This week we are continuing our analysis of the financial system as we remain wary of the financial stress the latest bout of bank collapses ensued, especially as central banks continue to navigate the dangerous waters of inflation. The controversy over AI technologies is still in full swing with some ringing the alarm bells and others saying it’s all just hype. In the energy world, we are seeing a renewed era of petrodollar power where more money is moving toward Asia and away from the West. To round out this week’s summaries, we look at the Ukraine conflict through the lens of the “nonaligned” countries.

After the easy money: a giant stress test for the financial system

John Plender, Financial Times

Five weeks after the collapse of Silicon Valley Bank (SVB), there is no consensus as to whether the ensuing financial stress in America and the European Union has run its course. With inflation still running high (above the 2% mark), there remains an open question as to whether central banks will maintain monetary tightening or will begin to ease financial conditions. When banks and other financial institutions face a liquidity crisis while inflation is high, tensions begin to arise for central banks’ twin objectives of price and financial stability, in addition to the Fed’s third objective of maximum employment. This conflict was fully in play during SVB’s collapse, which failed to accurately hedge against interest rate hike risk on long-term bonds and was left holding the bag when value collapsed and uninsured depositors, which numbered 88% of all depositors, fled. SVB is emblematic of a wider issue, where banks had priced in low interest rates and money creation long-term, setting the stage for financial troubles as monetary conditions changed. With inflation expected to continue falling throughout 2023 and central bank support for ailing financial institutions on the table, there exists yet more room for a little more tightening, setting the stage for disinflation and recession, with the IMF warning of a possible hard landing. Ultimately, this tightening cycle has proven to be a big stress test for the financial system and the wider economy, with its final repercussions remaining to be seen.

The AI Race

Into the AI Abyss?

Michael R. Strain, Daron Acemoglu, Simon Johnson, Diane Coyle, & Slavoj Žižek Project Syndicate

ChatGPT is about to revolutionize the economy. We need to decide what that looks like.

David Rotman, Technology Review

We must slow down the race to God-like AI

Ian Hogarth, Financial Times



Those who warn about impending massive changes to the economy from artificial intelligence (AI) are overstating the competency of current AI and the speed at which it will progress. Some experts fear pausing AI development is too drastic a step for such a young industry and has the potential to undermine US competitiveness in AI. While a major concern is that AI technology will replace jobs, AI tools can be used to help workers be better at their jobs, not just replace them. Furthermore, AI could make employees far more efficient by automating simple tasks, essentially augmenting the worker’s productivity.

There are risks with AI, to be sure. The front-runner AI companies currently have little oversight of their development process, a frightening concept for what could potentially be one of the most important technological revolutions in contemporary history. The potential for even more convincing scams and misinformation is high. Whatever ends up happening with AI, the world must wait for the hype and the panic to subside to see more clearly how AI can be used.

Welcome to a new era of petrodollar power

The Economist

The Gulf states have begun to diversify proceeds accrued from the sale of hydrocarbons away from Western capital markets towards national governments, sovereign-wealth funds, and central banks, representing a political shift away from the West. For instance, Turkey, which has historically petitioned the IMF for help when the economy has struggled, is instead turning to the Gulf states for assistance. Additionally, the Gulf states are buying fewer treasury bonds, opting instead to park their money in foreign bank accounts or buy stocks. Still, the vast majority of their account surplus is moving into sovereign-wealth funds, which are low-cost and offer diversification. Additionally, these investments allow for political opportunism. Take for example investments in Lucid, a US electric vehicle manufacturer, which recently agreed to open a facility in Saudi Arabia. A larger percentage of the money, too, is moving towards Asia, particularly into sectors that make use of hydrocarbons, representing a win-win for Gulf states eager to sell fossil fuels. The result is a murkier financial system that is more difficult for the West to track, allowing countries like Russia to move money more easily in a non-Western-dominated system.

The Nonaligned World

Matias Spektor, Nirupama Rao, Tim Murithi, Huuong Le Thu, & David Miliband, Foreign Affairs

While Washington has led a strong response among its close allies to Russia’s invasion of Ukraine, the rest of the world sees the conflict through a different lens. The majority of countries of the global South continuously refuse to take a side in the conflict. This is not a strategy born of immoral pragmatism, but one born of the fear of getting trampled under great power competition. This is not necessarily bad for the West – it also means the global South is refusing to throw in their lot with Moscow or Beijing, allowing Western capitals to court them.

India, in particular, has managed to keep (albeit, somewhat shaky) relations with Washington, Moscow, and Beijing, allowing them to avoid becoming too dependent on one actor. For African countries, the West’s call to arms to support the “rules-based international order” rings hollow. Many African countries feel, perhaps rightfully so, that the international order has kept the powerful on top while the weak are relegated to bystanders in global affairs. In Southeast Asia, the battleground between the US and China’s emerging Cold War, the renewed great power competition brings back memories of the old competition between the US and the Soviet Union, where Southeast Asia was often at the forefront. There is nothing that these nations want less than to lose their hard-earned gains due to the pull between Beijing and Washington. In order to bring the global South closer to the West, Western nations need to recognize that the global South finds other issues more important than Ukraine – debt relief, climate justice, and pandemic effects mitigation. This time, the global South wants less ideological babble and more items of substance.