Dear Reader,
The Israel-Iran war is over for now, China and the US seem to have arrived at an agreement to ease some trade restrictions, especially on rare earths. Stock markets have bounced, and at the time of writing this, the S&P 500 and Nasdaq futures were at all-time highs. The shrill rhetoric on tariffs has died down, US bond yields are off their highs. What’s more, the Fed Fund futures are now pricing in three 25 bps rate cuts by the end of the year.
All is well?
Not really. At the Hague this week, NATO members agreed to an ambitious defence spending target of 5 percent of GDP by 2035: 3.5 percent on core defence activities, and an additional 1.5 percent on broader defence-related infrastructure such as cybersecurity, protection of energy pipelines and the like. For perspective, in 2024, average military spending among NATO members stood at 2.2 percent of GDP.
Donald Trump, who has been haranguing the Europeans to increase military spending, was elated. And why shouldn’t he be? US defence companies already account for over 60 percent of European NATO weapons imports. European governments have caved in to Trump’s threats, underscoring their subservience.
It's far more than that. It’s a dramatic U-turn, away from a welfare state to a warfare one. It signals the emergence of a society where security is the main consideration. Civil liberties will be quietly redefined as security risks. Information flows will become threats. Borderlines will blur between foreign enemies and domestic agitators. We are witnessing the institutionalisation of the Orwellian state.
It will divert billions from social programmes to weapons. And for what? Russia is cited as an existential threat to Europe, but in 2024, its total military expenditure, according to the Stockholm International Peace Research Institute (SIPRI), was $149 billion. France, Germany and the UK together spent $235 billion, and SIPRI says all the European NATO nations spent $454 billion in 2024, thrice what Russia spent.
So, where’s the threat? That too from a country struggling to beat far weaker Ukraine? Or is this aimed at China, which spent $313 billion on its military in 2024? But wait, the US spent $997 billion. No sir, this is just old-fashioned arm-twisting by the US to buy their arms. It isn’t burden sharing, it’s tribute. It guarantees a decade-long expansion of the defence industry, creating new opportunities for weapons manufacturers and defence contractors.
What will be its impact? From one perspective, it’s straightforward military Keynesianism, a stimulus through militarisation. But which countries can stimulate their economies, given their ageing and dwindling populations and their high debt burdens? The IMF forecasts that by the end of this year, the UK’s gross government debt will be 104 percent of GDP, France’s 116 percent, Spain’s 101 percent, Belgium’s 106 percent. Of the big European states, only Germany has the leeway to splurge on arms. In any case, if most of the arms are bought from the US, it is the latter that benefits from the stimulus, not Europe.
Perhaps, the objective is different -- advanced economies, plagued by overaccumulation and underconsumption, increasingly rely on arms spending to absorb surplus capital. As the global economy slows and surpluses accumulate, defence spending emerges as a politically feasible sink for capital — a form of state-sponsored destruction that sustains accumulation. Unlike social infrastructure, military expenditure does not compete with private enterprise. And there are spin-offs in publicly funded military research that can then be used by the private sector.
It will also trigger an arm’s race — The rest of the world will have to keep up. China’s military spending in 2024 was 1.7 percent of GDP, India’s 2.3 percent, South Korea’s 2.6 percent, Japan’s 1.4 percent, Indonesia’s 0.8 percent, Australia’s 1.9 percent, Brazil’s 1 percent. If these nations wish to pursue independent foreign policies, they will have to spend more on arms. Countries will be pressured to choose sides, align their defence policies and purchase weapons systems from NATO-friendly states. Trade and diplomacy will increasingly be tied to security cooperation.
The trade-offs are clear: healthcare, education, housing, and climate adaptation are all likely to be axed in favour of armoured vehicles, missile shields, and drone fleets. It heralds the militarisation of the world and all of us, as policymakers, as citizens and as investors, will have to adapt to this brave new world.
We stand at a crossroads where the ghosts of the 20th century's militaristic past threaten to define the 21st century's future, this time with stakes that could prove existential for civilization itself.
The appropriate music for this weekend, therefore, is Richard Wagner’s ‘Ride of the Valkyries’, seen here in the movie ‘Apocalypse Now’.
Cheers,
Manas Chakravarty
In case you missed them, here are some of the stories and insights we published this week, apart from our technical picks in the equity, commodity, and forex markets:
Stocks
Weekly Tactical Pick: Will price polish add more shine to this gold stock? Pearl Global Industries, How to deal with IT stocks ahead of earnings? IDBI Bank disinvestment: How much of it is in the price? Is this agrochemical IPO a good bet? Aditya Birla Lifestyle Brands: What should investors do after the demerger? Transport Corporation of India, HDB Financial Services IPO, From Lead to Lithium: This battery maker is building the next growth engine, Optimism low on this healthcare stock, Kalpataru IPO, Ellenbarrie Industrial Gases IPO: Can it pump up gains for investors? Nocil, Is Sambhv Steel Tubes making a bold gamble with its IPO?
Financial Times
We are the new gremlins in the AI machine
A resilient economy makes a resilient market
How oil traders called the Middle East conflict
Martin Wolf: Why global imbalances do matter
Where is Iran’s uranium? Fate of strike hangs on 400kg stockpile
Markets
Moneycontrol Mutual Fund Summit: Will small cap party continue or pause?
War is not spooking markets, but economic realities might soon
Are markets becoming immune to war, geopolitics?
When markets discount a war, what’s the message for investors?
Is the glitter gone in gold?
Fixed income strategies in a 'lower for longer' rate environment
How the Iran-Israel war has altered the market
Trading volumes surge without matching turnover as action shifts to low-priced stocks
How to deal with equities as US joins the Middle-East conflict?
Economics & Policy
What is behind Indian rupee's recent rough ride?
Why India’s trade surplus with the US is likely to get trimmed
Changing contours of India’s domestic consumption story
Mixed signals from Middle East tensions leave RBI’s rate cut path in limbo
MPC minutes signal RBI may keep its powder dry ahead
FM’s GST tips need quick and focused execution
How crude oil prices influenced India inflation numbers in last decade
Middle East oil price risk not a headache for RBI yet
Why tier-two cities can drive forward India’s economic development
Pro Economic Tracker
Experts fear liquidity alone may not be enough to sustain market rally
Companies & Sectors
How TCS, Infosys are investing big bucks in their brands
Ease in priority sector norm gives small finance banks room to reduce stress
A mixed outlook awaits credit cards, but a turnaround is likely soon
What the CD issuance pattern of Indian banks tells us
PSU banks are biggest lenders to small entrepreneurs
Geopolitics & Geoeconomics
US strike on Iran: signals for global, Indian policymakers and investors
Is the US attack on Iran a turning point for the world order?
Can investment flows break free of global tensions?
Tech & Startups
From coders to bystanders: Is Indian IT missing the GenAI train?
IndiaAI Mission: Sarvam, others to get 100% compute subsidy from govt for foundational models
Indian firms allocate up to 20 percent of tech budgets to AI, says BCG
Others
Decoding Economics: Piketty’s new research reveals how the Global South was impoverished to enrich the North
Personal Finance | Indulgent borrowing benefits neither you nor the government
CCI’s case against ad agencies points to the persistence of cartels in Indian business
Can AI transform Indian agriculture? Yes, but we need to learn from past failures first
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