29.10.2026

Monumental crash beckons

Capitalist states face huge problems with high interest rates, low economic growth and ballooning government and corporate debt. Ted Reese says the system is in deep trouble and seems to be running out of options

The world economy is surely set for a monumental crash. The price of oil and diesel is surging, the bond market is breaking and the AI bubble is about to burst.

Shipping a single oil-tanker cargo from the US to Japan has reached $81 million - nine times more than a year ago. Hiring a supertanker has gone from $30,000 to $1.2 million daily, far surpassing the peak pandemic price of $250,000. In the Middle East, rerouting oil to Asia can stretch a voyage from 19 days to 48, driving the cost of shipping a barrel of oil from $3 to $26. Brent crude has climbed to $115 a barrel, but refining it into diesel has gone up from $20 to $110, contributing to the price of a barrel of diesel - needed to fuel ships, trucks and tractors - almost tripling from $85 to $210.

Shortages from the slowdown in freight transport beckon. As the savings and reserves of businesses, governments and households sink to cover rising expenses, the impact on the production, distribution and prices of everyday essentials is going to be severe and profound. Indeed, real (after inflation) year-on-year personal consumer income growth in the US has turned negative this year - the first time since 2020, during the pandemic. United States’ bank reserves have fallen from 17% of GDP in 2021 to 9% - one percentage point above what the federal authorities regard as the danger zone, where liquidity stress begins to show up in the financial system. The last time the US slid into a deep recession, for example, bank reserves had declined from 16% in 2015 to 7% in 2019.

Six of the largest 10 global stock markets have entered ‘correction territory’. France has fallen by 11% from its 2026 peak, India by 14%, Japan 14.5%, Hong Kong 18%, China 20.4% and South Korea 41%, actually putting China in ‘bear market territory’ and South Korea in something more associated with an outright crash and recession.

China’s main CSI 300 has been down for 11 successive weeks - its longest ever losing streak. Its STAR50 AI and chip index has crashed by 40% in under four months. The ever more crucial Philadelphia Semiconductor Index (SOX), which tracks 30 major semiconductor companies, fell by more than 19% between October 6 and October 23.

The stock valuation of cloud-compute provider CoreWeave - one of the key Jenga blocks holding up the AI tech tower - has nosedived by 38% in October alone and by 64% over the past 12 months. Investors are demanding an extraordinary $1.15 billion a year to insure $10 billion of CoreWeave debt against default. The cost of insuring its debt against default has more than doubled in a year, from below 5% to above 10%, implying a 63% chance of default within five years. That compares to the 47% chance Bear Stearns had in March 2008, days before its value plummeted from $20 billion to $4 billion and 44% for Lehman Brothers.

CoreWeave has accumulated around $50 billion in debt and plans to spend $35-39 billion on capital expenditure in 2026 (roughly three times its revenue), while its net interest expense reached $640 million in the second quarter - a figure expected to hit $1 billion later this year. The company borrows billions of dollars to buy hardware, rents computing power to companies, such as Microsoft and OpenAI, and relies on those payments to service its debts. These rental rates have fallen from $5-6 an hour in 2023 to $2.70 today.

Insurance costs

The cost of insuring debt against default has also reached record highs for Meta, Nvidia, Oracle, Amazon, Alphabet and other major AI-related companies. Oracle’s 124% increase eclipsed CoreWeave’s 120%, with SpaceX not far behind at 105%. Most significantly though, given its size and status, Meta’s credit default swap spread is up by 68%.

CoreWeave’s customers are, of course, themselves spending heavily on the AI buildout, with nothing to show for their outlay in terms of offsetting the debt they are accumulating. Between 2019 and 2024, the top five US tech conglomerates never borrowed more than $60 billion in a single year. Last year that jumped to $120 billion and this year they have already borrowed more than $230 billion - at the highest interest rates in 20 years.

Overall AI-related debt issuance has reached $466 billion, compared with $101 billion over the same period in 2025. Anthropic, America’s latest ‘great white hope’, reported annual losses of $80 billion and yet is valued at $1.5 trillion at least. Its annualised revenue run rate (ARR) - what revenue would be over a full year if it continued earning money at the current rate - rose from $3 billion in May 2025 to $65 billion by July 2026, but has substantially slowed down, only reaching $67 billion this month.

AI spending (on data centres, chips and software), plus consumer spending running ahead of wages (from debt, stock market returns or savings), is adding up to 2.8% of GDP growth, but all the other components of the economy are in negative GDP growth. AI and debt are making US economic growth look healthier than it really is. The US stock market as a percentage of GDP is at its highest ever level - 233%. Meanwhile, Microsoft is offering voluntary buyouts to 27% of its workforce.

AI’s borrow-to-spend binge is helping to fuel national debt burdens and inflation, as demand outstrips supply, making lending increasingly risky. Because private debt is continually loaded onto the backs of the public via bailouts, subsidies and corporate tax breaks, US debt-to-GDP stands at 126% - higher than at the end of World War II.

Long-term interest rates across the world’s richest nations are at their highest levels since the 2008 global financial crisis and great recession. The US 10-year treasury yield hit 5.3% at the start of October, up a whole percentage point on July and above the figure hit twice in the run-up to 2008. The UK’s 30-year gilt went above 6% for the first time since 1998, and Japan’s 10-year went above 3% for the first time since 1996. Its 30-year has hit a record 4.2%. France’s 10-year has gone above 5% and its 30-year hit 5.58%, a 24-year high. Beyond the G7, South Korea and Australia have seen bigger rises than the US over the past year.

Bond rate rises partly reflect falling demand from foreign governments and central banks, particularly China. Foreign official holdings have fallen from 42% of all US treasuries in 2008 to 13% today. But in the same period foreign private holdings have stayed more or less flat, currently at 19%, while the Federal Reserve’s share has halved from 25%. Domestic investment, though, has gone from a 25% to 55% share, a few percentage points above the ratio it held in 2000. Pension funds trebled their treasury holdings between 2008 and 2023, overtaking even Japan, although that figure has dipped slightly, since pension funds, of course, benefit from higher interest rates, pushing them to an overfunded level, incentivising them to look for higher returns by putting their surplus from treasuries into private credit, stocks and other assets.

As pension funds are not buying at higher yields, the government has to offer even higher rates to find new takers. Enter hedge funds, which have more than doubled their share of treasury holdings from 4% to 9%. Hedge funds invest in treasuries to make a profit via bets on future prices, but can only make the margins count by buying them up en masse via borrowing - up from $1 trillion to $4 trillion in four years. If and when lenders raise the collateral (treasuries!) they require from hedge funds because of tightening financial conditions, hedge funds will have to sell treasuries en masse, sending shockwaves through the global bond market.

Again, bank reserves are already very low. In 2019, cash suddenly became scarce in the very market that hedge funds used to borrow against their treasuries. The cost of borrowing shot up from about 2% to as high as 10% in a single day and the Fed had to step in and inject tens of billions of dollars into bank reserves, catalysing the inflationary spiral that followed when lending picked up again in 2022, decimating wages and savings.

Push, pull

The capitalist state is increasingly caught between two contradictory burdens: it wants to bring down long-term interest rates to make borrowing and investment cheaper, but faces mounting debt-servicing costs. In the US, the treasury is attempting to push down long-term yields by buying long-term bonds - sometimes financed through short-term liabilities. This does not eliminate the underlying debt: it changes the composition and maturity of public-sector liabilities, and governments must continually refinance maturing bonds. As older, cheaper debt is replaced by borrowing at higher rates, interest payments rise, squeezing public spending. US federal net interest payments rose from around 5.3% of total federal spending in 2009 to approximately 13.8% in 2025. Higher taxes or further borrowing are required to again increase subsidies for surviving capital. But, of course, the state has a new problem: it is competing with AI hyperscalers for investment capital.

Banks can be deregulated again, so that they can buy more bonds - as was the case during the pandemic - but reserves are already low. The Federal Reserve can ‘print money’ digitally to buy bonds, but that devalues wages and savings.

Capitalist society is - in a word - fucked. Trump has shamelessly implied that the debt will be inflated away “rapidly”. For sure, inflation played a role when US debt-to-GDP was eroded from 121% in 1946 to 31% by 1980. But the debt grew absolutely - productivity growth did the rest of the job, as the destruction of World War II had devalued capital and created new profitable opportunities, while returning soldiers went from destroying to producing. Most importantly, significantly deprivatised social democracies and near-fully deprivatised socialist blocs took on the burden of the societal rebuild, cheapening inputs bought by the remainder of the private sector and laying the foundation for reprivatisation, when capital’s profitability crisis once again reared its head. That puts what remains state-owned in China in the crosshairs.

Other than that, capital is fast running out of options.