance at the second Fed meeting. Although Warsh reiterated his commitment to the inflation target, he ultimately took no action - fuelling debate over whether he expects rising long-term bond yields to do the heavy lifting for him

Does a need for the pivot to opacity still hold? Or does it distort the relationship between Fed policy and the market’s reaction - weakening the overall transmission to the real economy?

I hope you enjoy, and am curious to know your thoughts - would also appreciate an explanation for the question above if possible!

A “fragmented decade” has made central banks the “The Only Game in Town”1 - a phrase to describe how their role has expanded beyond their original mandate to essentially control the entire economy. Political timidity paired with economic uncertainty has led to monetary policy being exerted and manipulated to the point of distortion. As this trend persisted, interest rates became the default solution to all macroeconomic problems, leaving the central bank’s primary role of maintaining price stability forgotten under this new, omnipotent command.

This was a point raised by François Villeroy de Galhau2 in his special report for The Economist - yet another testament to the institutions’ paramount role in navigating the tumultuous modern global economy. However, beyond these structural nuances; central banking difficulties have recently taken centre stage for a far more obvious reason.

The Trump administration’s second term has seen the Federal Reserve fall victim to incessant lobbying, abuse and threats from a president championing lower interest rates. Former Chair Jerome Powell faced direct insult - including “numbskull” and “moron” - with digitalisation publicising what became a prolonged and ugly affair.

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This threat to institutional independence, the deterioration of relations with government, and the aggressive disparagement of the Chair have triggered great concern regarding the central bank’s credibility. For an institution of such global and domestic economic significance, an erosion of trust carries profound consequences.

This disruption only heightens a stark period of transition: Powell’s term as Chair has ended and he has been replaced by Kevin Warsh, a Trump-endorsed pick. Following his departure, Powell voiced concern for this forthcoming phase, warning that the “Fed is Undergoing a Stress Test” - a direct reference to the nascent threat of political lobbying.

The metaphor of a “Stress Test”3 is highly deliberate. It implies Powell views current challenges as a baseline assessment of the institution’s credibility and operational capacity, providing critical data regarding the institution’s resilience to withstand more difficult times

Crucially, this is a transitory period on two fronts. With US inflation pushed to a three-year high of 3.8% in April, expectation of this figure to rise to 4.2% in May, the data lacks any previous ambiguity: it points to future rate hikes, rather than cuts.

Whilst geopolitical tension certainly plays a role, core CPI data - excluding volatile food and energy prices - illustrates that rising prices cannot all be attributed to the war. This is a long-term trend, rather than short-term blip.

Yet, downward lobbying from the president continues. This is no longer just a hypothetical “stress test”; the difficult times have arrived.

There is no doubt Kevin Warsh faces monumental choices ahead, but his most significant decisions have already begun.

Historically, the expansion of central banks’ role has come with an expansion in their transparency. Increased communication, economic forecasting and public airing of policy discussion has made internal happenings an important variable and an open source of information.

This has generally been viewed positively; higher transparency enables greater coordination between governments and central banks, increasing the effectiveness of economic management as a shared responsibility.

Furthermore, transparency harnesses public expectation as a powerful policy tool; an alternative to the manipulation of hard monetary variables. This was heavily utilised under Powell, and remains a favoured approach of major institutions like the Bank of England, highlighting the potency of expectation as an economic instrument.

However, despite the proven merits of openness, Warsh has strongly signalled a reduction in transparency. He has introduced actionable plans to cut back on forward guidance, omit easing/tightening biases, and eliminate the Fed’s ‘dot plot’ - a quarterly chart that illustrates where top policymakers expect short-term interest rates to be in the short and long term.

At first, this seems like a step backward. Yet, in such a fraught environment, his rationale makes perfect sense. When aggressive lobbying sparks contention and internal dissent runs high, co-operation dissolves into conflict and guidance morphs into uncertainty.

Transparency was once crucial to the role of Central Banks as “The Only Game in Town”. However, we have entered an environment where the strengths of openness have become its greatest vulnerabilities. This means a strategic retreat may well be a move for the better.

The financial world waits with anticipation for Warsh’s decisions on interest rates. However, in this pivot to opacity, he has already made his most consequential move. It is the first step toward restoring damaged institutional credibility and undoing the exertion that has stretched central banks for far too long.

The Fed’s most powerful statement may well be its silence.

Hope I made you think,

Ananyaa

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Questions, ideas or challenges? Please comment down below - I’d love to engage!

This piece was written before strikes were paused in late July. However, the argument still holds. Perhaps this is a sign that the exogenous pain is ‘spilling over’, or even beginning to turn endogenous - and if so, an end to the conflict may be in sight. Or it may be another futile attempt at progression. When the only certainty is its absence, we are forced to rely on time to tell…

The illusion of a stalemate

On 17th June, the US and Iran commenced a shaky ceasefire marked by a 14-point memorandum of understanding (MOU). The MOU presented optimism: in setting out plans for continued talks over various pressing issues, the implementation of minor agreements - such as Iran arranging for the safe passage of ships through Hormuz, the US lifting sanctions on Iranian oil exports - would hopefully build towards negotiating a final deal, bringing the war to formal end within 60 days of the MOU signing.

Any progress towards ending the conflict was positive; but regarding actual outcomes, none occurred. At the MOU, the US and Iran occupied essentially their pre-war positions, just substantially more battered. After months of painful war, Washington achieving at best a return to equilibrium suggested that the ‘ceasefire’ was a recognition of stalemate. Neither side had incentive to shift the equilibrium since forcing concessions would signal weakness for the other to exploit. Moving first meant defeat; thus neither took the step.

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However, the stalemate argument suggests that further development is impossible. The conflict’s resumption in July proved this wrong: progress could indeed be made - just in the wrong direction. And in falsifying the stalemate, the ceasefire’s deterioration reveals how the equilibrium is shifting, rather than stable

The War Reignited

In early July, Iran struck three commercial vessels that bypassed their pre-approved route - the US responded with their own strikes, and the conflict began once more.

The war has reignited fundamentally because the conflict of interest is too large and the stakes are too high for the steady state to remain acceptable. The US wants two things: the Strait of Hormuz open as normal without tolls, and a halt to the Iran’s nuclear programme - essentially a return to the pre-war equilibrium as discussed.

For Iran, the war has moved beyond a question of nuclear power to one of sovereign power. As a regime insider stated: “The nuclear issue can be negotiated. Hormuz cannot.”

Being attacked by nations with far greater military strength and global influence forced Iran to respond in the only way they could; weaponising Hormuz. Facing a future of increased adversity and economic warfare, it would be foolish for them to rescind this powerful source of leverage - its only real asset against rivals that hold many.

America wants to reverse the damage of the war; for Iran, there is no point in doing so. After everything, Iran has developed a high tolerance for pain: what is a little more if it means holding onto a strategic goldmine that grants previously unattainable authority?

This dynamic highlights the distinction between endogenous pain (factors within a system) and exogenous pain (factors outside it). For America, while pain exists, the nation itself is not directly imperilled: its citizens, homes, and infrastructure remain safe, while US bases in the Middle East bear the devastation. America’s real pain lies in diminishing power, military capacity, and wasteful expenditure - all of which can absorb further damage given their scale.

Iran, meanwhile, has nothing left to lose; enduring pain matters less than retaining command of the Strait. Consequently, endogenous pain fails to deter either side, leaving exogenous pain as the decisive factor in determining the conflict’s trajectory.

Exogenous Pain: The Global Impact

Whilst the pain internal to the war’s actors holds minimal consequence, the conflict’s external pain has been acute. Damaged or shut world scale facilities have severely threatened the supply of critical inputs like LNG, sulphur and helium. This causes immense disruption to energy, semiconductor manufacturing, petrochemical complexes, and fertiliser supply - the latter of which has raised global food prices at an accelerating rate.

Disruption to key industrial inputs will contribute negatively to global growth: an OECD report in mid-March suggested that global GDP growth could slow from 2.9% to 2.6% in 2026 and from 3.0% to 2.5% in 2027. By mid-April, the IMF was suggesting that a prolonged conflict could lead to a global recession.

Outside of the Middle East, Asian economies have suffered the most due to their reliance on imports of gulf energy, industrial supplies and remittances. China, initially cushioned by high levels of energy stockpiles and Russian imports, is set to struggle if global growth is hit as expected, given the country’s dependence on exports as an economic driver

Wide ranging cost and price rises impact inflationary expectations, indicating an upward long term interest trajectory - a problem for the UK and Europe, where this may tip weak growth into recession.

And, of course, the economies of the Gulf have been devastated. The war’s destruction extends beyond fossil fuel and industrial bases to the service sector: air travel, tourism, property, and hospitality have suffered severe institutional and credibility damage - not to mention the immense human cost of prolonged conflict.

A fluctuating oil price represents the biggest problem of all : uncertainty. The war has brought chaos without a timeline. Calls are made and rescinded. Prices rise and fall. Meanwhile, confidence dampens, business slows and the economy halts, afraid to make decisions whilst the ground is constantly moving.

Moving forward

Looking internally reveals that the conflict’s progress is either nonexistent or backward. This leaves external factors as forces most likely to disrupt the inertia.

If global pain becomes crippling, America may be forced to concede control of the Strait, ending the war to prevent further damage. Equally, Washington may choose ignorance - a plausible scenario given its recent shift from benevolent leader to aggressive exploiter. For Tehran, lacking strong allies in the Gulf and beyond, it is hard to see any external pain that would incentivise concession.

This means we must look to when exogenous pain becomes endogenous. If the global economy deteriorates to the point that the warring nations simply cannot continue, the conflict may finally see positive progress.

The question is, who will feel it first? Everything points to Iran; but the country has proven it can withstand a lot of pain. America, on the other hand, has never really had to.

The war is stuck in a dynamic equilibrium: asymmetries are shifting, but the position remains the same. And when a system is stuck, we must look beyond it to see the full picture; the world can only hope that the diffusion of pain outweighs the pull of pride.

Hope I made you think,

Ananyaa

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Innovation in China

China has long been the world’s dominant manufacturer; after all, it is production prowess and an export oriented strategy that has driven the country’s exponential growth. However, this story is evolving: an expertise in electric vehicles, robotics, renewable technology and AI has cemented China’s position as a global leader in high-technology sectors. This position has been reinforced through the country’s rare combination of manufacturing capacity and technological capability, allowing it to innovate at a scale, speed and efficiency that others simply cannot. It is perhaps the only true rival to the US on an innovation front - especially in AI, where the two are locked in a race so fast it has reduced the rest of the world to mere spectators.

A large part of this successful transition has been the active role of the state. Public funding - in the form of industrial subsidies - has accelerated the development of these high-tech sectors. For example, government funds invested an estimated $184 billion into AI firms between 2000 and 2023, illustrating the reliance on state-backed channels over private capital - which has been at the centre of America’s AI boom.

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Beyond financial assistance, the Chinese government has shaped this trajectory through its intense drive to build and reinforce the nation’s technological strength. From the President “championing high-tech manufacturing”, to limits on offshore investment - an attempt to deploy private capital domestically - a top-down strategy has been imperative in guiding the shift towards advanced industries. This push is driven by a desire to solidify the nation’s already powerful standing, allowing it to transcend the ‘The World’s Factory’ legacy that initially propelled it onto the global stage.

However, in the pursuit of innovative excellence, the country’s attention has been diverted from an economy that is in dire need of it.

The Economic Reality

China is known for treating GDP as a goal to meet, rather than an indicator to measure. Thus, this year’s decision to set an interval of 4.5 - 5% was already surprising; a figure that failed to meet the target was an even bigger surprise. Though given at 4.3%, independent estimates put China’s growth in real terms closer to zero. As China’s share of global GDP is falling, and its growth rate drops below the rest of the world’s, the numbers evidence a reality that is often masked by the narrative of economic strength that has developed around the country.

This performance is a reflection of a number of economic difficulties. China has been suffering from a severe housing market downturn since 2021, with the crisis estimated to have reduced annual real GDP growth per year by 2% in 2024 and 2025, according to Goldman Sachs - a consequence of prolonged negative wealth effects and damaged consumer confidence.

China also faces one of the world’s fastest growing ageing populations, which drags on economic growth through shrinking the workforce and lowering labour supply. Whilst automation could ameliorate this demographic pressure, it also poses a threat to broader development. Despite its technological strength, China remains a middle income country with a large rural population that largely fails to benefit from the progress taking place in big cities.

A natural consequence is slowing consumer spending; taken all together, this picture evidences how the average Chinese citizen is struggling in a way concealed by the country’s impressive innovative capacity.

The Dual Engine

The external picture of China’s economy differs from the internal reality because of the dual engine driving it: exports and AI.

Last year, China hit a record $1trn trade surplus, a source of tension amongst trading partners. However, the value of its net trade balance is actually falling this year as a consequence of rising imports.

Whilst true that imports have jumped 36%, overall exports still rose by 27% year-on-year in June, highlighting the prominent role they play in China’s growth.

A rising share of imports typically signals a booming domestic economy and rising living standards; as citizens consume more foreign goods, it reflects an overall increase in purchasing power. But, this doesn’t hold in the case of China, where the change in imports is a result of the dual engine’s second arm: AI.

The world’s largest exporter has also become its second largest importer, as a need for chips boosts trade in the opposite direction. For example, imports of integrated circuits were up 70% year on year in May. Driven partly by rising semiconductor prices, this surge demonstrates that the shift is a function of rising market value alongside actual trade volume.

China has crafted a formidable reputation through its preeminence in these areas. However, most interesting is the relationship between the two: net exports now account for a third of a country’s growth, and this has been driven by mostly AI-related goods. The weak domestic economy is being propped up by this dual engine, foreshadowing China’s vulnerability if either was to sputter.

In the State’s Hands

As established, the changing trade balance is not benefiting the average Chinese consumer, whilst the expected boost to China from AI-driven productivity is set to be a third of a percentage point by 2030. Therefore, an organic revival of the domestic economy is unlikely if exports and AI remain the drivers of the country’s growth.

As a centrally planned economy that is notoriously authoritarian, the outcomes for China can largely be influenced by the state. The current situation urges fiscal and monetary stimulus, and substantial progress could be made if done with intent and care. However, given the state’s priorities, this seems unlikely in the short-term.

Interest rates are already low; reducing them further weakens China as an investment destination, when the state is actively using capital controls to do the opposite. On paper, rising tax revenues suggest the fiscal position is actually moving towards austerity. And whilst rising public spending on social security seems promising, some thought reveals that this is a mechanical response to the demands of an ageing population - it is treating the symptom, rather than the cause.

If action is not taken, China is set to face a domestic demand deficiency that technological progress and delayed stimulus will struggle to mend; the economy operates to serve the world, whilst the people within it are neglected.

There is no doubt that China is an innovative superpower; but it is ceasing to be an economic one.

Hope I made you think,

Ananyaa

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Questions, ideas or challenges? Please comment down below - I’d love to engage!

With minimal growth, declining total factor productivity and diminishing international competitiveness, it is no secret that the UK has struggled post-Brexit.

Compared to its peers, the country’s lagging GDP growth and soaring inflation signal a deterioration of both absolute and relative economic position:

Whilst recent years have been trying for the global economy, the UK’s substandard performance is a consequence of domestic woes to match the external ones.

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The nation’s penchant for “Fairytale Economics” has played a large role in this. An apt term, it illustrates the unrealistic, unachievable nature of the goals championed by successive governments. Perhaps the best example is the chaotic mix of policies under the most recent administration, as discussed in my piece ‘Britain’s search For Relevance’:

From environmental stewardship, to building robust defensive capabilities, being a benevolent welfare provider to providing a lucrative low tax environment, the country wishes to achieve economic excellence on all fronts,“behaving as though it is wealthier, faster-growing and more influential than it is.”

A desire to project economic dynamism ultimately led to an incoherent, conflicting agenda that inhibited the kickstart to growth the party had promised. The biggest failure has been the excess of ambition and the lack of prioritisation; a more simplistic, yet concentrated policy set would have generated far more in real economic impact.

Furthermore, it has also been an unstable period politically. From Starmer’s ‘Mandelson Scandal’ to rising populism, the disarray continues as Britain approaches its sixth Prime Minister in ten years. Whilst even the most impressive countries have bouts of economic struggles, such political tumult is highly unusual for a major power - and has exacerbated the country’s fiscal and monetary challenges. How can any tangible progress be made under such capricious leadership?

The Difficulties of Devolution

In an essentially uncontested path to the premiership, Burnham is set to begin the role under great expectation. And, to his credit, he already seems to have priorities when it comes to policy.

He is a major proponent of devolution: giving regional authorities increased fiscal power, which is currently completely held in the capital. In theory, the measure aims to equalise growth across the country, as regions could deploy fiscal policy as needed to meet their specific challenges, opposed to having to comply with national policy that may not be appropriate for local conditions.

However, in practice, the argument can quickly fall apart. The measure is only effective if regional governments have the capacity to fully utilise this new fiscal authority. For example, a regional government may want to invest in local infrastructure; but does bureaucracy make it feasible to do so? Are there willing and available private contractors? Can they manage the fiscal burden?

There are many more considerations that multiply depending on the premise and scale of fiscal deployment. Friction - which is highly likely - at any point, will result in inefficiencies and misallocation, as this attempt to better distribute the UK’s growth may result in an erosion of existing growth instead; of which there isn’t much to spare. Given that such a measure is unprecedented in the UK, the question remains whether the country is actually equipped for decentralisation to be effective.

Furthermore, devolution is designed to target regional inequality through a distribution, rather than a production, of growth. If Burnham chooses to push this, it suggests he sees the concentration of growth - rather than growth itself - as the core issue.

However, regional inequality in the UK has actually remained relatively stable. And, it is also interesting that London aside, all other areas are fairly similar in terms of real gross value added per head, illustrating how the inequality is not necessarily amongst regions, but rather between London and the rest.

When most of the UK’s growth is centred in London, is there any real benefit to distributing it right now, when most of the little we have may either be lost in the inefficiencies of the process, or take decades to materialise?

Achieving Growth over Distributing it

Burnham needs to shift his current focus from regional disparity to generating meaningful economic progress.

There are three key areas where measures should be taken:

1. Innovation

The most important factor driving sustained and meaningful growth is innovation and its adoption. Whilst Burhham has pledged to make the UK “the world’s leading innovation nation”, there is little direction on how he plans to do this. Uncertain strategy on this front risks repeating Starmer’s mistakes.

Rather than a misguided push into various and novel areas, existing ones should be developed further. The UK is a pioneer in quantum technology; the global magnetism of the King’s Cross AI hub is only growing; the country dominates the European Venture Capital market. Innovative potential in the country is already present - focused policy could be a catalyst.

2. Pushing Private Sector Investment

A persistent challenge for Britain is scaling start-ups domestically. Boosting private sector investment offers a solution that would also drive organic growth. Crucially, the government achieve this without straining the public debt burden; doing so would trigger higher interest rates and risk crowding out private capital which would have a paradoxical effect.

This leaves deregulation and reducing red tape as the most viable immediate response. Vague action would do little to revive the economy; but if done strategically and carefully, with innovation kept in mind, there is room for great positive impact.

3. Strengthening International Ties

We are past the point where rejoining the EU yields significant benefit. In fact, regulatory change and adherence would impose a greater burden on our companies, damaging the business sector in tow. However, moving closer to the EU is a strategy with mutual long-term return, as increased trade, cooperative R&D and a pooling of resources and know-how allows each side to amplify strengths and supplement weaknesses.

More broadly, modern geopolitical tensions means reinforcing transnational relationships has become an even more important strategy. This is especially true for the UK which, despite its status, remains a small island nation, and has seen a major ally turn unreliable.

A positive outlook

The UK is forecast to be the fastest growing major European economy over the next two years, and it is the only G7 country - bar the US - to have its growth forecast upgraded1, a positive outlook following some difficult times.

Though devolution may not be the right strategy at present, Burnham’s clarity on the matter is promising. It suggests an ability to make the impactful, focussed decisions his predecessor could not.

If this can be channeled effectively, there is real potential for the UK economy to thrive, shedding the political and economic failures of the past decade

A new era is in sight. Will Burnham be able to see it through?

Hope I made you think,

Ananyaa

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An AI Sovereign Wealth Fund

Recently, Sam Altman proposed handing a 5% stake in the company to the Trump administration as the first step in distributing the wealth to be generated by AI amongst the American public. The idea is that other leading technology firms would follow suit, with the administration creating a sovereign wealth fund from the holdings. Money from the fund will be invested into financial markets, with the dividends then shared amongst the general population.

Whilst an honourable proposition, questions remain regarding the effectiveness of such a programme. It seems unlikely that each person will receive an income proportional to the aggregate riches AI will generate, meaning the inequality persists.

For the transfer to be meaningful, it would require co-operation on a similar, if not larger, scale from the other technology companies; something they may be unwilling to do, especially if the contribution rises from 5% and the return from huge investments are taking time to materialise.

The alternative may be to tax AI company profits. Public unrest and an extreme imbalance may compel it, but it still remains unfavourable for governments to pursue. Threatening the progress of a sector with growing political clout and global influence is a difficult, and risks ruining the goodwill that currently enables such altruistic suggestions.

Practicality aside, the fact such an idea has been raised seriously speaks volumes; especially when coming from a pioneer of the industry. It is a clear recognition that without direct intervention, the gains of AI will inevitably concentrate and divergence will ensue.

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However, this remains a discussion internal to America; yet to be heard elsewhere. Operating at the technology’s frontier, the US is already well-positioned to maximise the public benefits of the AI transition. Most nations are not so fortunate.

Therefore, what about the disparity AI may generate on a global level?

An AI-amplified Global Disparity

In their 2021 Paper, Korinek and Stiglitz examine the potential disproportionate negative impact of AI on developing countries, a result of the both ‘labour saving’ and ‘capital saving’ technological progress the technology is set to drive:

Labour Saving Technological Progress

This occurs when technology reduces the demand for human labour at a faster rate than increased productivity generates demand for it. This hits developing countries especially hard, due to the comparative advantage they hold in cheap, unskilled labour. If AI-enabled automation reduces worldwide demand for labour, their advantage will quickly lose value.

Capital Saving Technological Progress

This allows producers to generate more output using fewer natural resources. It involves two competing forces:

• The productivity effect - world output rises because resource constraints are relaxed

• Displacement effect - relative share of income earned by natural resources declines

An innovation is resource saving if the displacement effect outweighs the productivity effect. For developing countries that rely on natural resource exports, this can lead to a deterioration in their terms of trade, potentially making them poorer in absolute terms despite a wealthier global economy. This is especially true given how AI is changing the nature of capital and resources being demanded.

If the progress enabled by AI erodes the need for both labour and natural capital at a faster rate that increased productivity generates demand for them, it fundamentally disrupts the comparative advantage held by emerging economies.

Modifying a natural competitive edge to fit a changing environment is difficult for any nation; especially for those that physically and financially lack the means to do so. This indicates a period of economic reversal, as developing countries struggle to adapt to a globalised world that doesn’t necessarily require them in the chain, threatening their ability to sustain economic progress and ‘catch-up’ with the developed world that is simultaneously benefiting from the technological progress.

Whilst the situation for developed countries is not so dire, the implications for relative economic standing reveal another dimension of the widening disparity.

The Concentration of AI development

The principal reason why an equitable, global diffusion of AI’s potential gains is so difficult is because the technology’s development is essentially harboured in two locations: the US and China. And within these countries, the development is concentrated further within a few ‘superstar industries and companies’ ; the asymmetry that motivates proposals such as the sovereign wealth fund.

As suggested by Korinek and Stiglitz:

“There is a risk that those countries that lead in the advancement in AI may become ‘superstar countries’, reaping all the rents associated with the development of AI. The rest of the world, in particular developing and emerging economies may be left behind, with the monopolisation of knowledge being an impediment to the catch-up process.”

Whilst the ‘monopolisation of knowledge’ is a valid concern, equally pressing is a lack of infrastructure and capacity to actually use the ‘knowledge’ once it trickles down.

If nations lack the necessary physical and social frameworks to effectively integrate the technology into their existing economic systems, the resulting costs and frictions contribute to development lags, further widening the gap between countries that have adaptive capacity and those that don’t.

Reactive is the New Proactive

The impact of technological change is highly dependent on pace and scale. As recursive self-improvement becomes a reality and an unprecedented level of investment fuels innovation, AI development is bound for exponential, rather than linear growth, with the gap between countries unfolding in a similar manner.

Domestic policies are futile when the problem is between, rather than within, borders. The utopian solution would be something like a supranational level technology and wealth transfer scheme. But, the multilateral governance and co-operation required for this to be possible is a distant dream.

Being locked out of the frontier and reliant on diffusion yields a natural conclusion for non ‘superstar countries’: the need to hone adoption-led innovation. Adapting technologies to suit domestic needs is a major step towards benefiting, rather than losing out from developments in AI. Prioritising this is crucial to building the adaptive capacity needed to thrive in this era.

The disruption to the comparative advantage of developing countries is a more difficult issue. However, the time to start considering it is now, before the impact has fully materialised. Global support to help these countries begin to shift to less exposed sectors would go a long way; as would a period of trade guarantees and preferential agreements, easing the friction as they attempt to adapt.

Building economic resilience and absorptive potential is a far better approach to distributing the gains from AI; perhaps there is a lesson to be learnt here for the US and its cushy sovereign wealth fund.

Hope I made you think,

Ananyaa

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This is an incredibly stark and interesting duality; I hope you enjoy reading these pieces as much as I enjoyed writing them.

Last week explored the darker side of the AI revolution; how cognitive offloading erodes our critical thinking, damages our absorptive capacity, and threatens to accelerate a socio-economic divergence between those able to capture the gains of the technology, and those left behind. Yet, this is only half the story. Whilst AI has the potential to inhibit human progress, it simultaneously holds the power to spectacularly amplify it.

Potential of AI for Innovation

But, equally signifiant is the technology’s potential to amplify the process.

Aghion and Howitt’s innovation model1 demonstrates that economic growth stems from a continuous cycle of quality improvements, where new technologies replace old ones by building on prior knowledge. Essentially, each innovation “stands on the shoulders of giants”.

The collective brain model of innovation extends this concept further. It proposes that each individual possesses a “cultural brain” shaped by evolution to acquire socially transmitted, adaptive information. When individual minds network together, they form a collective brain: a society-level accumulation of knowledge. This shared foundation of past learning fuels the very innovation that shapes future knowledge.

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According to this framework, innovation stems from three primary sources:

1. Serendipity - Inadvertent, novel ideas reached through accidental or lucky discoveries.

2. Recombination - Combining existing tools and concepts in different ways to solve old problems and generate new ones

3. Incremental improvement - The marginal, continuous refinement of existing ideas and technologies that accumulates over time.

Concurrently, it proposes three factors that dictate the ‘rate of innovation’ - how rapidly these ideas emerge and accumulate:

1. Sociality - Larger, diverse, and well-connected populations possess immense innovation potential because more cultural brains contribute to the collective pool.

2. Transmission fidelity - the accuracy of knowledge transmission. High fidelity preserves past knowledge, creating a solid foundation that accelerates new progress

3. Cultural Variance - A diversity of ideas, models, practise, combined with a willingness to deviate from the norm, both crucial for generating novel ideas.

As a tool that aggregates vast repositories of human knowledge, AI offers a powerful opportunity to enhance this ecosystem

First, we can consider how we can use it to refine the three sources of innovation in the cultural brain:

Serendipity: AI can introduce links across subjects, facilitating cross discipline exploration and the unlocking novel discovery.

Recombination: The technology allows us to manipulate current knowledge in entirely new ways, inspiring fresh approaches to old problems, whilst also producing new challenges to solve.

Incremental improvement - AI expedites the rate of improvement by drastically accelerating the rate at which research, development and verification are conducted.

The refinement extends to the determinants of the “rate of innovation” as well:

1. Sociality - by democratising knowledge, AI enriches cultural brains globally, fostering an expansion in curiosity, knowledge and ideas. Consequently, when these minds connect, their discourse is amplified.

2. Transmission fidelity - AI has the potential to function as a vast digital ledger, preserving an accurate, global account of information, whilst reducing knowledge degradation over time.2

3. Cultural Variance - As an indispensable research tool, AI can empower thinkers who wish to deviate from the norm, providing the data and analytical support they might otherwise lack from peers or traditional institutions.

And, looking at the recent innovations AI has made possible, its clear that these refinements are materialising from theory into reality.

An AI-augmented humanity

How society and AI will ultimately integrate remains highly uncertain. However, analysing innovation reveals a stark duality: the technology has simultaneous potential to devastatingly inhibit the process or incredibly amplify it. The direction we take is highly dependent on human agency - our ability to resist cognitive decline and truly harness AI’s power.

The solution lies in guided integration from the ground up, introducing AI from a young age and structuring learning around it. As the technology evolves, its potential to elevate learning grows exponentially. By leveraging the cognitive plasticity of youth, using AI as a mental enhancer can become second nature. In this framework, cognitive offloading becomes productive rather than reductive, stimulating inspiration and discovery rather than dependency.

This approach ingrains a foundational principle: AI is a tool to inspire, not to exploit - to elevate the mind, not nullify it. And in cultivating this mindset, we do not just prepare the next generation of innovators; we equip the future population with the capability to effectively adopt the very technologies they generate.

The potential of an AI-augmented humanity is immense. We must ensure we possess the collective capacity to achieve it.

Hope I made you think,

Ananyaa

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This is an incredibly stark and interesting duality; I hope you enjoy reading these pieces as much as I enjoyed writing them.

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Cognitive Decline and Offloading

As GPT models expand in capability, their impact on human intelligence becomes an increasingly urgent question. Concerns regarding cognitive deterioration are highly justified. A study from the Swiss Business School has found that increased reliance on artificial intelligence tools is directly correlates with diminished critical thinking abilities1 - a conclusion echoed across numerous recent studies.

This trend is reflected in real-world data. According to the NCES2, the percentage of U.S. adults (ages 16 to 65) performing at the lowest literacy level jumped from 19% in 2017 to 28% in 2023, while children’s reading skills have declined annually since the pandemic.

Furthermore, substantial evidence suggests a reversal of “The Flynn Effect” - the historical trend of global IQ scores rising over successive generations due to environmental factors. However, the Programme for International Student Assessment (PISA) reports an unprecedented drop in maths, reading and science scores worldwide, alongside shortening attention spans and weaker critical thinking.

This sudden disruption points toward an external catalyst. Taken together, is clear the data indicates that AI advancement principal role in this population wide cognitive decline.

At the root of this issue is cognitive offloading - delegating cognitive tasks to external systems. Inherently, this process is positive. Outsourcing mundane tasks to tools like calculators enhances productivity and performance, allowing us to concentrate on the creativity and deep thought required for complex problem-solving.

However, AI-driven offloading is fundamentally different. By allowing us to delegate virtually any cognitive task - from reading to writing to mathematics to coding - what began as a helpful shortcut shifts into an automatic dependence.

This is dangerous. Because, before long, we begin to offload the act of thinking itself. And in eroding our ability to think, we erode our ability to learn - a loss with profound economic consequences.

Innovation and Human Progress

Robust research underscores the significance of cognitive skills for both innovation - the generation of new technologies - and diffusion - the process of adapting to and acquiring new technologies.

Whilst the the first point is intuitive, the second is particularly interesting: a population’s absorptive capacity, or its ability to adopt new technology, is highly determined by cognitive capability. Thus, a lack of cognitive capability impedes the process of building absorptive capacity.

This relationship is crucial for AI as an innovation, where ensuring an equitable and impactful diffusion of the technology’s gains is already a pressing concern.

If AI causes a deterioration in the general population’s cognitive skills, it directly inhibits the public’s ability to adopt the technology and maximise its benefits. Consequently, this will accelerate a socio-economic divergence on an individual, firm, and national level, as those capable of leveraging AI pull exponentially ahead of those left behind.

The long-term implications of this decline are severe; it is the combination of generation of technological advancement and its sustained adoption that drives sustained economic growth.3 Even if a collective of brilliant minds continues to drive innovation, society’s aggregate progress will be significantly paralysed if the general population cannot implement those findings - whether because the innovations become too niche to be practical, or because the cognitive friction of adoption becomes too great.

If the cognitive decline induced by AI leaves us unable to adopt the world we are building, the future may be one of stagnation and inequality. But, intellectual decline - and its consequences - does not have to be an inevitability. Next week, in Part Two, we will explore the foundational models of human progress, and will reveal how AI could be a powerful catalyst for innovation.

Hope I made you think,

Ananyaa

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A “fragmented decade” has made central banks the “The Only Game in Town”1 - a phrase to describe how their role has expanded beyond their original mandate to essentially control the entire economy. Political timidity paired with economic uncertainty has led to monetary policy being exerted and manipulated to the point of distortion. As this trend persisted, interest rates became the default solution to all macroeconomic problems, leaving the central bank’s primary role of maintaining price stability forgotten under this new, omnipotent command.

This was a point raised by François Villeroy de Galhau2 in his special report for The Economist - yet another testament to the institutions’ paramount role in navigating the tumultuous modern global economy. However, beyond these structural nuances; central banking difficulties have recently taken centre stage for a far more obvious reason.

The Trump administration’s second term has seen the Federal Reserve fall victim to incessant lobbying, abuse and threats from a president championing lower interest rates. Former Chair Jerome Powell faced direct insult - including “numbskull” and “moron” - with digitalisation publicising what became a prolonged and ugly affair.

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This threat to institutional independence, the deterioration of relations with government, and the aggressive disparagement of the Chair have triggered great concern regarding the central bank’s credibility. For an institution of such global and domestic economic significance, an erosion of trust carries profound consequences.

This disruption only heightens a stark period of transition: Powell’s term as Chair has ended and he has been replaced by Kevin Warsh, a Trump-endorsed pick. Following his departure, Powell voiced concern for this forthcoming phase, warning that the “Fed is Undergoing a Stress Test” - a direct reference to the nascent threat of political lobbying.

The metaphor of a “Stress Test”3 is highly deliberate. It implies Powell views current challenges as a baseline assessment of the institution’s credibility and operational capacity, providing critical data regarding the institution’s resilience to withstand more difficult times

Crucially, this is a transitory period on two fronts. With US inflation pushed to a three-year high of 3.8% in April, expectation of this figure to rise to 4.2% in May, the data lacks any previous ambiguity: it points to future rate hikes, rather than cuts.

Whilst geopolitical tension certainly plays a role, core CPI data - excluding volatile food and energy prices - illustrates that rising prices cannot all be attributed to the war. This is a long-term trend, rather than short-term blip.

Yet, downward lobbying from the president continues. This is no longer just a hypothetical “stress test”; the difficult times have arrived.

There is no doubt Kevin Warsh faces monumental choices ahead, but his most significant decisions have already begun.

Historically, the expansion of central banks’ role has come with an expansion in their transparency. Increased communication, economic forecasting and public airing of policy discussion has made internal happenings an important variable and an open source of information.

This has generally been viewed positively; higher transparency enables greater coordination between governments and central banks, increasing the effectiveness of economic management as a shared responsibility.

Furthermore, transparency harnesses public expectation as a powerful policy tool; an alternative to the manipulation of hard monetary variables. This was heavily utilised under Powell, and remains a favoured approach of major institutions like the Bank of England, highlighting the potency of expectation as an economic instrument.

However, despite the proven merits of openness, Warsh has strongly signalled a reduction in transparency. He has introduced actionable plans to cut back on forward guidance, omit easing/tightening biases, and eliminate the Fed’s ‘dot plot’ - a quarterly chart that illustrates where top policymakers expect short-term interest rates to be in the short and long term.

At first, this seems like a step backward. Yet, in such a fraught environment, his rationale makes perfect sense. When aggressive lobbying sparks contention and internal dissent runs high, co-operation dissolves into conflict and guidance morphs into uncertainty.

Transparency was once crucial to the role of Central Banks as “The Only Game in Town”. However, we have entered an environment where the strengths of openness have become its greatest vulnerabilities. This means a strategic retreat may well be a move for the better.

The financial world waits with anticipation for Warsh’s decisions on interest rates. However, in this pivot to opacity, he has already made his most consequential move. It is the first step toward restoring damaged institutional credibility and undoing the exertion that has stretched central banks for far too long.

The Fed’s most powerful statement may well be its silence.

Hope I made you think,

Ananyaa

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“Smart Tech is making War a Dumber Choice.”

This provocative headline from last week’s Economist highlights a profound truth: the nature of modern warfare has been fundamentally transformed. There are two critical developments behind this.

First is the advancement in drone technology. Versatile capability at a minimal price tag has granted an unanticipated position of strength to those that invested in them. Given the low cost, it is smaller nations rather than superpowers that have maximised the potential of drones for war - applying brute force through sheer volume against the much more expensive, but limited, arsenals of their powerful aggressors.

The second development is the diffusion of precise targeting tools. Formerly a privilege enjoyed by the stronger militaries, the technology is now more accessible, making it much easier to defend against. Additionally, the ensuing wariness erodes the lethal value of these weapons: if it were to be used for a serious cause, the retaliation could be equally devastating. When aggression could yields severe harm for little progress, a stalemate on this front becomes.

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Multiple, distinct wars of choice have revealed that military might does not necessarily translate to swift victory. And while this levelling of the playing field has been a boon for weaker parties, it has also prolonged fighting and uncertainty - inevitably increasing aggregate death and destruction.

It has become clear that wars of choice can no longer be ended by choice.

The contemporary global order has long been underpinned by economic, rather than kinetic, warfare. This is because physical war - and the leverage of physical economic chokepoints1 - require high levels of expenditure, regulatory strain and deep international cooperation in order to be effective and sustainable.2

History illustrates that extension of military might is an inefficient method of coercion for major powers, essentially driving direct military conflict toward extinction.3

Pure economic warfare, however, is a far more powerful and feasible approach - at least for the select few capable of executing it.

The global economy relies on collective financial system where every critical node is governed by the US. Think of SWIFT, the CHIPS Act, and the absolute centrality of the dollar.

When the entire network is held by a single set of hands, multiple chokepoints can be squeezed: individually, simultaneously and with varying pressure. Methods can be adapted according to situation, target and desired outcome, providing an ease and flexibility that completely eludes physical war.

Furthermore, minimal cost and unilateral execution enable sustainability. Leveraging an invisible infrastructure is essentially costless, whilst singular control means action is not contingent on co-operation. Western cooperation is virtually assured anyway, as systemic dependency compels submission from even other great powers. The plausible threat of exploitation means no country would wish to defect or challenge this dangerous dominance.

Thus, the historical shift from kinetic to economic warfare is perfectly logical. So, why the return to physical conflict? Two answers come to mind.

1. The power of American economic leverage is diminishing

Years of aggressive sanctions and restrictions has forced their biggest victims to innovate. A chokepoint’s power is highly contingent on dependency; increased self-sufficiency and assertion have eroded American influence, bleeding the potency of their economic leverage. No amount of economic manipulation could deter Iran from continuing its nuclear programme, and sanctioning Russia has done little to resolve the war in Ukraine

2. America’s ambition is growing too large

Unchecked dominance paired with erratic leadership has transformed complacency into aggressive exploitation. Because nothing stands in Trump’s way, it seems that nothing can stand in America’s way. The resulting series of geopolitical shocks have met minimal global retaliation, reinforcing this behaviour and ultimately culminating in a large-scale war based on whim rather than reason.

But, as discussed, physical warfare has become even more onerous for large powers than it was before. This reality necessitates a reinforcement of economic chokepoints. Holding these assets when weaker opponents do not greatly amplifies their strategic potential, as they remain an advantage that “smart tech” cannot yet erode. If America were serious about this newfound ambition, the course of action would be to identify new nodes to squeeze, or manipulate the old ones in novel ways.

However, America is no longer the only one with chokepoints. And as geopolitical tensions reach new highs, reinforcing them is not a unique idea.

Crucially, a capsized dynamic has facilitated the leverage of physical economic chokepoints.4 The difficulty here arose from coordinating a global coalition against an individual rogue actor. But when it’s an individual actor weaponising a chokepoint against the global body, it becomes a unilateral action requiring neither consensus nor cooperation.

The only requirement is a desire for vengeance - which years of American exploitation has allowed to sufficiently accumulate.

In his book ‘Chokepoints’, Fisherman suggested that economic weaponisation has long existed, but its implications become truly dangerous in today’s hyper-globalised world.

As the present world turns inwards, the consequences are yet to be seen - but we can be rest assured that they will be equally grave.

Hope I made you think,

Ananyaa

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The divergence with the S&P 500 began in early 2023, and continues to grow as AI exuberance reaches new heights, optimism inflates price premiums, and returns expand in response. Over the past 5 years the Magnificent 71 group has provided a return of over 3x that of the benchmark index

Moving to the present, the picture is less exceptional.

What used to be outperformance of magnitudes has become a mild elevation. This can be attributed to two things:

1. The Surge In Capital Expenditure

The first is the surge in capital expenditure. Big Tech’s projected spending for 2026 is eye-watering. With individual hyperscaler spending hitting $140-200 billion, the massive scale fuels concerns about both its sustainability and corporate profitability - especially given the challenge to revenues from the slow commercialisation of AI.

Whilst recent earnings partly neutralised some of the capex damage, this doesn’t detract from the fact that capex is rising, rather than falling - dragging down future profits.

Share prices have not been immune, as the top infrastructure spenders2 lag behind the benchmark indexes they used to dominate.

However, it is important to note that these companies are essentially funding the infrastructure that the entire AI economy is going to benefit from. Economics teaches us that the private sector has no incentive to provide public goods, due to the free-rider problem. But in this case, the companies are left with no choice, as governments simply don’t have the money - nor the desire - to foot the bill.

The incentive to continue AI development far exceeds the short-term costs that come with its financing. But, projects with long-term potential at the sacrifice of short-term profit historically tend to weigh on stock performance.

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2. A Maturing AI Division

The second idea is more nuanced: the AI divisions of these companies are maturing. And given that speculative excitement can be the driver of record-breaking returns, the loss of this quality translates to a more muted market performance.

But, AI exuberance still exists. It has just diffused to a different sector.

Over the past two months, the Philadelphia Semiconductor Index, (which tracks 30 of the world’s biggest US-listed chip manufacturers), has gained over $5trn in market value.

In particular, Arm, AMD and Intel have done exceptionally well:

Nvidia, one of the biggest benefactors of the AI boom, has lagged behind its chip making peers, in an exemplification of the maturation argument.

Despite beating revenue expectations and raising its quarterly dividend from $0.01 to $0.25 per share, the company’s stock price actually slipped upon announcement. This “apathetic” response signals a growing consensus that the company has transitioned from exponential growth into a “more mature tech stock”. Consequently, excitement has shifted to newer players with higher market cap growth potential.

This is one example in a broader story. The Magnificent 7 is no longer looking so magnificent in comparison to the return being granted by the chip sector.

But that is not necessarily a bad thing.

The Distinction: Structural vs Cyclical

As the technology itself develops, the AI industry that underpins it must evolve in tandem. We have reached a point of transition: to continue the boom, the infrastructure needs to be built to support it.

As discussed, hyperscaler capital expenditure is actively funding the data centres and physical equipment “needed to power the AI era this year.” The consequent demand for hardware is being met by chip firms - the very mechanism propelling the rally.

Here, the distinction between ‘structural anchors’ and ‘cyclical players’ emerges.

The market has deemed Big Tech as structural to the AI industry.3 They are the ones at the forefront of the technology’s development, and so will remain at the centre through its evolution. Thus, in this transition from speculative to foundational, the positioning of these companies aligns more with sustained, long-term growth, even if expenditure concerns may lead to temporary fluctuations.

On the other hand, “cyclical players” refers to the firms in AI-adjacent industries that stand to profit or lose from the developments being led by the structural component of the industry.

Take chip stocks; share prices have surged on the back of the infrastructure build-out. Alternatively, look to software stocks, which plunged when the coding prowess of Anthropic’s latest models were revealed. Since the trajectory of these adjacent firms is highly dependent on external drivers, their speculative potential aligns more with the volatile, short-term movements characteristic of extreme gain and loss.

Fundamentally, these cyclical industries remain vulnerable, since their value is tied directly to said external drivers.

What happens if demand for chips dries up? If a new form of hardware is required for the next stage of infrastructure? If chips become obsolete at a faster rate than they can be replaced?

This uncertainty only acts to reinforce the fervour.

Transition through Integration

But, equally, it could be the case that there is sustained demand for the hardware produced by these chip firms; especially if they can adapt their products to meet the changing needs of the industry.

When this happens, the chip companies would have integrated into the AI industry, becoming structural anchors rather than just cyclical players.

The conclusion remains the same. They are unlikely to retain the speculative potential needed for outsized return. However, they will tend towards the steady, long-run growth akin to their Big Tech counterparts.

An expansion of the AI industry’s structural component will inevitably lead to new cyclical players. Whether they integrate and become structural, or sputter in the long run, depends on investor sentiment, the AI trajectory and the market environment their run takes place in.

Therefore, AI is here to stay. Exceptional returns may not be.

Hope I made you think,

Ananyaa

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May has been much anticipated, for reasons beyond the beginning of summer. Originally planned for April, the US-China summit finally took place, following its postponement due to the Iran War. The time in between saw the world wait with bated breath; the decision to wait suggested serious, consequential talks were to be held.

The promise of the summit was great for both sides, as each had their own agenda to pursue. For America, this meant balancing bilateral trade through China’s appetite for beef, beans and Boeings, while navigating the technology duel. For China, it meant reducing America’s inclination towards Taiwanese independence, and pushing for predictability in uncertain times.

And what was achieved? Nothing of significance - as correctly predicted by The Economist, which attributed this partly to the large number of conflicting factors involved.

But the more interesting proposal was the idea that each side was looking to decrease the other’s leverage, rather than increase their own. When both sides are playing wary defence, it is bound to be a long game: two lions circling, neither wanting to make the first move.

However, post-summit, it became clear that the lions were not just circling; they were preening, both presenting a dual projection to influence an immersed global audience: first, of each country’s individual standing, and second, of the overall relationship.

But if both sides are projecting, the entire structure is just an illusion. How could any concrete decision be made when there is no solid foundation?

The US and China claim there is mutual desire for the relationship to yield stability and prosperity. The lack of any agreement thus signals the difficulties the two countries are having in shedding the zero-sum mindset that has historically governed their relationship.

This reveals that the stalemate is not a first-mover dilemma; rather, neither side wants to be the first to back down, and risk their own carefully crafted image. Because in this case, projecting weakness is the same as handing over strength.

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Dissecting the elite political and economic control between these nations is insightful. However, focusing strictly on leadership discussions neglects a critical ground reality: the impact of “soft power” on public perception.

To understand the distinction between soft and hard power, look at the US. Its hard power lies in military might, economic sanctions, institutional leadership, while its soft power is contained in the global trust and influence the country commands. This reputation is vital; despite actions that suggest otherwise, US credibility preserves its status as “The Good Guy” - effectively a warped version of the Halo Effect that legitimises its use of hard power.

In my view, culture plays an under-appreciated role in shaping soft power. The cold, top-down nature of geopolitics can forget that humans form an essential part of the ecosystem too. And America has been one of the most successful exporters in this regard. Hollywood, suburban neighbourhoods, and McDonald’s aren’t just US hallmarks - they sell a vision, a dream that has captured many worldwide, and have bolstered the country’s global pull in a way hard power alone could never accomplish.

Thus, culture makes countries internationally relevant, which is powerful in such a globalised world. South Korea is a great modern example.

Transnational perception of one’s country is hugely influenced by the culture it has been able to export to the rest of the world. When done so extensively that it forms a key component of national pride and identity, the role of culture in amplifying the influence of soft power is clear.

But once that culture permeates to the point of distortion, its allure quickly fades. When a McDonald’s sits on every corner and television loses its idealism, few still desire "The American Dream" - simply because there is no longer reason to believe in it.

Cultural erosion is one thing; but the active destruction of soft power is another. And, as Donald Trump threatens allies, attacks sovereign nations and engenders political corruption, faith in America has drastically declined. When lacking anything to dull the impact, aggressive exertion of hard power begins to be perceived as anarchy, rather than leadership.

Meanwhile, the soft power of China is only going to grow. This is a result of two things:

The first is that China never had any soft power to begin with. Since the country’s economic inception, it was designated as the world’s factory, a manufacturing machine. And as it has progressed into advanced technology, this perception has simply evolved to be sleeker and colder; the mysterious automation of a country. Thus, a blank slate provides ample room for growth.

The second is the development of China’s own cultural presence. From “Cyberpunk Chongqing” to TikTok to Luckin’ Coffee, the Chinamaxxing trend has painted the country in a novel, highly attractive light. This export of culture has humanised China, which is critical to countering the geopolitical friction arising from its dangerous dominance in key resources and technologies.

And as American cultural deterioration happens in tandem, the real zero-sum game seems to have materialised in the quest for soft power.

This, perhaps, is the most important point of all. Because despite all the projection and posturing done by the two countries’ leaders, it is this organic development of global influence that has been the most consequential in shaping the perception of China.

Whilst this has begun on the level of the general public, the implications it holds for China’s future relations is much greater. Because, China’s humanisation is a major step towards building the global trust and influence that is the most coveted asset a dominant country can possess.

The current world is malleable, meaning it is soft power that will mould it.

A hard approach just causes pots to break. And the shards left behind are sharp - a lesson America is beginning to learn.

Hope I made you think,

Ananyaa

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The “petrodollar” is a term thrown around so frequently in global economics that I never truly questioned what it meant. It wasn’t until I read a recent Financial Times weekend essay that I actually understood its mechanics.

Literally defined, petrodollars are the U.S. dollars that oil-exporting countries receive for their commodity.

But the petrodollar is more than just a technical term; it is an idea that captures how the capital flows behind oil continually reinforce U.S. financial dominance. The dollars accumulated by exporters must be spent, and the obvious destination is U.S. assets: namely, capital markets and Treasury bills. Thus, the liquidity of U.S. markets supports the petrodollar, while the petrodollar simultaneously feeds the liquidity of U.S. markets.

This mechanism has long been a silent truth of the financial system. However, the oil trade disruptions consequent of the Iran War have sparked ubiquitous discussion about the petrodollar—partially inspiring this article.

There is a growing consensus around the fading “Myth of the Petrodollar,” a designation from this piece in The Economist that attributes this decline to the increasing economic demands of Asia. The region is the world’s largest oil importer, and when you consider that China now pays for its oil in yuan and India has begun settling in rupees, it becomes clear why the petrodollar legacy is fracturing.

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The implications of this shift become particularly fascinating when viewed through the lens of burgeoning global imbalances.

I long thought that trade imbalances were just a natural byproduct of commerce. But, as Martin Wolf explained, current account imbalances create both immense power and severe vulnerability for the biggest players.

At over $800 billion, the U.S. holds the award for the largest deficit by a long stretch. Donald Trump spared no mercy villainising U.S. trading partners for the net trade portion of this sum—the core motive behind his protectionist assault on global trade. Yet, a forgotten driver of this deficit is the reserve role of the U.S. dollar. To meet global demand for “safe” assets, the U.S. is forced to run a capital surplus, which mathematically forces a current account deficit.

But what happens if that demand falters?

The collapse of the petrodollar will structurally reduce demand for U.S. Treasuries, breaking the mechanism that once funnelled oil money straight into American debt. As yields trend upward and the government balance sheet inflates, the sustainability of the debt binge enabled by America’s systemic importance comes under threat. Imbalances become a serious problem when nobody is willing to balance them.

However, an immediate catastrophe is unlikely, simply due to the sheer scale of the U.S. safe-asset market. Even if the petrodollar mechanism falters, other drivers of Treasury demand remain robust. There is currently no viable alternative to the liquidity, safety, and scale of U.S. debt. Unless a new international reserve currency is adopted—the Keynesian “Bancor” solution—this structural driver of global imbalances will persist.

A more interesting implication of the waning petrodollar is what it means for the dollar itself. We can segment the currency into three distinct functions:

1. The chosen international reserve and settlement currency

2. The American political tool

3. The favoured safe asset

While the third function appears perpetual, the same cannot be said for the first two.

To understand why, we must look at the centrality of the U.S. to the global financial system, starting with the “Eurodollar”—the offshore creation and holding of dollars. Interestingly, this practice is actively endorsed by the Federal Reserve. As petrodollars and other capital flow into these offshore assets, the foreign banks holding them build up massive dollar liabilities.

When a crisis hits, investors panic and hoard actual dollars, leaving foreign banks starved of the liquidity needed to service their debts. Forced to scramble for cash, these banks trigger large-scale asset sell-offs and credit freezes, causing a global contagion of instability due to the interdependent nature of modern finance.

Swap lines are Washington’s solution to this vulnerability. They act as systemic stabilisers, extending dollar liquidity to crisis-hit central banks to prevent a total crunch. Yet, in keeping the global financial system afloat, swap lines further entrench the very U.S. centrality from which the problem originates.

This mechanism is not going to change anytime soon. When the global financial architecture is built on American foundations, decoupling is equivalent to total collapse—even if U.S. decoupling is taking place on other fronts.

But we must distinguish this structural importance of the U.S. from the dollar’s political functions. Washington has long weaponised the dollar through sanctions and the economic leverage of swap lines. But, when it has become glaringly obvious that the hegemon will do whatever it likes, countries have been alerted to the vulnerability that dollar dominance imposes; and thus the need to reduce it.

Whilst de-dollarisation has not yet materialised in any significant form1, I think this is a product of the system’s inertia; not a reflection of global sentiment. In a system so deeply entrenched, tiny shifts can be big signals. We have entered a new era of global finance.

Which brings me back to the petrodollar: now that it is waning, what will take its place as the financial system’s silent guide?

Given the AI boom, the renewable pivot, and the rise of China, it seems only natural that we will see the emergence of some“Rare-Earthminbi.”

“What does that mean?” you ask. I honestly don’t know yet. But I anticipate we will find out. Perhaps it will be a solution to our imbalance problems; perhaps it will make them worse. Only time will tell.

Regardless, remember where you heard the term first. I hope it gains traction - even if Washington is praying it doesn’t.

Hope I made you think,

Ananyaa

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You might scoff if I called the Iran War “the biggest energy security threat in history.” However, when coming from the Chief of the International Energy Agency, it warrants serious consideration.

With the Strait of Hormuz - a passageway for 34% of trade in crude 29% of LPG, 19% of LNG and 19% of refined oil products - a victim of geopolitical weaponisation, it is obvious why the situation is as dire as it is.

‘Chokepoints’ have become a recurring theme in this transactional environment. Literally, a chokepoint is a strategic, narrow geographical feature that restricts movement and forces traffic through a confined area. Economic chokepoints are equally dangerous; even though the trap is metaphorical rather than physical. In the case of Hormuz, the Strait is a chokepoint both in the geographical and economic sense, elucidating why it is particularly painful.

The American-Israeli attack on Iran was fundamentally asymmetric. So, is it really a surprise that Iran was forced to leverage the Strait in this way? The real surprise has been the inability of the ‘mighty’ US to do much in response; especially when you consider how the ownership of - let alone the ability to wield - economic chokepoints has historically been a privilege unique to the central power.

But it takes a shock to expose latent fragilities. Especially when concealed by years of global co-operation, trade and amiable commodity flow.

And this shock has revealed a truth the world has been unwilling to face: energy dependence is now synonymous with energy vulnerability.

The UAE’s departure from OPEC reveals another unsettling truth; the redundancy of the cartel now that we know a single player can essentially control the supply of oil.

Control. Control means power. And power is dangerous when on any side other than yours.

Energy is an especially critical example. The lifeblood of any functioning economy, constraints on energy supply lead to economic leakage, like blood from a wound. Thus, given the world’s precarious turn, building energy sovereignty is all the more necessary.

“While it is impossible to be truly safe from disruption, the case for insurance against shocks in the supply of fossil fuels is strong. The need to switch more rapidly to renewables and nuclear power has been underlined.”

- Martin Wolf, Financial Times

The renewable energy transition represents more than just a greener future. It represents a chance for countries to regain a control over their energy supply, one that stochastic geographical assignment took from them. One does not have to be rich in natural resources to build wind turbines. Countries with an abundance of sun can take advantage of increasingly efficient solar panels. As the technology continues advancing, building energy independence turns from a distant dream to a feasible reality.

The fear induced by the war has catalysed the trend in renewables that has recently been accelerating. However, this trend has been most apparent in the US, even amidst Trump’s anti-climate rhetoric:

“Fully 93 per cent of US electricity capacity set to be added in 2026 is expected to come from solar, wind and batteries. And in March, for the first time the US generated more of its electricity from renewable energy, such as solar and wind, than it did via gas.”

- Financial Times

This physical change comes in tandem with a push on energy R&D, including a significant lead in nuclear fusion technology - an innovation that would transform the energy supply.

But, when it comes to green technology, the US is not the frontrunner. That position is undeniably held by China.

Holding a near monopoly in both rare earth minerals, and the technologies created with them, China’s dominance in this sector is a clear example of how the vertical dimension of technology1 can become a problem very fast.

Will China leverage this dominance with strategic benevolence, a potent route to building real global trust and kinship? Or, will it clench its fist and limit renewable development, inhibiting the dream of energy sovereignty that is so close yet so far. The former seems more likely; the latter could happen, if forced to play its hand.

Chokepoints don’t just disappear; they transform.

It’s sad, really, that geopolitical warfare and the needs of AI has accelerated clean energy development in a way global warming never could. Especially as the technology crucial to our planet’s future is at the crux of a shift in global dynamics, making it susceptible to incentives, power-plays and weaponisation.

But, the big difference between energy derived from technology compared to energy derived from resources is in the deployment. There is nothing stopping countries from trading with China, and using the technologies to invest in domestic renewable infrastructure right now.

This is the first step to building an energy capacity that is less prone to global disruption, and an energy independence that cannot just be seized - even if China was to aggressively exploit its stronghold.

The future is bright. And not only because the skies will be less polluted.

Hope I made you think,

Ananyaa

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However, the country’s desire to have it all remains intact. From environmental stewardship, to building robust defensive capabilities, being a benevolent welfare provider to providing a lucrative low tax environment, the country wishes to achieve economic excellence on all fronts,“behaving as though it is wealthier, faster-growing and more influential than it is”, as put aptly by Tej Parikh in this FT Free Lunch column

Inevitably, this confusion has produced negligible results. But, a lack of direction is just one problem Britain faces.

The country’s deterioration began long before the Labour Party’s rise to power. The dismal landscape inherited from their Conservative predecessors gave the party a chance to revitalise both the economy and Britain’s global standing, proving to voters that the political shift was the right decision. In my view, this is what has led to the plethora of overambitious policies and targets - measures designed to project dynamism and progress, rather than actually create it.

Projection is rooted in insecurity; Britain is attempting to cling to some shred of relevance in a world that has forgotten about it.

I apologise. Actually, the country has been topical lately, with the Lord Mandelson Scandal plunging it into a political disarray that has been scrutinised globally. With Westminister’s obliviousness being taken to substantiate Starmer’s incompetence, the Prime Minister and Chancellor have been attacked from all sides, leaving the party’s “Go for Growth” agenda to drown in a sea of criticism.

International woes come in parallel with the domestic ones. As Mr Trump, (or should I say Shakespeare), put in September:

the British-US relationship was not only strong, but harmonious, built on shared principles and mutual respect. But this “special relationship” has begun to splinter, as America’s rogue behaviour challenges this foundation of trust. And splinter quickly turned to shatter under the Iran war; a spectacle marked by the country’s leaders slinging insults back and forth - a comical spat of political figureheads that almost conceals the gravity of the situation.

A US led by the antagonistic Mr. Trump has seen fraying alliances become the new norm. This has exposed the asymmetric dynamic of the majority of America’s bilateral ties, a vulnerability Trump has been quick to leverage. Accustomed to compliance, Trump’s ire was sparked by Starmer’s refusal to play a larger part in the conflict, catalysing the disintegration of a relationship that was already strained.

Under this backdrop, King Charles’ US visit was understandably tense; even the diplomatic royal made reference to the host country’s recent disruptive pivot, (after which they dined on Spring Herb Ravioli and Dover Sole Meunière - I bet Starmer’s jealous!) Whilst this visit seemed to ameliorate the situation, I don’t think it negates the damage already done.

On Starmer, I appreciate his resilience when he could have easily been subordinated. It gives our country some greatly needed semblance of dignity; the first step to repairing Britain’s global image as a secure, trustworthy partner, even if not the power it once was.

So where does the UK go from here?

Well firstly, it needs to narrow its economic agenda. Pick a set of clear, actionable policies; crucially, ones that don’t conflict. These policies should be chosen with both domestic prosperity and global restoration in mind, as the gap left by the rogue US is potentially one for the “middle powers” to take. I think the third Heathrow runway is a good example of this; it provides a tangible economic boost, actively targets supply-side weakness and reinforces the capital’s position as a global hub.

Though restoration is a slow process, it doesn’t take long to see the results. Britain cannot wait for the world to change; it simply does not have the time to. Instead, it must begin to redefine its role within it.

And then, perhaps, the search will be over, as relevance is given to the country, rather than sought.

Hope I made you think,

Ananyaa

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I hadn’t, until it was The Economist’s cover piece last week. Illustrated with Greek God-esque depictions of current AI leaders, it’s a reference to the latest model produced by the AI lab Anthropic - and a reference to the grave implications it holds.

What’s so special about this Mythos model, anyway? On a high level, it is able to detect gaps and errors in complex coding, such as the code behind large-scale digital infrastructure. This helps firms identify vulnerabilities in their existing systems, allowing them to resolve problems they perhaps didn’t even know existed.

But making it easier to identify these vulnerabilities is essentially the same as exposing them. This leaves those same systems susceptible to cyberattacks on an entirely new level, enabled by a tool that can point directly at weaknesses to exploit.

Let that sink in.

An indicator of the danger this poses is the fact that Anthropic has decided to limit access to the technology. Coming at the expense of scale and revenue, this acts as a clear recognition of the threat Mythos presents. But, in my view, the paramount indicator is how the White House rushed to hold talks with the lab, despite blatantly blacklisting and belittling it not so long ago. This evidences how “The Mythos Moment” has scared the US government; they did not anticipate the development of AI ever posing a threat to data - and therefore national - security in this way.

But is it really that surprising?

America’s approach to AI is guided not by a thirst for innovation or progress, but rather a fear that if America does not get there first, China will. I don’t think this is necessarily the motivation of the field’s visionaries, but I do believe it is the undeniable driver behind the institutional push for accelerated development. And China surpassing America certainly poses a grave threat to national security.

In the excitement this race generates, balance is easily neglected. The balance between achieving rapid progress and ensuring society is equipped for safe integration. The balance between effective diffusion and limiting the dangers posed by malefactors.

Speaking of balance, the conversation around AI is equally lacking - the discussion is entirely dominated by the US and China. It made me blink twice when I saw a recent piece from the Financial Times on the role of Europe in the AI race.

Europe has long been characterised by a penchant for regulation and adherence, earning it a dreary reputation amongst its more daring peers. This extends to AI, where Europe has become a spectator in the development race; its far too busy checking its shoelaces are tied, whilst its competitors charge ahead, perhaps fuelled on steroids the Orderly Europe wouldn’t dare to touch.

Here, the question of AI sovereignty begins to creep in.

Does Europe actually stand to benefit from developing its own AI? It would allow alignment with its virtuous interests and standards, but comes with the risk of falling even further behind. Or does it remain a “taker” rather than “maker”, allowing it to keep up technologically, but limiting the potential economic gains?

Economics is all about trade-offs; efficiency vs sovereignty is a critical one in this transactional environment. Just take defence spending - should European nations invest in their own capabilities at the cost of efficiency? Or should they ramp up their imports of arms, ironically reinforcing the dependency that the spending should ideally mitigate? It is a mirror image of the painful choice Europe faces in AI.

However, I think there is optimism to be found. In validating concerns about safety and appropriate regulation, “The Mythos Moment” has necessitated a change in approach.

Does AI safety becoming a bigger priority give Europe a chance to shape the future of AI development in the West? I think it does. But only if the continent’s innovators and regulators are quick to seize the moment, striking before American egos are too bruised from the speed of Chinese progress.

And here is where the problem lies: AI development should not be a zero-sum game. The technology’s evolution stands to benefit all of humanity, and is more likely to do so if it is created with a goal of common prosperity in mind - a result of the strengths of Proud America, Speedy China, and Orderly Europe all complementing each other.

It’s unfortunate that we live in a world where innovation is a race, not a relay.

Better get running Europe.

Hope I made you think,

Ananyaa

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Hendrickson builds on the research by Thompson and Callais to discuss how incentives from type of labour contracts can influence the type of drug one takes. In a nutshell: jobs where output is measured, e.g. sales, leads to a higher chance of taking stimulants over depressants, which makes perfect logical sense.

The article was written in response to criticism of Price Theory’s limits, the general idea being that the analysis it produces is too simulated to be an accurate depiction of the real-world. But in his rebuttal, Hendrickson illustrates not only that it can be a feasible way of modelling irrational human choice, but actually an insightful one, as it elucidates the synonymity of cost and constraints in said real-world.

However, I don’t think this necessarily negates the criticism. In fact, I think this speaks to something broader: our need to use tried-and-tested frameworks to explain happenings that are foreign, as if familiarities can force a stabilisation of things that make absolutely no sense. By “these things”, I of course mean shocks - a word that seems to permeate current events, media and reporting these days.

History tells us that holding a ceasefire will defuse a situation. Not in this case. The “Law of The Jungle” implies that a strongman can achieve his ends with minimal friction. Said strongman is losing support, allies and respect day by day. Cyclicality would suggest the impacts of war for the global economy are temporary. Damage to existing structures - both physical and metaphorical (think of energy infrastructure vs the global order) - evidence the opposite.

The word “shock” implies a rare, unforeseen event. Whilst certainly unforeseen, from the pandemic, to Ukraine, to Donald Trump, to Iran, this frequency demonstrates a loss of the sporadicalness that is crucial to its definition.

How can our institutions cope, as the models used to analyse the world fracture in this constant state of instability? Trade-offs, already acute, are amplified as shock after shock attack our systems and ability to tackle monetary and financial stability simultaneously. How can we address rising inflation from the war whilst enabling the financial system to remain resilient as confidence and expectations take a global hit? Grappling with these questions, Central Banks find themselves in increasingly difficult positions, forcing them to prioritise one objective over another, resulting in a “tangency” that fails to meet either of them.

When an event is a singularity, it commands undivided attention. When it happens twice, we are alert, but in a more diluted form. The third time, a vague interest. Beyond that, we move to a state of complacency. As the word “shock” is beginning to lose meaning, I hope we don’t enter this state.

What began as an attraction to global disruption seems to be turning into an addiction. Perhaps this will result in growing tolerance as the resilience of the global economy builds in response. But this requires us to adapt our tried-and-tested frameworks to respond to the challenges we are faced with; a formidable task, as we struggle to even define these continuous shocks that test us.

The logic of Price Theory may struggle to rationalise this drug; it will certainly be a shock to me if it does.

All the best,

Ananyaa

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Hi, I’m Ananyaa! And I love to learn.

Well, I love the feeling of learning, the feeling of educating myself, the feeling that I am using my time to enrich my intellect. But I’ve realised there is a difference between the “feeling” of something, and actually doing it.

Overconsumption is all too easy in this era. That applies to knowledge as well. The internet has facilitated learning to the extent that what began out of genuine curiosity, can turn into mindless, mechanical habits, as information goes out at the same rate it came in. Podcast after podcast, article after article, lecture after lecture; I give myself no time to digest the content I engage with, creating a void of understanding that I attempt to fill by consuming more.

This is my story, but perhaps you relate to it too.

Inevitably, this materialised in frustration, as I found myself unable to recall a single thing, let alone have my own perspective on the topics I had studied. It was much easier to lie to myself when self-satisfaction concealed the absence of thought; when that satisfaction dissipated, I decided I wanted to move from simply consuming knowledge to actually creating it.

So, why do I write? I could give you a plethora of reasons. It forces clarity of thought, promotes better understanding and retention, and challenges the brain to synthesise and build new knowledge on top of old.

But, fundamentally, I write for myself. I want to move past just feeling to actually doing, and every time I post a note or write an article, it is proof that overconsumption of knowledge has not diminished my capacity to truly think.

Currently, I’m an A-level student, aspiring to study economics at university. In contrast to the diagrams and theory that underpin the “Dismal Science” characterisation , what draws me to economics is its interdisciplinary nature and applicability to the real-world. This has caused my academic interests to span a range of intertwined themes: geopolitics, AI, finance, mathematics and of course, learning itself.

I think that beauty lies in the intersection rather than the individual; that is where the most interesting ideas are found, and these intersections are what I am planning to explore in a short, sharp weekly article, where I put my own spin on what I have learnt over the week.

So, why should you read my writing? After all, I already declared that I am writing for myself.

Maybe you would like to join me on my intellectual journey. Who knows - you may discover some interesting ideas that also encourage you to think and create, rather than just consume.

You don’t have to join me. But, I would love it if you did.

All the best,

Ananyaa

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