Donald Trump’s latest attempt at escalating to de-escalate in the Middle East conflict has not had the desired effect. Since the bombing began over the weekend, bond yields have been rising across the world, the price of oil has shot back up and stock markets have turned shaky. 

On Tuesday, the conflict deepened further, with Iran launching missile and drone attacks at multiple American bases in the region. On Wednesday, Iran accused America, whose strike was reported to have hit a wedding party, of a “war crime”. If the exchange continues, with neither side making a show of retreating, the effects could multiply in severity. That’s because all of this is happening at a time when financial strains are beginning to become visible in the world economy — in both stock and bond markets, and in economies where growth is slowing but inflation remains stubborn. 

The AI bubble had already moved into a delicate phase. The hyperscalers who have driven the investment boom sustaining the US economy — counting among their number Anthropic, OpenAI, Amazon, Google and Microsoft — have burned through their ample reserves of cash and, to maintain the massive build-out of data centers and infrastructure, have now started turning to credit markets. They’ve been able to borrow on favorable terms because the rapid rise of their share prices has provided them with ample collateral. Those rising share prices have, in turn, been swollen by huge profits, creating a virtuous upward cycle which makes the new debt being taken on appear eminently manageable.

Unfortunately, though, all is not as it appears. A close look at the numbers reveals that tech leaders are making big money only because they’re spending big money. The actual rate of return on their investments is so far barely sufficient to cover the cost of depreciation of their assets, and from a long-term perspective they are essentially breaking even. Meanwhile, to justify their current very generous share valuations, the hyperscalers would need to see continued rates of profit growth that would amount to more than a doubling every year. This may be too much to ask: total revenues (not profits) from global AI sales have only just begun to surpass depreciation costs, which suggests that margins remain very tight.

Most importantly, the hyperscalers’ ascent has been underwritten by a massive expansion in the US national debt, with federal fiscal deficits expanding faster than the economy itself. More than half of US corporate profits have been funded by these deficits. Further flattering profit growth is that many more companies are today private than was the case a few decades ago, funded by private equity and venture capital, where creative accounting can keep weak performance “off the books”. But as depicted in Warren Buffett’s famous analogy of skinny dippers being exposed by a retreating tide, that sort of sleight of hand gets quickly exposed in a downturn.

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Two things could bring the blistering AI rally to halt: a drop in demand for its products, or a drop in the supply of the credit sustaining the boom. It is the latter which may now be coming into play. The fundamental driver of rising bond yields is falling bond prices, since the two move in opposite directions to one another: as bond investors demand lower prices on the bonds they buy, the effective rate of interest paid by the issuer goes up.

Over the last few years, Western governments have issued so many bonds to fund their spending that investors are getting stuffed to the point they can take no more. It began during the Covid pandemic, when governments borrowed an average fifth of GDP just to keep their economies from collapsing. It then continued during the recovery phase, and in the US was turbocharged by a bipartisan consensus to thereafter throw caution to the wind. Through both the Biden and Trump administrations, the US government ran large fiscal deficits in order to fund an investment boom, the former directly through government programs and the latter through tax cuts. But the end result is a national debt that has doubled in just the last ten years, and whose growth shows no signs of slowing down.

Add to that mix, then, the shift of hyperscalers from investing their savings to raising money in corporate bond markets, and the global demand for credit now exceeds its supply by a significant margin. Central banks could plug the gap by “monetizing” the debt — essentially, printing new money and then using it to buy government bonds — but are reluctant to do so because inflation remains above their target rates. And inflation has remained so sticky in large measure because of the same fiscal stimulus that is pumping money into the economy without producing equivalent growth.

Inflation had, however, shown signs of moderating over the summer, in part because the ceasefire between the US and Iran had allowed energy prices to fall back down. Had that continued into the autumn, we might have seen central banks lower interest rates further. Instead, due to the resumption of hostilities in the Middle East, oil prices are once again rising. Although this will raise gas prices, the greater damage will come through the prices of distillates like diesel, which are driving up transportation and farming costs just as the northern harvests are coming in. So the fertilizer shortages caused by the war are now starting to turn up in food prices on store shelves.

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This price resurgence comes at a most inopportune time. If it persists, the autumn inflation readings could prod central banks to further raise interest rates, raising credit costs for everyone. No G7 country will feel the weight of this expense more acutely than Britain. UK gilts have carried a premium for the last few years, imposed initially after the 2022 Liz Truss moment and then worsening after the 2024 election, when the incoming Labour government’s implausible tax and spending commitments caused investors to doubt the financial acumen of the British Treasury. The impact of perceived British mismanagement is that UK gilt yields are now the highest of any G7 country, and each day’s inching further upwards makes the government’s difficult situation even worse.

So pity the Chancellor, John Healey, who at the end of October will deliver his first Budget. Healey’s fiscal headroom, the gap between revenues and budgeted expenditure that he can “play with”, was tight to begin with and is now narrowing towards zero. At this rate, come Budget day, he will have to deliver bad news — either further spending cuts or tax increases. Either would probably bring an end to Andy Burnham’s honeymoon period, which has seen his net approval rating rise steadily since he became Prime Minister.

And if Andy Burnham faces a cold new reality, Donald Trump may become a lame duck. The odds of a Democratic sweep of Congress in the November elections, currently tilted slightly in their favor, will probably lengthen if gas prices go back up, inflation rises and credit card costs become more burdensome. Inflation that has been running over 3% has now begun to erode the incomes of ordinary Americans, and the bottom half of the economy can be forgiven for thinking there’s already a recession.

What has kept the economy from contracting has been the heavy consumption of the top half, fueled by the wealth effect of the stock market rally. So, if interest rates were to choke off the supply of credit and slow that growth, the market might fall as prices realign with the new reality. In that event, the reversal of the wealth effect could tip the US economy into recession, accelerating slowdowns elsewhere.

Worryingly, the capacity of Western governments to tackle recessions is not what it once was. As the Bank for International Settlements noted in its annual report, recent years have seen government debt rise during downturns, but without a concomitant decline during economic recoveries. The rainy-day funds of Western governments have then been further depleted by the rising demands of defense expenditure, aging populations and adaptation to climate change.

It seems unlikely that the rise in bond yields we’ve seen over the last week could continue much longer without something cracking. As debt-laden governments are forced to commit ever more of their revenues to interest payments — in the UK, they now suck out more money than the defense and Home Office budgets combined — they will have to either cut spending or raise taxes. 

In the US, such fiscal austerity would drain the supply of money that has kept the economy revving. That, in turn, would hit the profits of the tech companies inflating the bubble just as their access to credit dries up. In short, the scale of the recession could stand in direct proportion to the scale of the boom which preceded it, at a time western governments would be more constrained in their ability to engage in counter-cyclical policies. With the American economy already slowing and the job market at a virtual standstill, a slide into negative territory could deepen the hardship already being felt by many working people, strengthening the wind now filling the sails of political populists.

Thus, between the limited fiscal firepower of Western governments and the chariness of their central banks, reluctant to stimulate amid persistent inflation, this is not the time for a recession. Let us hope that Trump soon finds a different way out of his Middle East quagmire.

He made similar comments on Joe Rogan’s podcast in the run-up to his re-election, asserting he wanted to be a “whale psychiatrist”. Rogan remarked on the “dystopian” aesthetics of a wind farm in South Texas. Whether the concern is whale psychology or landscape aesthetics, there seems to be something visceral, even vibes-based, in the Right’s disdain for renewable energy.

In his second term in office, Trump has intervened on behalf of the whales — or, at least, against renewables. While Joe Biden’s Inflation Reduction Act (IRA) was uniquely generous in using tax credits to support electricity from solar and wind, Trump’s “One Big Beautiful Bill” (OBBB) is equally ruthless in repealing them.

What distinguishes the OBBB is its exacting focus on solar and wind energy: increasingly the object of an emerging culture war. On one side, the Right argues solar and wind are “expensive and unreliable”, to use the words of Trump’s energy secretary, Chris Wright. Increasing reliance upon these intermittent power sources has led, Wright insists, to grids that are “less stable”.

On the other side, many on the Left see climate change as solvable only through the vast expansion of solar and wind energy — entailing a huge increase in the supply of batteries. Several high-profile commentators, including the activist Bill McKibben and the engineer Mark Jacobson, argue that the world can solve its decarbonisation needs by focusing exclusively on solar and wind, along with hydroelectric power — with, of course, more batteries. “100% renewables!” is their rallying cry.

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Granted, the Right downplays the real value of these energy sources, which are already making huge contributions to energy capacity in places such as Texas and California. But the Left is wrong to imagine that wind and solar will be a cure-all. Decarbonisation is complex, and will rely on a wider variety of energy sources and technologies to not only clean up electricity, but also deal with harder sectors like steel, cement, aviation and shipping.

Intermittency, of course, remains a real challenge for renewable energy — particularly in regions not blessed with a robust supply of sunshine or wind. The problem is not only geographical, but temporal. To deal with the recurring phenomenon of “winter”, renewable-heavy grids would need better “long-duration” batteries than those that exist today. To its credit, the IRA actually did enact a very broad-based set of support for not just solar and wind, but also nuclear power, carbon removal and green hydrogen. 

This is not the first time that energy policy has been shaped by antagonistic cultural politics. The oil shocks in the Seventies led to a wave of anti-Arab xenophobia in the United States — leading one country singer to suggest that America should cut off food supplies to the Middle East by way of retribution. Fifty years later, energy provision remains affected by culture. Germany has a significantly more carbon-intensive grid than its neighbours because it voluntarily dismantled its nuclear power plants at the behest of a vocal and powerful anti-nuclear movement. The country has spent billions on renewable energy, but these investments have not yet broken Germany’s dependence on coal and gas. 

But Biden did not have a culture war in mind with his energy policy so much as an audacious political theory. With many of its investments targeted for red states, Biden bet the IRA would create a durable political coalition that would help ward off attacks from Republicans. It was an attempted enactment of the neo-Marxist theory that clean-energy jobs and investments would appeal to the material class interests of Republicans, thus securing political support for the Democrats. 

The theory has many flaws, one of which was the reality that most of the investments had barely broken ground prior to the 2024 election. Worse, the Democrats’ theory of material interests fell prey to the larger culture war. It’s notable that, during the negotiations of the OBBB, a vocal faction in the Republican Party rose up to attempt to save some of the IRA tax credits and investments. But they were drowned out by a wider GOP that was scornful of renewable energy. Reporting suggests that, at the eleventh hour, Trump himself entered the negotiations, assuring many in his party that the OBBB would repeal the subsidies for solar and wind specifically.

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To explain their defeat, the Left has reached for another class theory. In this telling, the passing into law of the OBBB is just another example of the power of the fossil fuel industry. Likewise, the legislation could be seen as a defeat for “green capital”. Indeed, the CEO of the Solar Energy Industries Association, Abigail Ross Harper, claimed it was time to “storm the Hill” upon reading the Senate version of the bill.

At its core, though, the energy culture war is being waged not between industries so much as between classes. For the new populist Right, whose most prominent figures include JD Vance as well as Chris Wright, the class enemy is not green capital per se, but the wider “professional class”: the liberal academics, journalists and bureaucrats who, of all Americans, are the most enthusiastic about the transition to renewable energy. Although the OBBB does the bidding of fossil fuel capital, its most significant appeal to MAGA is in its broader culture-war project of “owning the libs”. Beyond solar and wind, the repeal of electric vehicle tax credits for liberal consumers plays into this larger cultural class war.

It helped that Trump and his allies in Congress could call on some supportive evidence. One striking revelation of the political fight over energy policy was that Republicans on Capitol Hill were reportedly swayed less profoundly by energy capitalists, or even energy engineers, than by a philosopher, Alex Epstein. Epstein is the author of The Moral Case for Fossil Fuels and is one of the more powerful energy “influencers” on the Right engaging in online polemics against renewable energy. On his Substack, “Energy Talking Points”, he argues solar and wind power are “not real energy” and “unreliable parasites of reliable energy”, and if the US were to embark on a “renewables-only policy”, the consequences, “…would quickly turn America into a third-world country”.

This is a battle, then, that transcends energy sectors. It is also a battle that maps precisely onto the increasingly geographical contours of political polarization. Pro-renewable liberals live in cosmopolitan, blue cities where climate change is an overarching concern. In these areas, solar and wind power appear as an unalloyed good on spreadsheets and in newspaper charts.

In rural areas, where the vast majority of these projects are constructed, people see things differently. Wind and solar farms take up a significant amount of land. This is a boon for landowners, who receive lucrative lease payments, but it is of less obvious benefit to the broader swathe of rural residents. This concern, coupled with the aesthetic problem of landscapes covered in solar panels and wind turbines, has contributed to significant resistance to these projects in rural areas all over the country.

The culture war over renewables cannot obscure the reality that the challenge of climate change is much broader than simply swapping solar and wind power for fossil fuels. It’s a civilizational infrastructure challenge, encompassing housing, transit, agriculture and energy, and will require something akin to a new, green industrial revolution reshaping entire geographies of life and work. The Trump administration’s attack on solar and wind is as superficial and unserious as Biden’s gambit that it would be enough to use tax credits to incentivize the right investments and consumer choices. 

The irony is many climate liberals have been insisting for years that renewables have become incredibly cheap and cost-competitive with fossil fuels. If that’s the case, they shouldn’t need the subsidies. Their theory is about to be put to the test.