Fed Chair Warsh and Treasury Secretary Bessent Coordinate Capital Flows for AI Supremacy

The political establishment is playing a bigger game, systematically mobilizing global capital flows and trade to ensure U.S. dominance in the AI arms race. Almost no one notices the pieces moving behind the scenes, as players conceal their actions, mislead public markets, and political commentators on both the left and right demonize every player on the board.

This is not a conspiracy theory. If these so-called "conspiracy theories" were truly effective, they would contain actionable alpha that could be extracted from the market. Yet we do not see the so-called "gatekeepers" of these "secrets" making substantial profits in the market—this alone reveals the extent of the misinformation embedded in the algorithms. True players conceal rather than reveal the full picture.

For my following points to be valid, they must be clearly quantified and directly linked to financial markets, rather than based on vague generalizations. After reading this report, you will see clearly that Kevin Warsh (former Fed governor) and Scott Bessent (U.S. Secretary of the Treasury) are actively coordinating to advance a broader objective: establishing U.S. dominance over its adversaries through economic and financial countermeasures in response to coordinated Chinese economic and financial attacks. This directly impacts how capital flows and how the entire venture capital sector, defense spending, AI, and frontier labs respond.

It all began with Bessent and Warsh trading under Stanley Druckenmiller, one of the greatest macro traders in history. Why does this matter? Because as practitioners and risk-takers, the two possess a rare, deep understanding of global capital flows. Druckenmiller once said that Kevin Warsh understood international capital flows better than anyone else. But why does this matter? Aren’t capital flows just a reflection of fundamentals? Shouldn’t they have no impact on policy, right?

The elusive truth that keeps shifting into different financial bubbles is that international capital flows are the root cause of your biggest economic and financial challenges. Druckenmiller’s career has been about understanding these flows and their core mechanisms, then placing massive bets on how the symptoms evolve.

Social media algorithms and political establishments have been chasing the symptoms of this core issue to the point that entire social groups believe absurd ideas, such as "fixing money will fix the world," and then urge you to buy or sell certain assets rather than addressing the largest economic and financial imbalances in history.

One of Druckenmiller’s biggest bets was early investment in Palantir, long before anyone was talking about the U.S.-China AI race. Why? Because Druckenmiller and his closest allies understood the core mechanism driving the world’s largest economic and financial issues: international capital flows between the U.S. and China. Every technological advancement is merely another accelerator within the existing international monetary order. (The entire venture capital defense sector is now adopting the same strategy, effectively replicating Druckenmiller’s approach.)

Alex Karp is one of the few individuals who have recorded interviews with Kevin Warsh, highlighting the significant overlap in their views on AI, U.S. dominance, and China.

If you understand the core economic and financial issues existing in today’s world—not just their symptoms—you will begin to see why Bessent and Warsh were chosen: they possess one of the few documented records of the actual core flows and causal mechanisms of trading systems, not merely their statistical reflections. If you can connect this to the markets, you will be aligned with the most fundamental elements of the international monetary order, rather than false narratives about currency breakdown.

All players, flows, and markets are interconnected.

So, what core mechanism brings all these participants together?

The United States buys more goods from the world than it sells; it pays in dollars, and those dollars must go somewhere. Because the dollar is a reserve currency, the United States has the only financial market deep and open enough to absorb this volume, causing the world’s excess savings to flow into U.S. assets, regardless of whether the United States needs such financing.

Now let’s ask a harder question: If the United States were truly begging the world to finance its deficits, you would expect yields to rise and the dollar to fall. But the opposite occurred. Throughout the 2000s, as the current account deficit expanded, real long-term yields declined and the dollar remained expensive—this tells you these were never decisions made by profit-seeking investors. They were policy-driven flows, deliberately insensitive to price. The U.S. absorbed global surpluses not because Americans chose to spend more than they earned, but because the system was designed to require someone to absorb them—and the dollar made the U.S. that someone. Look at what happened to foreign holdings of U.S. debt once this system was locked in.

Why did the surplus exist in the first place? Because Chinese workers produced far more than they were allowed to consume. This was not a cultural preference for frugality; it was the result of design by the Chinese Communist Party. Approximately 40% of the value created by Chinese workers is returned to them as income, compared to nearly 70% in most major economies. For over a decade, capped deposit rates have quietly transferred wealth equivalent to about 5% of GDP annually from household savers to state-linked borrowers. Migrant workers contribute to benefits they cannot claim in the cities where they actually work. And an artificially suppressed currency constitutes a permanent transfer from every consuming household to every exporter. Taken together, Chinese household consumption remains below 40% of GDP—lower than in any other major economy in the world. Income that never reaches households cannot be spent by them, so excess production must be sold to others. That is the entire surplus. This has never been a conflict between American and Chinese households. It is a cross-border conflict initiated by the Chinese Communist Party, with both Chinese families and American workers as losers. You can see this suppression in the line below.

So what happens when these export savings enter the U.S. system? The forced inflows don’t build factories; they inflate the prices of things that already exist. Between 1998 and 2008, foreign official institutions purchased about $4 trillion in U.S. assets—nearly equivalent to the entire U.S. current account deficit over that period. With insufficient Treasury bonds to meet demand, Wall Street created the missing safe assets out of subprime mortgages; credit standards collapsed because this was the only way to mint enough paper. Households extracted nearly $5 trillion in home equity to replace the income their jobs no longer provided. Jobs did disappear: the same capital inflows kept the dollar expensive and manufacturing output shrank; over 80% of private-sector job losses in the early 2000s were in factory work. Unwanted capital inflows force a country into a combination of rising debt and rising unemployment. Asset owners grow richer during the inflow, while wage earners absorb the transfer; the bubbles and inequality everyone screams about are not separate problems—they are the exhaust of a machine.

Step back and look at what everyone calls the most expensive stock market in history. Why has the valuation of nearly everything been pushed up—not just AI stocks? The standard answer is “mania,” but the standard answer misses the mechanism. Excess savings flowing into this country must be absorbed by financial assets, and the pool of assets is growing slower than the flow of money. When trillions of dollars, insensitive to price, are forced year after year into the same market, the prices of everything already existing rise relative to their cash flows—this is just another way of saying valuations rise everywhere simultaneously. Wall Street’s central function within this system is to create things for this money to buy; 2008 already showed you what happens when it runs out of legitimate products. AI trading is built on top of this machine; it did not create it. Valuations are high not because investors have lost their minds. They are high because the world’s surplus has nowhere else to go. (This is the mechanical function of liquidity.)

This is where the debate over government spending goes off track. Should you be concerned about the deficit?

A better question is: Why did the deficit grow to this scale in the first place? The popular story is reckless spending in Washington, with everything else following suit. But look at the numbers. Whenever large amounts of foreign savings flow into this country, someone domestically must take on a corresponding deficit: either the private sector borrows—which households did before 2008—or the government borrows—which is what has happened since. For four decades, every major swing in fiscal balance has been matched by an opposite swing in private borrowing, while the external deficit has persisted regardless of who was in power or what they spent money on. The external balance is set beyond our borders; the budget deficit is a shock absorber, not the shock. Cutting spending without addressing the flows doesn’t fix the imbalance—it merely shifts the borrowing back to households or forces adjustment through unemployment. Government spending is a symptom with a mechanical cause—the very same machine.

If this machine was so powerful, why did it disappear from headlines after 2014? Because it went quiet—not disappeared. For over a decade, China’s official reserves have remained flat—and that’s exactly what you should notice. Beneath the surface, surpluses are the largest in history: manufacturing surpluses account for roughly 2% of global GDP, exceeding the combined peaks of Germany and Japan, and are recycled through state-owned banks that absorb dollars at a rate of about $700 billion per year, while official figures report nothing. The dollars never left the system; they simply shifted from central bank balance sheets to channels not counted as reserves. This is what non-kinetic warfare looks like: control over the pricing of goods you depend on; critical chokepoints like rare earths capable of halting your automobile production without firing a single shot; and the slow, unannounced erosion of your actual purchasing power. This attack was designed to be invisible—and the fact that almost no one talks about it tells you just how successful the design has been. The chart below is that silence, measured.

Now let’s pull the camera back to Warsh and Bessent. Once you understand the machine, these appointments were never personnel decisions—they were strategic moves by Trump. You don’t place two capital flow experts trained by Druckenmiller at the Fed and the Treasury simply to manage interest rates or issue debt. You place them there because the counterattack must occur through the same channel as the attack: capital flows themselves.

The U.S. dollar’s role as the global reserve currency cannot be abandoned—abandoning it would mean surrendering the system to adversaries; thus, the real strategy is to turn the burden into a weapon. Keep global capital flowing into U.S. assets, but redirect it from consumption-financing debt toward productive capacity: AI infrastructure, defense, and cutting-edge laboratories. This is why venture capital firms, frontier labs, and the world’s two most powerful financial institutions are all moving in the same direction. Capital flows are the war itself—and this is the first time U.S. policymakers have truly understood this. The entire game has one core scoreboard: the chart below.

This is likely why Marc Andreessen was appointed by Kevin Warsh to the Fed’s new AI task force. They have already aligned Alex Karp and Palantir with this strategy, and now they are aligning private market capital. The key is that Warsh and Bessent need to coordinate every aspect of technological development and capital flows to jointly counter China’s economic and financial attacks.

This is why Anthropic’s actions become crucial after properly understanding the context. Trump uses flowery language, and Dario frames the context as “defending the freedoms of the American people,” but understanding the actual structural dynamics reveals that if the U.S. falls behind in the AI arms race, the jobs outsourced could extend far beyond manufacturing. If China wins the AI race, America’s economic and social problems could be amplified tenfold!

This is the monetary order, this is the macroeconomic endgame: every player is positioning themselves around the same core mechanism—the international capital flows between the United States and China. Once you understand the mechanism itself, actions in venture capital, defense spending, and AI frontier labs no longer appear as isolated headlines, but rather as moves on the same chessboard.

So how do you observe this coordination in real time? Starting with last week’s FOMC meeting on Warsh. The Fed held rates steady, with three policymakers voting for a rate hike, and Warsh spent considerable time during the press conference discussing capital expenditures:

The most notable feature of the economy is the strong growth in business investment, with a significant surge in high-tech capital expenditures.

——Kevin Warsh, July FOMC

He provided specific figures:

In the AI-related category of high-tech equipment and software, the latest data shows a growth rate of nearly 20% in the fourth quarter.

——Kevin Warsh, July FOMC

He clearly tells you how he believes this round of infrastructure connects to the interest rate path:

This is a race between supply and demand. The surge in corporate capital spending around AI makes this judgment even more difficult.

——Kevin Warsh, July FOMC

Two weeks ago, he was even more straightforward in Congress:

What is now called AI investing will soon be called investing itself.

——Kevin Warsh, July FOMC

A Federal Reserve Chair who thinks in terms of capital flows tells you that the AI capital expenditure cycle is now the economy itself—he holds policy rates steady below, letting the market adjust on its own. In his own words: "We did nothing for 42 days; the market did a lot." Look at what the market did to the interest rate path after he said that.

See my report on interest rates after the FOMC:

So what role does Bessent play in all of this?

Where does the marginal liquidity for this entire trade come from? Japan. The Bank of Japan still maintains the cheapest funding rates in the developed world, and borrowing cheap yen to buy U.S. assets remains one of the oldest liquidity channels in modern markets: direct cross-border yen lending amounts to approximately $250 billion, and when derivatives are included, the total approaches $1 trillion. These funds are not left idle—they flow into the deepest and fastest markets on Earth, which today means U.S. assets and their core AI sectors.

Look at last week's time series: the yen plunged to its weakest level since 1986. Reports indicate Japan spent over $50 billion in a single day to defend its currency, possibly the largest intervention on record.

The next day, the U.S. Treasury collaborated with Tokyo to intervene, with the New York Fed purchasing yen.

Then Bessent appeared on television and said in the calmest voice: "The yen appears severely undervalued to me," and that "excessive volatility in the yen is unhealthy." The Treasury could least afford for the market to link the funding currency with AI trading, dismantling this pipeline just when liquidity is still needed for infrastructure.

Bessent deliberately made everyone see his notes on the yen—a tactic he had used before. Bessent was fully aware of what he was doing: attempting to actively shift market expectations (essentially, forward guidance in the foreign exchange market). The Japanese economy began to face negative impacts from high oil prices and a weak currency. Bessent knew that carry trades had to remain intact to ensure liquidity continued flowing into AI infrastructure, but he also needed to balance support for Japan to prevent the new prime minister from losing public support due to rising inflation. Bessent preferred to intervene proactively to maintain capital flows toward AI trades rather than allow the situation to spiral out of control, creating volatility harmful to both countries.

Why is this liquidity so important now? Because leading labs are nearing the point where private funding is insufficient. Anthropic’s annualized burn rate has surged from $9 billion to nearly $50 billion in just five months, and it has secretly filed for an IPO. OpenAI is valued at around $25 billion but still loses more than a dollar for every dollar it earns, as the compounding cost of compute outpaces its revenue growth.

Companies of this scale that burn through cash ultimately need public markets, and the moment they reach that window coincides with it slamming shut: SpaceX, the largest IPO in history, went public seven weeks ago and is now trading 20% below its offering price and down more than half from its peak; the semiconductor sector has just experienced its worst month since the financial crisis.

So the question must be asked in the way Warsh and Bessent are forced to confront it: What happens if the companies driving the AI arms race cannot access public capital? These are not ordinary companies. They are already operating as national security assets, with Pentagon contracts and export controls treating cutting-edge models as strategic capabilities. The entire infrastructure—labs, chips, data centers, power—is cross-collateralized; if one pillar falls, it pulls down all the others. It is no coincidence that a Federal Reserve chair is endorsing a capital expenditure cycle while a Treasury secretary defends the financing currency in the same week. This reflects larger mechanisms within the global monetary order.

When you pull everything together, you can see why misinformation is so effective. The core forces—real purchasing power shifts and international capital flows—are extremely difficult to understand, yet you can feel their pressure at the societal financial level. This is why most people ultimately build entire narratives around the symptoms of these core issues, while individuals like Bessent, Warsh, Druckenmiller, Karp, and Andreessen build everything around the actual mechanisms.

This occurs against the backdrop of financial markets at historically high valuations, with correlations nearly perfectly aligned. Stocks and interest rates move in tandem, as every capital flow revolves around core mechanisms—the Chinese capital account’s closure, the U.S. dollar’s status as the global reserve currency, and the Chinese Communist Party’s economic and financial actions that resonate globally.

In this world, remaining neutral and inactive is as dangerous as making misguided decisions based on systemic symptoms. That’s why Bessent and Warsh are taking proactive steps on interest rates, currency, and fiscal policy, while clearly aligning with Alex Karp and Marc Andreessen on the AI arms race and private capital markets. They are aligning the public and private sectors in a unified direction to actively counter all attacks from the Chinese Communist Party, particularly in the AI arms race. Without understanding the context of international monetary flows, all their actions may appear arbitrary.

The most important factor to understand in this context is that policy decisions will be structured around core issues rather than symptoms. This is why many policy decisions so far have seemed nonsensical to people. The tariffs that triggered the stock market crash in 2025 appeared illogical to many because Trump implemented them at the expense of the stock market. Regardless of whether they triggered a surge or collapse in financial assets, the priority has been to adjust around core structural issues—the international monetary system and the largest factor in the macroeconomic endgame. All of this is occurring at a time when interest rate volatility and foreign exchange volatility remain abnormally low and complacent relative to the risks accumulating beneath the surface, while historically high stock valuations further compress tail risk.

We are now in the midst of a macroeconomic climax that will go down in history. For active traders who understand these mechanisms, this will be one of the greatest opportunities ever. That’s why I’m here. I believe the United States must win this contest against China, and I fully support the ongoing strategic coordination aimed at improving the lives of ordinary Americans. However, we know this won’t be smooth sailing. Volatility exists to transfer wealth from the weak to the strong.

Volatility is expected. That’s precisely why trading and investing exist.

Author: Capital Flows; Translated by Shenchao TechFlow