Are you working a bit less today, enjoying the early fruits of all this 'AI productivity'? Or are you somehow working longer, more stressful hours than ever?
Is it your sense that life is getting a little bit easier for the poor or the middle class or anyone other than the very rich as the 'AI revolution' arrives? Is it your sense that young people are a bit more hopeful about the future now that it's an 'AI economy'? Is it your sense that 'AI friends' are beginning to enrich our social lives? Is it your sense that goods and services are becoming more plentiful and cheaper as 'AI deflation' kicks in? Is it your sense that news is more informative and shows are more entertaining as 'AI content' spreads? Is it your sense that job prospects are improving as we enter an 'AI employment boom'?
Yeah. Same.
Honestly, I don't see how the carrot was ever going to work. It's just too at-odds with our actual lived experience, even here in Fiat World where our reality is declared and announced to us. They're going to need the stick. They're going to need to tell us that national survival is at stake, that our enemies will triumph if we don't make the 'necessary sacrifices' to win this 'AI arms race'.
They're going to need a war.
Oh, maybe not an actual war, but the functional equivalent thereof, full of threats real and imagined and adversaries foreign and domestic. They're going to need World War AI...
The United States spent $296 billion over a roughly four-year period to fight World War II, which would translate to about $4 trillion in today's dollars.
At its peak (1943), the war effort accounted for 37% of US GDP, and no aspect of American life was untouched or unconstrained by the US government's reallocation of the three basic building blocks of economic activity -- labor, capital and energy (energy being my shorthand for all physical resources as well as the core input to mining, farming, manufacturing and transportation) -- and the enormous expansion of government's role in American society to carry out this reallocation. In particular, every aspect of consumer behavior was subordinated to the political will required to execute the war effort, a political will which created extreme shortages in the labor, capital and physical resources available to the consumer economy.
I think it's hard for Americans today to grasp both the level of consumer sacrifice that was required during World War II and the level of governmentpropaganda 'nudge' involved in enforcing that consumer sacrifice. (...)
I mean, I'm guessing that the mother and child in the poster above, dressed in their perfectly matching frocks and radiating Stepford Wives aura, maybe did not have enough food the winter before? And if you think that it's 'encouraging political violence' to call someone a Nazi today for supporting fascist policies ... in 1943 the government would call you a Nazi if you didn't carpool.
I find these posters and broadsides from World War II pretty funny, like they're from some cartoon world, and I bet you do, too. But when you read the memoirs and economic histories of the WWII homefront, there's nothing cartoonish about it. These were hard times! Shortages of food, energy and labor created extreme cost-push inflation, like our Covid-era supply chain inflation but on steroids, to which the government responded with draconian price controls on EVERYTHING. And when price controls didn't work, meaning that when even a suppressed market failed to distribute enough calories to enough people to prevent widespread hunger if not starvation, the government abandoned market mechanisms altogether and instituted outright rationing on food, energy and other necessities.
They're going to need a war.
Oh, maybe not an actual war, but the functional equivalent thereof, full of threats real and imagined and adversaries foreign and domestic. They're going to need World War AI...
The United States spent $296 billion over a roughly four-year period to fight World War II, which would translate to about $4 trillion in today's dollars.
At its peak (1943), the war effort accounted for 37% of US GDP, and no aspect of American life was untouched or unconstrained by the US government's reallocation of the three basic building blocks of economic activity -- labor, capital and energy (energy being my shorthand for all physical resources as well as the core input to mining, farming, manufacturing and transportation) -- and the enormous expansion of government's role in American society to carry out this reallocation. In particular, every aspect of consumer behavior was subordinated to the political will required to execute the war effort, a political will which created extreme shortages in the labor, capital and physical resources available to the consumer economy.
I think it's hard for Americans today to grasp both the level of consumer sacrifice that was required during World War II and the level of government
I mean, I'm guessing that the mother and child in the poster above, dressed in their perfectly matching frocks and radiating Stepford Wives aura, maybe did not have enough food the winter before? And if you think that it's 'encouraging political violence' to call someone a Nazi today for supporting fascist policies ... in 1943 the government would call you a Nazi if you didn't carpool.
I find these posters and broadsides from World War II pretty funny, like they're from some cartoon world, and I bet you do, too. But when you read the memoirs and economic histories of the WWII homefront, there's nothing cartoonish about it. These were hard times! Shortages of food, energy and labor created extreme cost-push inflation, like our Covid-era supply chain inflation but on steroids, to which the government responded with draconian price controls on EVERYTHING. And when price controls didn't work, meaning that when even a suppressed market failed to distribute enough calories to enough people to prevent widespread hunger if not starvation, the government abandoned market mechanisms altogether and instituted outright rationing on food, energy and other necessities.
At the same time, every bit of available domestic investment capital and savings (which are the same thing) was absorbed by the federal government and unavailable for the consumer economy. That meant that in addition to the extreme inflationary pressures from widespread shortages, there was ZERO economic growth from small and medium businesses, which were an even larger portion of American GDP back then than they are today. The only thing that kept the American economy from collapsing into a stagflationary disaster was the $4 trillion that the US government spent on manufacturing war materiel and -- hold this thought! -- the enormous number of new jobs created from that.
The same amount of inflation-adjusted money we spent on World War II -- somewhere between $4 trillion and $5 trillion -- is scheduled to be spent on AI and datacenter buildouts in the United States over the next four years.
Yes, our economy is proportionally bigger today, so this is 'only' something like 15% of US GDP ($30 trillion in 2025), but an economic mobilization of this magnitude will require a similarly massive reallocation of our fundamental economic building blocks -- labor, capital and energy -- especially capital and energy.
On the capital side, it's difficult to communicate how much money this is over such a short period of time. As JPMorgan puts it in their magisterial research note on AI Capex financing, "The question is not which market will finance the AI-boom. Rather, the question is how will financings be structured to access every capital market.” Here's their chart for where they think the money will come from (slightly apples to oranges as this is global spend, not just US, but I figure 70-80% of this datacenter build is going to happen in the US, so it's essentially the same), and I'd call your attention in the $1.4 trillion attributed to "Need for Alternative Capital / Governments", which combines both our favorite financial topic du jour -- private credit -- with direct government subsidy/investment.
The same amount of inflation-adjusted money we spent on World War II -- somewhere between $4 trillion and $5 trillion -- is scheduled to be spent on AI and datacenter buildouts in the United States over the next four years.
Yes, our economy is proportionally bigger today, so this is 'only' something like 15% of US GDP ($30 trillion in 2025), but an economic mobilization of this magnitude will require a similarly massive reallocation of our fundamental economic building blocks -- labor, capital and energy -- especially capital and energy.
On the capital side, it's difficult to communicate how much money this is over such a short period of time. As JPMorgan puts it in their magisterial research note on AI Capex financing, "The question is not which market will finance the AI-boom. Rather, the question is how will financings be structured to access every capital market.” Here's their chart for where they think the money will come from (slightly apples to oranges as this is global spend, not just US, but I figure 70-80% of this datacenter build is going to happen in the US, so it's essentially the same), and I'd call your attention in the $1.4 trillion attributed to "Need for Alternative Capital / Governments", which combines both our favorite financial topic du jour -- private credit -- with direct government subsidy/investment.
AI Capex - Financing The Investment Cycle (J.P.Morgan North America Fundamental Research, Nov. 10, 2025)
Sarah Friar didn't 'misspeak' when she called for a federal backstop -- by which everyone means and intends a US Treasury guarantee -- on AI datacenter debt issuance, and she didn't need to 'phrase things more clearly'. She used exactly the right word to describe exactly the policy that OpenAI and Wall Street and every other participant in this $10 trillion ouroboros ecosystem desperately wants and frankly requires for this massive reallocation of capital to have a chance of succeeding.
I mean, a federal debt backstop is just the start. Within a couple of years -- and this is the point of the $1.4 trillion "Alternative Capital / Governments" item on the JPMorgan chart! -- the US government will need to allocate hundreds of billions of dollars directly to the AI buildout, maybe through defense appropriations, maybe through equity stakes, maybe through whatever. Otherwise, we're a good trillion dollars short in the funding required to make this work here in the US. All from additional borrowing and deficit spending, of course, just like in World War II when the federal debt skyrocketed to an amount that was 100% of GDP. What's different today, of course, is that the federal deficit is already at World War II debt-to-GDP levels before the additional borrowing for the AI buildout support. Bottom line: whatever you think the future path of US debt-to-GDP looks like, you're too low.
The economic term for the impact of capital reallocation at this enormous scale is 'crowding out'. The public and private capital that is invested in or lent to the AI hyperscalers and their counterparties over the next four years is that much less public and private capital available to be invested in or lent to the rest of the economy. And while I'm sure most large B2B enterprises will find a way to at least get a taste of what's being poured into the AI buildout, small and medium enterprises will be mostly shut out and consumer-facing enterprises are going to be completely shut out.
The inevitable impact of a massive reallocation of capital away from the consumer economy is that consumer credit becomes more expensive (if it's available at all), capital-intensive consumer services like health insurance and homeowners insurance become more expensive (if they're available at all), consumers stop spending (especially the bottom 50%), and consumer-facing businesses stop hiring (if they're not actively cutting back).
Sound familiar? That's because what I'm describing isn't some maybe-projection of some hypothetical future. This is all happening already. This is all happening NOW.
by Ben Hunt, Epsilon Theory | Read more:
Image: JP Morgan; US Govt.
[ed. Very much enjoy Mr. Hunt's essays. Unfortunately, only for subscribers these days. See also: This is the Great Ravine (ET):]
In The Dark Forest, volume 2 of the Three-Body Problem science fiction trilogy, Cixin Liu mentions almost in passing a 50-year period of immense social upheaval, destruction and (ultimately) recovery across the globe. He never goes into the details of this period that he calls the Great Ravine. He basically just waves his hands at it and writes “yep, that happened”.
Why? Because the Great Ravine does not advance the plot.
It’s there. It happens. But there’s nothing to be gained by examining its events. Like the Cultural Revolution of Cixin Liu’s real-world history, the Great Ravine is ultimately just a tragic waste. A waste of time. A waste of wealth. A waste of lives. There is nothing to be learned from our time in the Great Ravine; it must simply be crossed.
And cross it we will.
***
This is all going to get much worse before it gets any better.In The Dark Forest, volume 2 of the Three-Body Problem science fiction trilogy, Cixin Liu mentions almost in passing a 50-year period of immense social upheaval, destruction and (ultimately) recovery across the globe. He never goes into the details of this period that he calls the Great Ravine. He basically just waves his hands at it and writes “yep, that happened”.
Why? Because the Great Ravine does not advance the plot.
It’s there. It happens. But there’s nothing to be gained by examining its events. Like the Cultural Revolution of Cixin Liu’s real-world history, the Great Ravine is ultimately just a tragic waste. A waste of time. A waste of wealth. A waste of lives. There is nothing to be learned from our time in the Great Ravine; it must simply be crossed.
And cross it we will.
