After issuing fire and brimstone comments last Friday morning in response to the Chinese decision\u2014some of his most bellicose in the tariff war\u2014Trump was singing from a different song sheet as he made his way to the Middle East over the weekend.<\/p>\n
\u201cDon\u2019t worry about China, it will be all fine! Highly respected President Xi just had a bad moment. He doesn\u2019t want Depression for his country, and neither do I. The USA wants to help China, not hurt it!!!\u201d he wrote in a social media post.<\/p>\n
The cause of the apparent rapid backpedaling was the reaction in the markets. Before Trump\u2019s tariff threat on Friday, Wall Street had been heading for another record high. By the end of the day, it had experienced its worst fall since it dropped sharply in April in response to Trump\u2019s unveiling of his \u201creciprocal tariff\u201d plan and major retaliatory measures against China.<\/p>\n
The S&P 500 index fell by 2.7 percent, wiping $2 trillion off its total market capitalization, the tech-heavy NASDAQ index was down 3.6 percent, and around $400 billion was wiped off the crypto market. Two of the biggest market falls were the chipmakers Nvidia and AMD which are at the center of the AI boom powering Wall Street. Their shares were down 5 percent and 8 percent respectively. The markets then moved back up after the shift in Trump\u2019s rhetoric.<\/p>\n
The sharp reaction to the China tariff threat is only one expression of the extreme fragility of the present debt-fired Wall Street boom and the growing fears that the inflated bubble could soon burst amid a breakdown of international economic relations.<\/p>\n
The impact of the US-China trade war on the global economy was highlighted in comments earlier this week by copper mining billionaire Robert Friedland, the head of the Canadian firm Ivanhoe Mines, to the Financial Times (FT).<\/p>\n
Speaking at the start of an annual meeting of mining industry executives and traders, he echoed the sentiments no doubt held by many in this and other industries when he said rising global tensions were leading to a \u201cbreakdown in the international order.\u201d<\/p>\n
\u201cThese tensions are Balkanizing the world economy, and we see it in the copper industry. We have very significant global tensions developing \u2026 Unlike anything I\u2019ve seen.\u201d<\/p>\n
The US-China trade war, at the center of which is the production of ever-more advanced computer chips and rare earth materials needed to make them, is intimately connected to one of the key economic issues of the day\u2014the development of artificial intelligence and who will control and dominate it.<\/p>\n
The development of AI contains the potential for economic advances and a major boost in the productivity of human labor in every area. But it is not being advanced in a rational and planned manner but in accordance with the laws of profit and the capitalist market, leading to a boom on Wall Street powered by increasingly risky operations.<\/p>\n
There are mounting concerns that the complex financial mechanism through which it is being developed has created a financial bubble, the bursting of which would have far greater consequences than the collapse of the dot-com bubble at the start of the century.<\/p>\n
While they reported bumper profits, three major US banks\u2014Goldman Sachs, JP Morgan Chase, and Citigroup\u2014warned of developing risks.<\/p>\n
\u201cWe have a lot of assets out there, which look like they\u2019re entering bubble territory,\u201d JP Morgan chief Jamie Dimon said.<\/p>\n
Concerns about the boom in AI and related stocks were summarized in an FT editorial earlier this week.<\/p>\n
\u201cThe artificial intelligence boom,\u201d it began, \u201cis entering a new and riskier phase.\u201d Up until now, the expenditure on chips and data centers had been financed by \u201chyperscalers\u201d\u2014the tech giants\u2014though their vast internal cash balances.<\/p>\n
\u201cBut the projected scale of computing power for generative AI is now prompting a shift towards more leveraged, opaque and circular financial structures, which raises the economic stakes riding on the technology\u2019s success.\u201d<\/p>\n
While the tech giants still enjoyed higher ratings, it said, debt is being channeled into projects for non-investment grade borrowers including OpenAI, the developer of ChatGPT, and smaller AI start-ups with some agreements involving \u201ccomplex circular financing arrangements.\u201d<\/p>\n
Two of the most prominent examples are the deals involving OpenAI. In an agreement with the leading AI chipmaker, Nvidia, it is obtaining finance part of which will be used to buy Nvidia chips. In the deal with another chipmaker, AMD, it will obtain shares in the company for one cent and then, as AMD stocks rise, be able to cash them in to obtain the finance to buy the company\u2019s chips.<\/p>\n
The FT editorial noted that both the Bank of England and the International Monetary Fund have warned that tech valuations are approaching the dot-com extremes, giving rise to a \u201csharp correction\u201d in global equities and that a \u201csudden reversal would hit investment funds, pensions, and retail portfolios.\u201d<\/p>\n
And they would not be the only ones impacted because the \u201cgrowing reliance on debt, particularly from lower-quality users, now also leaves banks and the highly leveraged non-bank sector exposed to any defaults. Incestuous bilateral funding deals can only amplify the risk of domino effects.\u201d<\/p>\n
In short, contained in the mechanisms being used to develop AI is the potential for a full-blown financial crisis, impacting every area of the economy.<\/p>\n