Executive Summary
The Premise and Structure
In a creative exercise, Nomura's chief economists role-play fictional correspondence between the world's leading central bank governors. The roleplay is designed to explore what these influential policymakers might really be thinking about the current state of the global economy, free from the careful public communication constraints they normally operate under.
The exchange begins with Rob Subbaraman, portrayed as General Manager of the Bank for International Settlements, writing a confidential letter in early January to the heads of the Federal Reserve, European Central Bank, Bank of England, Bank of Japan, People's Bank of China, and Reserve Bank of India. In his letter, he raises serious concerns that 2026 could be the tipping point for the global economy and markets, highlighting five major risks that demand collective attention and coordination.
The Five Major Risks
The BIS General Manager identifies fiscal irresponsibility as having become the new normal in many major economies. Public debt ratios have reached levels not seen since World War II, while rising youth unemployment and widening wealth inequality are driving voters to short-sighted populist governments. The combination creates a dangerous scenario where if bond yields rise or growth slows, fiscal finances could become unsustainable.
Second is the risk of fiscal dominance. To win elections, populist governments burdened with high debt have every incentive to politically pressure central banks to cut interest rates for growth gains and lower borrowing costs, even if over-stimulating the economy has greater longer-term costs in terms of inflation and boom-bust cycles.
Third, a US political revolution is unfolding. With sinking approval ratings and polls suggesting Democrats are favored to take the House in November midterm elections, the Trump administration may grow more radical in policies. The expansion of executive authority unchecked and erosion of the rule of law could lead to more domestic policy mistakes and crony capitalism, while gunboat diplomacy aims to revive the Monroe Doctrine.
Fourth is the risk of AI turning out to be a bubble that bursts. While AI computing power is advancing far faster than Moore's Law and ChatGPT reached 800 million users in three years compared to the internet's 13-year timeline, revolutionary technologies historically involve overinvestment, market hype, and disruption before clear winners emerge. A bursting AI bubble would be particularly severe given US equity market cap is now over 2X GDP.
Finally, the erosion of trust among world leaders leaves little hope for rapid global coordination during crises, whether an AI-driven cyberattack, financial collapse, or pandemic. Unlike the COVID-19 response, governments have become too disconnected to deliver coordinated action.
The Bank of England: Cautious but Constructive
Governor George Buckley opens the interchange, acknowledging the sobering nature of the risks while noting that the UK is in a particularly precarious position as a more open economy. He highlights the Bank of England's particular consciousness of fiscal irresponsibility following the 2022 mini-budget debacle, noting that while the fiscal ship has been steadied, the UK needs to take particular care given it lacks the reserve currency status of the US or the EU/ECB backing.
On geopolitical risks, Buckley notes the unprecedented number of flashpoints including Venezuela, Greenland, Iran, Ukraine, Taiwan, and NATO. While any individual risk may be limited, the chances of at least one becoming a major issue is non-negligible. He expresses particular concern about Iran's role supplying 5% of global oil and the potential for energy-driven inflation reacceleration.
Regarding AI, the BOE governor proves more optimistic, believing it could be a genuine game-changer for global productivity. However, he acknowledges the parallel to the tech boom before March 2000, which came too early even though smartphone technology later proved era-defining. The Bank's Financial Stability Reports have highlighted many of these global risks, from geopolitics to sovereign debt to stretched AI valuations.
"Europe always pulls together in a crisis. Think German fiscal support, increased European defense spending, Ukraine reconstruction, increased UK-EU cooperation, and joint bond issuance helping make the euro a more global reserve currency."
The Federal Reserve: Decidedly Optimistic
Fed Chairman David Seif emerges as by far the most optimistic voice in the correspondence. Before addressing the BIS concerns, he first turns to the critical issue of Fed independence, calling the Department of Justice's criminal investigation into his conduct "wholly unacceptable." However, he remains confident Fed independence will endure thanks to enormous support from central bank colleagues and bipartisan political leaders.
On geopolitical risks, Seif vigorously disputes the assertion that they are increasing, arguing instead that geopolitical risks have declined dramatically over the past four years. He points to Russia's weakness exposed by the Ukraine invasion, Iranian proxies defeated across the Middle East, and asserts the world is materially safer with these adversaries diminished.
Regarding US foreign policy, the Fed chairman defends military intervention in Venezuela as consistent with two centuries of Monroe Doctrine precedent, citing successful US interventions in Grenada, Panama, and Haiti. On the Greenland initiative, while unconventional, he frames it as enhancing NATO's military presence near Russia's northern border.
On AI, Seif finds himself far more aligned with the BOE's optimistic perspective than the BIS's cautious outlook. He argues that throughout two and a half centuries, optimists have proven far more accurate than pessimists in identifying emerging trends. AI appears poised to become the next major driver of positive innovation, and while occasional market turbulence is expected, disruptions will be temporary exceptions rather than the prevailing pattern.
The Reserve Bank of India: Worried About Spillovers
Governor Sonal Varma expresses surprise at the Fed chairman's assessment that geopolitical risks have declined, arguing instead that they have clearly intensified. Russia's invasion fundamentally destabilized European security architecture, US-China tensions remain elevated, and Middle East conflicts continue escalating, creating unprecedented systemic vulnerabilities requiring constant central bank vigilance.
As an emerging market central bank governor, Varma worries most about US spillovers. US trade policies have created tremendous uncertainty for exporters, rising fiscal risks in developed economies are leading to capital outflows, and concerns over Fed independence add to the volatile mix. She notes that the Trump administration's gunboat diplomacy is making banks reluctant to engage in legitimate transactions due to compliance concerns.
On AI, while acknowledging huge potential, Varma worries about the deeply uneven distribution of benefits. The technology is creating a K-shaped impact with dramatic productivity gains for high-skilled workers while routine jobs disappear. This isn't just a domestic concern but a global phenomenon that could trigger widespread social unrest, particularly given already-elevated youth unemployment rates.
For India specifically, 2025 has been tough following the unraveling of the US-India relationship. Despite this hostile external backdrop, India's strategy has been threefold: signing free trade agreements to hedge bets, announcing countercyclical policies to boost domestic demand, and implementing structural reforms. India's current goldilocks moment of 7.5% real GDP growth with below-target inflation has real staying power, with underlying inflation trends having shifted dramatically from 6% in 2022 to 3.5% currently.
The People's Bank of China: Deflation and Export Dependence
Governor Ting Lu highlights a remarkable post-pandemic oddity: while the US and Europe wrestled with high inflation, China has been quietly battling stubborn deflation. Headline CPI limped between 0% and 0.8% in late 2025, producer prices have been underwater for more than three years, and the result is the world's largest trade surplus at USD 1.2 trillion in 2025.
Lu expresses nervousness about the US economy's all-in bet on the AI gold rush, which somewhat reminds him of the dot-com bubble. If the AI bubble pops, its after-effects could reach Beijing at a time when China is already addressing deflationary issues and property contraction. The surplus isn't caused by an undervalued currency but by collapsed domestic demand and three years of deflation, with the RMB actually appreciating 3% against its trade-weighted basket between 2021 and 2025 while exports exploded 45%.
Despite contracting for five years in a row, the property sector remains a major economic and fiscal pillar. New home sales are down more than 55% from peak, investment contracted 17% in 2025, and unfinished apartments remain a material issue. Households, with over half their wealth in housing, have raised savings rates further. The government will likely set its 2026 GDP growth target at 4.5% to 5.0%, a moderation from last year.
On monetary policy, China has quietly borrowed from the Bank of Japan's ETF adventure to back the national team, with two facilities totaling RMB 800 billion launched in October 2024 and topped up in April 2025 following Trump's tariffs. Major indices are up over 30% since late 2024, though the PBOC remains cautious after the 2015 bubble experience.
The European Central Bank: Precarious Equilibrium
ECB President Andrzej Szczepaniak notes that the euro area appears close to equilibrium, with inflation hovering around target since early last year and economic growth reaching pre-pandemic trend rates by mid-2026. With rates at the midpoint of neutral estimates, the ECB is in what they term "the good place." However, this position remains precarious and requires continued vigilance.
On German fiscal stimulus, while the coalition government has signaled willingness to deploy up to €1 trillion in additional spending over the coming decade focused on defense, infrastructure, and green transition, questions remain whether this will be offset by fiscal tightening elsewhere in France, Italy, and Spain. The European Commission estimates the net impact on GDP growth in 2026-27 will be almost neutral.
Szczepaniak cautions that Germany and the euro area must simultaneously undertake structural reforms that improve global competitiveness. Since Mario Draghi's 2024 report outlining why the euro area could be considered the sick man of the world, only 11% of his recommendations have been implemented. The rise of nationalist and eurosceptic political parties favoring less European integration underscores risks that recent crises may have been insufficient catalysts for necessary reforms.
The most troubling risk is that if Europe is unable to unite, the world may move to a US-China dominated order with a fragmented Europe losing superpower status. Unfortunately, national interests still often trump European solidarity when stakes are highest, a pattern that may only amplify as nationalist parties increase in importance across Europe.
The Bank of Japan: Determined to Normalize
Governor Kyohei Morita shares concerns particularly around the relationship between monetary policy and fiscal policy, given Japan's deep engagement in unconventional monetary easing including QQE with YCC and negative policy rates. However, he is determined to normalize Japan's monetary policy via further rate hikes based on the view that Japan's economy continues to normalize gradually.
Most importantly, Japan has started experiencing the "three types of hikes" – price hikes, wage hikes, and rate hikes – for the first time in almost three decades. As of 2025, these hikes have reached their fourth, third, and second years respectively. As price and wage hikes are likely to continue, the BOJ believes it can continue with rate hikes as well.
On fiscal concerns, Prime Minister Takaichi describes her fiscal policy stance as "responsible active fiscal policy," implying expansionary but disciplined. However, markets aren't fully convinced, with long-term yields rising together with rapid yen weakening. Some have made analogies to the UK's Truss moment, though Morita believes this won't repeat in Japan thanks to over forty years of current account surpluses making Japan the world's largest creditor country.
Regarding AI, Morita is optimistic that demand will continue partly because software generally has shorter depreciation periods than hardware due to technological advances, making new demand form relatively easily. AI should have substantial benefits for Japan's economy, particularly in addressing labor force shortages by making capital stock more of a substitute for labor rather than a complement.
Investment Conclusion
This creative roleplay exercise reveals fundamentally different perspectives among the world's leading central bank governors on critical risks facing the global economy in 2026. The correspondence crystallizes into two competing worldviews: a pessimistic perspective seeing unprecedented global fragility with multiple crisis triggers converging simultaneously, and an optimistic outlook viewing current disruptions as necessary transitional adjustments toward greater stability and prosperity.
The pessimistic view, primarily articulated by the BIS and echoed by several governors, paints a picture of compounding risks. Fiscal crises could trigger political instability, shattering international cooperation just when coordinated response becomes most critical. With fat tail risks multiplying, the mathematical probability of at least one materializing approaches certainty. The world appears to be sleepwalking toward a crisis that could dwarf previous economic disasters.
The optimistic perspective, championed by the Fed chairman with some support from the BOE and BOJ governors, sees current tensions as necessary adjustments creating clearer strategic relationships. The past four years have resulted in an unambiguous victory for Western democracies, with Russia and Iran significantly weakened. AI represents the next great leap in human productivity, fiscal concerns are manageable with proper policy frameworks, and institutional coordination remains robust despite surface tensions.
What's particularly striking is the divergence on fundamental assessments. The Fed chairman asserts geopolitical risks have declined dramatically while the RBI governor sees them as clearly intensified. On AI, views range from transformative opportunity to dangerous bubble. On fiscal sustainability, perspectives vary from manageable challenge to looming crisis. These aren't merely differences in emphasis but reflect genuinely different readings of the current global landscape.
For investors and policymakers, this exercise highlights the profound uncertainty facing markets in 2026. When the world's most influential monetary policymakers would hold such divergent views on basic risk assessments, it suggests we are at a genuine inflection point. The reality likely lies somewhere between the extremes, with both significant risks and meaningful opportunities ahead. What remains clear is that central bank coordination and communication will be crucial, and monetary policy may indeed be the primary tool available for rapid, forceful response if worst-case scenarios materialize.
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