Category: Economics

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AI firms are on the ropes, having spent way too much money building infrastructure for tools that are valuable, but not nearly valuable enough to support the money already spent, let alone what they’re planning to spend over the next two or thee years. This is bound to come to a bad end.

As Jerry Holkins puts it:

They can only loan each other money for so long. Then, they’ll socialize the losses through nationalization.

Source: Cyberbullies – Penny Arcade

At least, that’s their plan. Oliver Jutel and Gil Duran have a name for this plan: “exit through the state.”

Because I’m at heart an optimist, I like to imagine a more hopeful solution—one where this plan fails. And I legit think it might.

If Congress changes hands, and Trump becomes even more toxic (two things that seem very likely), there might not be anybody in a position to lead the charge for socializing the losses. A toxic Trump trying to hand another bunch of taxpayer money over to billionaire tech bros might actually be very unpopular. And if a Republican minority in Congress can’t get it together to come up with a plan that a significant number of Democrats will support, socializing the losses just might not happen.

But it has to “not happen” right then—with a Democratic (or divided) Congress.

If the AI firms can hold things together (with circular financing, SPVs, and the like) until there’s a Democrat in the White House, that guy will probably not be able to resist the pressure to “do something.”

If—as I hope, and kind of expect—it comes to a head before that, the Republicans might well not be able to come up with a plan that meets the demands of all their different constituencies, while the Democrats refuse to join in any plan that a large subset of Republicans will agree to. The result might just be that we just let the sucker go down.

Letting the sucker go down is what George W. Bush wouldn’t do in 2008. Except, of course, he kinda did, as far as homeowners were concerned. Banks, investment firms, and insurance companies got saved. Homeowners got hung out to dry.

My point being that the government is totally willing to let some suckers go down. The Republicans would like those suckers to be ordinary investors, computer users, and (in particular) tax payers. But I like to imagine that there’s at least some chance that the politicians will simply be unable to cobble together an arrangement to accomplish that, with the result that the AI firms go down, a bunch of AI firm executives get prosecuted for investment fraud, and all that infrastructure (data centers and large language models) gets sold off in bankruptcy, ending up in the hands of people with a certain amount of rationality (and much less debt).

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A graph of oil prices, showing the peak during the war, and the start of another peak now

A few weeks ago, back before the Iran war heated back up, The Economist wrote a mia culpa, explaining why they’d gotten it wrong about the war being an economic disaster. Briefly, while the MOU was holding up, I was tempted to write my own.

Like The Economist editors, I had thought back in April that Things are amazingly more bad than markets seem to think, but by the beginning of June, it was looking like maybe the risk of catastrophe had eased.

I didn’t write a mia culpa. To be fair, part of that was just laziness. But part of it was looking at things and thinking I was still right. Maybe between some demand destruction and some dribs and drabs of oil getting through the strait, world markets had found a new equilibrium that wasn’t nearly as bad as I’d expected. But I didn’t think so.

The Economist thought so. They thought they’d gotten it wrong for two reasons:

First, we thought that America and Iran would hold out against a deal to reopen the Strait of Hormuz: America because Mr Trump deludedly thought he held the whip hand, Iran because its regime knew its people could be made to endure more pain. In fact, facing the fury of American motorists, Mr Trump all but folded, preventing a disaster. Since the two parties struck a provisional deal in June, enough oil has been getting out of the Gulf to reassure markets that supply is coming back online, even if the future of the strait remains uncertain.

Our second oversight was, like others, not anticipating the staggering degree to which China would be able to slash its oil imports. Crude imports are 5m barrels a day lower than a year ago, despite the fall in prices. China has cut its demand and shored up supply. Its oil reserves are opaque—many barrels are hidden from satellites underground, and there is a blurred line between official reserves and corporate inventories. But they have been shown to be a powerful buffer.

I pretty much bought their second point. China had produced a truly fantastic amount of demand destruction, and had done it with minimal impact on their own economy, by largely shifting the impact onto people in other countries who had bought their oil distillates, before China prohibited exports. They could probably keep that up indefinitely, removing their demand from the world market.

That first point, though, I found doubtful. I mean, yes, Trump always chickens out, which is why we got the MOU and the briefly partially reopened strait. But I think they were wrong in thinking that Iran would go along with what Trump wanted, or that Trump could settle for what Iran would (obviously) want to do. They tried to paper over the cracks for a few weeks. I mean, I believe Trump settling for whatever Iran did and pretending it was a victory was a thing that could happen. But I’m not surprised it didn’t work out. Too many other people in the U.S. government were simply unwilling to let Trump leave the strait in Iran’s hands. And, although oil prices were coming back down, they were not on a trajectory that would improve the Republican’s chances in the midterms.

So, I think The Economist was right in the first place, and wrong to imagine that Trump and Iran could agree that “preventing a disaster” was something they could do.

The oil price graphic above is already out of date. It shows yesterday’s closing price, and things have gotten worse already today. Brent crude is over $100 as I wrap up this post.

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I’m using “AI” here in the older sense, rather than the newer sense where it’s just another way to say LLM.

In this older sense, I don’t have anything against AI (even though I generally try to avoid LLMs). So, I thought I’d talk a little about the things I actually object to, when it comes to what people call AI these days. Specifically, what I object to (in order of objectionableness) are:

  • Using them to generate anything that looks like creative output. (It isn’t creative output, but it resembles it enough that I can waste a lot of time realizing that. That’s what I object to.)
  • The copyright theft at the base of LLMs. (I think half the profits (perhaps 40% of the gross revenues) of every AI company should be distributed to holders of the copyrights that were violated in the generation of the models).
  • The resource usage needed to run the inference engines. (Also the resource usage that went into doing the training, but that’s already sunk, so there’s no more point in complaining about it than there is in complaining about the resources that went into building your house.)
  • The fact that AI is unnecessarily used to do stuff that used to be better without it (such as web search).

I do also have some good thoughts. Generally speaking, there’s all kinds of stuff that (I hope) is going to get a lot better. Here’s an almost random sampling of ideas I’ve had. This list is most definitely not comprehensive. It’s not even the most important stuff. It’s just a few things I have been thinking of, because they’re things I want.

I would like an AI to keep track of everything I read (including whether I finish reading it, or give up part way through), and then (insted of trying to sell me something), guess what I’d like to read next. I’d pay money for this. (Not much money, but a little.)

I’d like an AI that picked up domain information what what I read. When I read an economics or finance article, I’d like it to put a little note over on the edge of the screen that I could click on, and then it would apply the information in the article to my situation. “That article, and three others that you’ve read in the past two weeks, suggest that European stocks might do better than U.S. stocks over the next year. Your portfolio is 43% U.S. stocks and only 16% European stocks. Click here for steps you could take to boost your European stock holdings.”

Of course, it should also track future results of each of those hypotheticals and compare them to both what I had before and what I actually did.

I’d like an AI to look at a blog post I’ve written and then from the taxonomy of categories and tags I’ve already created, suggest which ones I should use for that post. (There have long been “tag recommending” plugins for WordPress, but the last time I checked, none of them preferred the tags I’ve already got. Most of them seem intended for a completely different purpose from supporting your own internal tagging system. It seemed like maybe they were intended for finding keywords for maximizing ad revenue?)

I couldn’t think of a good picture for this post, but didn’t want to post it without a picture, so I thought I’d use this picture of my dog. It’s been hot here.

A dog panting, sprawled out on the carpet

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A metal case holding $1 million in $100 bills

Economists pretty much understand both inflation and recession. Because the policy tools to fight them—raising or lowering interest rates—are the opposite of each other, people sometimes think they are the opposite of each other. But this is not true, which is why “stagflation” is even a thing.

Inflation is caused by the money supply growing faster than the supply of goods and services. Back in the 1970s and 1980s there was a real push to manage the money supply as a way to keep inflation low and stable, but it didn’t work very well. (For a lot of reasons. In particular, the lags between money supply growth and the flow to spending are long and variable. Also, people have choices in where they spend their money, so sometimes the money flows to goods, other times services, and other times assets like stocks, bonds, real estate, etc.) Since the mid-1980s, the Fed hasn’t really considered controlling money supply as a key policy tool.

Recessions, on the other hand, are caused by consumers or businesses choosing to spend less money. The Fed tries to fight this by lowering interest rates. This can work—lower interest rates make it cheap to borrow money to spend. But people can still choose to spend less, even when they could borrow that money really cheaply. This happened very obviously in 2007 and 2008.

When people (or businesses) choose to spend less, the economy slows down. It’s a self-reinforcing cycle. People spend less, so business income declines. Businesses sell less, so they buy less raw materials; they buy less products to sell; they cut employees. Employees lose their jobs, their income shrinks, so they spend less. Commodity sellers can’t sell what they produce, so they stop producing. Businesses can’t sell what they buy, so they quit buying. All those choices flow through the economy, reducing everyone’s income, reducing everyone’s spending even more.

We haven’t seen much of this yet, but we’re about to.

I mention all this now because I just saw this article in the New York Times: We Crunched the Data: There’s a Grocery Price Emergency in America. The writers came up with a model for a fairly affluent middle-class family in the United States, and found that rising prices were crushing it:

According to our calculations, the math has stopped adding up for this family over the past 18 months. They had a small cushion in 2024. Now they are in the red after covering just the basics

People’s reactions to prices that outstrip their income vary. Up to now people have adapted by simply doing what they have to do. They start by making the easiest cuts they can manage, but that doesn’t go very far. You can only make the adjustment from beef to chicken to beans one time. You can quit buying new clothes and make do with what’s in your closet for a year or two, but eventually your old clothes start to wear out. People can quit saving and investing, and they can start borrowing to cover their expenses, but that can’t go on. Eventually, people have to start making structural changes to their household costs, of the sort I talked about all the time when I was writing for Wise Bread: They can become a one-car family. They can move from a house, to an apartment, to a smaller apartment. They can raise the deductibles on their insurance policies.

These sorts of changes have long lead-times. Selling your second (or third) car might take months, and it might not save you much money in the first year or two after you do it. Moving to a cheaper place to live similarly takes months and costs money. Even switching to a cheaper phone plan takes a while. But 18 months is enough time for people to start making these changes. And once they’ve done so, that new lower-spending structure is largely locked in for at least months, probably for years. Even as prices start to come down (and they will, although not to what they were in 2020), people who have made those structural changes to their household cost structure aren’t going to undo them anytime soon.

The result is going to be a recession, very possibly a severe recession, and one that goes on for a very long time. It’s not obvious yet, because businesses are still spending huge amounts of money on things like AI infrastructure, but a lot of that spending is illusory, so it will vanish all at once, rather than gradually.

This wasn’t inevitable. The Fed deserves some of the blame. The Trump administration deserves much more—tariffs and war are what most dramatically hit the cost structures of the typical business and the typical household.

At this point, there’s no good solution for the economy as a whole, because the smart moves by individuals (dramatically changing the cost structure of the business or the household to enable lower spending) all act to deepen the recession. But that is no reason to do anything else but act to bring your costs in line with your income. Going bankrupt will not help the economy.

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“People with substantial cryptocurrency holdings face grave personal danger, and the physical attacks on their person grow bolder, more violent, and more sadistic by the day.”

Source: Pluralistic: Hold on for dear life (28 May 2026) – Pluralistic: Daily links from Cory Doctorow

Apropos nothing in particular, I just wanted to mention that I own no cryptocurrency assets at all, and (except for a few bitcoin cents that I briefly owned and then lost in 2011 in the hack of mybitcoin.com) I never have.

And, just for the record, I’ll also mention that I don’t think any cryptocurrency asset will ever be a thing of durable value. (This doesn’t mean that blockchains aren’t a useful technology. Just that they make crappy assets.)

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My brother and I think alike about many things, and differently about many other things. We also sometimes disagree about what it is that we disagree about, which is kind of funny all by itself.

Although we agree about many things, we sometimes actually come at things from quite different perspectives.

Source: Retiring to… Something – Steven D. BREWER

My brother and me, wearing hats. In pre-pandemic days, so not wearing masks, even though we were out in public
My brother and me.

In my brother’s thinking, I “never really wanted to work and pursued a career with the goal of retiring early,” which is both true and false. I hated having a job of the sort where I needed to show up every day, and do stuff that I didn’t find interesting. But I never objected to working. I just wanted the word used correctly. I was delighted to “work” in the sense of producing great works of literature (or art, or philanthropy).

It was never working I objected to. I simply didn’t like “working for the man.”

In retirement I don’t have to do that, and am able to devote myself to work (such as my fiction writing), to the necessary tasks of daily living (such as walking my dog), and to doing things I enjoy for their own sake (such as exercise, and reading).

And although the specifics may be quite different, in this area I think my brother and I are very much in agreement.

I have no shortage of interesting projects I intend to work on in retirement.

Source: Retiring to… Something – Steven D. BREWER

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Soybeans and corn, with a solar array behind

All over Europe, farmers are parking their tractors on bridges, in front of fuel depots, and across from government offices, to protest government policies that are making the economics of being a farmer completely untenable.

It’s not happening so much in the U.S. At least not yet. I guess, as long as people are willing to pretend it’s not welfare, farmers are willing to take government money—even as their livelihoods are being destroyed.

But…

But emergency checks are not farm policy. And without a permanent Farm Bill, the next drought, the next bad harvest, the next crisis, won’t have a safety net waiting — just another extension, and another prayer.

Source: Where’s the Smoke? – Offrange

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Graph of the spot price for West Texas Intermediate crude oil, showing the recent spike

For no reason I can understand, markets seem to think that (with the cease fire with Iran) things are going to return more or less to normal, more or less immediately. This is false. It is not just false, it is so far from the truth that I don’t understand why way more people aren’t panicking.

There are so many problems with oil supply delivery right now—so many more than just the Strait of Hormuz. A lot of oil and gas production infrastructure is gone. A lot of oil and gas distribution infrastructure is gone. Even where the production infrastructure is still there, since there’s no way to ship out what is produced, production is being shut in. Production that has been shut in will take weeks to get started again. And it won’t be started again until it can be delivered.

At the same time, shipments of oil and gas that came out through the Strait just before it was closed, are probably only now reaching their destinations—meaning that it is only now that refineries are finding themselves without their next input for refining. The refining facilities are going to have to shut down. And just like the production facilities, it will take weeks to get them started again. And they won’t be started again until the people who run them foresee reliable, steady deliveries of crude.

These effects are already obvious in the observed spread between spot prices (the cost of a barrel of crude to be delivered right now), which are high (although not as high as I think would make sense), and futures prices (the cost of a barrel of crude to be delivered in a month), which are also high (but not nearly as high as I think would make sense).

The same is true (with various differences in details) with helium, nitrogen for fertilizer, aluminum, and who knows how many other commodities that used to come though the Strait.

This all matters because the knock-on effects are going to be huge. Higher fuel prices—much higher, and for much longer than the markets are currently anticipating. Higher food prices, due to the shortage of fertilizer reducing food production, especially of corn—which is a major input to both meat production and to ethanol production, meaning another way it feeds-through the higher energy prices. Higher helium prices feed through to shortages of computer chips—which were already under strain due to AI-related data-center demand.

In the background of all these are Trump’s tariffs from a year ago, the impact of which was eased in many different ways (the pause, various rate cuts, firms stocking-up ahead of the imposition of the taxes, the supreme court decision ruling that the worst of them were illegal), all of which delayed the main impacts for months. For some reason, the markets seem to think that those impacts would quit showing up in comparison to the year-ago numbers (since the tariffs were announced one year ago), but in fact are probably only now fully showing up in reported numbers.

My take on all this is that every aspect of the economy is going start getting bad, and then going on getting worse. The getting-worse phase will go on at least for months and months, and very possibly for a year or two or three.

Inflation spiked up to 3.3% last month, but that is only the start. That’s just the energy-price spike. As soon as those effects feed through to other prices, they’ll all go up. And as soon as those high prices start forcing people to cut back on other spending, we’ll see at least a recession, and very possibly worse than that. And that’s all before actual shortages or fuel and food start impacting every aspect of people’s lives.

Oh, and as I’ve said before: Don’t imagine that having some idea about what things are going to be higher-priced or in short-supply gives you the sort of insight that will let you invest to make money off these circumstances. The real-world impact of these things are going to be chaotic enough that any particular investment could go very badly wrong, even if your understanding of the general direction of events is correct. And, of course, the government is going to trying to protect their supporters (oil companies and tech billionaires, mostly) so they may well be bailed out. Any investments that suppose that things will go badly for them in particular may well go spectacularly awry.

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Recent news is that a contingent of ground forces have arrived in Iran. The markets still seem expect that Trump will chicken out (which seems likely) and that things will return to normal in the Gulf (which seems very, very unlikely).

My most hopeful guess at this point:

  1. Trump chickens out, declares victory, says we have a deal with Iran, and pulls out.
  2. Europe and Asia make a deal with Iran that conditionally opens the Strait, with Iran deciding who can transit, and collecting large tolls.
  3. Europe and Asia start getting deliveries of oil and gas and fertilizer and helium. Because of the gap already embedded in deliveries, prices spike up in the meantime.
  4. Because the U.S. is an oil and gas exporter, our prices spike up less (but still spike up, because there’s a global market), and reduced supply of fertilizer and other things from the Gulf means other prices spike up as well, producing an inflationary recession that rivals the worst of 2008 and 2020.

All my other guesses are similar, except that my scenario is preceded by a step 0 in which a bunch of U.S. soldiers and marines are killed while failing to reopen the Strait.