Hoping AI will grow the economy out of its debt burden is flawed. The massive investment required to boost GDP growth (G) competes for capital, inadvertently raising interest rates (R). In the short term, this can increase the debt service cost (the R-G spread), potentially worsening the debt spiral before any productivity gains are realized.

Jeffrey Schmid suggests the massive capital investment required for the AI and data center build-out is creating significant new demand for credit. This demand competes directly with public sector borrowing and other commercial needs, which in turn puts upward pressure on bond yields as part of a classic supply-and-demand dynamic for money.

The AI industry and the US government both require trillions in funding. This creates a paradox: the more successful AI becomes, the more it erodes the white-collar tax base by automating jobs, forcing the Treasury to borrow even more and intensifying the competition for scarce capital.

The multi-trillion dollar AI investment cycle will force hyperscalers to issue unprecedented amounts of debt. This sheer supply will eventually create a supply-demand imbalance that causes investment grade credit spreads to widen, regardless of the companies' fundamental health.

The global shift away from centralized manufacturing (deglobalization) requires redundant investment in infrastructure like semiconductor fabs in multiple countries. Simultaneously, the AI revolution demands enormous capital for data centers and chips. This dual surge in investment demand is a powerful structural force pushing the neutral rate of interest higher.

The sustained rise in global bond yields isn't attributable to a single driver like U.S. policy or inflation alone. Instead, it's the powerful and simultaneous combination of persistent government deficits, new private sector borrowing for AI, and recent inflationary shocks that is fundamentally and broadly repricing the cost of capital.

The AI buildout requires trillions in debt financing, which will crowd out other borrowers and raise global interest rates. This could make it impossible for developing countries with high, short-duration debt to service their loans, risking widespread defaults and a global financial crisis.

An anticipated $3 trillion in AI-related spending requires significant debt financing, creating a $1.5 trillion gap. This is expected to cause a 60% increase in net investment-grade bond issuance, creating a supply-side headwind that makes the asset class less attractive despite sound fundamentals.

The era of a global savings glut, which pushed interest rates down, is over. The world now faces capital scarcity, evidenced by rising real interest rates. This shift is driven by massive demand from the AI boom, persistent fiscal deficits, and reshoring initiatives.