A.I. To Cause Even Higher Inflation & Interest Rates? | Jim Bianco

Jim Bianco (0:00)

And so, the bigger concern I have is not be careful, it's going to pop, and these companies are going to fail, they're going to default on their debt, and the technology is going to disappoint. I think it's more along the lines of what if the technology does actually deliver on some or most of its promise? Nothing delivers on all of its promise.

What does that mean? That does mean that we could see a complete revamp of the economy, much faster growth, much higher inflation, much higher interest rates.

Adam Taggart (0:47)

Welcome to Thoughtful Money. I'm Thoughtful Money founder and your host, Adam Taggart. Welcome you here for an interesting discussion, I'm sure, to be on AI and bonds, with the great Jim Bianco himself. Jim, how are you doing?

Jim Bianco (1:00)

I'm doing good. Thank you very much.

Adam Taggart (1:02)

Hey, thanks so much for joining me here. I feel pretty frisky today, Jim, I got to say because we had the Thoughtful Money Fall Online Conference this past weekend, and it was amazing. And I'm going to talk a little bit about it in a few minutes. But it was over 13 hours. It is what we try to do here is just provide sort of overwhelming value for the price paid for the conference. And this year, we did it like no other. I mean, literally, it was just hit after hit after hit after hit, and it went super well. So I've got an extra spring in my step today. And I'm probably going to bring in some of the observations of the experts from the conference as relates to our discussion today. But we're going to talk first about AI, and then we'll talk about bonds and high yields and stuff that folks are really interested in.

But we're going to take a slightly different angle on AI.

You have been talking of late that you think the bigger risk to worry about in AI is not, wow, what if it's a bubble and the bubble bursts and the technology disappoints? It's more, hey, what if this technology actually delivers the way that we're being promised it might? So let's start that real quick and then I'll take a little break and just tell people how they can buy the replay of the conference.

Jim Bianco (2:21)

Sure, first of all, all technologies do end in a bubble and this one I don't think is going to be any different. The difference is, though, I think this bubble is expanding and it might be years before we eventually see that peak in the bubble. And so the bigger concern I have is not be careful, it's going to pop and these companies are going to fail, they're going to default on their debt, and the technology is going to disappoint. I think it's more along the lines of what if the technology does actually deliver on some or most of its promise, nothing delivers on all of its promise.

What does that mean? That does mean that we could see a complete revamp of the economy, much faster growth, much higher inflation, much higher interest rates. And that is going to be something, to use the example that the president uses.

He thinks the economy could grow 20 percent if AI fulfills its promise. First of all, the economy has never grown at 20 percent in the history of the United States. So that would be something completely unprecedented. But yeah, let's just go with the concept, it could grow really fast and let's not get bogged down in what number. What does that mean? Well, and this might get us to our discussion about interest rates.

If your economy is growing, let's say we're growing at, I just to give numbers because it helps people understand. Let's say we're growing to four or five percent real and we have three-ish percent inflation.

That's like seven or eight percent nominal growth. What does that mean for the economy?

I've argued that the long-term interest rate for an economy should be about where your nominal growth is. That would mean we'd have to have bond yields, treasury yields at seven or eight percent. We'd probably have mortgage rates near nine percent, ten percent. We'd probably have corporate borrowing near eight or nine percent. And you know what that would mean? Nothing. That would mean that that's the appropriate level for the economy and the economy can handle that kind of number. So what would happen to the housing market with a ten percent mortgage? Nothing because it's the appropriate mortgage for an economy growing that strong. But a lot of businesses, a lot of investments will not be growing at those levels. They might be growing at two or three or four percent. They'll need borrowing, they'll need financing, and they won't be able to justify the higher levels that we're seeing in the economy. Our economy is structured for a low single digit return and low inflation. And if AI delivers on that promise and changes the economy, our economy has to be restructured for that higher interest rate. It's not just, oh, it delivers on the promise, so everything we do in our life is fine, and just the stock market goes up more. No, there's a lot more that goes on with that. So be very careful. What if it delivers? And where did I get this model from? It's the Internet itself. The Internet did, after the bubble peak popped, deliver on a lot of the promises. That's why, after an 83% decline between 2000 and 2002 on the NASDAQ, when the bubble popped, it went up nearly 20x right after that for the next 20 years.