The $8 trillion arms surge fuelling AI — and spooking bonds: Mike Dolan

By Mike Dolan

LONDON, Sept 30 (Reuters) - If you think all the new investment spending pouring into the world economy right now is solely targeted at Big Tech and AI, you're only half right. According to some estimates, the planned increase in Group of Seven (G7) defence spending over the next decade may match it — even if the overlap between the two is now huge.

Another measure of the simultaneous stimulus to global economic activity and inflation, alongside pressure on public purses and rising borrowing rates, is the eye-popping scale of planned defence spending over the coming decade.

Former US Navy Admiral James Stavridis, now managing director and partner at The Carlyle Group, estimated this week that additional defence commitments from G7 governments over the next 10 years amount to some $8 trillion of additional re-armament spending on top of prior trends.

With the collective annual gross domestic product (GDP) now just over $55 trillion for the US, Japan, Germany, France, Britain, Italy and Canada, an $8 trillion increase over a decade amounts to almost 15% of 2026 GDP.

Stavridis points out that G7 defence spending has risen to 2.0% of GDP, its highest share in over 30 years, with that share projected to rise to 3.8% as soon as 2030. Across Europe alone, he said broader defence goals imply roughly €4 trillion to €5 trillion ($4.5-$5.7 trillion) of additional spending over the coming decade — rising toward €9 trillion "when adjacent infrastructure is included."

The earmarked increase in US defence outlays in the 2027 fiscal year to a record $1.5 trillion would surpass the World War Two peak in inflation-adjusted dollars. And according to the Center for Strategic and International Studies estimates that Stavridis cites, that level of defence spending by then would amount to some 4.6% of US GDP — just shy of 2009's peaks and approaching levels last seen at the height of the Cold War in the 1980s.

That budget boost may bring the US defence bill back above the current estimate for annual Treasury debt servicing costs — although at the rate at which bond yields are rising, there could be a protracted race between the two to gobble up US tax dollars.

AI-DEFENCE VENN DIAGRAM

Aside from the eye-catching totals, the main point Stavridis makes is that this spending is likely to be very different in terms of procurement than in the past — far less on warships and tanks and more on tech, drones, cybersecurity and battlefield AI.

"The center of gravity is moving toward smaller, faster-moving companies in cyber, encryption, and hypersonics rather than the traditional prime contractors, and the deals being struck are correspondingly smaller and more numerous," he wrote.

The overlap in the Venn diagram between AI and broader tech investment and defence spending is therefore very large. Data centres and their security are another common factor between both.

This is nowhere more salient than in Europe, where the Russian threat to Europe's eastern borders, doubts about US commitment to the North Atlantic Treaty Organization (NATO) under Donald Trump, and a ratcheting up of defence spending across the continent combine in ways that some hope will also boost its tech sector.

"Two decades of declining European defense investment tracked closely with two decades of declining European tech competitiveness, a pattern the current rearmament cycle appears determined to reverse," Stavridis noted.

All of which will be cold comfort for restive government bond markets having to absorb the additional borrowing that goes with these increases.

The defence-to-debt-servicing ratio has historically been cited as a warning metric signalling debt sustainability concerns.

The Washington-based Institute of International Finance recently estimated that average government borrowing costs across the G7 are now at their highest since mid-2008, while annual interest expenses are nearly 85% higher.

Over the past year, advanced economies paid over $3.3 trillion in interest on internationally traded government bonds alone — more than the estimated $2.6 trillion of global spending on AI, $3.1 trillion on defence or $2.3 trillion on clean energy.

The sheer scale of economic stimulus from both the defence and AI splurges may be at least reining in debt-to-GDP ratios. But there's little doubt that the world's major economies are now entering a high-octane, high-stakes balancing act that may achieve its goals but risks increasing instability in the process. No one is fully sure where this all ends.

(The opinions expressed here are those of Mike Dolan, a columnist for Reuters.)

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