Welcome to this week’s edition of Geopolitics & the Day After. Each week, we curate and synthesize key developments from global politics, economics, and financial markets, drawing from a wide range of trusted sources. Our goal is to provide you with a clear, concise, and insightful overview of the forces transforming the world today and shaping tomorrow. Below is an overview of what we cover this week:
Geopolitical Concerns examines how governments with little fiscal room are running out of ways to absorb shocks, with Latin American voters turning on incumbents as costs rise, French borrowing costs climbing toward a presidential election, and Chinese pensions strained by a shrinking, aging workforce.
Geoeconomics shows how government bond markets have become the point where inflation, heavy government and corporate borrowing, and leveraged trading collide, with yields at multi-decade highs, contagion worries in Europe, and a fast-growing volume of AI-related debt testing the nerves of investors and regulators alike.
Global Junctions traces how the AI buildout is turning electricity, financing, and engineering talent into points of vulnerability, from data-center projects that may never be completed to power grids open to hackers and autocrats who depend on the small group of engineers running their systems.
Global Trajectories outlines how countries are staking out positions in arenas that will shape the coming decades, from China’s export base, which rivals struggle to counter, to carbon pricing spreading across emerging markets and a race for nuclear reactors on the moon, while deep reading fades.
Geopolitical Concerns
The Two Shocks Upending Latin America
Dan Restrepo and Ricardo Zuniga, Foreign Affairs
The Bolsonaro comeback in Brazil
The Economist
Strikes, Barricades and Fiscal Turmoil: An Autumn of Discontent Grips France
Mark Landler, New York Times
Carl Minzner, Foreign Affairs
Latin American and Caribbean governments with little fiscal room face the prolonged closure of the Strait of Hormuz and one of the most significant El Niños on record at once. The Hormuz closure has already reshaped the region’s politics, as Chilean President José Antonio Kast’s approval rating fell 14 points in March after he declined to issue consumer subsidies. In Peru, voters upset by the sharpest monthly inflation spike in more than 30 years gave the leftist Roberto Sánchez an unexpected first-round surge in April. The right-wing candidate Keiko Fujimori ultimately won the runoff by a narrow margin over him. El Niño is expected to bring flooding to Argentina, Brazil, Ecuador, Paraguay, and Peru, and drought to Central America and the Amazon. Many governments drained their budgets responding to the market shocks of the Gulf conflict, so they will meet El Niño with little to spare. Brazil has the broadest exposure, since El Niño threatens its southern soy and corn harvests and strains the hydropower that supplies most of its electricity. It is also heading into a presidential runoff marked by widespread disenchantment. Flávio Bolsonaro finished the October 4 first round ahead of President Luiz Inácio Lula da Silva, 47 percent to 45 percent. The runoff is set for October 25, and no candidate who lost a first round has won a runoff since Brazil’s return to democracy in 1985. Lula has been hurt by unhappiness over the economy, including a loss of fiscal credibility and rocketing interest rates. A bank-fraud scandal linked to a Supreme Court justice close to him has also fed anti-establishment sentiment, though he is not directly implicated. Abstention was the highest since 1998, while the Liberal Party more than doubled its Senate seats to 28 of 81. Flávio’s main proposal is to pardon his father, Jair Bolsonaro, who was sentenced to 27 years for plotting a coup.
France faces its own fiscal test, with consequences already visible in bond markets. French 10-year bond yields stayed near 5 percent in early October, among the highest in the European Union. Public debt stands at roughly 119 percent of economic output, and the cost of servicing it is projected to rise to about $100 billion in 2027. Prime Minister Sébastien Lecornu proposes to raise some taxes and freeze housing aid and family allowances. Teachers and other public workers have rallied against proposed wage freezes and joined students whose blockades have closed hundreds of schools over underfunding. Marine Le Pen leads polls ahead of next spring’s presidential election, and her National Rally holds 118 of 577 Assembly seats, the most of any party. Some analysts expect her to order its lawmakers to abstain so the budget can pass. Harvard economist Kenneth Rogoff calls France’s position unsustainable and says bond markets have flagged the problem without yet reacting forcefully. Pressure on China’s state finances is demographic, as its population peaked at 1.4 billion in 2021 and is now falling by three to four million people a year. The share of residents aged 65 and older is projected to double to about 30 percent in the 2040s. The main urban pension fund covers some 500 million people, and Chinese researchers expect it to run out by the mid-2030s. A phased increase in the retirement age announced in 2024 will not be fully in place until 2040. In 2022, urban retirees drew an average pension roughly 18 times that of rural and migrant retirees. Carl Minzner argues that officials have avoided redistributive changes because they fear alienating urban beneficiaries more than rural communities with limited capacity to organize. Beijing has put off the changes that would shore up pensions while the number of retirees keeps rising.
Geoeconomics
Whispers of Contagion Risk Return to Europe’s Bond Market
Alice Gledhill and Alice Atkins, Bloomberg
Eurozone borrowing costs surge in global bond rout
Emily Herbert, Ian Smith, William Sandlund, and Leo Lewis, Financial Times
10 Reasons Investors Are Driving Government Bond Yields Higher
Ruth Carson, Masaki Kondo, and Alice Gledhill, Bloomberg
AI debt surge raises risk of sharp market correction, warns Bank of England
Martin Arnold, Financial Times
French bonds fell alongside Italian, Belgian, and Greek debt on October 1, producing some of the largest spread moves in years. Euro-area bonds had mostly sold off together for much of the year as an energy shock fueled inflation fears and pushed the European Central Bank to raise rates. France had been the clear underperformer, and the October 1 move led traders to watch for contagion of the kind seen in the region’s debt crisis 15 years ago. Germany withstood the pain as investors moved into the traditional safe haven, and the rout largely stabilized on October 2. The French-German 10-year spread widened by 10 basis points to 150 basis points on October 5. Market watchers attributed part of the swings to hedge funds, whose leveraged carry trades in Italian, Spanish, and French bonds were washed out. Citigroup strategist Jamie Searle says the ECB could pause its quantitative tightening program if signs of contagion intensify. The hedge-fund washout and the talk of an ECB response came on a day when the selling began in the US. Eurozone borrowing costs jumped on October 1 after the US 10-year yield hit 5.34 percent, its highest in nearly 25 years, as the energy shock from the Iran war added to strain on public finances worldwide. France’s 10-year yield rose as much as 10 basis points to 4.96 percent, its highest since mid-2002, and Italy’s spread over German debt reached 100 basis points for the first time since March. The swings came as the French government put forward a 2027 budget with €43 billion of cuts and tax increases. TD Securities strategist Pooja Kumra says Italian and other euro-area bonds are suffering spillovers from France and that policymakers will need to respond vocally.
That strain is part of a wider repricing of government debt. Benchmark 10-year Treasury yields have climbed to their highest level since 2007 in a global bond selloff. Global bonds have lost 2.7 percent this year, while global equities have gained 13 percent over the same period. More than half of 173 survey respondents expect US 30-year yields to reach 6 percent by the end of the year. Resilient growth has made bonds a weaker hedge for equities, and the Federal Reserve raised rates in September. Supply is heavy as well, since US debt recently passed $40 trillion and OECD countries are expected to borrow a gross $18 trillion this year. Japan’s holdings of foreign securities fell by a record $87.8 billion in August as it likely sold Treasuries to support the yen, adding pressure on global bonds. AI infrastructure adds to the supply of debt, withAI-related debt issuance totalling $450 billion in the year to September, more than double all of last year. The Bank of England cited Morgan Stanley estimates in noting that global AI-related debt sales are expected to exceed the bonds the UK government sells this year. Its Financial Policy Committee warned that a sharper correction than the summer’s remains possible if earnings expectations take a significant hit over the pace of AI development or adoption. The committee added that if AI-driven productivity gains fail to lift growth as much as forecast, the damage would extend from AI valuations to sovereign debt markets. Bank lending to hedge funds and other non-banks in gilt repo markets has doubled to about £200 billion since 2023. The Bank said a planned easing of its leverage ratio would bring a meaningful increase in the leverage banks provide to hedge funds for government bond bets. Hedge funds appear in both accounts, tied to part of the euro-area swings and named by the Bank as a risk in gilts.
Global Junctions
Why Planned Data Centers Worth $9 Trillion May Never Be Built
Nate Wolf, Barron’s
Inside the Biggest Feud in Artificial Intelligence
Kevin Roose, The Atlantic
Hackers Could Overwhelm Our Power Grid. This Is How to Stop Them.
Harry Krejsa and Phoebe Benich, New York Times
Seva Gunitsky and Bruce Schneier, Foreign Affairs
A Columbia Business School model estimates that 45 percent of roughly 509 gigawatts of planned U.S. data-center capacity may never be built. The planned total is almost nine times the data-center capacity now operating in the United States. At about $8.2 billion per 200-megawatt campus, the unbuilt share would amount to roughly $9.3 trillion in investment. Its central scenario projects about $10.3 trillion in spending through 2032, averaging 3.6 percent of U.S. GDP a year, which would exceed the railroad, highway, and telecom buildouts. Stijn Van Nieuwerburgh discounts projects by timeline, assigning a 90 percent completion chance to those due in 2026. That probability falls five percentage points for each later year, since more can go wrong the longer the timeline. Financing is changing as well, since Alphabet and Amazon are turning cash-flow negative from data-center spending and increasingly rely on project debt, joint ventures, and private credit. Those vehicles spread the risks among more parties and make them harder to track. The two companies at the center of that spending are heading to public markets, with Anthropic expected to list in coming weeks and OpenAI possibly following in 2027. Kevin Roose reports that the rivalry between them is personal, since Anthropic was born from Dario Amodei’s loss of faith in Sam Altman’s leadership of OpenAI. Amodei objected to a 2017 fundraising idea that five people familiar with it describe as an auction of future artificial general intelligence (AGI) rights among governments including the United States, China, and Russia. OpenAI says it did not consider selling AGI to China or Russia. Amodei and six colleagues left in December 2020 to start a safety-focused lab. Anthropic’s founding document envisioned roughly 50 employees and put the cost of building AGI at about $10 billion. It now has thousands of employees and a trillion-dollar IPO on the horizon. Roose writes that few who know the executives expect them to reconcile soon.
The electricity demand behind that buildout has also made the power grid a security concern. China has spent years preparing to attack American infrastructure and has likely positioned hackers to cause sustained blackouts, two Carnegie Mellon researchers warn. The researchers developed cyber and China policy for the Biden White House and the Trump Pentagon. In their view, AI agents may hack faster than the Chinese government and may not be deterred by the threat of conventional war. They propose a more distributed grid built on solar and batteries, whose software can be patched quickly. That kind of grid can split into microgrids that keep local services running if the wider system fails. They argue that the risk lies in what a component can do and who controls it rather than where it was made. The F-35 offers a model, since its flight computers and sensors get maximum security scrutiny while screws and hydraulic hoses get less. They say the administration’s grid security emergency could carry that framework, but that its resistance to clean energy projects undercuts the effort. Elsewhere, autocratic governments are turning to AI to monitor and replace the human subordinates they have long distrusted.China’s “Zero Trust AI system” cross-referenced more than 150 government databases and flagged 8,700 officials before local governments rolled it back under pressure from the bureaucrats being monitored. Russia’s digital development minister has said AI could replace half of officials, perhaps slightly more. Two University of Toronto professors argue that the self-running state is an illusion, since these systems depend on a small group of engineers whom rulers cannot evaluate. Russia responded to a tech-worker exodus with draft deferments and tax exemptions for their firms. Roughly 100,000 specialists still left in 2022, about a tenth of its tech workforce. Rulers who adopt AI to escape unreliable officials end up depending on a narrower group of technical experts instead.
Global Trajectories
Emerging markets double reach of world’s carbon-pricing measures
Hirofumi Yamanaka, Nikkei Asia
Can Anything Slow China’s Export Juggernaut?
James Mayger, Fran Wang, Paul Abelsky, Brendan Murray, and Yujing Liu, Bloomberg
Superpowers Race to Put Nuclear Reactors on the Moon
Selam Gebrekidan, New York Times
A grim prognosis for the post-literate future
George F. Will, Washington Post
Carbon pricing now covers about 29 percent of global greenhouse gas emissions, roughly double the 2020 level, as emerging economies adopt it. Vietnam has allocated emissions caps to 110 facilities covering 40 percent of its emissions. India’s system covers oil, aluminum, and cement, and its steel sector joins from 2027. India’s targets range from 2 to 5 percent of production, and an Indian think tank estimates that missing them would typically cost large companies less than 7 percent of annual profits. That is a modest cost, and the government appears intent on raising the bar gradually. The EU’s Carbon Border Adjustment Mechanism took full effect in January and helped drive the push, because it collects the difference in carbon costs on imports such as steel and aluminum. Some governments have moved the other way, with the United States withdrawing from the Paris Agreement for a second time in January. Ireland postponed a planned carbon tax increase after fuel prices rose, and in July the European Commission proposed slowing the reduction of emissions allowances. From another direction, China’s exports are on track to exceed $4 trillion this year, about 80 percent above their 2019 level. The EU’s trade gap with China is running at around $1 billion a day. Chinese firms hold almost 70 percent of global ship orders and about three-quarters of EV production. They also account for more than four-fifths of the solar panel manufacturing supply chain, and Chinese EV makers enjoy a cost advantage of as much as 40 percent, according to McKinsey. The EU is weighing “Made in Europe” rules for public contracts, and Germany is preparing measures to shield strategic industries that may include tariffs on hybrid vehicles. China’s dominance in critical minerals and EV batteries makes trade barriers risky, since Beijing could retaliate in ways that severely disrupt rival economies. Many of China’s investments in these sectors are already complete, so they will keep sharpening its competitive edge for decades even if Beijing curbs subsidies.
Away from trade and climate policy, the United States and a Russian-Chinese partnership are racing to put nuclear reactors on the moon. NASA asked contractors in late August to prepare a reactor that can run without maintenance near the lunar south pole and be ready to launch by December 2030.Russia aims to have a reactor running by 2036 to power lunar stations led by China. NASA moved up its schedule over concern that a Russian-Chinese reactor could create a de facto exclusion zone. A 1978 Soviet satellite re-entry scattered radioactive material across about 48,000 square miles of northern Canada. MIT’s R. Scott Kemp says accidents are more probable on the moon, where a reactor would have little containment. NASA’s preferred fuel, high-assay low-enriched uranium, is in short supply in the United States. Russia is the largest producer, and the United States has banned Russian uranium imports since 2024. Few experts expect either side to meet its deadline, and nobody has yet installed a reactor in low gravity. On a separate front, James Marriott’s book The New Dark Ages argues that smartphones are driving a post-literate future that resembles the pre-literate past. Literature professors report that they no longer assign novels such as Middlemarch and Ulysses, and sentences in popular books have grown shorter by almost a third since the 1930s. Marriott recalls that Lionel Trilling’s literary essays sold more than 100,000 copies in the 1950s. Best sellers in the 1960s included Saul Bellow’s Herzog and Giuseppe Tomasi di Lampedusa’s The Leopard. Marriott asks whether the most advanced civilization in history can be run with the intellectual tools of a pre-literate society, and columnist George F. Will says he may even be insufficiently pessimistic.
