The global rearmament boom and its economic implications

The war in Iran has significantly changed global economic prospects, leading to higher energy costs, inflation, higher interest rates, slower growth, and higher debt payments. This week, in the podcast The Spillover, Rebecca Patterson and Sebastian Mallaby discuss a set of overlapping interactions: those stemming from rearmament.

The economic impact of military spending

Before examining the numbers, I thought I understood what the increase in military spending would mean for economies. Now, having absorbed the magnitude of the changes, I realize I underestimated what is happening—by a lot.

In the United States, there is incessant talk about how investment in artificial intelligence (AI capex) is driving most of economic growth. Well, those $1 trillion in spending are less than the $1.5 trillion for defense requested by the Trump administration in the current budget cycle. In other rich democracies, double-digit increases in military spending, adjusted for inflation, have become normal; SIPRI reports year-on-year increases of 22% in Canada and 24% in Germany.

The case of Japan

Rebecca Patterson, returning from Japan, reports what she learned during her week in the country, where Prime Minister Takaichi is pursuing the dual goals of rearmament and economic revitalization.

In Japan, the military transformation marks a significant reversal of its post-war identity. The country's debate on nuclear weapons remains emotionally raw more than eighty years after Nagasaki.

Global implications

Fear of China and doubts about the U.S. security umbrella are redefining politics in Japan and Germany. Governments are trying to finance massive military buildups without cutting popular programs, and bond markets may eventually force a reckoning.

The increase in military spending could fuel a wave of inflation, higher interest rates, and global market volatility, trapping central banks between fighting inflation and funding governments at war.

As Rebecca Patterson states: "All of this is happening when governments, frankly, can't afford more guns or butter because debt levels are very high."

The evolution of modern warfare

Artificial intelligence, drones, and cyber warfare are rapidly changing the economy and strategy of modern conflict. The new arms race is spilling far beyond the battlefield, influencing technology, energy, supply chains, and the future of globalization.