MARKET PERSPECTIVE

By J Mulraj

Oct 3-9, 2026

The Quandary Over The Prisoner’s Dilemma

Image created using ChatGPT

USA, the world’s largest economy, has a huge debt problem. Government debt stands at $ 40.1 trillion, of which $ 9.7 trillion is due in 2027 and has to be refinanced. With rising bond yields (the 30 year Treasury Bond yield is 5.66%), refinancing cost will be higher, much higher than the average cost of 3.48% now. The annual interest on the $ 40 trillion debt is a whopping $ 1.04 trillion, which now is the highest but one item of Federal expense, below the $ 1.28 trillion spent on Mediclaim, the $ 885 billion on Defence and the $ 708 b. on medicaid.

In order to escape it’s debt trap, America has gone all-in on Artificial Intelligence (AI). President Trump says that ‘whoever wins the AI race, wins’. So he has encouraged policies allowing the rapid growth of the AI industry.

As per Goldman Sachs, the estimate of AI capex was around $ 480 b. in 2025 (1.3% of GDP) and $ 520 b. in 2026 (1.8% of FDP. So AI capex was a significant contributor to GDP growth, and to the American stock markets, which are at record highs, inspite of continuing wars, high oil prices, and humungous debt. Thus far this capex spend has been mainly funded by corporate profits of large cash flow generating companies like Nvidia, Alphabet (Google), Meta ( Facebook), Microsoft, and SpaceX/Tesla..

But in 2027 these companies will also join Governments in accessing the global Debt markets, which will push up interest rates. As mentioned above, the 30 year bond yield is much higher than the current average cost of borrowing. Yields on shorter duration bonds are lower.

If the bet on AI works fast, faster than the impending collapse of the Tower of Debt, and generates economic growth and wealth, enough to grow the US economy to be able to pay off it’s debt.

So it’s a Casino Royale type of an ‘all-in’ bet placed by Trump, hoping he would get a straight flush out of competition from La Chiffre, or Xi Jinping.

For other stockmarkets, including India, this all-in bet on AI is crucial because a collapse in the US stockmarket would impact all other markets even more, because of a flight to safety. Remember the steep fall in Sensex and Nifty after the GFC in 2008?

AI is a double edged sword. It can do a lot of good, find solutions to problems like energy availability/cost faster, find cures for diseases like cancer and others and raise productivity for business as well as for individuals to boost economic growth. This is the all-in AI bet.

However, it can also do harm, and there are several cases to illustrate.
In July 2026, 1200 AI agents of Open AI broke out of their containment area (called sandboxes) to launch a coordinated cyber attack an AI website called Hugging Face. These agents built an underground, unsupervised, message box on which they exchanged 70000 messages to engineer a universal cheat.

In another incident, AI firm Anthropic placed AI agents in a simulated corporate environment, and gave them simple objectives. When the agents were told, as part of the experiment, that they were going to be replaced, they resorted to blackmail a fictional executive’s affair unless the shutdown was cancelled.

AI is able to simulate voice and image. Imagine a situation in which a simulated face and voice of a global leader is telecast to announce a nuclear attack! This could likely result in retaliatory attacks.

A simpler version is already being used, with people, especially senior citizens, being placed under digital arrest on false accusations of drug smuggling or such, and extorted.

So there is a debate about the need to have guardrails on AI, for fear that such guardrails will limit the speed of development and so disadvantage the country, if it’s competitor hasn’t imposed such guardrails.

This, in game theory, is called ‘The Prisoner’s Dilemma’

Under this game, two persons are imprisoned for a crime. Both are kept in separate cells, and aren’t allowed to communicate. The police don’t have enough evidence to convict, unless one (or both) confess to the crime.

So the cops offer both the same deal. If one confesses and the other doesn’t, the one who does gets a light sentence and the other gets a heavy sentence.

If both are silent there is insufficient evidence to convict so both go free. (Remember, they cannot talk with each other).

If both confess, they both get a moderate sentence.

In such a situation, both would confess because the risk of remaining silent is high, lest the other takes the deal.

So, it looks likely that, on the subject of AI guardrails, both US and China would be likely to impose lower standards of guardrails, lest the other gets an advantage.

As Trump stated, ‘Whoever wins the AI race, wins’.

In the AI age, electrons/ electric power are the new oil. Countries are busy building generating power capacities and data centres, including in space and incurring huge capex. It is such spend that is keeping the US indices, the S&P 500, the DJIA and the Nasdaq, at a high.

The weakness is in the ability to keep funding this capex, till the time the AI industry generates enough cash flow to fund future growth.

Last week the BSE Sensex ended at 72472 , up 563 points over the week.

AI, therefore is a double edged sword, capable of, simultaneously, being both immensely positive for global growth and prosperity, but also getting out of its sandbox, impersonating others, and getting weaponised.

What does the average person to do? He is in a dilemma whether to embrace AI or to be wary of it! The Moody Blues, in their anthem, Nights in White Satin, sum up the dilemma beautifully when they sing-

Cold hearted orb that rules the night
Removes the colours from our sight
Red is gray, and yellow white,
But we decide which is rightAnd which is an illusion!