Inside the political establishment, a larger game is being played—systematically manipulating 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 both left- and right-wing pundits demonize every participant on the board.

This is not a conspiracy theory. If so-called "conspiracy theories" were actually effective, they should generate verifiable alpha extractable from markets. Yet we see no evidence that these supposed "gatekeepers" of secrets are amassing fortunes in financial markets—this alone reveals the extent of algorithmic deception embedded within. True players conceal rather than expose the full picture.

For what follows to be valid, it must be grounded in clear quantification and direct linkage to financial markets—not vague generalizations. After reading this report, you will clearly see Kevin Warsh (Chair of the Federal Reserve) and Scott Bessent (U.S. Treasury Secretary) actively coordinating toward a broader objective: using economic and financial countermeasures to establish American hegemony over its adversaries, in response to coordinated economic and financial attacks from China. This directly determines how capital moves and how risk capital, defense spending, AI, and frontier labs act.

Druckenmiller’s Disciples

It all begins with how Bessent and Warsh learned to trade under Stanley Druckenmiller, one of history’s greatest macro traders. Why does this matter? Because both men, as practitioners and risk-takers, possess deep understanding of global capital flows—a rare insight. Druckenmiller once said Kevin Warsh is more knowledgeable about international capital movements than anyone else. But why is this important? Aren’t capital flows just reflections of fundamentals? Shouldn’t they influence policy, right?

The elusive truth beneath ever-shifting financial bubbles is that international capital flows are the root cause of the largest economic and financial challenges facing us. Druckenmiller’s entire career was dedicated to understanding these flows and their core mechanisms, then placing massive bets on how symptoms evolve.

Social media algorithms and political establishment figures have chased symptoms of this core issue so relentlessly that entire social groups now believe absurd ideas like “fixing money will fix the world,” then recommend buying certain assets instead of addressing the largest economic and financial imbalance in human history.

One of Druckenmiller’s biggest bets was early investment in Palantir—before anyone even discussed the U.S.-China AI competition. Why? Because Druckenmiller and his closest allies understood the core mechanism driving the world’s largest economic and financial problems: international capital flows between the U.S. and China. Each technological advance is merely another accelerator within the existing international monetary order. (The entire VC defense sector now adopts the same strategy—effectively replicating Druckenmiller’s approach.)

Alex Karp is among the few who has recorded interviews with Kevin Warsh, underscoring how aligned their views are on AI, U.S. dominance, and China-related issues.

If you grasp the core economic and financial problem underlying today’s world—not just its symptoms—you’ll begin to understand why Bessent and Warsh were chosen: they possess rare records of actual system-level flows and causal mechanisms, not just statistical proxies. If you can link this to market dynamics, you align with the deepest layers of the international monetary order—not with false narratives about broken currencies.

All players, flows, and markets are interconnected.

Moneyness Order & Macro Endgame

What core mechanism pulls all these players together?

The U.S. imports more goods than it exports; it pays in dollars, which must go somewhere. Because the dollar is the reserve currency, the U.S. has the only sufficiently deep and open financial markets capable of absorbing these volumes. Global excess savings are pushed into U.S. assets, regardless of whether the U.S. needs such financing.

Now consider a harder question: if the U.S. truly relies on the world to finance its deficits, shouldn’t yields rise and the dollar fall? Instead, throughout the 2000s, current account deficits expanded while real long-term yields declined and the dollar remained strong—indicating these were never choices made by profit-seeking investors. They are policy-driven flows, designed to be price-insensitive. The U.S. absorbs global surpluses not because Americans choose to spend beyond their means. The system is engineered so someone must absorb them—and the dollar makes the U.S. that someone. Observe what happened to foreign-held U.S. debt once this system locked in.

Why do surpluses exist in the first place? Because Chinese workers produce far more than they are allowed to consume. This isn’t cultural thrift—it’s a deliberate design by the CCP. About 40% of value created by Chinese workers returns as income, compared to nearly 70% in most major economies. For over a decade, capped deposit rates have quietly transferred wealth equivalent to roughly 5% of GDP annually from household savers to state-linked borrowers. Migrant workers pay for benefits they cannot access in the cities where they work. And artificially suppressed currency constitutes a permanent transfer from every consumer household to every exporter. Combined, Chinese household consumption remains below 40% of GDP—lower than any other major economy. Income never reaching households cannot be spent, so excess production must be sold elsewhere. That is the surplus. This has never been a conflict between American and Chinese families. It’s a cross-border conflict initiated by the CCP, with both Chinese households and American workers as losers. You can see this suppression clearly in the chart below.

When these export savings enter the U.S. system, what happens? Forced inflows don’t build factories—they inflate prices of existing assets. Between 1998 and 2008, foreign official institutions purchased approximately $4 trillion in U.S. assets—almost equal to the total U.S. current account deficit during that period. With insufficient Treasuries to meet demand, Wall Street manufactured missing safe assets via subprime mortgages. Credit standards collapsed because it was the only way to create enough paper. Households withdrew nearly $5 trillion from home equity to replace income lost when jobs disappeared. Jobs did vanish: the same capital inflows kept the dollar strong, causing manufacturing output to shrink. Over 80% of private-sector unemployment in the early 2000s was in factory jobs. Unwanted capital inflows force nations into combinations of rising debt and rising unemployment. Asset owners grow richer upon inflow; wage earners absorb transfers. The screaming bubbles and inequality aren’t independent problems—they are the machine’s exhaust.

Step back and look at what everyone calls the most expensive stock market in history. Why are valuations inflated across nearly everything—not just AI stocks? The standard answer is “mania,” but that misses the mechanism. Excess savings flowing into this country must be absorbed by financial assets, yet the asset pool grows slower than the flow. When trillions of price-insensitive dollars are forced year after year into the same market, the prices of all existing assets are elevated relative to their cash flows—just another way of saying valuations rise everywhere simultaneously. Wall Street’s core function within this system is to manufacture purchasable assets for this money. The 2008 crisis already showed what happens when it runs out of legal products. AI trading operates atop this machine—it didn’t create it. Valuations aren’t high because investors lost reason. They’re high because global surpluses have nowhere else to go. (This is the mechanical function of flow.)

This is also where government spending debates go off track. Should you worry about deficits?

A better question: why did deficits reach this scale in the first place? The popular story is reckless Washington spending, with everything else following. Now examine the books. When large amounts of foreign savings enter the country, someone domestically must bear the corresponding deficit: either the private sector borrows (what households did before 2008), or the government borrows (what has happened since). For four decades, every major fiscal imbalance has been accompanied by an opposite movement in private borrowing, while external deficits continue regardless of who governs or how money is spent. External balance is set beyond our borders; budget deficits are shock absorbers, not shocks. Cutting spending without touching capital flows doesn’t fix imbalances—it simply shifts borrowing back to households or forces adjustment through unemployment. Government spending is a symptom with mechanical causes—the same machine responsible.

If this machine is so powerful, why did it vanish from headlines after 2014? Because it became quiet, not gone. For over a decade, China’s official reserves have remained flat—exactly what you should notice. Underneath, surpluses are the largest in history: manufacturing surplus accounts for about 2% of global GDP, exceeding the combined peak of Germany and Japan, recycled via state-owned banks that absorb dollars at roughly $700 billion per year—while official data reports nothing. Dollars never left the system; they moved from central bank balance sheets into channels not counted as reserves. This is what non-kinetic warfare looks like: pricing power over goods you depend on, choke points like rare earths stopping your car production without firing a shot, and slow, invisible erosion of actual purchasing power you never declare. This attack was designed to be invisible—its success is evident in how few people discuss it. The charts below capture that silence.

Now zoom back to Warsh and Bessent. Once you see this machine, these appointments were never personnel decisions—they were strategic moves by Trump. You don’t appoint two capital flow experts trained by Druckenmiller to the Fed and Treasury just to manage interest rates and issue debt. You appoint them because the counterattack must use the same channel as the attack: capital flows themselves.

The U.S. dollar’s role as reserve currency cannot be abandoned—abandoning it would hand the system to the adversary. Thus, the real operation is turning the burden into a weapon. Let global capital continue flowing into U.S. assets—but redirect it from consumption-financing debt toward productive capacity: AI infrastructure, defense, and frontier labs. This explains why the venture capital community, frontier labs, and the two strongest global financial institutions are all moving in the same direction. Capital flow is war itself—and this is the first time U.S. policymakers truly understand it. There is one core scoreboard for the entire game: the chart below.

This likely explains why Marc Andreessen was appointed by Kevin Warsh to the new Fed AI Working Group. They’ve already aligned Alex Karp and Palantir with this strategy, and now they’re aligning private market capital. The key is that Warsh and Bessent must coordinate every facet of technological development and capital flow to jointly counter China’s economic and financial aggression.

This is also why, when viewed in proper context, Anthropic’s actions become significant. Trump speaks in grand rhetoric; Dario frames the backdrop as “defending the freedom of the American people.” But understanding the actual structural dynamics reveals that if the U.S. falters in the AI arms race, what gets outsourced may extend far beyond manufacturing jobs. If China wins the AI race, America’s economic and social problems could multiply tenfold!

This is the monetary order. This is the macro endgame: every player positions around the same core mechanism—the international capital flows between the U.S. and China. Once you see the mechanism itself, actions in venture capital, defense spending, and AI frontier labs cease to appear as isolated news headlines and instead emerge as moves on the same board.

How do you observe this coordination in real time? Start with Warsh’s FOMC meeting last week. The Fed held rates steady, with three members voting for rate hikes. Warsh spent extensive time discussing capital expenditures:

"The most striking feature of the economy is the robust growth in corporate investment. The surge in high-tech capital spending is particularly notable."

—Kevin Warsh, July FOMC

He provided specific figures:

"In the AI-related category of high-tech equipment and software, the latest data shows quarterly growth approaching 20%."

—Kevin Warsh, July FOMC

He explicitly linked this infrastructure cycle to the path of interest rates:

"It’s a race between supply and demand. The surge in corporate capital spending around AI makes this judgment harder."

—Kevin Warsh, July FOMC

Two weeks prior, he spoke more bluntly in Congress:

"What’s now called AI investment will soon be called investment itself."

—Kevin Warsh, July FOMC

A Fed Chair thinking in terms of capital flows tells you: the AI capital expenditure cycle is now the economy itself. He held policy rates steady below, letting the market adjust. His own words: “We’ve done nothing in 42 days—markets have done a lot.” See what the market did to interest rate paths after he spoke.

See my report on post-FOMC interest rates:

Will Warsh Crash the Market? Misinformation in the Markets

So what role does Bessent play in all this?

Where does the marginal liquidity in this entire transaction come from? Japan. The Bank of Japan still maintains the cheapest funding rates among advanced economies. Borrowing cheap yen to buy dollar assets is the oldest liquidity pipeline in modern markets—direct cross-border yen lending totals around $250 billion, with derivatives pushing estimates near $1 trillion. These funds don’t sit idle—they flow into the deepest, fastest markets on Earth, now meaning U.S. assets and their core AI segments.

Now look at the time series from last week. The yen plummeted to its weakest level since 1986. Reports indicate Japan spent over $50 billion in a single day defending the currency—possibly the largest intervention on record.

The next day, the U.S. Treasury joined forces with Tokyo, and the New York Fed bought yen.

Then Bessent appeared on TV, speaking in the calmest tone: “The yen appears severely undervalued to me,” and “excessive yen volatility is unhealthy.” The Treasury cannot afford for markets to link financing currency to AI trading, especially as infrastructure still requires liquidity, and the pipeline starts to unravel.

Bessent deliberately let everyone see his notes on the yen—his old tactic. Bessent knows exactly what he’s doing: trying to proactively shift market expectations (effectively forward guidance in forex markets). Japanese economy now faces negative impacts from high oil prices and weak currency. Bessent knows arbitrage trades must remain intact to keep liquidity flowing into AI infrastructure—but he also needs to balance support for Japan, preventing the new prime minister from losing public support due to inflation. Bessent would rather intervene proactively to maintain capital flow toward AI trading than allow the situation to truly explode, causing damaging volatility for both nations.

Why are these flows so critical now? Because frontier labs are nearing the point where private capital dries up. Anthropic’s run rate jumped from ~$9 billion to nearly $50 billion within five months and has secretly filed for IPO. OpenAI is close to $25 billion in size but still loses over $1 for every $1 earned, as compute bills compound faster than revenue.

Companies burning capital at this scale eventually need public markets. Their window to go public coincides with the window slamming shut: SpaceX, the largest IPO in history, listed seven weeks ago and now trades 20% below its issue price, half its peak value. The semiconductor sector just endured its worst month since the financial crisis.

So ask the question through Warsh and Bessent’s lens: what happens if companies carrying the AI arms race cannot access public capital? These aren’t ordinary firms. They operate as national security assets—holding Pentagon contracts, with export controls treating frontier models as strategic capabilities. All infrastructure funding—labs, chips, data centers, power—is cross-collateralized. Any leg collapsing drags down the entire structure. A Fed Chair backing the capital expenditure cycle, and a Treasury Secretary defending the financing currency in the same week—this is no coincidence. It reflects the larger mechanism of the global monetary order.

Summary

When you pull everything together, you see why misinformation is so effective. The core power—real changes in purchasing power and international capital flows—is extremely difficult to comprehend, yet felt acutely at the financial level of society. That’s why most people ultimately build entire narratives around symptoms of the core issue, while Bessent, Warsh, Druckenmiller, Karp, and Andreessen build everything around the actual mechanisms.

This is also the context behind historically highest valuations and near-total correlation across markets. Stocks and rates move in sync because every capital flow orbits the core mechanism—China’s closed capital account, the dollar’s reserve currency status, and the CCP’s globally resonant economic and financial aggression.

Remaining neutral or passive in this world is as dangerous as making decisions based on surface symptoms. That’s why Bessent and Warsh are actively acting on interest rates, currency, and fiscal policy, while clearly connected to Alex Karp and Marc Andreessen on the AI arms race and private capital front. They are aligning public and private sectors toward a single direction—active counterattacks against all CCP aggression, especially in the AI arms race. Without understanding the background of international monetary flows, their actions appear random.

The most crucial insight in this context is that policy decisions are built around the core issue, not symptoms. That’s why many policy decisions have seemed meaningless to observers so far. Tariffs in 2025 that triggered stock market crashes made little sense to many—Trump imposed them at the cost of the market. Whether financial assets soar or crash, priorities are adjusted around the core mechanism—international monetary system and the macro endgame’s dominant factor. All of this unfolds amid abnormally low and complacent volatility in interest rate and foreign exchange markets, while the highest-ever stock valuations further compress tail risk.

We are now in a macro endgame that will be remembered in history. For active traders who understand these mechanisms, this could be one of the best opportunities in history. That’s why I’m here. I believe the U.S. must win this fight against China, and I fully support the ongoing strategic coordination aimed at improving the lives of ordinary Americans. Yet we know it won’t be smooth sailing. Volatility exists precisely to transfer money from the weak to the strong.

Expect volatility. That’s why trading and investing exist.

Author: Capital Flows, Translated by DeepFlow TechFlow