America is in a bubble, nurturing a “new America”

Stop waiting for a crisis to erupt or the bubble to burst. Chances are, neither is going to happen.

Not because it can’t burst, but because today’s America won’t deliberately prick the bubble or let it burst easily. This time, a “new America” is gestating inside the bubble, absorbing the world’s resources and continually replenishing the dollar. Once this gets underway, it can’t be stopped midway.

A lot of the fluctuations you see aren’t just market sentiment; someone is “propping up the market.” The way they do it is unusual: not by inflating the bubble further, but by creating “volatility.” Put simply, America is using physics to solve a financial problem.

If you’re still analyzing valuations, earnings, and whether rates will be raised, you’re just watching fluctuations amid the fluctuations someone else has created. It’s hard to see the real motives that way. Get the judgment backwards, and you could well lose money.

The two ways to respond I’ll discuss today matter less than getting a feel for the other side’s financial playbook—it isn’t a “single discipline,” but an “interdisciplinary one.”

People often joke about AI, “This time is different.” This time really is different. The difference isn’t the type of industry or how the bubble formed; it’s that America today is different.

We’ve never had a president like this before. Trump is a reflection of the problem; he’s here to solve it, which shows how serious it is. In the past, whenever a bubble burst, whatever crisis it triggered, the Fed could cut rates to rescue the market and then scoop up global assets to replenish its reserves. Now it can’t keep harvesting. The dollar-tide playbook ran its course in September 2024. There’s nowhere left to replenish its reserves; it can only harvest a few small countries, and that’s not nearly enough.

This needs one more clarification: the point of harvesting is to replenish the dollar. You have to harvest real businesses or equity; commodities can’t replenish it—that’s arbitrage. Wall Street wants more dollars, and Washington needs to prove they have value. What’s being replenished is confidence, not inventory. If inventory did the trick, the ruble and lira would both be hard currencies.

The dollar’s underlying credit comes from federal tax revenue. What people look at is whether today’s cash flow can cover future debt interest, and productive assets are what can generate cash flow on an ongoing basis. If you can’t take someone else’s, you have to create your own. Now it all depends on AI.

So the core motive of the U.S. right now isn’t to set off a global crisis; it’s to do everything it can to prevent the AI bubble from bursting. It’s crucial not to get this motive backwards—not because America has turned virtuous and can just reap the rewards. Who would choose to shift from speculation to the real economy if they didn’t have to? They’re being forced into it. AI is the only opportunity left to replenish the dollar, and the ultimate goal is to make productivity growth outpace the growth in debt interest.

You see Bessent and Warsh constantly talking about how AI will boost total factor productivity. They’re saying it for the creditors, basically, “I’ll definitely be able to pay you back.” They’re telling you what the plan is. Whether it ultimately works or not, at least there’s a story for now.

Industries tend to experience bubbles in their early stages; the essence of a bubble is overinvestment. The U.S. financial markets and real economy are joined at the hip. Protecting valuations means protecting financing, which enables overinvestment and covers the cost of trial and error. So what America really needs to solve isn’t “whether to have a bubble,” but how to let this bubble “overheat without bursting.”

The biggest feature of the current market is frequent fluctuations. No matter whether prices rise or fall, you can find a whole bunch of reasons. Analysts argue with each other, and everything they say sounds plausible, but none of those views matter. The real key is “disagreement.” Disagreement comes from uncertainty, and uncertainty comes from the White House and the Fed. The link between the White House and the Fed is expectation management.

I’m not talking about Fed independence—that’s neither here nor there. I’m saying that decision-makers on the other side are systematically designing coordinated interventions and management of the market. To keep a bubble from bursting, you need frequent fluctuations. In physics, this is called “high-frequency vibration to prevent resonance”—you can’t let everyone settle on the same one-way consensus.

If everyone is bullish, buying power runs out, and the bubble could burst at any moment; if everyone is bearish, there’ll be a stampede, liquidity will dry up instantly, and the bubble will still burst. So the market can’t be allowed to reach a consensus.

Conversely, disagreement means liquidity. As long as Trump keeps arguing both sides, or Warsh says something that leaves people wondering, uncertainty will tear the market apart. Once the volatility has played out, other advisers and Fed governors can come out and say a few words, make a small adjustment, and keep the bulls and bears in dynamic balance. Every sale will have a corresponding purchase, and liquidity will never run dry.

This kind of high-frequency volatility also hits both bulls and bears. Speculative money won’t dare take a one-way bet or keep adding leverage. If the market is also being forced to deleverage during a sideways stretch, that clearly means the managers are controlling the pace: they don’t want the bubble to burst, while forcing institutions to hedge and making capital continuously burn through friction costs amid the volatility.

This is like converting the bubble’s potential energy into heat and dissipating it, preventing too much potential energy from building up so the bubble won’t burst. This is physics, and psychology, and ultimately management. Looking at the world from the managers’ perspective can help you worry less.

Let’s look at how they’re managing things. Trump and Warsh can both influence the bubble, but they have different roles: Trump is responsible for “immediate volatility,” using sudden statements and high-frequency unpredictability to wear out short-term speculative money and directly control the heat at the trading level. Warsh’s role is the “delayed impact”—volatility that gradually takes effect. The market probably needs a week to digest it, rebalance, and reassess discount rates, controlling the pace of bubble expansion at the valuation level.

This process has been obvious since Warsh’s debut. Is he trying to emulate Greenspan? Greenspan’s famous line was, “If you think you understood what I said, then I must not have been clear.” Warsh is taking that same approach now, making you mull things over. That includes removing forward guidance, which is basically, “I don’t communicate, so you’re uncertain; if you’re uncertain, I can manage you.”

As for rate hikes, that’s pure nonsense, but expectations of rate hikes are enough to create volatility, especially with Wall Street playing dumb along and amplifying that volatility through the media. Do they really not know what Warsh is doing? Of course they do. They’re each getting what they want—you manage the market up there, and I’ll shake things out down here.

At this point, suppose someone understands the managers’ motives. They should pay close attention to something called “volatility.” Volatility—the important thing bears repeating three times—because it can help you respond to the managers’ motives. Let me stress once more: the motive isn’t volatility; it’s preventing a burst. So volatility can’t get too high.

Suppose this person can’t predict when volatility will occur, but knows that it will subside. This involves time value, so I’ll leave it there. By now, you can see that America’s playbook is clear. With Warsh taking office and SpaceX going public, the whole “AI + space” stage has been set, and the key players are in position.

Let’s look at Team USA’s lineup: Trump directly controls the market on the front line, while the fiscal, monetary, and industrial arms are represented by Bessent, Warsh, and Musk. Musk is the only one here generating output; the others are managing the field and doing the accounting, and can only buy time.

Whether a new America can emerge from the AI bubble depends on Musk. He’s the key to success or failure, the one they’re counting on to create value. But value certainly won’t come quickly. How will he create it? Musk isn’t an ordinary entrepreneur; he’s been a minister, so he has a different level of commitment. He really wanted to solve problems when he was running the Department of Government Efficiency, but the debt side is full of vested interests and the deficit can’t be cut. The resistance is too great, so the only option is to repair the asset side.

But the U.S. debt is so huge that it can’t be contained. To match $39 trillion, can you really get by without trying something unconventional? There are a ton of armchair critics in America taking shots at SpaceX, saying it’s worth nothing. If you look at it purely from an industry perspective, their criticism is right, but they’re missing the bigger picture. Musk isn’t focused on the capital markets; he wants to take part in the grand sweep of history and lead humanity’s future. But first, he has to make sure America still exists. He’s stuck with an incredibly difficult problem.

What kind of asset can expand to that scale? It has to go to space. What happens if it doesn’t? Only once it’s in space can it get a valuation, and valuation is corporate credit. Once it’s tied to the federal government in the future, corporate credit can be converted into national credit. So you see, Musk isn’t issuing debt just to raise money; he’s doing it to help the dollar through its ordeal, because national credit is failing. But it’ll be easier later. Aren’t people unwilling to buy more Treasuries? No problem—you can buy some “Musk bonds” instead. Buying “Musk bonds” is buying U.S. Treasuries. This is the prelude to the post-dollar-credit era.

Whether America can achieve an AI-driven productivity boom, cover its debt interest through increased tax revenue, and ultimately restore its sovereign credit—I don’t know. But the framework is already in place. It’s theoretically possible, though the process will certainly be very difficult and full of uncertainty. Even a major power has to go all in. So this uncertainty is the uncertainty surrounding America’s fate.

This year marks the 250th anniversary of America’s founding. Whether it can last another 250 years depends on whether AI can bring a new America into being. If it can’t, there’s only one thing that can hedge against America’s national fortunes—or, more precisely, one line. I’m not deliberately trying to sound clever; I’m speaking practically, because I have to be managed too, and I have to follow the rules.

Back to the point: reality is far more complicated than success or failure, because America may use the full power of the nation to buy as much time as possible, keeping the bubble intact until productivity materializes—but only keeping it intact. If AI advances slowly and productivity takes a long time to materialize, hedging will be necessary. This will be a long, drawn-out process, so hedging isn’t an either-or choice. It’s the ultimate response.

One last thing: from now on, don’t just look at what America says, or only at what the market has gained or lost. Look at what it fears. It doesn’t fear the bubble rising; it fears the bubble bursting. It doesn’t want a one-way rise; it wants disagreement. It isn’t managing prices; it’s managing volatility. It isn’t trying to gain one or two years; it’s trying to buy time until productivity materializes.

So stop asking every day when the crisis will come or when the bubble will burst. What you really need to look at is whether anything real is growing inside that bubble, and once it does, what kind of volatility the market will use to shake the less committed out of the ride. Understanding volatility matters more than predicting whether prices will rise or fall. Hedging isn’t an either-or choice; it’s a long, drawn-out process. This really isn’t a simple bubble story.

This is an “old America” trying to use the AI bubble to bring a “new America” into being. Whether it can do so is unknown, but the framework is already in place.

The above is for educational purposes and represents only my personal views. It does not constitute investment advice.