Rising US national debt concerns

Good morning from the Financial Times. Today is Thursday, june twenty fifth, and this is your FT newews briefing Anthropic is beefing with Alibaba, and European defense markets are in flux ahead of a major IPO How long can America's debt problem go on Well, the public debt in America now exceeds one hundred percent of GDP So we're talking very large numbers indeed, which are quite hard to wrap one's head around. I'm Mark Filipino and here's the news you need to start your day. Anthropic is accusing the Chinese e commerce giant Alibaba of illicitly using its clawed AI assistant to train cheaper and smaller models. In a letter to Congress, the U. S. based AI company said Alibaba conducted the quote largest campaign to illicitly extract ClLad's capabilities Anthropic alleges that Alibaba did so by creating twenty five thousand fake accounts, which were used for tens of millions of interactions Anthropic does not offer claud in China, and it's asking Congress to crack down further on Chinese labs accessing advanced AI chips, which are restricted by US export controls Meanwhile, Alibaba this week asked to be removed from a Pentagon blacklist of Chinese companies with alleged ties to China's military Last fall, the FFT learned that the White House concluded that it had provided tech support for, quote, operations against unspecified U.S targets Alibaba has denied any connection to the People's Liberation Army at the time of this recording and had not responded to the accusations from anthrobic. Tankmaker KNDS is planning to list its shares on the Paris and Frankfurt exchanges. and the Franco German venture is set to have one of the largest European floatations in recent memory But the initial public offering announcement comes at an uncertain time for Europe's defense sector Eron Kirchfield is the FT's chief European business correspondent. He's been writing about this. Hi, Earon So let's start with KNDS. Tell me about the company and the IPO that they're planning So CandS is one of the biggest defense companies in Europe. It's a crucial supplier. to the war in Ukraine because they make the famous leopard tank And so this is kind of a pivotal moment for the company because until now it's been private, held between the French government and a German family But that now has come to a head because the German family wants to sell out after many years as its owner. And so they've agreed to do a listing after selling a big chunk to Germany to make sure that Germany and France remain biggest and equal shareholders in the tank maker Now why is this IPO something that people are talking about in the same breath as Ryatal a different German defense manufacturer Yeah, that's because yesterday, when CandDS finally got to the point where it was ready to announce the launch of its IPO. and this is after almost a year of planning and wrangling between politicians. The German government, unrelated, decided to cancel a huge warship order with Rimatal, one of the main KandDS peers. So the positive investor sentiment around KandDS and the possible IPO has been somewhat overshadowed by this negative news of a huge order being missed by one of their competitors. And so there's been so much euphoria around European defense companies, but in the last several months, that has kind of come down significantly. So the news yesterday has really brought to the fore the challenges faced by some of European defense makers Let's back up a little bit. Can you give me a big picture here of why European defeense is bringing in so much interest right now Of course, it's because, you know, we're in a historical moment where Europe is finally investing hundreds of billions in defense and that's largely due to President Trump pressuring NATO members to up their investments and also the European feeling and the reality take that they might not be able to rely on the U. S like they did in the past. So investors obviously want to get on that train because the orders are going up and up and up So then how did investors react to yesterday's news with Ryim Matel So yesterday, we saw a dramatic plunge in Rimatel shares nineteen percent, which was one of the biggest drops in almost a year. And that was because the CEO of Rimateel had built such a high expectation they were going to get this mega shhip order that when it didn't materialize, investors started asking themselves whether they can trust the predictions and whether there is enough visibility on which orders are going to which u defense companies Given all this Eron, What are we expecting from the KNDS IPO? And I guess, you know, what are you watching ahead of it So what we're hearing is that the valuation expectations, like the rest of the defense market have come down significantly. So when we were talking about this IPO almost a year ago, we were talking about ranges of twenty billion euros or more. Now we're hearing from sources it's gone down to more like twelve to fifteen billion euros, still a significant amount, but obviously a steep decline. And that kind of traces the share price development of RyMatal And it just reflects the somewhat negative sentiment among investors that maybe the stock runs had gotten out of control That said, this is still a pivotal moment for European capital markets if it goes ahead. And I think it also is important because it's a time when there's a lot of demand for European countries, France and Germany in particular, to work together to bolster their defenses with the war in Ukraine and the rest of the geopolitical developments Eron Kirsfeld is the FT's chief European business correspondent. Thanks so much Eron Gb Meta is ramping up its plans to replace human moderators with artificial intelligence For years, the tech Giant has used both humans and bots to review posts and ads, but employees usually handled complaints that came directly from users That is until now AI is now reviewing about fifty percent of requests sent in by users, and that's expected to increase The shift has already led to layoffs on some teams, which could help Ma save billions of dollars per year, according to sources CEO Mark Zuckerberg has been looking to offset his heavy spending on AI products But the company says that its AI moderators are solely meant to improve how it regulates content The US is up to its eyeballs and dead The ratio of public debt to gross domestic product is the highest it's been since World War two And the percentage of that GDP, which we're paying an interest is also at record levels. borrowing doesn't seem to show signs of slowing either John Plenter is the FT's senior editorial columnist. John recently wrote about this in an essay called Trump's Empire of Dbt. And he joins me now Hi Jh. Hi Mk. John I feel like the current scale of American debt gets a little lost because it's so hard to conceptualize. Let's start with how bad is it? Why you're writing about it now Well, the public debt in America now exceeds one hundred percent of GDP. GDP is just over thirty two trillion dollars. So we're talking very large numbers indeed, which are quite hard to wrap one's head around This is unprecedented in peacetime. The reason I felt a need to write about this at the moment was, first of all, Donald Trump's war of choice in Iran. which is going to be very, very costly. I think the other reason I felt a need to write about this issue of imperial overstretch is that I detect nervousness in the markets. It started around the time of Trump's announcement of tariffs, but there have been periodic bs of nerves in the treasury market, which I think are rather unusual They are indicative of people being scared about the public debt, also about Trump's erratic policy making So John how did we get here I think the striking thing about today's debt situation is that since nine eleven America's wars have been entirely financed by debt The cost of the war in Iraq and Afghanistan and the other forries into the Middle East has been put by Brown University's Cost of Wars project at about eight trillion dollars. admittedly includes two point two trillion for future care of veterans, but it doesn't include anything for interest on the debt One of the things that comes to mind when we talk about national debt here in the US is campaign promises, President Trump, among others, have told us that he will take care of the debt. How likely is that to happen? Can he actually do that Well, you have to bear in mind that President Trump has submitted to Congress a national defense budget request for twenty twenty seven of an extraordinary one point five trillion, which is double the figure for twenty twenty. Although there have been promises from President Trump and from Scott Bessant, the US Treasury seecretary to get these numbers down, the fact is that there is a deficit bias built into American politics. Politics are very, very polarized, and it's very hard for anybody to make and fulfill a promise to bring down the level of debt My money is on a continuing increase in the debt for the rest of the Trump period, but then the deficit bias will continue under any new president in two years time What would it look like if the US were to buckle under its overreach. How would we know it's happening? Well, it's striking that central bank reserve managers around the world have been reducing that investment in the US Treasury market and turning to investments like gold, commodities and some of the smaller countries' debt markets The fact is that there can be a tipping point, and you will see it, the signs of the U.S losing its economic primacy will be a collapsing dollar and a huge increase in yields in the US Treasury market and thus a big decline in prices, an implosion in effect in the US treasury market. What that means is first of all there will be more Inflation in America borrowing costs for ordinary households as well as the government will rise. And we will probably be looking at a stagflationary situation, one where you have both high inflation and stagnation in the economy, very low growth indeed, if any John Pleunder is a senior editorial columnist for the FT. Thanks so much, John Not at all, my pleasure Just a friendly reminder that we want to hear from you. 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