The Second-Largest Risk to Asset Markets Is an AI Capex Bust… What Is the Largest?

The U.S. federal budget deficit is accelerating toward an unsustainable trajectory as interest expenses and mandatory spending significantly outpace revenue growth. This fiscal imbalance, characterized by the "U-Shaped Fiscal Policy" thesis, forces a diversion of capital away from the private sector to fund sovereign debt, fueling a K-shaped economy that disproportionately harms lower-income households. By violating Ferguson’s Law—where debt service costs exceed defense spending—the U.S. risks a decline in its global hegemonic status, a pattern historically associated with systemic instability and social upheaval. With foreign creditors increasingly rotating out of Treasury bonds into U.S. equities, the resulting supply-demand imbalance in the bond market threatens long-term economic stability. Current policy, which relies on government-adjacent sectors for employment growth, fails to address the underlying structural crisis, leaving the nation vulnerable to potential systemic realignments and economic stagnation.