The idea that excessive federal deficit spending can crowd out private investment under conditions of elevated interest rates is not anything new or controversial.
A look at debt by sector as a percentage of total debt shows that through the end of the third quarter, the federal debt accounted for 42% of total debt, according to the Federal Reserve’s Flow of Funds.
Now, with interest rates staying higher for longer, and with spending on data center construction continuing to soar, the combination of government borrowing and AI investment may be crowding out other industrial sectors from obtaining capital and critical materials.
Get Joe Brusuelas’s Market Minute economic commentary every morning. Subscribe now.
For example, the shortage of DRAM chips because of the buildout of AI data centers is likely going to lead to an increase in the price of goods that use those chips, like smartphones.
As with almost all things within the world of economics and finance, pricing and lending are highly conditional.
At a time when inflation remains well above the Federal Reserve’s 2% target, the availability of capital and commodities to support economic development is going to be part of the larger inflation narrative this year.
