Analysis

The Tariff That Won’t Die: How World Economies Are Navigating Trump’s 2026 Global Trade Shock

Published

5 months ago

February 22, 2026

After the Supreme Court Struck Down His Signature Trade Policy, Trump Reached for a Dusty 1974 Law — and Raised the Stakes. The World Is Now Running Out of Easy Responses.

In the winter of 2026, the global trading system — already battered by more than a year of White House tariff whiplash — absorbed two seismic shocks within 24 hours. On the morning of February 20, the United States Supreme Court, in a 6-3 decision, ruled that President Donald Trump had exceeded his constitutional authority by using the International Emergency Economic Powers Act (IEEPA) to impose sweeping “reciprocal” tariffs on nearly every country on Earth. By that evening, Trump had signed a new executive order under a previously dormant 1974 law, hitting the world with a 10% global import surcharge. By Saturday morning, he had raised it to 15% — the legal ceiling — calling the court’s ruling “ridiculous, poorly written, and extraordinarily anti-American.”

Welcome to the most turbulent chapter yet of Trump’s trade war: a constitutional battle whose resolution, paradoxically, has left the global economy no safer than before.

The Trump Tariff Shockwave: A Global Overview

To understand how the world arrived here, it helps to trace the arc. From April 2025 onward, Trump’s administration transformed U.S. trade policy more aggressively than at any point since the Smoot-Hawley era. By leveraging the IEEPA — a 1977 emergency statute — the White House imposed sweeping tariffs on dozens of trading partners, pushing the average effective U.S. tariff rate from roughly 2.5% in January 2025 to a staggering 27% by spring, the highest in over a century. Even after negotiations and carve-outs, the rate stood at approximately 16.8% as of November 2025, according to Wikipedia’s tariff tracker. U.S. tariff revenues hit $287 billion in 2025 — a 192% increase from 2024.

Then, as reported by CNBC, the Supreme Court delivered its landmark rebuke: IEEPA, the court’s majority concluded, “does not authorize the President to impose tariffs.” The justices reasoned that taxation is squarely a congressional power, and that no prior president had ever used the 1977 emergency statute to levy tariffs. In a telling dissent, Justice Brett Kavanaugh — while disagreeing with the outcome — acknowledged that other statutes could give the president comparable authority. The administration had been listening.

Within hours, Trump reached for Section 122 of the Trade Act of 1974 — a provision so obscure it had never once been invoked in its 52-year history. The law allows a president to impose a “temporary import surcharge” of up to 15% for 150 days if he determines that the United States faces “large and serious balance-of-payments deficits.” No lengthy investigations are required. No interagency process. The president simply declares a problem, and the tariffs begin. As the Council on Foreign Relations analyzed, actions under Section 122 must be applied uniformly across all trading partners — a constraint, but hardly a binding one given the administration’s maximalist instincts.

By Saturday, February 21, Trump maxed out that authority, raising the new global tariff to 15%. It takes effect February 24, 2026, and — unless Congress acts — expires approximately July 24, 2026. The world, once again, recalibrated.

Economic Implications of Trump’s Global Tariff: What the Data Shows

The numbers that matter most do not come from the White House. They come from the analysts, economists, and budget offices whose job it is to separate the declaratory from the quantifiable.

The Tax Foundation offers the clearest accounting of what remains after the Supreme Court ruling. With IEEPA tariffs now invalidated, the remaining tariff architecture — dominated by Section 232 levies on steel, aluminum, autos, and other goods, plus the new Section 122 global surcharge — is projected to raise $53.8 billion in federal revenue in 2026, or 0.17% of GDP. To put that in perspective: had IEEPA tariffs remained, that figure would have been $171.1 billion — the single largest tax increase since 1993. The court’s ruling, in fiscal terms, erased roughly two-thirds of the administration’s projected tariff windfall.

Yet the long-run economic damage is not erased quite so neatly. The Tax Foundation estimates the remaining Section 232 tariffs alone will reduce long-run U.S. GDP by 0.2%. If the Section 122 tariffs are extended by Congress, the hit deepens. Critically, as of September 2025, threatened or imposed retaliatory tariffs from trading partners affected $223 billion worth of U.S. exports — a sword still hanging over American farmers, manufacturers, and service exporters.

The Yale Budget Lab, updated specifically to incorporate Trump’s rate increase to 15% on February 21, projects that the current tariff regime will raise unemployment by 0.3 percentage points by the end of 2026. In the long run, U.S. GDP will be persistently 0.1% to 0.2% smaller — roughly $30 billion annually in 2025 dollars. Prices, meanwhile, will rise. If Section 122 expires as scheduled, the average household faces a cost increase of $600 to $800. If the tariffs are made permanent, that figure rises to $1,000–$1,200. The Federal Reserve, Yale economists note, is likely to “look through” the tariff-driven inflation — meaning the price pain will land directly on consumers rather than being absorbed by monetary policy.

The trade deficit tells another sobering story. Despite Trump’s stated goal of eliminating America’s trade imbalance, the total U.S. trade deficit in 2025 reached $901 billion — barely changed from pre-tariff levels, according to CNBC reporting. Tariffs, as economists have long argued, do not reliably close trade deficits. They redistribute economic activity, often at a cost.

Suggested Data Visualization — Comparative Economic Impact Table:

Economy	Pre-Feb 20 Tariff Rate	Post-Feb 21 Rate	Projected GDP Impact	Key Vulnerability
United States	~16.8% avg effective	~13.0% (Section 122 + 232)	-0.1% to -0.2% long-run	Consumer prices, retaliation risk
European Union	15% (IEEPA deal)	15% (Section 122)	Marginally positive	Export competitiveness
China	~36% (IEEPA + 301)	35% (301 + Section 122)	Significant negative	Export-led sectors
Canada	25% (fentanyl tariff)	USMCA-compliant exempt	Moderate negative	Auto supply chain
Mexico	25% (fentanyl tariff)	USMCA-compliant exempt	Moderate negative	Manufacturing exports
Emerging Markets	10–25% (IEEPA range)	15% flat	Net relief for many	Currency, capital flows

Sources: Yale Budget Lab, Tax Foundation, CNBC, CFR (February 2026)

Key Economies’ Responses and Strategies

Different capitals are drawing very different conclusions from last week’s constitutional drama — and their responses will define the next phase of global trade policy.

The European Union enters the Section 122 era in a peculiar position: its agreed IEEPA tariff rate was 15%, which happened to match exactly the new Section 122 ceiling. In practical terms, Brussels faces tariffs no higher than before — though the legal ground has shifted dramatically. EU trade negotiators have signaled a preference for cautious continuity, unwilling to jeopardize the existing deal framework even as its legal underpinning evaporates. The longer-term EU strategy — accelerating trade diversification toward Southeast Asia, Africa, and Latin America, while deepening the EU’s own internal market for strategic goods — gained considerable momentum during 2025 and is unlikely to reverse.

China faces a more complex arithmetic. With IEEPA’s two separate 10% “fentanyl” tariffs now struck down, China’s total tariff burden has fallen slightly — from roughly 36% to approximately 35% (Section 301 at 25% plus the new 15% Section 122 baseline, minus some stacking exemptions). That marginal relief is unlikely to prompt a strategic rethink in Beijing, which has spent the past year aggressively developing alternative export markets across Southeast Asia, the Middle East, and Africa. China’s counter-tariff posture — covering billions in U.S. agricultural and industrial exports — remains intact and is widely expected to be maintained as leverage in any future negotiations. As J.P. Morgan Global Research has noted, the IMF estimates that a universal 10% U.S. tariff combined with retaliation from the eurozone and China could reduce U.S. GDP by 1% and global GDP by roughly 0.5% through 2026.

Canada and Mexico, whose USMCA-compliant goods remain exempt from Section 122, have emerged as relative winners from this week’s ruling — at least temporarily. Yet neither government is declaring victory. Both are acutely aware that Section 301 investigations, which the administration has vowed to launch against “most major trading partners,” could reimpose tariff pressure within months. Ottawa has maintained its own retaliatory tariff regime as insurance; Mexico City continues to walk the diplomatic tightrope of economic dependency and political sovereignty.

Emerging markets present the most variegated picture. Countries that faced high IEEPA reciprocal tariffs — Vietnam at 46%, India at 25%, Brazil at 10% — may now find themselves at a uniform 15% under Section 122, representing relief for some and a steeper bill for others. The more profound risk, however, is macroeconomic: dollar-denominated debt burdens swell as tariff uncertainty sustains a strong greenback, and export revenue volatility strains fiscal positions already strained by pandemic-era borrowing. As CFR’s analysis makes clear, the administration’s pivot to Section 301 investigations against “unfair trading practices” of individual countries is already underway — and most emerging-market economies lack the trade lawyers, leverage, or political bandwidth to mount effective defenses.

The Constitutional and Legal Fault Lines

One of the signal facts of this moment is that the Supreme Court’s ruling has not resolved the question — it has only changed the playing field. The 150-day clock on Section 122 tariffs will expire around July 24, 2026. At that point, the administration faces a binary choice: seek congressional approval (politically difficult given divisions within the Republican caucus), or allow the tariffs to lapse and declare a fresh balance-of-payments emergency to restart the clock.

As the Cato Institute’s analysis cautions, nothing in the statute explicitly prohibits successive emergency declarations. If the administration adopts that interpretation, the 150-day limit becomes a 150-day renewable license — which would raise profound separation-of-powers questions that courts would eventually need to resolve. Meanwhile, new Section 301 investigations — targeting individual countries for “unfair trade practices” — could produce a patchwork of country-specific tariffs within months, potentially replicating the IEEPA structure through slower but legally sturdier means.

There is also the unresolved question of refunds. The Supreme Court said nothing about whether importers are entitled to recover the IEEPA tariffs they have already paid. Legal experts estimate that exposure at up to $175 billion, according to CNBC — a sum that, if ordered returned, would represent one of the largest fiscal reversals in U.S. customs history. Importers must now pursue administrative remedies or litigation before the Court of International Trade, adding another layer of uncertainty to an already disorienting landscape.

Long-Term Implications for Trade, Growth, and Global Order

Beyond the immediate economic arithmetic lies a more fundamental question: what kind of international trading system emerges from this period of sustained American unilateralism?

The Section 122 chapter, whatever its legal merits, has demonstrated something important: the United States retains multiple statutory pathways to impose broad tariffs, and a determined administration will find and use them. The IEEPA ruling narrows one channel but leaves several others open — including Section 232 (national security), Section 301 (unfair trade practices), and Section 338 of the Tariff Act of 1930, a little-tested provision that would allow tariffs against countries deemed to discriminate against American commerce.

For businesses, this means the uncertainty that devastated supply chain planning in 2025 is not ending — it is merely entering a new phase. Retailers like Walmart have already announced price increases; small manufacturers have halted import orders; global logistics companies are repricing their services to reflect tariff volatility as a structural cost. The Tax Foundation estimates the 2025 tariffs imposed an average household tax burden of approximately $1,000 — a figure that will evolve in 2026 as the Section 122 tariffs replace part of the IEEPA structure.

For investors, the picture is equally nuanced. The immediate reaction to the Supreme Court ruling was positive for markets that had been dreading a worst-case tariff scenario. But Treasury Secretary Scott Bessent was quick to temper expectations, stating that tariff revenue in 2026 would remain “virtually unchanged” — a deliberate signal to markets and trading partners alike that the administration’s trade posture is not softening, merely repositioning.

For policymakers around the world, the deeper lesson is structural. The WTO’s dispute settlement mechanism, already weakened by U.S. resistance to appellate body appointments, has been essentially bypassed by the administration’s bilateral approach. Countries that invested in bilateral negotiations with Washington — accepting specific tariff rates under IEEPA deals — now find those legal underpinnings dissolved, even if their substantive commitments (purchase agreements, investment pledges, regulatory coordination) remain politically expected. As CFR President Michael Froman noted, “between the Section 122 tariff, plus any subsequent tariffs imposed under Sections 232 and 301, most [countries] could end up being pretty close to where they are now.”

Suggested Chart: U.S. Effective Tariff Rate Timeline (2024–2026) A line graph tracing the average effective tariff rate from 2.5% (Jan 2025) → 27% (April 2025) → 16.8% (Nov 2025) → 9.1% (post-SCOTUS ruling, pre-Section 122) → 13.0% (post-Section 122 at 15%), illustrating the volatility of the policy environment and the narrowing of the gap between IEEPA and Section 122 regimes.

What Comes Next: A Road Map for Businesses, Investors, and Policymakers

The next 150 days will be among the most consequential in U.S. trade policy history. Here is what to watch — and what to do about it.

For businesses importing into the United States: The 15% Section 122 tariff is in effect as of February 24, with significant carve-outs — agricultural products, pharmaceuticals, semiconductors, critical minerals, and energy products are largely exempt, mirroring the IEEPA structure. Logistics teams should immediately audit their HTS classifications against Annex II of the February 20 Proclamation. More importantly, they should model two scenarios: one in which Section 122 expires in July, and one in which it is extended or replaced by Section 232/301 actions at comparable or higher rates. Do not assume the July expiration represents a return to free trade.

For investors in international equities: The short-term relief rally following the IEEPA ruling should not be mistaken for a structural shift. With Section 301 investigations newly launched against most major trading partners, and Section 232 actions covering steel, aluminum, autos, and potentially pharmaceuticals and semiconductors, the tariff overhang on global supply chains remains substantial. Sectors most exposed include consumer electronics, auto parts, specialty chemicals, and apparel. Conversely, U.S. manufacturing equities — particularly in durable goods — may see continued tailwinds, as Yale’s Budget Lab projects long-run manufacturing output expansion of approximately 2%.

For policymakers and trade negotiators: The bilateral agreements struck under IEEPA — with the UK, Japan, South Korea, Vietnam, Taiwan, India, and others — retain their political weight even if their legal foundation has shifted. Countries that have made investment pledges or purchase commitments to the United States have strong incentives to honor them regardless of the legal environment. Equally, the 150-day window of Section 122 creates a genuine deadline for Congress: if lawmakers want to assert their constitutional authority over trade, now is the clearest opportunity in a generation. A bipartisan vote to either extend, modify, or replace the Section 122 tariffs with a more durable legislative framework would both honor the constitutional ruling and provide the policy certainty that markets desperately need.

Conclusion: The Permanent Impermanence of Trump Trade Policy

There is something almost surreal about the situation confronting the global economy in late February 2026. The highest court in the United States delivered a landmark constitutional ruling — and within 24 hours, the practical effect was a global tariff at the legal maximum permitted under an entirely different statute. The world had hoped for clarity. What it received was continuation under new management.

This is not simply a legal or political story. It is a story about the structural transformation of the post-war trading order — one that has been accelerating since Trump’s first term but has now reached a new threshold. The U.S. trade deficit stubbornly persists at $901 billion. Tariff revenue has soared but largely at the expense of American consumers and businesses. Global supply chains are bifurcating in ways that will take decades to reverse.

What the Section 122 tariff regime ultimately reveals is not the strength of the president’s trade policy — it is its fragility. A 150-day authority, invoked for the first time in history, at the maximum permissible rate, in the hours after a constitutional defeat, is not a trade policy. It is a tactical maneuver inside a larger strategic uncertainty. The world’s finance ministers, central bankers, supply chain executives, and small business owners deserve better than that. So, ultimately, do American consumers — who are paying the bill.

Discover more from The Economy

Subscribe to get the latest posts sent to your email.

Up Next

Ukraine’s Economy Is Growing Despite the War — Inside the $524 Billion Resilience Story of 2026

Don't Miss

Tarique Rahman’s Plan to Revive Bangladesh’s Economy: Challenges and Opportunities in 2026

Click to comment

Analysis

Strait of Hormuz 2026: Why Markets Still Don’t Trust It’s Open

Published

11 hours ago

July 11, 2026

Abdul Rahman

If you’ve followed headlines about the Strait of Hormuz over the past several months, you’d be forgiven for losing track of whether it’s actually open. That confusion isn’t a media failure — it genuinely has opened, closed, and reopened multiple times since the conflict began, and the pattern itself is the real story markets need to understand, far more than any single day’s price move.

A Timeline That Explains the Market’s Persistent Skepticism

The crisis began February 28, 2026, when US and Israeli military operations against Iran triggered Iranian retaliation, including drone, ballistic missile, and small-boat attacks on vessels attempting to transit the Strait (Brookings). By March 4, Iranian forces formally declared the Strait “closed.” Insurance for transiting vessels became unavailable or prohibitively expensive, and seafarers largely refused the journey — meaning the Strait was effectively shut even without a formal blockade in the technical sense (Brookings).

What followed was a genuinely chaotic sequence that explains why traders remain reluctant to fully price in a resolution even now. On April 9, there was no sign an earlier agreement to lift the blockade was actually being implemented — ships were once again prevented from passing. Abu Dhabi National Oil Company’s CEO confirmed the Strait remained closed despite an announced ceasefire, noting 230 loaded oil tankers were waiting inside the Gulf (Wikipedia — 2026 Strait of Hormuz crisis). On April 17, Iran’s foreign minister announced the Strait was open to all shipping — oil prices dropped 11% immediately following the announcement. The very next day, April 18, Iran closed it again, citing the US refusal to lift its own naval blockade in response.

Even the June 17 memorandum of understanding between Trump and Iranian President Masoud Pezeshkian to formally end the war and the blockades didn’t hold cleanly: on June 20, Iran said it had closed the Strait again, citing continued Israeli strikes in southern Lebanon as a violation of the broader ceasefire agreement — a claim the US military denied (Wikipedia). By June 27, the US Navy’s Joint Maritime Information Center announced a widened shipping route through the Strait near Oman, an action explicitly framed as challenging Iran’s control over the waterway rather than a clean bilateral resolution.

Why This Chokepoint Matters More Than Any Other Piece of Global Infrastructure

Approximately 20 million barrels of oil per day move through the Strait of Hormuz — roughly 20% of global seaborne oil trade and about 27% of the world’s maritime crude oil and petroleum product trade combined (Congressional Research Service). At its narrowest point, the Strait is just 33-34 kilometers wide, split into two unidirectional two-mile-wide shipping lanes separated by a two-mile buffer zone sitting entirely within Iranian and Omani territorial waters (Congressional Research Service).

Critically, no rerouting option exists that can replace this volume at comparable cost. An extended full closure would remove 17-21 million barrels from daily global supply against total world consumption of roughly 100 million barrels per day — a supply shock with no readily available substitute (Ziro Market).

The Damage Already Done, Even With Partial Reopening

The International Energy Agency characterized the disruption as the largest supply disruption in the history of the global oil market (Wikipedia — Economic impact of the 2026 Iran war). At peak conflict intensity in February-March 2026, Brent crude surged well above $120 per barrel. As ceasefire talks progressed through May and June, prices retreated significantly — falling to around $95-100 per barrel by early June, and briefly dipping to $78.24 per barrel by mid-June, the lowest level since March 3, before the framework agreement was formally signed (Al Jazeera).

But the ripple effects extend well beyond crude oil pricing. The Strait closure disrupted roughly 45% of global sulfur supply — critical for fertilizer production, copper industry metal leaching, and sulfuric acid manufacturing — and constrained helium supply, a commodity essential to semiconductor manufacturing (Wikipedia — Economic impact). Shipping companies including Maersk, CMA CGM, and Hapag-Lloyd suspended transits through the Strait and related routes like the Red Sea entirely, forcing rerouting around the Cape of Good Hope that added two to three weeks to journey times and increased per-shipment costs by 30-50% (Ziro Market).

Europe’s Quieter But Deeper Crisis

While oil price headlines dominated coverage, Europe faced an arguably more severe parallel crisis through the suspension of Qatari liquefied natural gas exports combined with the Strait closure — hitting at the worst possible moment, with European gas storage sitting at just 30% capacity following a harsh 2025-2026 winter. Dutch TTF gas benchmarks nearly doubled to over €60/MWh by mid-March (Wikipedia — Economic impact).

The European Central Bank responded by postponing planned interest rate reductions on March 19, simultaneously raising its 2026 inflation forecast and cutting GDP growth projections, with UK inflation specifically projected to breach 5% during 2026. Chemical and steel manufacturers across the UK and EU imposed surcharges of up to 30% to offset surging electricity costs, and the ECB explicitly warned that a prolonged conflict risked pushing major energy-dependent economies, including Germany and Italy, into technical recession by year-end.

Why OPEC+ Couldn’t Simply Fill the Gap

A natural question is why Saudi Arabia and the UAE — the two largest Gulf Cooperation Council producers with meaningful spare capacity — didn’t simply increase output to compensate. The answer is logistical rather than a lack of willingness: the Strait closure itself limited their ability to actually export any increased production volumes, even when pumping more oil, because the export bottleneck was the same chokepoint causing the broader crisis (Ziro Market). Total OPEC country production fell more than 30% since the start of the war, and the region’s spare capacity — the traditional shock absorber for global oil markets — proved largely irrelevant when the actual export route itself was under attack (Brookings).

US shale producers, meanwhile, responded more slowly to the price signal than historical patterns would predict. Rig counts stayed largely steady through April 2026, though well-completion activity in the Permian Basin did rise roughly 20% over several weeks as previously drilled wells came into production — still below pre-pandemic activity levels overall (Brookings).

The Market Is Still Pricing a Discount for Uncertainty, and Analysts Say That’s Correct

Vandana Hari, founder of Singapore-based Vanda Insights, offered perhaps the most useful framing for understanding current market behavior: crude’s slide following the memorandum of understanding is “entirely sentiment-driven,” with markets front-running the prospective reopening and likely pricing in a best-case scenario for normalized flows — meaning potential hiccups, from logistics to renewed geopolitical tensions, aren’t being adequately factored in (Al Jazeera).

Given the actual track record — multiple announced reopenings followed by renewed closures throughout April and June — that skepticism looks well-founded rather than excessive.

What This Means for Businesses and Investors Going Forward

For companies with Gulf-dependent supply chains: Treat any single reopening announcement as provisional rather than a genuine all-clear, given the pattern of reversals throughout the spring. Maintaining rerouting contingency plans and insurance flexibility remains prudent even after formal ceasefire signings.

For inflation-sensitive investors and central bank watchers: The relationship Ziro Market’s analysis highlights is worth internalizing directly: whether oil settles near $80-85 (supporting rate cuts, lower CPI, stronger oil-importing currencies) or spikes back toward $120 (elevated inflation, delayed rate cuts) functions as a genuine macro regime switch — not a marginal input, but potentially the single largest swing factor for 2026 global monetary policy.

For commodity-exposed sectors beyond energy: The sulfur, fertilizer, and helium supply disruptions are underappreciated second-order effects that specifically hit agriculture and semiconductor manufacturing — sectors not typically associated with Middle East conflict risk but directly exposed through this specific chokepoint.

The Bottom Line

The Strait of Hormuz crisis of 2026 has been less a single supply shock than a recurring pattern of partial resolutions and renewed disruptions, and that pattern itself is the most important thing for markets and businesses to understand going forward. Prices have retreated substantially from their conflict-peak highs, and the June 17 memorandum of understanding represents genuine diplomatic progress. But given that the Strait has been declared “open” and then closed again multiple times within the same several-week windows, treating the current relative calm as a durable resolution — rather than the latest phase in an ongoing negotiation — would be a mistake that both markets and policymakers seem determined not to repeat.

Discover more from The Economy

Subscribe to get the latest posts sent to your email.

AI

AI Capex Bubble 2026: The Hidden $662B Debt Nobody Reports

Published

11 hours ago

July 11, 2026

Abdul Rahman

Every earnings season now brings a fresh wave of headlines about hyperscaler AI capital expenditure hitting a new record. The “big four” — Amazon, Microsoft, Alphabet, and Meta — are on track to spend roughly $725 billion combined in 2026, a 77% jump from the $410 billion deployed in 2025 (UnboxFuture). That number gets reported constantly. What almost nobody is reporting with the same prominence is a separate figure that may matter more: roughly $662 billion in data center lease commitments that hyperscalers have already signed but not yet begun — obligations that currently sit entirely off balance sheet.

Why the Off-Balance-Sheet Number Changes the Whole Picture

Under GAAP accounting rules governing when a lease “commences,” these signed-but-not-started commitments don’t appear in the capital expenditure figures analysts and investors typically scrutinize when assessing hyperscaler financial health. According to reporting citing Moody’s early-2026 analysis, this shadow liability is larger than the combined on-balance-sheet debt of the same companies (Anomaly Investments).

That detail matters enormously for one specific argument AI infrastructure bulls have relied on: the claim that this buildout is being conservatively self-funded from operating cash flow rather than risky leverage. Once the full picture of committed-but-unrecognized obligations is accounted for, that defense becomes much harder to sustain.

The Debt Is Already Showing Up, Not Just Theoretical

This isn’t a purely hypothetical concern about future liabilities. Big tech companies have already issued more than $100 billion of bonds in 2026 specifically to help fund AI capital expenditure, and investors have responded by demanding record levels of protection against potential defaults through credit default swaps — essentially insurance policies against bond default (IEEE ComSoc).

Individual company examples illustrate the shift toward leverage: Oracle issued an $18 billion bond specifically tied to its data center expansion; CoreWeave secured a $2.6 billion loan alongside a $1.75 billion bond package; and OpenAI and Oracle reportedly entered into a $100 billion vendor financing arrangement (Anomaly Investments). At Amazon specifically, capital expenditure over the trailing twelve months has reached $151 billion — a figure that now exceeds the company’s entire operating cash flow, pushing free cash flow into negative territory.

The Depreciation Assumption Almost No Coverage Questions

Here’s an angle genuinely underexplored across most financial media: the depreciation schedules hyperscalers use for AI hardware assume a five-to-six-year useful life. But given how rapidly GPU generations are turning over and how intensively AI workloads are pushing hardware utilization, critics argue the real economic life of this equipment is closer to two to three years. That gap between assumed and actual depreciation is estimated to understate true asset depletion by roughly $176 billion between 2026 and 2028 alone — a figure that grows as accelerating token consumption pushes hardware utilization beyond the assumptions built into current depreciation schedules (Anomaly Investments).

Layered on top of that is the energy cost curve: running the current roughly 30-gigawatt installed base of AI infrastructure costs approximately $27 billion annually today, but that figure is projected to climb to between $45 and $90 billion per year as capacity scales toward 2029 — and crucially, these are first charges against revenue, not optional or deferrable costs.

The Revenue Gap: Who’s Actually Paying for All This?

The most commonly cited justification for the capex surge is that the pure-play AI vendors — OpenAI, Anthropic, and others — represent a massive and rapidly growing revenue opportunity. The reality is more nuanced. OpenAI’s roughly $20 billion annualized revenue run rate, while genuinely impressive for a company with barely any consumer products three years ago, represents only about 3% of projected 2026 hyperscaler capex. Anthropic’s roughly $9 billion run rate, despite showing 9x year-over-year growth, occupies a similarly small share. The entire cohort of pure-play AI vendors combined — including Cohere, Mistral, Perplexity, and others — likely accounts for less than $35 billion in projected combined 2026 revenue against a hyperscaler capex figure exceeding $700 billion (Futurum Group).

That gap is the crux of the bubble debate: hyperscalers are betting the infrastructure will ultimately serve enterprise adoption and their own AI services broadly, not just third-party AI vendor revenue — but that bet requires enterprise AI monetization to arrive at a scale that, as of mid-2026, remains largely unproven outside of code generation and basic customer service automation.

The Skeptic’s Case, From Inside Goldman Sachs Itself

The most prominent voice of institutional skepticism doesn’t come from an outside critic — it comes from within Goldman Sachs itself. Jim Covello, the bank’s Head of Global Equity Research, has consistently argued the economics of the generative AI transition are fundamentally flawed, stating in mid-2026 that the industry has moved “further away” from justifying the scale of capital expenditure compared to two years prior (UnboxFuture). Covello has specifically flagged circular capital flows between cloud providers and AI startups — where hyperscalers invest in AI companies that then spend that same capital purchasing compute from those same hyperscalers — as a red flag reminiscent of vendor financing patterns seen in the dot-com era.

The valuation comparison to that era is explicit and increasingly common among strategists: US technology and AI equities carry EV/EBITDA multiples near 25x, close to historical extremes and above the telecom valuations that preceded the 2000 dot-com peak. More specifically, capex is currently expanding roughly 46 percentage points faster than revenue growth — a gap that exceeds the 32-point divergence observed during the 2001 telecom excess cycle (Allianz Research). Separately, Bank of America strategists have pointed out that AI stock concentration has reached levels matching prior bubble peaks, with the “AI Big 10” (Nvidia, Microsoft, Alphabet, Amazon, Meta, Apple, Tesla, Broadcom, Micron, and AMD) now making up 41% of the S&P 500 — comparable to the concentration of tech and telecom stocks during the actual dot-com bubble (Yahoo Finance).

The Bull Case Isn’t Naive Either

It would be inaccurate to frame this purely as informed skeptics versus blind enthusiasm. Goldman Sachs’ own broader research (distinct from Covello’s individual view) models roughly $7.6 trillion in cumulative AI capital expenditure between 2026 and 2031, built on the expectation that token consumption will increase 24-fold by 2030, driven largely by enterprise AI agents becoming embedded in production workflows rather than remaining experimental (Sesame Disk / Goldman commentary). Microsoft has disclosed an $80 billion backlog of Azure orders it currently cannot fulfill due to power constraints — genuine evidence that demand, at least for existing capacity, is outpacing even the current aggressive build-out pace (Futurum Group).

Leverage levels also remain more conservative than headlines suggest in absolute terms: the top five US capex providers reported a combined $385 billion in debt at the end of 2025, with leverage ratios still roughly 20% below the “high spender” cohort from the 2000 dot-com peak, according to Allianz Research analysis — meaning rising debt levels are a trend worth monitoring closely, not yet an acute crisis.

What Happens If the Bubble Skeptics Are Right

Historical infrastructure cycles offer a specific and somewhat counterintuitive lesson: the investors who fund the initial frenzied build-out phase rarely capture the long-term rewards. If the AI capex cycle follows the pattern of the 1998-2001 fiber optic buildout, hyperscalers may eventually be forced to write down the value of data centers and GPUs purchased at today’s prices and utilization assumptions. But that collapse in computing costs, paradoxically, could pave the way for a new generation of leaner, genuinely profitable software companies to build on top of the resulting cheap, overbuilt infrastructure — much as fiber-optic overbuild eventually enabled the 2000s streaming and cloud computing boom, even after the original telecom investors were wiped out.

What This Means for Investors and Businesses

For equity investors, the practical signal to watch isn’t the headline capex number — it’s the widening gap between capex growth and revenue growth, and whether that gap begins narrowing through 2027 as enterprise adoption either accelerates or disappoints. For businesses evaluating AI vendor relationships, the circular-financing pattern flagged by Covello is worth diligence: understanding whether an AI vendor’s revenue depends partly on capital originally supplied by the same hyperscaler providing its compute is a legitimate red flag for assessing that vendor’s underlying financial independence. For fixed-income investors, the rising credit default swap pricing on hyperscaler-linked debt is itself a market signal worth tracking as an early indicator of shifting sentiment, independent of equity price action.

The Bottom Line

The AI infrastructure buildout genuinely is the largest corporate capital expenditure cycle in recorded history, and it’s happening for real, defensible reasons tied to a genuine technology shift. But the debate over whether it constitutes a bubble isn’t really about whether AI technology is useful — it’s about whether the timing of returns can keep pace with public equity markets’ patience, and whether the $662 billion in off-balance-sheet lease commitments, aggressive depreciation assumptions, and circular vendor financing arrangements represent manageable financial engineering or the early architecture of a genuinely serious correction. Both cases have real evidence behind them. What’s clear is that the headline capex figure everyone quotes is no longer the most important number in this story.

Discover more from The Economy

Subscribe to get the latest posts sent to your email.

Markets & Finance

Gold Overtakes US Treasuries in Reserves: What It Means

Published

11 hours ago

July 11, 2026

Abdul Rahman

Most gold coverage in 2026 has fixated on the price chart — the spectacular run from roughly $2,633 an ounce at the start of the year to fresh record highs above $5,400 by mid-year (Intellectia). That’s a legitimate story. But it’s not the most important one. The more consequential shift is structural, not seasonal: gold has overtaken US Treasuries as the largest share of global central bank reserves for the first time in three decades (BlackRock).

That’s not a headline about a commodity rally. It’s a headline about the architecture of the global monetary system quietly shifting under everyone’s feet.

The Trigger Most Coverage Undersells

The pivotal moment behind this shift traces back to 2022, when roughly $300 billion of Russian central bank foreign exchange reserves were frozen as part of international sanctions following the invasion of Ukraine (ISA Bullion). For reserve managers around the world — not just in Russia — that event functioned as a wake-up call: dollar-denominated assets held abroad are not unconditionally safe from geopolitical sanctions risk. Gold, by contrast, carries no counterparty risk; nobody can freeze a gold bar sitting in a country’s own vault.

That single realization has reshaped reserve management strategy globally. Central bank gold purchases averaged 225 tonnes per quarter between 2021 and 2025 — roughly double the pace seen from 2016 to 2020 (J.P. Morgan Global Research). BRICS+ nations now hold 17.4% of global gold reserves, up sharply from just 11.2% in 2019 (ISA Bullion).

Who’s Actually Buying, and Why the List Matters

Poland has been the standout accumulator, adding 20.2 tonnes in February 2026 alone, another 11.2 tonnes in March, and 14 tonnes in April — extending a rapid buildup that has added more than 360 tonnes to its reserves since 2023 (BestBrokers). China’s central bank maintained consecutive monthly gold purchases for 19 straight months through May 2026, even though much of this buying goes officially unreported to the IMF — analysts widely believe the People’s Bank of China continues accumulating gold “off the books” (ISA Bullion).

China’s motivation appears explicitly strategic rather than opportunistic. Chinese net gold imports jumped to 317 tonnes in the first quarter of 2026 alone — nearly triple the prior quarter — while the People’s Bank of China’s own reported purchases accelerated from roughly one tonne per month through February to eight tonnes in April (J.P. Morgan Global Research). J.P. Morgan’s own analysts frame this as part of a long-term Chinese project to build gold reserves as a foundation for establishing the renminbi as a credible alternative reserve currency.

A World Gold Council survey found a striking 95% of central banks expect to increase their gold holdings in 2026, up from 81% in 2024 and just 52% in 2021 — a trajectory showing accelerating, not plateauing, institutional conviction (BlackRock).

The Part of the Story Most Coverage Misses: Not Everyone Is Buying

Here’s an angle that gets consistently underplayed: this isn’t a uniform global stampede into gold. Several countries, including Singapore, Jordan, Mexico, and the Solomon Islands, actually reduced their gold reserves in 2025 — Singapore in particular emerged as a notable seller, likely driven by portfolio rebalancing decisions and a desire to realize gains after gold’s historic surge, rather than any lack of confidence in the metal (BestBrokers). Germany, for its part, has reduced its gold holdings every year since at least 2002, though its 2024 sale of just 1.1 tonnes was the smallest annual reduction on record.

This nuance matters for anyone trying to build a genuinely accurate picture: the de-dollarization and gold-accumulation trend is heavily concentrated among specific emerging-market and non-aligned economies — not a universal central bank consensus. Understanding which countries are buying and why is more analytically useful than simply citing an aggregate global purchasing figure.

Where Forecasts Diverge — And Why the Spread Is So Wide

Institutional price forecasts for gold currently show a genuinely unusual spread. J.P. Morgan projects gold reaching $6,000 an ounce by the end of 2026, and potentially $6,300 by the end of 2027 (J.P. Morgan Global Research). Morgan Stanley’s more conservative 2026 forecast sits at $4,400 an ounce (Morgan Stanley), while State Street projects a range of $4,750 to $5,500, and DWS targets $5,400 by mid-2027 (Discovery Alert).

A spread exceeding $1,500 per ounce between the most bullish and most conservative institutional forecasts reflects a genuine, unresolved analytical disagreement — not just differing house styles. The bull case rests on the idea that central bank reserve diversification represents a structural, policy-level shift rather than opportunistic market timing, making it fundamentally different from prior gold cycles driven mainly by retail or momentum investors. The more cautious case notes that gold’s roughly 245% rally from September 2022 to January 2026 is the largest percentage advance in modern gold market history — and historically, rallies of that magnitude have eventually triggered significant, multi-year corrections (Discovery Alert).

The Under-Discussed New Buyer: Stablecoin Issuers

One of the least-covered developments in this entire gold story is the emergence of stablecoin issuers as a genuinely new category of gold demand. As crypto markets have matured, some stablecoin issuers have begun holding gold as part of their reserve backing strategy — a development BlackRock specifically flags as part of the “early stages” of a new demand wave that also includes central banks and the broader AI infrastructure buildout’s effect on institutional portfolio hedging behavior (BlackRock).

What This Means for Different Audiences

For everyday investors: Gold ETPs still make up only about 0.17% of total US private financial assets, remaining well below prior peaks seen in the early 2010s, while private wealth gold allocations globally sit roughly 50% below levels seen a decade ago (BlackRock). That suggests meaningful room for incremental Western retail and institutional demand to grow, even after the current rally, if the structural de-dollarization narrative continues to gain mainstream acceptance.

For businesses managing currency exposure: The scale and persistence of central bank gold buying is one of several signals (alongside Fed communication policy changes and fiscal deficit concerns) suggesting continued structural pressure on the US dollar’s long-term reserve currency dominance — a trend worth factoring into multi-year currency hedging strategies rather than treating as a short-term news cycle.

For portfolio allocators: The unusually wide spread between institutional forecasts is itself useful information — it suggests treating any single gold price target as a scenario input rather than a confident base case, and sizing gold allocations based on its role as a portfolio diversifier and inflation/geopolitical hedge rather than as a directional price bet.

The Bottom Line

The gold price chart is the story most people are watching. The reserve-composition shift is the story that actually matters for the long-term structure of global finance. Gold surpassing US Treasuries as the largest share of central bank reserves for the first time since 1996 is a genuinely historic threshold — one triggered specifically by the 2022 Russian asset freeze and now sustained by a broad, if uneven, cohort of emerging-market central banks pursuing deliberate de-dollarization strategies. Whether the price keeps climbing toward J.P. Morgan’s $6,000 target or cools toward Morgan Stanley’s more conservative range matters less, in the long run, than the structural fact that the world’s reserve managers have permanently changed how they think about gold’s role in the global financial system.