Why Everything Is Going to Keep Getting More Expensive

In the following excerpt, Derek and Conor Sen dive into why the U.S. economy isn’t worse off right now and how AI is playing into it. 

Derek Thompson: So there’s a lot I want to get to today. I want to start a bit slow. Let’s start with the news that’s all over financial media right now, which is that 30-year Treasury yields are at their highest point in decades, at the same time that interest payments by the U.S. government are at their highest share of GDP in basically modern history. On the spiking of U.S. interest rates in particular, why do you think this is happening now?

Conor Sen: I think you have a lot of factors going on with that. You have longer-end interest rates going up everywhere in the world: Japan, Germany, the U.K., the U.S. And externally, you could say that it’s in part due to the war in Iran because other countries are more dependent on foreign oil than we are. So if you are importing a lot of oil, the price goes up, or you can’t even get it. That’s going to raise your inflation rate. That’s going to put pressure on your bond yields. In the U.S., we have this massive AI build-out that’s really needing a lot of capital now in a way it wasn’t even a year ago. You have record peacetime economic expansion budget deficits due to a combination of a lot of retirees on entitlements and the tax cuts we’ve done in recent years. And then in housing and real estate, these sectors are bottoming out, and the next phase probably looks like wanting capital rather than paying down debt. And so that’s just one more thing for bond markets to worry about. We’re already struggling with interest rates now. What happens if people actually want to borrow money to buy a house or build more housing?

Thompson: One thing that I struggle with is—I think the comment I made a few months ago was that the U.S. economy is like Rasputin. At this point, it’s been shot and poisoned so many times, and there have been so many different points when a reasonable economist could say, “Well, now we’re going to enter a recession.” It’s like, “Well, we have high inflation in 2021, 2022. OK, inevitably we’ll have a recession.” And then interest rates rise the fastest ever in modern history. “Oh, well, surely we’ll have a recession.” We don’t. And then Trump becomes president, and we start waging completely random wars in parts of the world that raise the price of commodities, again, for no perfectly articulable reason, and again, you’ve got economists saying, “Well, surely now we’re going to have a recession. On top of the inflation, on top of the interest rates, now we also have commodity price pressures.” The U.S. economy is chugging along. You look at stocks, and it’s like stocks are at their highest ever, and in many cases, it’s not because prices are becoming totally disconnected from earnings; it’s because earnings are kind of on fire as well. Why isn’t the U.S. economy, with the world falling apart around it, doing worse?

Sen: I would say it’s two reasons. One is that whenever you have a capex cycle—and that just means tech companies spending record amounts of money building out AI, whether it’s buying chips, memory, building data centers, power infrastructure, all of that—whenever you’re spending that much money, you, by definition, aren’t going to have a recession because lots of spending means lots of growth, even if it’s inflationary growth. And then because the Fed raised interest rates so much four years ago, everything that’s interest rate–sensitive in the U.S. basically braced for recession and never really got out of it. In housing, we’ve been selling 4 million existing homes per year for the past four years, when normal’s probably closer to 5.5, and we’re at Great Recession levels of housing transactions. So it’s like if you’re already dead, you can’t die again. Meanwhile, you have this AI boom going on.

Thompson: Yeah, AI really does seem to be eating the economy. Wall Street Journal reported it’s currently accounting for a third of GDP growth. It’s accounting for some enormous double-digit percent of tech capex and software investment.

I can see two stories with AI. On the one hand, AI is clearly creating some jobs: trades jobs, construction jobs. Looks like software is hiring again. It’s stimulating spending, especially from the hyper-scalers, these companies that are maybe the richest companies in the history of capitalism that built these enormous troves of money over the last few years who are just bazooka-ing that money at AI. But on the other hand, it’s doing some things that clearly aren’t necessarily good for the economy. It is putting upward pressure on some prices, especially in software. Some people worry that it’s absorbing scarce resources that other parts of the economy might need or want. What do you think is a good way to think about how AI’s dominance is either good or bad for the economy right now?

Sen: I would say in the short term, it’s more inflationary and bad in the sense of: If you’re a consumer, you’re probably being negatively impacted this year by it more than you maybe will benefit from it sometime down the road. If you’re looking to buy a laptop, or it’s back to school, so maybe computers for a dorm room, an iPhone, smartphone, a gaming system, you are feeling the impact of rising memory prices or just not able to get what you want at all. We’re seeing utility prices going up, and that’s complicated, but you’re feeling more of the inflation than the benefit of AI. And you see that in the top-level economic data, where real economic growth is still about 2 percent. So despite the amazing things that a lot of people can do with AI, and I’m sure you and I use it in different ways, you don’t really see it in the economic data. Also, you don’t see the job losses, either, which is fortunate. But to the extent that it really will be this productivity-boom, life-enhancing benefit, we’re just not seeing that yet because, in part, we have these shortages that are pushing up prices, and we can’t get the compute we need and data centers we need and all of these things. So I think the bigger benefit is still probably many years down the road, honestly.

This excerpt has been edited and condensed.

Host: Derek Thompson
Guest: Conor Sen
Producer: Devon Baroldi
Additional Production Support: Ben Glicksman