Council on Foreign Relations 33d ago

As governments around the world ramp up defense spending, a new era of rearmament is reshaping economies, markets, inflation, and politics. This episode examines Japan’s dramatic shift away from its postwar pacifist identity amid rising tensions with China, ongoing conflicts in the Middle East, and growing uncertainty around the global security role of the U.S. Hosts: Sebastian Mallaby, Paul A. Volcker Senior Fellow for International Economics, Council on Foreign Relations (CFR) Rebecca Patterson, Senior Fellow, Council on Foreign Relations (CFR) We discuss: 1. Why the global rearmament boom could become the biggest fiscal stimulus story since the pandemic. 2. How defense spending is colliding with already massive government debt, and pushing bond yields higher. 3. Why Japan’s military transformation marks a significant reversal of its postwar identity. 4. Why Japan’s debate over nuclear weapons remains emotionally raw more than eighty years after Nagasaki. 5. How fear of China and doubts about the U.S. security umbrella are reshaping politics in Japan and Germany. 6. How governments are trying to fund massive military buildups without cutting popular programs, and why bond markets may eventually force a reckoning. 7. How rising military spending could fuel another wave of inflation, higher interest rates, and global market volatility, trapping central banks between fighting inflation and financing governments at war. 8. As Rebecca Patterson puts it: “All this is happening when governments, frankly, can't afford more guns or butter because debt levels are very high.” 9. How AI, drones, and cyberwarfare are rapidly changing the economics and strategy of modern conflict. 10. How the new arms race is spilling far beyond the battlefield into tech, energy, supply chains, and the future of globalization. 00:00 - Introduction to The Spillover 03:03 - Today’s Topics: Geopolitics, AI, & Remilitarization 04:45 - Global Defense Budget Trends & SIPRI Report 06:03 - Financing Deficits: Debt vs. Monetary Policy 07:04 - NATO Defense Spending & Trillion Dollar Budgets 08:22 - Comparison: Military Spending vs. AI Capex 10:28 - Japan Case Study: Defense Hawks & Inflation 12:02 - History of Pacifism: Article 9 & Self-Defense 15:13 - Geopolitics: Japan-China Tensions & Rearmament 18:01 - Three Non-Nuclear Principles & Deterrence 25:50 - Political Hurdles: Referendums & Public Opinion 29:54 - Macroeconomic Spillovers: Guns vs. Butter 34:41 - Central Banks: Interest Rates & Yield Curves 41:40 - Closing: Global Supply Chains & Papal Views on AI Mentioned on the Episode: David Kelly, “Five Scenarios for the Federal Debt,” J.P. Morgan Asset Management https://am.jpmorgan.com/us/en/asset-management/adv/insights/market-insights/market-updates/notes-on-the-week-ahead/five-scenarios-for-the-federal-debt/ “Fiscal Policy under Pressure: High Debt, Rising Risks,” International Monetary Fund (IMF) https://www.imf.org/en/publications/fm/issues/2026/04/15/fiscal-monitor-april-2026 “Global Supply Chain Pressure Index (GSCPI),” Federal Reserve Bank of New York https://www.newyorkfed.org/research/policy/gscpi#/interactive “Majority of Japanese Support Constitutional Revision: Poll,” UPI https://www.upi.com/Top_News/World-News/2026/05/03/japan-constitution-amendment-public-support-remains-above-50/9801777847035/ “Rebuilding Our Military,” The White House https://www.whitehouse.gov/wp-content/uploads/2026/04/rebuilding-our-military-fact-sheet.pdf “The True Cost of Peace: Rebalancing World Military Spending For a Sustainable and Peaceful Future,” United Nations https://www.un.org/en/peace-and-security/the-true-cost-of-peace “World Economic Outlook: Defense Spending,” International Monetary Fund (IMF) https://www.imf.org/-/media/files/publications/weo/2026/april/english/ch2.pdf Want to keep up with The Spillover? Sign up to receive an email alert when new episodes are released at http://cfr.org/newsletters/#podcasts The Spillover is a production of the Council on Foreign Relations. The opinions expressed on the show are solely those of the hosts and guests, not of the Council, which takes no institutional positions on matters of policy.