My decision to begin reading Thomas Mann’s The Magic Mountain was inspired, at least in part, by my late father. I have a distinct childhood memory of him reading this enormous book and, perhaps even more vividly, of the satisfaction he took in having finished it. I don’t remember him telling me exactly what he thought about it. What stayed with me was that he had undertaken something difficult and worthwhile and had stuck with it. Decades later, I suppose I have begun climbing the same mountain.
I’m approaching it somewhat differently because I am both reading the book and listening to it. The listening experience has been particularly captivating. There is something about hearing Mann’s long philosophical passages spoken aloud that makes them feel less like exposition and more like seduction. And nobody has seduced me more, at least so far, than Lodovico Settembrini.
Settembrini is a humanist and a passionate disciple of reason, science, education, democracy, progress, and the brotherhood of man. He believes civilization can improve itself through knowledge and enlightened institutions. His speeches are passionate, articulate, and frequently mesmerizing. I find myself wanting to believe him.
Perhaps that’s why I’ve also found myself resisting him.
Not because his aspirations are wrong. I hope they aren’t. But because increasingly they don’t seem to describe the world in which we are actually living.
And that may be what makes a novel published in 1924 feel so appropriate a century later.
What If Settembrini Is Right About the Destination but Wrong About the Journey?
One of the intellectual conflicts in The Magic Mountain occurs between Settembrini and another of Hans Castorp’s teachers, Leo Naphta. I haven’t progressed far enough in the book to render a verdict on Naphta, and I don’t intend to rush to one. I’m enjoying Mann’s mountain far too much to race to its summit.
But even from where I currently stand, Settembrini has started me thinking about our own moment.
For decades following the Second World War, and particularly after the end of the Cold War, much of Western economic thinking operated according to something resembling the Settembrini ideal. Trade could knit nations together. Comparative advantage would determine where things got made. Capital would flow toward its most productive uses. Global supply chains would minimize costs. Markets generally would allocate resources better than governments. Greater prosperity would hopefully produce greater stability.
It was never that simple, of course, but directionally this was the prevailing wind.
The prevailing wind has changed.
Governments increasingly ask different questions.
Not simply:
Where can we produce this most cheaply?
But:
Who controls its production?
Not:
Where is the most efficient supply chain?
But:
Can an adversary interrupt it?
Not:
Where is capital most productive?
But:
What capabilities can we absolutely not afford to lose?
Semiconductors. Energy. Artificial intelligence. Critical minerals. Defense production. Electricity generation. Data centers. Manufacturing capacity. Shipping lanes. Communications infrastructure.
These remain economic assets, but increasingly they are also instruments of national power.
Economics hasn’t disappeared.
It has become entangled with strategy.
Power Isn’t What You Have. It’s What Others Believe You Will Use
This distinction has become increasingly important to me.
A country can possess enormous wealth, advanced weapons, and vast natural resources without necessarily translating those assets into deterrence. Conversely, countries or movements with much smaller economies can exert extraordinary influence if adversaries believe they are willing to absorb costs and impose them.
Events in the Middle East provide a particularly difficult contemporary laboratory for observing this.
I initially found myself thinking about Israel and Saudi Arabia through this lens, although recent events demonstrate why the comparison is far more complicated than arguing that one country is attacked and another isn’t. The more interesting lesson for me is about deterrence.
Deterrence is partly about possessing power and partly about creating expectations concerning its use.
The person sitting across the table doesn’t merely ask:
What can you do to me?
He asks:
What do I believe you are actually prepared to do?
That is a much less Settembrinian question.
President Trump also seems to view power in highly transactional terms. Whatever one thinks about that philosophy or its potential consequences, economic power, military capabilities, tariffs, energy, access to markets, technology, and strategic resources can all become instruments of leverage.
I’m not particularly interested in arguing here whether that approach is good or bad.
For an investor, I think the more useful question is:
What if this is simply how the world increasingly works?
From Comparative Advantage to Strategic Advantage
That question has enormous economic implications.
A world organized primarily around efficiency tends to push costs down.
A world organized increasingly around resilience and power can push them up.
Reshoring a factory that can operate more cheaply abroad may improve national resilience, but somebody still has to pay the additional cost. Restricting immigration may serve political or security objectives, but it can also affect the supply of labor. Maintaining redundant supply chains reduces vulnerabilities while sacrificing some efficiency. Building domestic energy infrastructure, semiconductor fabrication, defense capacity, and critical-mineral processing requires enormous amounts of capital.
Then there is artificial intelligence.
AI isn’t simply a technological race anymore. It is increasingly an energy race, infrastructure race, and capital race.
If artificial intelligence becomes foundational to economic and military power, countries aren’t likely to remain indifferent about who possesses the chips, who controls the intellectual property, where the data centers are located, where critical minerals originate and, perhaps most importantly, who can supply the extraordinary amounts of electricity required to power it all.
The sovereign inevitably moves closer to the center.
And yet, strangely enough, the sovereign cannot protect everything.
The Castle Walls Are Going Back Up
I encountered a small but revealing example of this while writing this piece.
Jamie Dimon announced that JPMorgan Chase would not permit outside AI agents to operate directly inside customers’ accounts, citing risks both to customers and to the bank and specifically raising the danger of potentially thousands of rogue agents. Interestingly, the bank isn’t rejecting agentic AI. It is operating AI agents internally and has begun testing its own Smart Cash agent. JPMorgan also says it supports properly secured, customer-authorized data sharing.
What interested me wasn’t only the cybersecurity issue. It was the metaphor.
There is something almost neo-feudal about an emerging world in which everyone increasingly has to defend his own castle.
Countries are securing borders, energy supplies, industrial capacity, supply chains, technology, and access to critical resources. Corporations have their own walls to defend: networks, intellectual property, data, customers, payment systems, and increasingly the AI agents allowed to operate within their digital domains.
Governments can establish laws, regulations, military protection, and other elements of public security. But they cannot protect everything inside every company’s walls.
Enterprises increasingly need defenses of their own.
And defenses require resources.
That leads to what I think may be one of the most economically consequential changes underway.
For much of the globalization and digitization era, progress was about removing friction. Capital should flow freely. Inventories should arrive just in time. Supply chains should locate wherever they were most efficient. Information should move instantaneously. Commerce should become frictionless.
We seem to be rediscovering that some friction serves a purpose.
I think of it as protective friction.
Cybersecurity.
Redundant supply chains.
Domestic manufacturing.
Energy security.
AI safeguards.
Critical inventories.
Border security.
Defense capabilities.
Trusted networks.
Each sacrifices some efficiency in exchange for greater security or resilience.
Efficiency asks: How cheaply can we do this?
Power asks: How vulnerable does doing it cheaply make us?
And once that question becomes important, the demand for resources changes considerably.
Perhaps another way of saying it is:
Efficiency was optimized for a world of trust. Resilience is optimized for a world of mistrust.
And resilience is expensive.
Sovereign Dominance
I have been using the term sovereign dominance to describe this larger regime change.
I don’t mean that private enterprise disappears. Quite the opposite. Many of the greatest capabilities will probably continue to be created through extraordinary private companies and entrepreneurs.
But the environment in which those companies allocate capital is increasingly being shaped by national priorities.
Defense.
AI.
Energy security.
Immigration.
Industrial policy.
Trade policy.
Strategic manufacturing.
Critical resources.
The sovereign increasingly determines where the chessboard sits and, in certain strategic industries, how some of its most important pieces are allowed to move.
At the same time, the JPMorgan example reveals an interesting paradox. Even as governments become more consequential, private enterprises may need to devote more of their own resources to protection, not less.
Sovereign dominance therefore doesn’t necessarily mean governments assuming responsibilities previously handled by businesses.
Sometimes it means governments and businesses both spending more.
And sovereignty isn’t cheap.
What If Higher Interest Rates Aren’t a Bug?
For investors, one of the most consequential mistakes would be assuming that the financial conditions prevailing between the Global Financial Crisis and the pandemic represent some natural equilibrium to which the world must eventually return.
Perhaps they don’t.
A world characterized by significant defense spending, enormous AI investment, greater electricity demand, reshoring, reduced emphasis on globally optimized supply chains, constraints on immigration, larger government deficits, corporate spending on security and resilience, and greater competition for capital looks structurally different from the one that produced ultra-low interest rates.
This certainly doesn’t mean interest rates can only rise.
Recessions will happen. Central banks will ease. Productivity improvements from AI could ultimately prove enormously disinflationary. Technology routinely surprises us.
But I believe the equilibrium gravitational force may have shifted upward.
Government needs capital.
Defense needs capital.
Data centers need capital.
Power generation and transmission need capital.
Semiconductor plants need capital.
Manufacturers need capital.
Infrastructure needs capital.
And, as Jamie Dimon helped remind me this week, corporations increasingly need to spend money protecting their own technological castles.
Meanwhile, governments must finance large existing obligations and fiscal deficits.
That combination should at least make us question the assumption that the extraordinary post-2008 period of exceptionally cheap money represents normality.
For those of us investing in long-duration assets such as apartments, this matters enormously.
It affects financing costs. Cap rates. Development feasibility. Replacement costs. Transaction volumes. The relative attractiveness of leverage. And ultimately, the prices disciplined investors should be willing to pay.
Paradoxically, it may also create opportunity.
If one’s premise is that capital has become structurally more expensive, then the ability to remain patient, preserve liquidity, avoid overleveraging, and potentially defer leverage becomes an advantage. Sellers who constructed their strategies around permanently cheap capital eventually have to confront a world that may no longer share their assumptions.
The investor doesn’t need to predict every move in interest rates.
He needs to recognize the regime in which he is operating.
Settembrini’s Dream
Which brings me back to the mountain.
There is something deeply appealing about Settembrini’s faith that reason, science, education, democracy, and humanism can steadily improve mankind. I don’t want to mock that faith. In many ways, I share it.
But perhaps one of the lessons I am beginning to take from The Magic Mountain is that civilization isn’t governed by one force.
Reason exists alongside passion.
Progress alongside reaction.
Cooperation alongside competition.
Ideas alongside power.
Openness alongside protection.
And human beings, companies, and nations rarely operate according to a single organizing principle.
The mistake may be believing we have to choose between Settembrini and Naphta.
I’m only partway through the book, so Thomas Mann undoubtedly has some surprises waiting for me. Hans Castorp is still receiving his education, and apparently so am I.
But already The Magic Mountain has reminded me of something investors can sometimes forget:
The world we would like to inhabit and the world in which we must allocate capital are not necessarily the same world.
We can hope for brotherhood while preparing for competition.
We can believe in reason while recognizing power.
We can support progress without assuming progress moves in a straight line.
We can promote openness while recognizing that openness without adequate safeguards can create vulnerability.
And we can wish that nations would devote themselves primarily to maximizing prosperity while acknowledging that history often gives them other priorities.
My father finished The Magic Mountain many years ago. I remember how satisfied he was that he had stayed with it. At the time, I couldn’t possibly have understood what he found up there.
Now I’m making the climb myself.
And perhaps that’s part of what great books do. They sit patiently on the shelf until the world, and the reader, are ready for them.
A century after Thomas Mann sent Hans Castorp up his mountain, I’ve started wondering whether we are climbing one of our own.
And the higher we go, the more clearly I think I can see something that Settembrini might not like:
Power hasn’t replaced economics. Power is increasingly determining the economics.
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