In late 2025, we published an article on the Socialist Party Scotland website titled Fractured World Economy Heading for a Crash? In it, we pointed to the various crisis factors that could trigger a new global capitalist recession. The AI bubble, the increased role of private credit markets, debt-saddled nation states, overvalued stock markets, and Trump’s destabilising tariffs were all featured.
How do things stand today, eight months later? Has capitalism stabilised the ship, or are these aforementioned factors getting worse? If anything, there is an even more precarious situation for the global economy. Since that article was written, Trump launched, with Israeli Prime Minister Netanyahu, their ill-fated war on Iran in February 2026. That conflict is, five months later, still going on and has certainly weakened the US and the world economy further.
The impact of the war is yet to be fully felt, but the IMF has downgraded its 2026 growth predictions twice this year already. Rising costs of oil and gas are also driving up inflation, expected to be at least 4.7% in 2026. Iran’s closure of the Strait of Hormuz, which facilitated about one-fifth of global trade in oil and liquefied natural gas before the war, is having a major effect on fuel prices and food production costs.
As one commentator, John Plender, wrote in the Financial Times on 18 July: “The Trump administration increasingly resembles Plato’s ship of fools. The patience of the bond markets will ultimately wear thin. My guess is that the crunch will come within the next twelve months.”
Stagflation and debt
Higher inflation and lower growth – a form of stagflation – predominates in the advanced capitalist nations generally. Plender’s comment about the bond markets is apposite. Stagflation, accompanied by rising levels of nation-state debt, leaves even the strongest capitalist nation vulnerable to bond markets moving against them.
For example, Trump was forced to retreat on much of his ‘liberation day’ tariff campaign, in large part due to the fear of rapid increases in the cost of financing US debt. Yet tariffs on goods entering the US are at their highest levels since 1938, another destabilising factor.
When the markets began to move against US Treasuries, officials panicked and, in Trump’s words, “became a little queasy”, forcing a retreat.
In an economy with one of the highest debt-to-GDP ratios in the world, a market sell-off of US debt alone has the potential to spark turmoil in the financial and stock markets.
Capitalism has increasingly turned to debt to maintain its crisis-ridden system. Indeed, debt levels in the advanced capitalist economies are back to where they were at the end of World War Two, even though there has been no world war.
However, there has been the Great Recession of 2007–09, a pandemic, and the inflationary shocks that followed, alongside economic stagnation and increasing geopolitical conflict, including international and regional wars.
In order to try and stave off social and political revolt, the capitalist classes in the US, Europe, etc, have increasingly resorted to using the state to bail out and ‘save the system’, alongside brutal attacks on the working class through austerity, the slashing of public services, and wages that do not keep pace with inflation. For example, US public debt was 60% of GDP prior to the Great Recession and now stands at a record-breaking 120%.
Unlike post-1945 – when US capitalism acted as a giant stimulator that produced the largest economic upswing in world history between 1950 and 1973 – there is no prospect of it being able to repeat that feat today.
Without organic economic growth, we have seen the accumulation of massive state indebtedness. The public debt of emerging economies is also at an all-time high. Higher interest rates, a tool used by governments to tackle the post-Covid inflationary spiral, mean government debt is more expensive to pay back.
Private debt is also increasing dramatically. Data from the Institute of International Finance shows private gross indebtedness is close to where it was on the eve of the global financial crisis in 2007.
Moreover, the US Federal Reserve estimates that large private hedge funds’ holdings of US Treasuries – at $2.5 trillion – doubled between 2023 and 2025.
“The Bank for International Settlements [BIS], the central bankers’ bank, has warned that the hedge funds might have to dial back their stakes in government bond markets even quicker than they arrived – a possibility it describes as one of the most troubling financial stability risks in the world today.” (Financial Times, 20 July)
Irrational exuberance of AI
In 1996, the then Federal Reserve chair Alan Greenspan characterised the boom in technology, media, and telecom stocks as showing signs of “irrational exuberance”. Within four years, the bubble had burst. It’s clear that the huge investment in AI is distorting the economy massively and, more importantly, is highly irrational based on the likely return that can be accrued from that investment.
The AI bubble has grown yet further over the last year. Spending on data centres and AI infrastructure has soared. It’s estimated that around 1.1% of current US GDP is accounted for by this investment. 40% of the S&P 500’s market capitalisation is down to AI-linked stocks. Increasingly, capitalist commentators are drawing parallels with other bubbles that went bust in the past.
As Martin Wolf commented in the Financial Times recently: “Over-investment, destructive competition, waves of bankruptcies and then painful consolidation are standard features of such episodes, from the railway booms of the 19th century to the internet boom of the 1990s. This is the classic capitalist story of booms and busts.”
He goes on: “The valuation of US stocks is even higher today than in September 1929. In only one other period since 1881 has there been a higher valuation of the US market than today’s. That was in 1999-2000, immediately before the bursting of the ‘dotcom’ bubble.”
The fears of those analysts for capitalism are based on the scale of investments by the multibillion-dollar AI hyperscalers and those specialising in AI infrastructure – the likes of Amazon, SpaceX, Nvidia, Alphabet/Google, and Microsoft. Until recently, the huge investments – $400 billion in 2025 alone, the four biggest hyperscalers Google, Meta, Microsoft and Amazon combined on track to spend more than $725 billion in 2026 – have come mainly from the profits of these companies, increasingly they are relying on debt and the private credit markets to raise finance for investment.
The share of private credit to AI-related companies has increased from less than 1% of total outstanding loan volumes to almost 8%. It’s estimated that outstanding private credit to AI firms could reach around $300-600 billion by 2030.
The BIS has warned of the circular nature of AI investment. That is where tech companies and chipmakers finance AI model developers, who then use that capital to buy computing hardware and cloud services from those same tech companies.
For example, say Nvidia agrees to invest in OpenAI to help fund data centre construction, and OpenAI, in turn, commits to filling those centres with millions of Nvidia chips. Both benefit, and it looks good on the books and for potential stock valuations. However, it inflates the actual revenue and value of the companies, as, in effect, it’s the same money counted twice, masking the fundamentals of some of those companies.
Goldman Sachs, the mega investment bank, reckons that AI is just “one big trade on the US economy”. If stock markets fall in value, this will have a huge impact on company valuations and profits as well.
Catastrophic impact
A former chief economist of the IMF, Gita Gopinath, has calculated that a fall in stock markets equivalent to that of the dotcom bubble in 2000 would remove $20 trillion in American household wealth and another $15 trillion from wealth internationally – several times more severe than that of 2000. Household equity held in stock market investments in the US has more than doubled since 2010.
Such a crisis would have a global impact. Japan, South Korea, Thailand and Malaysia are major exporters of tech-related hardware. When the AI bubble bursts, it will have a devastating effect in the US and internationally.
Marxists cannot predict the exact timing of a new crisis or the exact proximate cause, but we can point out the growing accumulation of crisis factors that will eventually lead to such a crash.
While China has emerged strengthened overall from the catastrophic shambles of Trump 2.0, not least the failure of the war on Iran, the CCP is by no means immune from the growing problems in the world economy.
Weak domestic demand has been compensated for by a massive global trade surplus for Chinese exports. However, a new economic crisis will cut the market for Chinese goods internationally, increasing the problems facing a CCP regime reliant on the world market.
Unlike the 2007-09 Great Recession, when capitalist governments coordinated massive bailouts of large parts of the global financial system, today the possibility of such cooperation has been undermined by the increasing national conflicts that have erupted between, for example, the US and Europe.
While governments will seek to firefight the next crisis, it is likely their response will be less effective as a result of the deepening divisions among capitalist powers, which will worsen the complications of the crisis.
Capitalism is a casino. Blind bets are laid by billion-dollar companies, and if they go bust, their CEOs will demand that national capitalist governments bail them out. Meanwhile, workers and families pay the price in the loss of jobs, homes, incomes, and everything that goes along with it.
Socialist planning offers a viable alternative to profit-driven chaos. Public ownership and democratic workers’ control and management of the world’s resources will increasingly be seen as the only way out of the nightmare of capitalist rule.