— Technology stocks, particularly those related to data centers, plunged last week.
“The vast majority of members of Congress and state government officials, regardless of party affiliation, are moderates rather than people who are radically opposed to AI. I think an extreme scenario in which most data center development is completely halted is highly unlikely.”
“Historically, there have been investment booms driven by technological innovation that were followed by busts, such as railroads and fiber-optic networks during the first digital revolution. The current AI boom is different. Today, the supply of computing capacity is not keeping up with demand. Even if additional regulations are introduced, supply is likely to remain somewhat below demand, reducing the risk of a boom-and-bust cycle driven by overcapacity. A moderation in the pace of AI-related capital expenditure could actually make the AI boom more sustainable.”
— AI-related stocks have been highly volatile, and investors remain divided over their outlook.
“I believe AI is the greatest technological innovation in human history. It may be even more important than the printing press, electricity, or railroads. AI will accelerate automation through semiconductors and robotics. From nuclear fusion and biomedicine to space and defense technologies, the AI revolution is transforming everything. In baseball terms, we’re still only in the first few innings.”
“With disruptive innovation, many companies will succeed and many will fail. Corrections such as the sharp decline in shares of CoreWeave, the emerging US cloud computing company, may simply reflect heightened volatility caused by a combination of macroeconomic factors. Potential causes include slower demand growth and increased semiconductor supply from new sources such as China. But I believe this is only a very modest correction.”
AI Will Reduce Inflation While Driving Growth
— You were once known as ‘Dr. Doom,’ a leading voice of economic pessimism. What has made you so optimistic?
“In my 2022 book Megathreats, I discussed stagflationary shocks — factors that slow economic growth while generating inflation. Climate change and trade tensions are examples of these ‘negative aggregate supply shocks.’”
“On the other hand, there are also very significant ‘positive aggregate supply shocks.’ Technological progress is creating a situation in which inflation is restrained while economic growth accelerates. At present, the positive shocks are having the stronger effect.”
— Some commentators compare the current private credit market with the subprime mortgage market before the global financial crisis.
“There are risks, but I believe they are limited. The asset class has grown, but it remains relatively small compared with bank lending and corporate bonds, and not all private credit is problematic. In some cases, capital is financing sound investment projects, including those in AI and technology.”
“Debt levels are certainly high, but they should remain manageable unless there is a shock to income. Even if the economy weakens, private credit will not be the biggest problem. There are many other forms of debt, including bank debt, mortgages, and corporate debt.”
— The Democrats won control of both chambers of Congress in the US midterm elections.
“Markets are concerned about political pressure on data centers. But this is happening not only in Democratic-controlled states, but also in strongly Republican states. People are becoming increasingly sensitive to the impact on energy and water resources. Building data centers in the United States, where energy costs are high, does not make sense. Argentina, Brazil, and Azerbaijan may be more suitable locations.”
“Another important factor is the role of market discipline in containing certain tail risks. Developments in bond, equity, credit, and commodity markets force governments to exercise restraint. Both last year and this year, even President Trump has yielded to pressure from bond vigilantes, or market vigilantes more broadly. If policymakers pursue foolish policies, markets will punish them.”
Japan’s Manufacturing Expertise Provides a Competitive Advantage
— What is your outlook for Japan?
“I’m not concerned about Japan’s macroeconomic situation. Its fiscal deficit and public debt are large, but the government also holds substantial assets. Japan runs a current account surplus and has significant assets both domestically and overseas. Moreover, much of the government’s financing is sourced domestically.”
“Whether we’re talking about robotics or quantum technologies, the AI revolution will ultimately depend heavily on the physical world. Manufacturing expertise will be essential, and Japan has a competitive advantage in this area. These developments should raise Japan’s potential growth rate, but much of the progress is happening from the bottom up, and most people have barely noticed it.”
— Can Japan’s potential growth rate increase despite its declining population?
“In the past, high population growth was considered an economic advantage. Today, however, the adoption of AI and robotics could eliminate many jobs. Countries with declining populations may be better positioned to navigate this transition than countries experiencing rapid population growth.”
Conviction in AI as a Disruptive Innovation Amid Market Uncertainty
In a 2006 speech, Roubini warned that the housing market would have adverse consequences for the broader economy, much like the bursting of the dot-com bubble. He was among the first to identify the emerging risks that would lead to the global financial crisis two years later, earning him the nickname “Dr. Doom.”
Many investors view the recent sharp decline in AI-related stocks as a warning from market vigilantes about excessive investment. Although Roubini understands these market forces well, he maintained a bullish stance throughout the interview, characterizing AI as a disruptive innovation.
Will his assessment prove correct? The AI-driven market rally appears to be approaching an unprecedented inflection point.
(Ryo Saeki, Nikkei.com, Japan)
Nouriel Roubini
Nouriel Roubini is known for predicting the US subprime mortgage crisis and the subsequent global financial crisis. During the Clinton administration, he served as an economist on the Council of Economic Advisers and as an adviser to the US Treasury Department. He is also a Senior Economic Strategist at Hudson Bay Capital, where he participates in investment team meetings.