Financial markets and governments currently operate under the belief that they have acquired immunity from systemic collapse, even as the world careens toward a moment of financial upheaval that could dwarf the damage caused by the US housing meltdown 19 years ago. The most frightening aspect of this impending crisis is not its specific nature, but the guaranteed incompetence with which Washington’s response will be handled, steered by Donald Trump’s incontinent appetites and animosities.
Capital's Speculative Drive
One pathway to this crisis involves a financial bubble popping, specifically in stocks buoyed by current euphoria over artificial intelligence. These assets face sharp downgrades if returns disappoint, leading to a tumbling stock market.
Such a market decline would shrink consumer spending and damage the balance sheets of companies that have heavily invested in the AI dream, as well as their financiers.
The largest risk, however, revolves around the federal government’s accumulation of debt, which now exceeds 120% of the nation’s gross domestic product, a near unprecedented level. This debt is projected to grow rapidly due to massive built-in budget deficits for the next decade.
Globally, the US’s demand for capital to finance datacenters or the federal deficit is met by China’s export of capital, recycling its huge trade surplus.
Investors purchasing US Treasury bonds today demand yield and diversification, indicating a mercenary approach to capital allocation. These investors are prepared to mercilessly dump US assets if market conditions turn sour.
Evidence of this volatility emerged 1 year ago, when Trump’s tariffs on everything sent the price of treasury bonds briefly into a tailspin, demonstrating how Washington’s idiosyncratic decisions can trigger capital flight.
The State's Role in Crisis Management
US politics are positioned to inflict significant damage, with scenarios including Trump bombing Iran again, invading Cuba or Greenland, or increasing the deficit through military spending. He shows no concern over growing federal debt, and Republicans in Congress show no interest in stopping him.
Trump might also strong-arm the Federal Reserve to cut interest rates or compel it to buy government bonds to keep rates low, actions that serve to prop up asset values.
However, pumping money into the economy through such measures would stoke inflation, further encouraging investors to flee for the exits and sending the dollar into a tailspin, directly impacting the purchasing power of the working class.
Maurice Obstfeld, former chief economist at the International Monetary Fund, stated that “The political fundamentals are really bad,” highlighting the systemic dysfunction.
Inadequate Solutions for Systemic Failure
The closest any government official has come to a plan to address national indebtedness was Scott Bessent, the US treasury secretary, who claimed artificial intelligence would generate massive productivity growth and enormous tax revenues to fill government coffers. No other official has offered a public solution.
Obstfeld further noted that “If you try to war game it, the Fed doesn’t have any good options. The only good option is fiscal regime change in the Congress.” He concluded that such a change is “not likely to happen,” underscoring the limitations of reform within the existing political structure.
Internationally, France faces a budget crisis alongside a looming election that could bring a populist right wing to power, mirroring Trump’s political tendencies. China, while not facing political instability, has shown little interest in addressing global financial imbalances, prioritizing the subsidization of manufactures for export to generate jobs.
When the crisis hits, international cooperation is unlikely to play a significant role due to the animosities Trump has cultivated. The world faces an unprecedented future where a financial crisis invites the most self-defeating government response ever, leaving the working class to bear the brunt of capital’s contradictions.