Cold War II
In 1945, George Orwell described a cold war as a “peace that is no peace.” According to Niall Ferguson, “That nicely describes relations between the United States and China right now.”
Any great power that spends more on interest payments than on defence will not remain great for long.
“There's a technological rivalry, an ideological rivalry, and a geopolitical rivalry,” says Ferguson. “These two powers are colliding in a whole range of areas.”
Looking ahead, the US will struggle to close the manufacturing gap with China, he says. “Despite efforts through tariffs, industrial policy and other measures, the US will find it significantly harder to manufacture goods than China.” Ferguson also expects significant dollar depreciation over the next decade – which he says will be positive for safe haven assets like gold and the Swiss franc.
Meanwhile, China is poised to outpace the US in the race for technological supremacy, says Ferguson. His prediction is driven, in part, by China’s cost-effective, open source artificial intelligence models – like DeepSeek – and the fact that China now generates twice as much electricity as the US.
In terms of geopolitical rivalry, Ferguson highlights how the US is now spending more on interest payments than it does on defence and that it will be spending twice as much on interest by 2040. According to Ferguson's Law, which is based on observing the decline of empires since the 17th century, this trend poses a profound threat to the durability of American power.
Ferguson says that by 2035, there will be three nuclear superpowers, with China joining the US and Russia. While a cold war with two nuclear superpowers is “relatively straightforward from a game-theoretical perspective,” he says, “the dynamics become far more complex with three, especially if two of them are allied.”
“The danger in any cold war is that it becomes hot – maybe over Taiwan – at some point in the next few years,” Ferguson warns. “If Xi Jinping and Donald Trump get it wrong, we could find ourselves facing as big a geopolitical crisis as the Cuban missile crisis, except that it would have much bigger economic consequences because of Taiwan's centrality to the global economy.”
Ultimately, Ferguson believes the US and China will avoid war over Taiwan due to the principle of mutually assured economic destruction. “A détente between the superpowers was possible in the first cold war, and I think it will be possible in the second cold war.” Nevertheless, Ferguson expects China's influence over Taiwan will continue to grow, and over time, Taiwan may face a fate similar to Hong Kong’s.
In this respect, Ferguson predicts that “Cold War II will likely end, not with a bang, but with a whimper.”
