Dear Readers,
It’s Thinking Time! This week we cover pandemic-era inflation’s root cause and just how large Wall Street is betting on AI.
TBL Thinks is our way to summarize the most important paywalled, longer reads relevant to global macroeconomics, helping you cut through the noise. With that in mind, please enjoy.
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How Democrats Blew it on Inflation (WSJ) As President Biden comes close to the end of his term, WSJ is looking back at where it all went wrong for the Democrats, focusing on inflation. The story will be familiar to TBL readers, who understand that “borrow and spend” Treasury deficits are directly responsible for pandemic-era inflation that just won’t die.
Before Biden was even inaugurated, he proposed a $1.9 trillion stimulus bill, resulting in the American Rescue Plan, which “boosted child tax credit, sent $1,400 per-person direct payments to households and directed $350 billion to state and local governments.” This stimulus bill came at the heels of billions of dollars of Covid-19 aid already making its way into the economy, along with strong demand from additional fiscal stimulus, ultra-low interest rates, and a disrupted supply chain and labor market. New Covid variants, Russia’s war on Ukraine, and Covid-related lockdowns in China only worsened global supply chains and commodity market functioning.
Democrats bet that they would be rewarded for strong labor market recovery with tangible gains for workers, but did not account for the impact the higher cost-of-living would have on voter loyalty—40% of voters this election cycle said that the economy was their main issue. “Consumer prices during Biden’s term have risen 20%, compared with 8% in Trump’s term”—when confronted with these facts, White House and Democratic officials have defended their actions, stating that overall US economic outcomes were better than those achieved in other advanced economies, and argued that the American Rescue Plan was developed at a time when it wasn’t clear if the US could escape the pandemic, but these arguments all failed to convince voters to stay with the current administration.
Larry Summers, a top adviser to Obama but not to Biden, was one of the loudest critics of the stimulus, but his warning of how Democrats lost elections in the bouts of inflation in 1968 and 1980 fell on deaf ears, and went unheeded. The stimulus package was passed in March 2021, after which inflation jumped in April—something that White House officials and the Federal Reserve said was likely to be transitory. Prices did come down that summer, but by fall were back up enough that the Fed rushed plans to end further easing. The damage, however, was done. Inflation was at 7% by December 2021.
In April 2022, Biden’s economic team pushed for rolling back tariffs on certain Chinese goods imposed by the Trump administration, arguing that even if it didn’t make a noticeable difference to consumer prices, the optics of it would be good for the White House. But the team was overruled when political and foreign-policy advisors made their arguments against the move, and Biden agreed with them, saying that removing tariffs would not help move the needle on inflation.
Over the course of four years, the Biden administration made some efforts to reduce inflation which included releasing oil from the US strategic reserve, capping the price of insulin and other prescription drugs for seniors, took steps to ban junk and hidden fees, but the bulk of the burden to cool down the economy fell on the Fed which raised rates at the fastest pace over 40 years to reach a two-decade high. Former Dallas Fed president Robert Kaplan said in an interview “the whole job of fighting inflation shouldn’t just be up to the Fed. I’d prefer a whole-of-government approach.” Interesting to see the Fed blame the government when the Fed enabled such wild stimulus with its QE continuation in 2021.
When the US faced a deficit that was unprecedented for a peacetime economy, the current administration passed legislation that boosted spending on infrastructure and clean energy as opposed moves that could cut the deficit. One such legislation passed was the Inflation Reduction Act in 2022.
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Wall Street’s Elites are Piling into a Massive AI Gamble (BBG) At dinner party in New York attended by top bankers and scions of the private capital world, the topic of artificial intelligence and the fortunes to be made from the frenzy around it dominated conversation. Morgan Stanley preached unity among the two opposing sections of the lending world, espousing that the demand for investment dollars to build up this digital revolution is so large that both bankers and private lenders should be ready to combine forces.
Bloomberg estimates that at least $1 trillion is needed to for data centers, electricity supplies, and communication networks for the AI revolution to take place in every sector from medicine to customer service, while others estimate it could be double that amount. Even skeptics such as Goldman Sachs’ Jim Covello (head of equity research) have acknowledged that its worthwhile to stay invested in those that provide the infrastructure.
Banks such as JP Morgan Chase and Deutsche Bank have set up dedicated teams to keep up with activity, while another bank admitted it is lacking the staff to meet workload for the number of data-center deals on its plate. This is also the issue with debt-funding—banks are lacking the balance sheet heft to meet the demand for credit, and therefore Morgan Stanley’s entreaty to private capital to combine their firepower.
For private investment firms like Apollo and KKR, digital infrastructure provides a chance to undo some of the damage caused by higher interest rates to deals made during the cheap-money era. Firms such as Blackstone, Brookfield Infrastructure Partners, and Stonepeak Partners are not only investing in data centers, but also the groundwork to build them. BlackRock is teaming up with Microsoft and will raise about $120 million in debt related to data centers for the development of buildings and energy infrastructure.
Tech companies including Amazon, Microsoft, Google, Meta Platforms and Apple have become known as “hyperscalers” as they race to manage, process and manipulate even vaster magnitudes of data. According to Craig Scroggie, CEO of Australian data-center group NEXTDC, hyperscalers had spent $52.9 billion on AI infrastructure in just three months in. An August report by the firm also highlighted how rent in facilities leasing out rack space to tech companies had gone up by as much as 37% in 12 months. These spaces, called co-location centers, have also seen more than a sevenfold increase in construction.
The asset-backed securities market is also benefitting from the AI boom—“sales of debt backed by data centers have already jumped to a near-record $7.1 billion this year.” At TBL, we’ve been covering the AI boom all year, but it does appear that investment is only increasing from here. We aren’t rushing to un-cancel our recession watch on any of this news.
Until next time,
TBL Thinks
With today’s macro landscape, many people are worried about whether they’re saving enough for retirement. Now you can grow your retirement savings using tax-advantaged bitcoin in an Unchained IRA! The Unchained IRA is the only solution that allows you to hold the keys to real bitcoin in a standard IRA.
Right now, get started with no setup fees and no account fee for the first year. You can roll over old IRAs or 401(k)s into traditional or Roth bitcoin IRAs while keeping control of keys. With Unchained, you get the power of key control combined with the long-term potential of Bitcoin, making it the ideal choice for those looking to protect and grow their retirement savings.
Don’t wait to take control of your financial future. Set up an Unchained IRA today at unchained.com/tbl and experience true ownership of your retirement.
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