Politics and AI Disrupt Markets, Reshaping Financial Order: The Dollar's Uncertain Future

Summary

1. Political Intervention and Changes in Monetary Policy Shake the Dollar System

Under the Trump administration, the independence of the Federal Reserve has weakened, leading to a structure where monetary policy is influenced by politics. This has accelerated concerns about inflation, declining trust in the dollar, and moves towards de-dollarization, prompting a reorganization of the financial order.

2. The AI Bubble Enters a 'Selection Phase', with Limited Winners

In the AI market, profits are concentrated on the supply side, such as NVIDIA, while startups struggle with cost structures. Moving forward, cost management, specialization in specific areas, and ownership of unique data will be survival conditions, transitioning from bubble-like growth to a phase focused on practical benefits.

3. Investment Focus Shifts from Digital to 'Physical and Implementation'

With the advancement of AI, the importance of the real economy, including power, semiconductors, infrastructure, and robotics, is increasing. Japan, in particular, holds an advantage in 'AI x Physical (Manufacturing and Robotics)', and companies that hold implementation capabilities and physical assets are expected to take the lead.

Guardians of Interest Rates Resist Politics: Swift Response to the COVID Crisis and Strong Measures Against Historic Inflation

Current Position

Jerome Powell

Stance: Data-dependent (Cautious, Traditional)
Weapon: Federal Funds Rate Manipulation
Independence: Maintaining Distance from Politics
Market Evaluation: 'Stable' but 'Slow'

Proponent of Balance Sheet Reduction: A Theorist Challenging Quantitative Easing with AI Productivity Theory

Candidate

Kevin Warsh

Stance: Supply-side Focus (AI, Productivity)
Weapon: Balance Sheet Reduction
Independence: Strategic Alliance with the White House
Market Evaluation: 'Reformative' but 'Uncertain'

1 'Rate Cut Wizard' vs 'Balance Sheet Surgeon'

The Philosophy of Whether to Prioritize 'Interest Rates' or 'Balance Sheet (Asset Size)'

The decisive difference between Powell, the 'Rate Cut Wizard', and Warsh, the 'Balance Sheet Surgeon', lies in their philosophy of whether to make interest rates or asset size the main focus of monetary policy.

Powell's approach centers on interest rate manipulation, valuing dialogue with the market, and is traditional and cautious. In contrast, Warsh is proactive in reducing the bloated assets of the Federal Reserve. He advocates a unique theory that balance sheet reduction removes market distortions and enables natural rate cuts. His intention to achieve the low interest rates desired by Trump through quantitative tightening has shocked the market.

2 Warsh's Gamble on 'AI-Driven Inflation Control'

Proposing AI Gold Rush Economics

Typically, cutting rates in an overheated economy is a taboo that reignites inflation. However, Warsh is challenging this economic axiom head-on. The backdrop is his strong belief in AI's dramatic productivity improvements.

Warsh is optimistic that technological innovation driven by AI will significantly enhance supply capacity and drastically lower costs. According to this so-called 'AI Gold Rush Economics', even if aggressive rate cuts stimulate the economy, explosive productivity will offset inflation, preventing price hikes.

Is this the foresight of a prophet predicting a new economic cycle, or a precarious logic crafted to justify Trump's rate cut demands? The world’s market participants are watching this ambitious gamble with bated breath.

3 Historical Grudge: Powell's 'Punishment' and Warsh's 'Revenge'

Dismantling the Bloated Federal Reserve with His Own Hands

This drama is driven not just by economic theory but by the raw human dynamics of two men's clashing pride. Currently, Powell is under judicial scrutiny. Reports of a Justice Department investigation into building renovation costs have raised suspicions of 'political pressure' to prompt early resignation, whispered in the market as a de facto 'punishment' for Powell.

Opposing him is Warsh, who became an FRB governor at the young age of 35. He opposed Chairman Bernanke's large-scale quantitative easing and resigned before achieving his goals. Fifteen years later, he has returned to dismantle the bloated Federal Reserve he once warned about.

The current incumbent, surrounded by political pressure, and the challenger aiming for a revenge driven by determination. This fateful confrontation has transcended the realm of monetary policy, becoming a fierce power struggle.

4 The 'Second Fed' Invites Market-Splitting 'Two Correct Answers'

The Second Fed as a Potent Drug: Savior or Destroyer?

The emergence of the 'Shadow Fed' has brought unprecedented chaos to the market. Until now, the statements of the Fed chair were the sole truth for investors. However, if Powell suggests a cautious stance while Warsh openly advocates bold rate cuts, the market's compass will begin to falter.

This divergence in direction transforms the market into a multi-headed dragon. Should investors follow the current reality under Powell, or bet on the future envisioned by Warsh, the likely successor? The confusion of information will amplify volatility, ushering in unprecedented chaos.

When two correct answers stand side by side, the market can no longer face a single direction. This potent drug of a second Fed may become the savior of the economy or the destroyer of financial order. The curtain on this turbulent drama has just risen.