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how our model is wired · 22 october 2026
A popular chart shows the world economy as a vicious triangle: Europe saves, America inflates, China builds. Our simulation has its own version of that picture. It is 67 machines, each reacting to what the others publish, joined by 300 connections. Below are the loops they form, drawn the same way, and then a comparison: what the triangle has that our model does not.
Every arrow is a connection in the model, read from its wiring file. A ring is a loop that feeds back on itself; the thick arrows carry one region's machines into another's. Small grey labels name the machines behind each step.
reading the picture
America borrows and spends. Growth moves jobs and pay. Prices follow, the Fed's rule answers, and the long yield is built from the real rate, expected inflation and a term premium. Stocks are priced as earnings over the gap between that rate and growth. Since 14 October the rate stocks are discounted at also takes 0.15 of any rise in the 10-year's term premium, so a bond-market scare reaches stocks directly, not only through the real rate. Households feel the result twice: asset owners through their wealth, wage earners through their pay and their saving rate, which is low today at 4.1%, so spending is set to slow toward income. Inside the ring sits the debt loop. Higher yields raise the interest bill, the bill raises the deficit, the debt asks a supply premium, and the premium raises yields. It is stable while nominal growth beats the average coupon.
Europe pays for energy. Higher oil and gas prices weaken the euro through the terms of trade. Energy and a weaker euro reach euro-area prices faster than US prices, the ECB answers, and Bund yields close part of the gap to Treasuries, which pulls the euro back. Since 9 October Europe also has its own economy: growth, jobs and households that answer to energy, the ECB and Chinese export prices. When Europe is squeezed, its households save more, and part of that saving flows to US assets.
Japan funds. The gap between US and Japanese yields pays investors to borrow yen. The position grows toward what the spread justifies. A loss past its stop forces a sale that ignores the spread, the sale widens credit spreads, the risk index bids the yen, and what is left of the position marks down again. The Ministry of Finance and the US Treasury can step into the yen.
China recycles. A wider US trade deficit hands China dollars, which the PBoC parks in the US long end. Chinese credit stimulus lifts world growth and copper, and growth widens the US deficit again. The yuan is managed: the move the band refuses is published as pressure, and defending it drains reserves, which means selling Treasuries. China's export prices are the newest link: the dollar price of Chinese goods, plus tariffs, reaches US and euro-area core inflation, and credit stimulus lowers it about a year later.
AI builds. The AI investment cycle buys copper and power, lifts the AI part of the stock index, borrows in its own credit market, and competes with the Treasury for the same buyers. Only half of it counts as US demand, because the chips are imported.
Around all five sit the shock ladders (fragmentation, energy, fiscal confidence, weather, refining), which scenarios move and the quiet path leaves alone, and the commodity chain that carries them into prices. Crude reaches the shelf mostly through diesel; food answers to weather, gas and diesel. Gold has no industrial leg: it answers to the dollar, real yields, inflation, stress and official buyers.
against the triangle
Of the triangle's fifteen links, our model carries six, half-carries six and lacks three. Everything that runs through the dollar, the capital account and asset prices is in. Since 9 October part of the goods side is too: China's export prices reach US and European inflation, and Europe's households, wages and saving answer to Europe's own conditions. What is still missing is China's own economy, its households and its factories, and the trade flows between the regions.
| The triangle says | In our model | How, or what is missing |
|---|
The two gaps that mattered most for the questions we are asked were closed on 9 October, in a first form. China's export prices let cheap goods hold down US and European inflation, and let tariffs or a fragmenting world take that discount away: a 25-point rise in US tariffs adds about 0.08 to US core inflation in a year and lifts the Fed about 0.09, and the goods channel of a fragmenting world adds about 0.06 to US and euro-area inflation. Europe's households now save more when Europe is squeezed, about 0.4 points of income in a gas shock, and part of that saving flows to US assets. At today's settings that flow is small, about 0.2 basis points off the US term premium.
the full wiring
Each dot is a machine; each line runs from the machine that publishes a value to the one that reads it. Choose a machine to see what it listens to and who listens to it.
Disclaimer. This report is for informational and educational purposes only. It is not investment, financial, legal or tax advice and not a recommendation to buy or sell any security or asset. The Macro Twin is an experimental simulation of the world economy, not a forecast: its figures are scenario outputs that depend on our assumptions and may be wrong, and past behaviour does not guarantee future results. Where this report scores a named analyst, the scoring is our own reading of their public statements; those views are their own, and the analyst has not reviewed or endorsed this report. Do your own research and consult a licensed professional before making investment decisions. Full disclaimer