Will The Popping Of The AI Bubble Bring Back High Inflation?
And if the bubble bursts will inflation come back?
If you have been reading my stuff long enough, you will know that one of my hypotheses is that one of the side effects of investment bubbles is lower inflation.
My theory works as follows. Inflation is too much money chasing too few goods and services. Too much money is usually a result of some combination of fast wage growth and high credit growth. But excess savings and credit don’t need to go into goods and services, they can also flow into investments. If there’s enough enthusiasm around a certain asset class or investment theme, then investment markets can soak up more of the available money supply (savings plus credit) than usual. Thus, less money would go towards goods and services putting downward pressure on inflation.
Of course, this mainly impacts CPI related inflation. Investment bubbles tend to lift the values of related assets like stocks and real estate as people bring their paper riches back to the real world and animal spirits take over. Status type goods like luxury goods and art also go up. But those aren’t counted in official inflation numbers even if they do actually make life more expensive (by increasing the costs of buying a home and saving for retirement).
