“A Huge Problem for Everybody” | Paul Krugman on China, the Dollar, A.I., & More

Speakers

Paul Krugman — Nobel Prize-winning Economist, Distinguished Professor, Publisher of the Paul Krugman Substack

Jack Farley — Host of Monetary Matters

Summary

The US Dollar's dominance is entrenched due to network effects and a lack of viable alternatives (Euro is fragmented, RMB has capital controls); the risk is not replacement by another currency, but a fragmented chaotic system.
China is exporting its demand deficiency via trade surpluses, which is unsustainable and will lead to a "wall of tariffs" from both the US and Europe.
The current AI Capex boom resembles the late 1990s Telecom boom: the technology may be real, but the companies spending the capital (Hyperscalers) may face poor returns or failure ("grief").
"R-star" (the neutral interest rate) has structurally risen; unlike 2019, debt is now a concern because interest rates exceed the growth rate, making fiscal deficits more problematic.
Immigration into the US has flatlined or turned negative, which historically lowers investment demand (housing/offices) and could eventually lower R-star, though current data doesn't reflect this yet.

Trade Ideas

Ticker	Direction	Speaker	Thesis	Time
US DOLLAR	LONG	Paul Krugman Nobel Prize-winning Economist, Distinguished Professor, Publisher of the Paul Krugman Substack	Krugman states the dollar is the "money of monies" and replacing it is harder than imagined. He notes, "The issue is not that the dollar might be replaced by something else, but that the dollar might be replaced by nothing else." Despite fears of weaponization or deficits, there is no alternative (TINA). The Euro is too fragmented, and the RMB has capital controls. Therefore, betting on the dollar's collapse is betting against the structural reality of global finance. LONG USD as the continued global hegemon. A total breakdown of the international order leading to a fragmented, chaotic monetary system (Argentina-style loss of credibility).	0:06
MCHI /FXI	AVOID	Paul Krugman Nobel Prize-winning Economist, Distinguished Professor, Publisher of the Paul Krugman Substack	Krugman argues China is "exporting the demand deficiency via trade surpluses" and predicts China will "run into a wall of tariffs by everybody," specifically noting a coming "big European backlash." China's economic model relies on exports to offset weak domestic consumption. If both the US (already 37% tariffs) and Europe (coming soon) block these exports, Chinese manufacturing and export-heavy equities will suffer severe revenue compression. AVOID Chinese equities, particularly exporters. China successfully pivots to domestic consumption (which Krugman deems necessary but hasn't happened yet).	—
GOOGL /MSFT /META	AVOID	Paul Krugman Nobel Prize-winning Economist, Distinguished Professor, Publisher of the Paul Krugman Substack	Krugman compares the current AI spending to the late 1990s Telecom boom. He notes that while the internet was real, "the companies that did the big spending in many cases did not survive." He describes current tech giants as "aging behemoths... spending vast amounts... to dig their moats deeper." The "Hyperscalers" are the ones laying out massive Capex ($500-600B). If this parallels the Telecom boom, the spenders of capital are at risk of poor ROI and financial distress, even if the technology (AI) eventually changes the world. AVOID the massive spenders (Hyperscalers) due to risk of capital destruction. AI generates immediate, high-margin revenue that justifies the Capex (unlike the dark fiber glut of the 90s).	—
TSM	LONG	Paul Krugman Nobel Prize-winning Economist, Distinguished Professor, Publisher of the Paul Krugman Substack	Regarding the AI boom, Krugman notes, "There's an awful lot of chips produced in Taiwan... so it may not be as much of a stimulus to the US economy." While the US companies (spenders) are risking capital, the manufacturers of the hardware are the immediate beneficiaries of the cash flow. The "leakage" of US stimulus goes directly to Taiwanese manufacturers. LONG the hardware manufacturers receiving the Capex spend. Geopolitical conflict in Taiwan or a sudden halt in US Hyperscaler Capex.	—
US TREASURIES /TLT	AVOID	Paul Krugman Nobel Prize-winning Economist, Distinguished Professor, Publisher of the Paul Krugman Substack	Krugman admits "R-star has moved way up" and the 2019 logic that debt doesn't matter (because r < g) no longer holds. "Interest rates are much, much higher... higher than the sort of long run growth rate of the economy." When interest rates exceed the growth rate, debt dynamics become unsustainable. The fiscal deficit is now a "problem" whereas it wasn't before. This structural shift suggests rates will not return to near-zero levels, creating headwinds for long-duration bonds. AVOID long-duration Treasuries as the era of "free money" is over. A severe recession forces the Fed to cut rates aggressively despite the structural issues.	—
COMMERCIAL REAL ESTATE /OFFICE REITS	AVOID	Paul Krugman Nobel Prize-winning Economist, Distinguished Professor, Publisher of the Paul Krugman Substack	Krugman highlights that US net migration may have turned negative. He cites the "accelerator principle," stating that investment demand depends on the growth of the population. "If the working age population is shrinking then you don't need a lot more office buildings." A stagnating or shrinking workforce destroys the fundamental demand for new physical space (offices/housing). Without population growth, the vacancy rates in commercial real estate cannot be absorbed. AVOID Commercial Real Estate and Office REITs. A sudden reversal in immigration policy or a productivity boom that increases space requirements per worker.	—