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Will DeepSeek deep-six the US economy?

America has financed a current account deficit that bloated to US$1.2 trillion in 2024 by selling tech stocks to foreigners. Tech stocks, meanwhile, are trading at valuations not seen since 2000, when the NASDAQ Composite began a descent that wiped out 75% of its market capitalization by 2002.

Could a tech crash turn into a funding crisis for the United States if expectations sour on the revenue prospects of artificial intelligence? The January 27 crash in AI-related stocks in response to cheaper and better Chinese competition raises troubling questions. These questions have the undivided attention of every equity investor in the world.

Foreigners stopped buying US debt of all kinds – Treasury, mortgage, and corporate – after the post-Covid inflation of 2021 and the Federal Reserve’s consequent rise in interest rates. That denoted the end of a 40-year bull market in US bonds. From a 1981 peak of 15%, the US 30-year bond yield fell in a nearly straight line to an August 2020 low of just 1.41%.

The inflationary surge of 2021-2022 put an end to this bull run. In March 2022, moreover, the US and its allies seized half of Russia’s $600 billion in foreign exchange reserves, prompting other central banks to shift away from US Treasury securities to gold and other assets.

But the world’s appetite for American tech stocks has been bottomless for the past ten years, whetted during the past year by the advent of Large Language Models (LLMs). Are elevated valuations for AI-related stocks justified? That depends on two factors: Which sectors are likely to generate revenues from AI and how fast they will generate them.

China’s DeepSeek R1 model appears to have achieved a breakthrough in model efficiency: novel architecture and related

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