There is a persistent disagreement about the macroeconomic moment. One camp sees the world as still in a leverage cycle, pointing to massive AI investment, persistent fiscal deficits, and buoyant equity markets. Another sees an unmistakable deleveraging, pointing to commercial real estate, slowing globalization, higher interest rates, demographic aging, and cautious consumers. Both are right, and both are wrong, because they are asking the wrong question.
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The global economy is not experiencing a generalized leveraging or deleveraging. It is reallocating leverage from one theory of coordination to another.
That is the shift that matters. Financial markets are not merely deciding how much debt society can sustain. They are deciding which kinds of coordination deserve to be financed, which deserve only to be maintained, and which no longer justify expanding commitments. The familiar language of liquidity, credit conditions, fiscal deficits, and monetary policy describes the plumbing of this process but not its direction. The deeper question is what kinds of future societies investors, governments, firms, and households believe they are underwriting.
Debt is often described as a claim on future production. That is true but incomplete. Production itself is impossible without coordination. Factories require suppliers, workers, logistics, energy, legal systems, payment networks, and customers. Scientific discoveries require research communities, universities, instruments, standards, and funding. Markets require institutions, contracts, currencies, and trust. Every loan therefore rests upon an implicit claim that future coordination will produce enough surplus to honor today’s promises.
This suggests a different way to think about leverage. Leverage is not fundamentally optimism. Nor is it simply a willingness to take risk. It is a judgment about the expected return on coordination.
When markets leverage, they are saying that creating additional layers of coordination is likely to generate more surplus than it costs. When markets deleverage, they are saying that additional coordination no longer appears sufficiently productive to justify further commitments. The cycle is therefore not primarily financial. It is civilizational.
Viewed this way, the history of the last half century can be understood as a transition between two competing theories of coordination.
The first theory, which dominated roughly from 1980 through the middle of the 2010s, might be called cosmopolitan coordination. Its premise was simple and remarkably successful. Every additional layer of global integration was assumed to produce increasing returns. Longer supply chains were better than shorter ones. More specialized firms were better than vertically integrated ones. More trade was better than less trade. Capital should move frictionlessly across borders. Labor should become globally mobile. Production should occur wherever costs were lowest. Financial markets should intermediate these flows with ever greater sophistication. Political and legal convergence was expected to continue. The world was becoming one enormous coordination graph whose increasing density would continue to generate surplus almost indefinitely.
This was an extraordinarily successful theory. Containerization, the expansion of the WTO, China’s industrialization, global capital markets, multinational corporations, the Internet, cloud computing, and digital communications all reinforced one another. Every additional node connected to the network seemed to increase the value of every other node. Credit naturally expanded because every additional layer of coordination appeared capable of paying for itself.
This was the great leveraging cycle of cosmopolitan globalism.
Notice that the leverage was not simply financial. It was organizational. Firms became larger, supply chains became longer, inventories disappeared, production became geographically fragmented, universities internationalized, research became increasingly collaborative, and lifestyles themselves became globally integrated. Debt merely reflected the underlying conviction that increasingly dense coordination would continue to produce increasing surplus.
Eventually, however, the marginal returns changed.
The important point is that globalization did not fail. Trade did not suddenly collapse. The Internet did not disappear. Multinational corporations did not cease to exist. Instead, something subtler happened. Markets began questioning whether the next increment of cosmopolitan coordination would produce the same surplus as the previous one.
Brexit, rising strategic competition between the United States and China, pandemic supply-chain failures, sanctions, export controls, energy shocks, semiconductor shortages, and geopolitical fragmentation did not destroy globalism. They raised its hurdle rate.
This is better understood not as deglobalization but as a cosmopolitan recession.
A recession does not imply that an industry disappears. It implies that investors become more selective. Credit becomes tighter. Projects that previously cleared the hurdle rate no longer do. Marginal investments are cancelled before existing ones are liquidated. Something very similar has happened to cosmopolitan coordination.
The financial analogue is striking. Companies now demand dual sourcing instead of single sourcing. Inventories replace just-in-time logistics. Firms build redundancy into supply chains. Export controls require legal compliance teams. Political risk enters capital budgeting. Semiconductor fabrication migrates despite higher costs. Manufacturing diversifies across trusted jurisdictions. None of this represents the abandonment of global coordination. It represents tighter underwriting standards.
One might call this tighter credit for globalism.
Importantly, this does not mean that markets have become autarkic. The opposite of cosmopolitan leverage is not economic nationalism in its pure form. Pure autarky has rarely generated high returns. Instead, a different theory of coordination has emerged.
Call it thick sovereignty.
The central premise of thick sovereignty is not that states should replace markets. Rather, it is that states must underwrite the critical coordination capacities upon which markets ultimately depend. Semiconductor manufacturing, electrical grids, ports, cyber defense, energy systems, defense industrial bases, strategic mineral supply chains, payment infrastructure, and domestic manufacturing capability are no longer viewed merely as sectors of the economy. They are treated as strategic coordination assets.
These investments often appear unattractive through the lens of traditional return-on-investment analysis. A semiconductor fabrication plant built for geopolitical resilience may never achieve the lowest production costs. Maintaining excess electricity generation capacity may appear inefficient. Building redundant logistics networks lowers measured productivity. Strategic reserves produce no quarterly earnings.
Yet these investments optimize a different objective function.
They are not expansionary investments.
They are option-preserving investments.
Their purpose is to buy adaptability under conditions of profound uncertainty. They resemble insurance, but only superficially. Insurance assumes known probabilities. Thick sovereignty operates under Knightian uncertainty, where the relevant risks cannot even be fully enumerated. The investment is not a wager that a particular crisis will occur. It is a wager that maintaining the capacity to respond to unforeseen futures has become more valuable than maximizing static efficiency.
This distinction reveals that leverage itself has fractured into three increasingly distinct forms.
The first is expansionary leverage, which finances genuinely new coordination capable of creating new surplus. Historically this included railroads, electrification, highways, container shipping, and the Internet. Today it is overwhelmingly represented by artificial intelligence and the infrastructure surrounding it. AI is unusual not because it is fashionable, but because it is almost alone in offering a credible global narrative of expanding the production frontier. Markets are willing to tolerate extraordinary capital expenditures because they believe AI may fundamentally increase the productivity of future coordination itself.
The second is option-preserving leverage, represented by thick sovereignty. Here debt finances adaptability rather than growth. Electrical grids, semiconductor capacity, defense systems, strategic manufacturing, resilient logistics, and industrial policy all belong here. Their value depends not upon maximizing today’s output but upon preserving tomorrow’s strategic flexibility.
The third is maintenance leverage. This finances neither expansion nor adaptability. Instead, it preserves the continued functioning of already mature societies. Healthcare systems, pensions, disaster recovery, financial backstops, infrastructure repair, and much public spending fall into this category. They rarely create measurable new wealth. They prevent existing coordination from degrading.
This taxonomy helps explain one of the apparent paradoxes of the present. Governments continue borrowing aggressively despite the apparent absence of obvious new engines of growth. Traditional macroeconomics often interprets this as evidence of fiscal irresponsibility or political dysfunction. There is undoubtedly some truth in those critiques. But a more structural interpretation is available.
Modern sovereign borrowing increasingly finances maintenance and option preservation rather than expansion.
Healthcare maintains aging populations.
Infrastructure maintains mature economies.
Defense preserves geopolitical optionality.
Financial interventions preserve the monetary system.
Climate adaptation preserves future habitability.
None of these obviously make society richer.
They attempt to prevent society from becoming poorer.
That is a profoundly different confidence story from the one that characterized earlier leverage cycles. Bond buyers are not necessarily saying that explosive growth lies ahead. They are expressing confidence that the state will remain the indispensable institution for maintaining civilization-scale coordination through an era of structural transition.
This also clarifies the relationship between globalization and sovereignty.
The world is not moving from globalism to autarky.
It is moving toward a different architecture consisting of thick sovereignty resting upon a thin cosmopolitan floor.
The thin cosmopolitan floor includes those systems whose reversal would destroy more value than it could ever create. Global shipping, reserve currencies, payment systems, Internet protocols, scientific standards, aviation, commodity markets, satellite infrastructure, and core scientific collaboration all remain indispensable. They are becoming less like speculative growth sectors and more like civilizational infrastructure.
Above this floor sit increasingly sovereign coordination systems. States compete over industrial capacity, energy security, technological leadership, defense, strategic manufacturing, and AI capability while continuing to rely upon a common global substrate that makes these competitions possible.
This explains why globalization appears simultaneously alive and diminished. The floor remains intact. The speculative premium once assigned to extending it indefinitely has disappeared.
The same framework also clarifies the world’s major economies.
The United States currently occupies all three categories simultaneously. It hosts the dominant expansionary leverage story through AI. It is aggressively building thick sovereignty through semiconductor policy, defense, energy, and industrial investment. It also remains the principal underwriter of the thin cosmopolitan floor through the dollar, Treasury markets, financial infrastructure, and global security architecture.
China has shifted from leveraging cosmopolitan integration toward leveraging sovereign industrial depth. Export-led globalization increasingly serves domestic strategic capacity rather than existing as an end in itself.
Europe continues attempting to preserve cosmopolitan institutions while gradually accepting the necessity of thicker sovereignty in defense, energy, and industrial policy.
India remains unusual because it still possesses a classic expansionary story built upon demographics, urbanization, infrastructure, and rising productive capacity. It therefore resembles earlier leverage cycles more closely than most advanced economies.
Seen from this perspective, today’s macroeconomy is neither an age of generalized optimism nor generalized pessimism. It is an age of selective confidence. Markets remain extraordinarily willing to finance certain forms of future coordination while simultaneously withdrawing support from others.
What, then, is actually being deleveraged?
It is not capitalism, globalization, or technology.
Rather, it is the specific theory that ever-denser private cosmopolitan coordination would continue generating increasing marginal surplus.
Commercial office real estate, globally optimized just-in-time production, frictionless labor arbitrage, hyper-specialized multinational supply chains, perpetual regulatory convergence, and business models dependent upon ever-cheaper capital increasingly face higher discount rates because the coordination assumptions embedded within them have been repriced.
What is being levered is equally revealing.
Artificial intelligence.
Scientific and technological capability.
Electrical infrastructure.
Energy abundance.
Defense.
Cybersecurity.
Industrial systems.
Semiconductor ecosystems.
Strategic logistics.
Resilient manufacturing.
Critical supply chains.
These are not simply sectors. They are components of a new theory of coordination.
The practical implications extend well beyond portfolio allocation.
Business leaders should ask not merely whether a project generates returns, but which theory of coordination it strengthens. Does it expand humanity’s capacity to create new surplus? Does it preserve adaptability under uncertainty? Does it maintain indispensable systems upon which everything else depends? Or does it merely assume that the old cosmopolitan model of ever-cheaper, ever-denser private coordination will automatically resume?
Individuals face similar choices. Careers increasingly reward those who build new coordination technologies, strengthen strategic capabilities, or maintain critical infrastructure. Institutions that organize around these imperatives are likely to enjoy easier access to capital, talent, legitimacy, and political support than those organized around assumptions that belonged to the previous era.
The question is therefore no longer whether the world is leveraging or deleveraging.
The question is which theory of coordination society is willing to leverage.
For nearly four decades, markets underwrote the belief that ever-denser cosmopolitan coordination would continue producing increasing surplus. That belief has not disappeared, but it has been repriced. In its place, a new allocation of leverage is emerging. Expansionary coordination seeks new sources of surplus through technologies like AI. Thick sovereignty finances resilience, adaptability, and strategic capacity under uncertainty. A thin cosmopolitan floor preserves the irreducible infrastructure that keeps an interconnected world functioning despite political fragmentation.
The imperative of the old theory was simple: maximize coordination. Make networks larger, supply chains longer, specialization deeper, capital more mobile, and borders more economically irrelevant. The imperative of the new theory is fundamentally different: differentiate coordination. Expand where new surplus is genuinely possible. Build sovereign depth where strategic capacity matters. Preserve only those cosmopolitan layers that remain indispensable. The future belongs not to the world that coordinates the most, but to the one that coordinates most intelligently.
Market Design
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