We’ve been talking about the “boom loop” in the American economy. Compute generates revenue, revenue funds more compute, compute generates more revenue.

Here’s the result of that in a chart.

This black line (going straight up) is this self-reinforcing loop at work, fueled by $650 billion of AI capex this year, $1 trillion next year, massive commitments to expand domestic energy capacity, and simultaneously, a defense industrial mobilization.

This is why the Fed is raising its growth forecast, and sees high productivity growth continuing, leading to higher incomes and higher potential growth for the economy.

Notice in that chart above, the planned capacity for the “rest of the world” (led by China) is following the U.S. trajectory.  This is the “AI race” we’ve been documenting.

And then there’s the blue line. 

Europe. It’s barely visible, at the bottom. 

This is a key ingredient in the “doom loop” we’ve been talking about for the European economy.

Europe has spent a year planning a big spend on defense, AI and energy capacity.  The question has been, how will they pay for it?

The plan: They tried to knit together support last month for fiscal union: “One Europe, One market.”

That plan may have blown up on February 28th, when the U.S. started dropping bombs on Iran. 

Twenty-six days later, Europe’s deficits in defense, AI and energy have been exposed, and now its solvency and liquidity vulnerabilities may be exposed. 

With that, European policy makers and economists were in Frankfurt today at “The ECB and Its Watchers” conference.

And the ECB’s own chief economist presented a “severe scenario” where eurozone inflation rises to almost six percent this year — and does not return to target over the next two years. Growth goes negative for 2026.

Important detail:  This “severe scenario” (which includes destruction of energy infrastructure) is particularly interesting, because it’s already happened.

The data modeling in the presentation (see it here) had a March 11th cutoff date.  That’s two weeks ago. 

There has since been a strike on the world’s largest natural gas facility, and 19 million tonnes of LNG supply has since gone offline, through at least the end of May. And in the same conference, ECB President Lagarde acknowledged this is the largest supply disruption in history.

That brings me to an interesting study today.

The ECB also published a working paper focused on the resilience of euro liquidity under financial stress. On the surface, it looks reassuring. The paper says the euro repo market remained resilient in recent periods of stress.

But from this paper (study from 2021-2025) 30% of the government bond collateral supporting that “resilience” was Italian government bonds — the bonds of the most fiscally fragile major economy in Europe, and the very bonds we’ve been flagging from the onset as most vulnerable to a solvency crisis.

This is the doom loop we’ve been discussing.