Well! Large, directional predictions of interest rate movements from smart people get my attention! The rule “never make large, directional predictions of interest rate movements”is up there with “never get involved in a land war in Asia”! The chain of causation is this: AI-success makes Productivity outruns consumption and thus savings rises; AI-failure sends money fleeing into safe Treasuries; Either way, the 30-year U.S. Treasury bond yield falls from 5% back towards 3%:
Torsten Slok makes a large, directional prediction: the risk is rising that interest rates will go down a lot over the next six months:
The commentary:
Torsten Slok: : ‘The risks are rising that long rates six months from now could be a lot lower than where they are today…. Inflation [fears] and [deficit] fiscal problems… could end up being dominated in early 2027 by what happens to AI…. If AI succeeds and tech companies generate trillions in revenue, AI will be massively deflationary and push rates lower. If AI does not work out, the bubble bursts and the Nasdaq is down 50% as investors rotate out of equities into Treasuries and long rates fall dramatically.
Over the next six months, the market will make up its mind about which AI scenario is playing out…. Financial markets are driven by narratives. The narrative… today is… inflation and fiscal problems. But the narrative… is going to be… the success or failure of AI. And in both scenarios, long rates are going to be lower…
What do I think of this?”
The “AI success” path is, if I am reading this correctly, the argument of last week’s: Caballero, Ricardo. 2026. “Speculative Growth and the AI ‘Bubble’”. MIT. August 23.. The AI-buildout switches to being financed by profits as they role into the labs and the hyperscalers, and the rise in productivity outruns consumption and increases savings.
The “AI failure” path is the standard bubble-collapse=and-aggregate-demand-driven-recession scenario.
What is very noteworthy is the claim that all of this is likely to come to a head in the next six months, and that the narratives surrounding it are overwhelming what Torsten Slok sees as the “inflation [risk] and [deficit] fiscal problems” that are the narratives currently dominating the financial market.
There is one enormous puzzle here: Why does Torsten Slok think that the AI question will be resolved in the next six months? I do not see the reason for thinking that at all.
What makes him think a significant portion of AI revenue would go into government coffers as tax revenue? Aren't all the tech bros using their riches to ensure that doesn't happen?
Timeline aside, the outcome of the "AI fails" branch [which IMO is the likely one given the high bar for success used here] depends of course on Treasures still being perceived as a safe heaven, which as per Tooze might not be as axiomatic as it once was.
There's enough automatism in financial strategies that this might still be what amounts to a reflex, but it's an assumption worth pointing out.