The Hidden Recession Beneath The AI Bubble w/ Paul Kedrosky
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What is the hidden recession behind the AI bubble?
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Greetums and salutations, I am at Ditron, and this is Better Off Lime.
That's a whole fine.
We are back, folks. We're back, fellas and ladies, and everyone in between. And today we are joined by the incredible economist and writer Paul Kodrowski. Paul, good to have you back. Hey Ed, good to be back. So just before, literally seconds ago, you were telling me that AI has started to show up in odd places. And I think that's just a good a good place to start. Where are the odd places in the economy it's showing? Because I can kind of guess, but at least it's breakfast.
Yeah, like it's funny because almost a year ago, um, one of the things that first got me interested in this bananas topic was the it was uh AI CapEx specifically was, you know, blah blah, more than half of GDP growth, blah, blah, and so on, and which was just, you know, uh unprecedented and goes back to the railroads and everything else. And so that was interesting and I started c talking about it and then I was surprised that no one else was sort of noticing this, the how consequential it had become. And now, of course, that's become commonplace. And so then I went on and I've been I've been paying attention to that. And that hasn't varied very much from quarter to quarter over the last eight uh sort of, I don't know, 12 to 18 months.
It's been consistently between 30 and 70 percent of GDP growth. And then it started to, it was interesting how it's almost in cancer terms sort of metastasized across the global economy and become even more consequential. So the next example was about a month ago, where all of a sudden we had this. Treasury market freak out in the tenure. What one of the reasons driving what happened was this um sudden spike in the tenure and up over five percent now. And what was increasing And that's the two
year Treasury bond, right? So that's that's right. And when you say spike, it means it was selling off, so people were asking for more interest on it.
Correct. People required more compensation. Yeah, sorry. I go all I go all finance. No, no, it's fine.
Keep going.
Yeah, yeah. So so normally the treasury market, which is a multi-trillion dollar market, is so large and liquid that unless you are a sovereign, uh meaning another country issuing debt on the scale and with the same sort of security as the United States, um, you really it's really hard to influence it just through issuance, meaning that I'm just because I'm selling treasuries or I'm com or not treasuries, I'm selling comparable duration. debt, it's really hard to have an impact on treasuries because it's such a big, large, and unusually liquid market. So one of the things that one of the things that happened a month ago was that this thing we call AI capex and this staggering amount of issuance, much of which has a duration, meaning the length of time over which the bond is becomes due, the debt becomes due, is on the it the it varies from five to fifty
That becomes a good thing. 15 years, but let's call it a median duration of 10 years. It began to seem like it was something unusual was going on in treasuries. And as we sort of work through the math, and then this has now become fairly widely accepted, that AI CapEx issuance was actually had become so large that was beginning to bleed into the treasury market. And so one of the reasons why we had this treasury market freakout is because of the unprecedented. Amount of AI-related debt being issued. And that in turn was causing a sell-off in treasuries.
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Chapters
8 chapters
1
What is the hidden recession behind the AI bubble?
0:00–6:57
2
How is AI capex influencing US Treasury yields?
6:57–15:22
3
Why did the Treasury market experience a sudden spike in yields?
15:22–20:49
4
How is AI‑driven trade affecting global commerce statistics?
20:49–29:40
5
What role does AI capex play in current US inflation?
29:40–36:20
6
How are energy costs and the Iran conflict linked to AI spending?
36:20–42:40
7
What is a balance sheet recession and why might it follow AI growth?
42:40–50:31
8
Why are hyperscalers competing with US Treasuries for investor dollars?
50:31–57:47