AI boom, US debt and protectionism: Economist flags risks to global financial stability

“Since it is a totally new technology which is extremely capital intensive, the ability of this model to generate the cash flow which will justify the valuation and the debt accumulation is definitely a question mark,” Landau told The Indian Express. He added that a correction in stock market valuations could be manageable, but the larger question was whether the financial structure supporting AI investments could sustain growth.

AI financing model raises concerns Landau identified high stock market valuations and circular financing among the concerns surrounding the AI boom. In the latter model, major chipmakers finance their customers, who then buy products from these companies, creating sales that may not fully show independent demand. He cautioned that this arrangement could have limits, particularly as AI infrastructure requires substantial capital investment.

Why Indian tech firms may need more of them by 2030 Landau told The Indian Express that the sector's ability to generate sufficient cash flow to support its valuations and debt accumulation remained uncertain. The concern, therefore, extends beyond the possibility of a stock market correction to the financial arrangements underpinning the industry's expansion. “In my view, it’s not so much a question of a bubble, and if there’s a bubble, a pure stock market bubble, we can absorb it,” he told The Indian Express.

He added, "The question is the viability of the whole financial structure and growth which is taking place in that sector,” Landau added. US debt risks linked to policy uncertainty Landau's concerns over financial stability extend beyond AI investments. Responding to concerns about the US debt situation and its efforts to address the trade deficit, Landau told The Indian Express that the relationship between debt and US policy could be the reverse of what it appeared to be.

“I don’t think the US is becoming aggressive because it has a debt problem. I think the fact that they’re becoming aggressive is creating a debt problem,” he told The Indian Express. He pointed to concerns over the independence of the US central bank and said confidence in the country's debt partly depended on the expectation that its institutions would be respected. “The US debt is still very safe compared to the others, but part of that safety rests on the expectation that the institutions will be respected,” Landau said.

He added that doubts about institutional stability were emerging from the authorities' own actions, creating another source of uncertainty for global financial markets. Middle powers seek to protect trade ties Amid growing tensions between the US and China, Landau said countries such as India, Canada and members of the European Union were working to protect trade relationships through free trade agreements and economic partnerships.

These efforts, he said, indicated an attempt by middle powers to maintain stable economic ties amid rising protectionism and uncertainty surrounding the world's two largest economies. Landau said India was particularly important because of its size and role in the emerging world. He also described Europe as a source of monetary stability, citing its credible monetary framework and central bank. However, he warned that these partnerships did not make countries immune to a financial shock originating in debt markets, private credit markets or stock markets.

He said existing multilateral platforms, including the G20 and BRICS, lacked the operational mechanisms required for effective monetary and financial cooperation during a crisis. Reindustrialisation comes with a cost Landau also cautioned against excessive efforts to bring manufacturing back within national borders as countries seek greater strategic autonomy and resilience. He said countries could rebuild domestic industries, doing so at the expense of cross-border specialisation and trade could increase costs and weaken economic growth.

“We can all have our domestic industries, and the question is whether we keep growing, because part of our growth has come from the fact that we specialise, we organise cross-border, we interact with each other,” he told The Indian Express. Landau cited France as an example, saying the country could manufacture all its cars domestically, but doing so would be expensive and could limit growth. He argued that countries needed to balance strategic independence with the economic benefits of international trade.

The earlier global economic system, despite its shortcomings, had delivered substantial gains in poverty reduction. Nuclear power could support future energy demand Landau also explained the importance of nuclear power as AI infrastructure expands and energy demand rises. He said nuclear energy could help address several environmental challenges, although its success depended on effective governance.

“I think it is the energy of the future,” he told The Indian Express. He questioned the economic viability of relying heavily on renewable energy without the supporting infrastructure needed to manage intermittent power generation. He said improvements in battery technology could allow renewable energy to expand further, but the pace of adoption would depend on technological progress. Landau also pointed to China's approach to industrial development, arguing that the country had benefited from introducing and supporting technologies as they matured.

He said the challenge for governments and industries was to manage the timing of technological adoption while avoiding policies that undermine economic growth. Looking ahead, Landau identified Africa's population growth and capital requirements as a major challenge for the global economy, particularly for Europe. He said the continent's population was expected to double over the next 30 years, increasing the need for investment in infrastructure and productive capacity. “If we don’t double at least the stock of capital in Africa, it’s (going to be) a big challenge for everybody,” he told The Indian Express.