Why transformative AI could push interest rates up, not down — and crowd out everything else
banaca4 · reddit · 2026-09-27
The author challenges the popular macro chain — AI lifts productivity, lowers inflation, so rates fall — citing the LessWrong paper AGI and the EMH: if the future economy is vastly more productive, today should offer many exceptionally attractive investments, raising capital demand and long-term real rates.
Key data:
- Fed: US business fixed investment grew at an 11% annual rate in Q1 2026, driven mostly by AI infrastructure; non-AI investment is weak
- Minneapolis Fed: Alphabet, Amazon, Meta, Microsoft and Oracle could spend nearly $1 trillion on AI datacenters in 2027, versus $5.5T total US private investment
- OpenAI's Stargate: 7 GW planned capacity, $400B+ over three years
- IEA: datacenter electricity rose 17% in 2025 and may double by 2030; transformers, gas turbines and advanced chips are already bottlenecking deployment
Core argument: if AI projects expect 25% returns vs 7% for conventional projects, at 8% financing costs only AI survives — the equilibrium cost of capital can rise and crowd out ordinary projects. So AI is inflationary during the buildout (datacenters must be built before producing intelligence) and deflationary only long-term.
Sovereign debt risk: global public debt is near 94% of GDP. A small country growing at 3% nominal while refinancing at 8–10% is in trouble even if Nvidia and OpenAI earn fantastic returns. Developing countries paid $741B more in principal and interest than they received in new external financing from 2022–2024.
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