Promises of foreign investment to build factories in the US are not funded by new money. Foreign entities sell their large holdings of US Treasury bonds to raise the cash for the real investment, creating upward pressure on interest rates.
A common question is "who will buy all the debt?" The answer is that money borrowed and spent by a company on a project becomes income and then savings for others. These new savings are then used to buy the debt, completing a self-funding circular flow.
Companies offshore production because it's cheaper. Forcing manufacturing back to the US via policy results in more expensive or lower-quality goods. While it improves supply chain resilience, this should be viewed as an insurance premium—a cost, not a productive investment.
For the past decade, the Fed was the primary driver of liquidity. Now, the focus shifts to commercial banks' willingness and ability to create credit to fund major initiatives like AI and onshoring. Investors fixated on Fed policy are missing this crucial transition.
Only the Fed and commercial banks can create new, spendable money out of thin air. In contrast, credit creation, like in shadow banking, simply reallocates existing money from a saver to a spender. This distinction is crucial for understanding economic stimulus and risk.
The previous era of central bank money printing lifted all asset classes together. The new regime, driven by private borrowing for real economic investment, is different. It creates GDP growth (good for stocks) but also a large supply of debt (bad for bonds).
Typically, an investment cycle creates jobs, boosting consumer confidence and leading them to borrow and spend. However, the AI boom is unique because its goal is automation, which threatens jobs. This could break the cycle, preventing the investment from translating into broader economic strength.
Massive investment requires issuing assets (bonds, equity), creating supply pressure that pushes prices down. The resulting spending stimulates the real economy, but this happens with a lag. Investors are in the painful phase where supply is high but growth benefits haven't yet materialized.
Stuffing banks with reserves via Quantitative Easing doesn't spur lending if there's no real economy demand. The current shift is driven by a genuine "pull" for credit from sectors like AI and onshoring, making banks willing to lend, which is a far more powerful economic force.