Can AI pay Government debts?
The US Government is overspending at an historic rate. Chicken Little believes the most likely end-game is for the bond market to choke off overspending by a rise in real interest rates. However, it is possible that AI, and technology generally, will make us so much richer that we can afford government spending and thereby avoid disaster.
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| Can AI feed the US Government? |
US Government Debt is Historically Large
The US Government debt is at or near the highest level in history. Furthermore, the nature of spending and deficits has changed. From the beginning of the country until around 2003, Debt spiked during wars and then returned toward 0% of GDP (no debt) during peacetime.
Recently, politicians somehow figured out that, at least for some decades, the government could overspend every year, even in peacetime, without an immediate financial crisis.
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| First massive, peacetime explosion in US Debt |
High debt is caused by non-defense spending
The cause of rising US government spending, and corresponding large deficits, is non-defense spending. Over the last several decades, defense spending has trended down; now below one-half of the level it was in the late 1960s. Over the same period, non-defense spending has approximately doubled (all as measured by % of GDP).
So the government is spending a larger part of the nation's output, and the mix has shifted dramatically from defense to non-defense.
What is the right mix of spending? At one level, that is simply a political choice. From a financial point of view, however, it is almost certain that, in the future, the US will be involved in large-scale wars. At that point, defense spending will increase signficantly, and the deficit and debt will also increase signficantly.
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| Higher non-defense spending, lower $ for military |
Deficits are likely to increase significantly
In 2019, I predicted that US deficits would hit $3 trillion in a year, and could exceed $6 trillion (see post "Huge Deficits"). Soon thereafter, the annual US federal deficit did indeed hit $3 trillion. $6 trillion or higher are still entirely possible.
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| Massive deficits loom |
Can AI save us from financial doom?
Yes, AI can save us. Higher productivity, leading to higher real growth, can solve any fiscal problem. If AI and other new technologies can catalyze significantly higher productivity, we can pay off the national debt and enjoy our great lifestyles.
So far, however, there is zero statisical evidence that technology has kicked up productivity rates. In fact, productivity in the current period is among the lowest of any period post WWII. So zero evidence of technology is making us richer so far.
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| AI has not (yet) made us richer |
July 2024 performance
The Dow Jones Industrial Average gained 4.45% in July 2024. The Chicken Little Portfolio lost 0.29%. Year to date, the Dow is up 9.35% while Chicken Little is up 2.23%
July 2024 was a strong month for major asset classes. Gold and Bitcoin had the best returns in the month gaining over 5%. Every major asset class was positive.
Year to date, all these major asset classes are showing strong, positive returns except for long-term US Government bonds which have slipped modestly. In short, it has been a great year (so far) to own risky assets.
August 2024 portfolio position
The Chicken Little portfolio remains positioned for financial apocalypse. No change in the portfolio positioning in the month.
Unless productivity increases significantly, I continue to believe we are overspending ourselves to financial catastrophe.
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