#economy

With no end in sight to the war in Iran and oil prices stuck above $100 a barrel, bond traders worried about inflation have sold off long-term government debt in the U.S. and developed economies in recent days. That has the effect of raising bond yields, including on the benchmark 10-year Treasury note , which rose nearly 24 basis points in the past week to end Friday near 4.6%. 

The 10-year Treasury yield influences the cost of mortgages, auto loans, credit card rates and other consumer debt. When it goes up, consumers feel the pinch. Its rate is set by the market, not the Federal Reserve.

If we’re going to live in a world in which fiscal deficits continue to increase indefinitely, there’s really not any political will to do something about that, and you have, at least in the U.S., a central bank that’s, let’s just say, uniquely hesitant to hike, then it just stands to reason that the yield curve is going to steepen. Long-term yields will continue to increase, because buyers need more compensation against the fiscal risk and the inflation risk that they’re absorbing now.

Savvy investors will understand this is a multi-stage process, and the U.S. government will also get to decide how to react to a sharp and sustained spike in long-end yields.

If this continues, and let’s say Treasury yields [on the 10-year note] march to 5% or above, it won’t be long before the Treasury secretary says, “Listen, I have a toolkit as well, and I’m not afraid to use it.” The Treasury secretary can shorten the weighted average maturity of our debt issuance, make more aggressive use of the buyback tool, and potentially jawbone the market with the Fed and say we may have to engage in purchases of long-end bonds to align them with long-term fundamentals.

In other words, that is financial repression [when the government artificially holds interest rates down, making debt more manageable at the cost of harming savers, among other risks].

I think that’s the end game for the bond market, because 5%-plus bond yields are not sustainable for a variety of reasons.

The U.S. Dollar Index, which measures the greenback against other major currencies, logged its steepest six-month drop in more than 50 years in the first half of 2025. Though the decline hasn’t deepened, the dollar index is still about 10% lower than the start of Trump’s term.

A strong dollar makes imports cheaper and can help keep inflation in check. A weak one can increase prices on foreign goods but boost American exports.

Trump has suggested a strong dollar puts the U.S. at a disadvantage and that a weak dollar helps American industry. And as with most things with Trump, he’s been blunter in his messaging.

“You make a hell of a lot more money with a weaker dollar,” he said last year, one of a number of public statements showing his preference for seeing the dollar decline.

Trump isn’t alone in seeing benefits of a weaker buck.

In recent months, corporate earnings calls have been peppered with talk of how a weaker dollar has helped companies from Philip Morris to Coca-Cola, with executives pulling out C-suite phrases like “favorable currency impact” to note how the dip brought tailwinds outside the U.S. that added to bottom lines.

Currency values are constantly moving and, while the dollar’s recent fall is notable, it has reached lower levels at points in the presidencies of each of Trump’s predecessors, back through the creation of the Dollar Index in 1973, when Richard Nixon was at the helm.

Kenneth Rogoff, a Harvard University economist and former chief economist at the International Monetary Fund, says while “a lot of policies that Trump is doing are something of a cancer for the dollar,” he believes that it was destined to fall no matter who was in charge.

“The dollar had been on a 15-year bull run,” he said. “I would argue the dollar is still wildly overvalued, and over the next maybe five or six years, it might fall 15%.”

What does that mean for American consumers? Rogoff says commodity prices are likely to rise, particularly with the impact of the Iran war on fuel prices.

“They’re just going to go up,” he says, “no matter what the dollar’s at.”

“We were cautiously optimistic on inflation heading into this year,” as price pressures like those from tariffs were unwinding, said Thomas Ryan, a North America economist at Capital Economics.

“Basically, we’re on hold now, just to see what happens with the energy price shock,” Ryan said. “If it’s long-lasting, we become more concerned about leakage” into other areas of consumers’ wallets, he said.

The year is 2026. The unemployment rate just printed 4.28%, AI capex is 2% of GDP (650bn), AI adjacent commodities are up 65% since Jan-23 and approximately 2,800 data centers are planned for construction in the US*. In spite of the current displacement narrative – job postings for software engineers are rising rapidly, up 11% YoY.

Indeed Job Postings: Software Engineers + Overall Postings, Daily and 21dma

The more important question insofar as it relates to the AI displacement narrative is: how intensely is AI being used for work? We can tease out the answer from a subset of the St Louis Fed data that buckets by frequency of AI use. We would posit that if AI represents imminent displacement risk, the real time population data would show an inflection upwards in the daily use of AI for work. The data seems unexpectedly stable and presents little evidence of any imminent displacement risk (solid lines at the bottom of the chart).

Displacing white collar work would require orders of magnitude more compute intensity than the current level utilization. If automation expands rapidly, demand for compute definitionally rises, pushing up its marginal cost. If the marginal cost of compute rises above the marginal cost of human labor for certain tasks, substitution will not occur, creating a natural economic boundary. This dynamic contrasts sharply with narratives assuming frictionless replication of intelligence. Even if algorithms improve recursively, economic deployment remains bounded by physical capital, energy availability, regulatory approvals, and organizational change.

For AI to generate a sustained macro contraction one must assume that labor income falls and no compensating rise occurs in investment, fiscal transfers, or external demand. The surge in new business formation is an interesting point of reference here.