Global Financial System on Shaky Ground Amid Excessive Debt and AI Boom

The global financial system is increasingly vulnerable to various shocks, according to Bank of England Governor Andrew Bailey. As chairman of the Financial Stability Board, he warned the G20 club of major economies that any crash or correction in US equity and/or debt markets would quickly send shockwaves across the Atlantic.

The core problem is debt. Governments worldwide are addicted to it, with the US being the worst offender. The national debt has surpassed $40 trillion, an unprecedented amount. The Trump administration is projecting budget deficits for as far as official forecasts go, adding to the insatiable appetite for debt.

This excessive borrowing is driving up interest rates, making it more expensive for governments and individuals to borrow money. In the US, the Treasury is now paying over 5.2% interest to borrow long-term, while in the UK, our national debt will pass the £3 trillion mark before the clocks go back.

A new player in the credit markets has emerged: America's artificial intelligence (AI) hyperscalers are investing several trillion dollars to roll out their transformative technology, largely on borrowed money. This increased demand for credit is pushing up borrowing costs, not just for governments but also for individuals and businesses.

With AI share prices already considered overvalued, a potential downturn could bring the whole stock market down with it. The S&P500 index covers some of America's biggest companies, with AI-linked stocks accounting for over 40% of its total value and driving most of its rise in value this year.