The Deficit Narrative May Find its Cure in Artificial Intelligence
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View Membership BenefitsLately, the “deficit narrative” has dominated much of the financial media, particularly those channels that are continual “purveyors of doom.” In this post, we will discuss the “deficit narrative,” the likely outcomes, and why the cure for the deficit may be found in Artificial Intelligence.
The “deficit narrative” has dominated the media lately as President Trump’s “Big Beautiful Bill” winds its way through Congress. The immediate concern is that this bill will add further to the U.S.’s current debt and deficit levels, like before. As we discussed recently in “Ray Dalio Predicts A Financial Crisis,” much of the concern stems from the recent CBO scoring of the bill, which projects a never-ending rise in debt.
“Here we remind readers, that the Big, Beautiful Bill currently in Congress has been scored to add about $5 trillion to the debt, resulting in what we said would be Debt Doomsday for the US; this is simply a trade-off of short-term prosperity (a few extra trillion in the next 4 years) for long-term economic collapse (that 220% in long term debt.GDP).” – Duetsche Bank
That is undoubtedly a horrifying chart, as the US has accumulated debt levels not seen since World War II, when federal debt exceeded 100% of GDP.
However, that chart also needs some context and understanding. As shown, the US has run a negative deficit-to-GDP ratio most of the time since 1980. The only period during which there was a surplus was a very brief moment in the Clinton Administration, where he “borrowed” $2 trillion from Social Security to balance the budget. It is worth noting that while there is much “hand-wringing” about the current 6% deficit-to-GDP ratio, such is not that far above the -4% average.
While a 6% deficit is not a “good thing,” we must better understand its impact on the economy.
Understanding The Deficit
The fiscal year 2024 deficit was $1.8 trillion. That seems scary, but it is significantly lower than deficits during the COVID pandemic. Furthermore, investors must understand a critical accounting concept: that the government’s debt is the household’s asset. In accounting, for every debit there is a credit that must always equal zero. In this case, when the Government issues debt (a debit), it is sent into the economy for infrastructure, defense, social welfare, etc. That money is “credited” to the bank accounts of households and corporations. Therefore, when the deficit increases, that money winds up in economic activity, and vice versa. In other words, those shouting for sharp deficit reductions are also rooting for a deep economic recession.
Nonetheless, the deficit trend is worrisome because it persists despite relatively strong but slowing economic growth. Historically, deficits shrink during periods of economic prosperity due to higher tax revenues and lower safety-net spending. Since the pandemic crisis, deficits have indeed shrunk, but are starting to expand again due to ongoing economic weakness. However, while the current structural imbalance shows no signs of abating, which is putting upward pressure on interest rates, it is notable that central banks globally have exited their support of the debt markets. We suspect that if the “deficit becomes critical” due to higher interest payments, the Federal Reserve will reverse its monetary policy course again.
As noted, the lack of interventions has allowed interest rates to rise. However, interest rates must be analyzed in relation to economic growth and inflation. Currently, rates are trading at levels equating to economic growth and inflation and are certainly not outside of historical norms. Interest rate currently “feel” high, only because they are normalizing from abnormally low levels following the pandemic interventions.
The consequence of that lack of intervention and the normalization of rates is the cost of servicing the national debt. In 2024, net interest spending reached $882 billion, surpassing expenditures on Medicare and defense, according to the GAO. Due entirely to the rise in rates, this figure has more than tripled since 2017, when it was $263 billion. However, as shown, if the Federal Reserve begins to cut rates and borrowing costs decline by 1%, the interest payment expense will decline by nearly $500 billion.
However, interest payments are only one side of the equation; the other is the revenue from economic growth.
Why The Deficit Narrative Of Doom May Fail To Mature
As discussed in the Ray Dalio article, there are MANY problems with the CBO projections. To wit:
“These [CBO] forecasts, often treated as gospel by lawmakers and media outlets alike, are used to shape public policy debates, inform budget decisions, and frame the long-term fiscal narrative of the United States. Yet, with striking regularity, these projections fail to materialize. The reason is that these CBO projections are often biased or one-sided estimations, data is excluded, and various other issues impair future accuracy, both good and bad. Furthermore, the agency’s forecasting methodology has structural flaws, ranging from rigid assumptions to exclusions of dynamic economic feedback to blind spots in fiscal behavior and policy change. The result is a set of projections that often mislead more than they inform.”
The article linked above goes into further detail about the many problems with CBO projections. However, the most critical flaw is the dismissal of potential upside scenarios. Demographic shifts, productivity surges due to technology, or policy-induced economic acceleration. Conversely, it fails to adequately model downside risks like recessions, geopolitical shocks, or credit events. The result is a misleading “middle path” that rarely reflects actual outcomes.
Looking back at history, previous high debt levels did not lead to “economic devastation” or a “financial crisis.” In the post-WWII era, strong economic growth helped shrink that debt ratio to about 25% of GDP by the 1970s. Subsequent decades saw new debt cycles. The 1980s military buildup and tax cuts drove debt up. However, the 1990s tech boom and fiscal restraint brought it down. Then events like 2008 and 2020 sent debt soaring again. Today, U.S. public debt is roughly 120% of GDP, an unprecedented peacetime high. While high debt isn’t new, the current trajectory stands out in scale and persistence.
But just as in the post-WWII era, there are reasons to hope the “deficit narrative” will improve. As noted above, following WWII, the US was the manufacturing epicenter of the entire world. The global demand for US manufacturing increased economic growth rates in the U.S., lowering the debt-to-GDP ratios substantially.
Fortunately, the US again stands at the doorstep of the next industrial revolution with Artificial Intelligence. As UBS recently noted:
“We expect stimulus and structural forces to drive the rebound, while cyclical factors remain weak. We are forecasting construction growth to reaccelerate to 4% in 2026.”
The drivers of that growth will come from;
- Structural changes driving spending on Manufacturing, Power, and Data centers/Telecom; potential upside from tax incentives/bonus depreciation
- Stimulus funds are flowing and should contribute to spending growth in 2025 -26
- State finances are in stable to good condition for now; set up for modest public growth.
Suppose the buildout of Artificial Intelligence comes to fruition. If that activity only maintains the economy’s current growth rate, the debt-to-GDP ratio becomes more sustainable. This assumes interest rates do not fall, and spending remains at the current growth rates.
However, if the growth rate increases to 4% annually (nominal), as some forecasts project, the debt-to-GDP rate will fall to roughly 100% by 2035.
This is not entirely “high hopes,” as the Trump administration has already secured commitments from major corporations of $1.8 trillion. These projects are either “shovel-ready” or near that stage, with many already beginning to gear up.
While $1.8 trillion may not seem like much, compared to the current size of the economy, these are heavily infrastructure-intensive, which can significantly boost economic growth, directly impacting the debt-to-GDP ratio by increasing the denominator (GDP). The U.S. GDP growth rate is projected at 1.8% annually through 2035 by the Congressional Budget Office (CBO), but infrastructure spending could push this higher. The American Society of Civil Engineers (ASCE) estimates that every $1 billion in infrastructure investment creates 13,000 jobs and adds $3 billion to GDP over a decade.
Therefore, if the U.S. invests $1.8 trillion in AI infrastructure by 2030—plausible given the $500 billion energy need, $300 billion for data centers (150 new centers at $2 billion each), and $200 billion for chip production—GDP could rise by $5 trillion over 10 years, or roughly $300 billion annually. However, that $1.8 trillion is only the beginning. McKinsey & Company expects spending to reach $6 trillion by 2030, just 5 years from now, equating to $18 trillion in economic growth.
While that spending will reduce the deficit trajectory, it will also provide investors with a fantastic opportunity to grow wealth.
Taking Advantage Of What’s Coming
The current “deficit narrative” overlooks the economic improvements resulting from artificial intelligence’s buildout. As discussed in “Electricity May Cure The Debt Problem,” the United States’ power grid has lacked sufficient investment to handle the increasing burdens of electricity demand in previous years. It isn’t just a growing population that needs more housing, mobile phones, laptops, and computers. However, adding electric vehicles, bitcoin mining, and artificial intelligence will overwhelm the current electricity supply in the U.S.
For example, bitcoin mining demands an extreme amount of electricity. As noted by Paul Hoffman in Bitcoin Power Dynamics:
“The daily consumption of 145.6 GWh for Bitcoin mining in the U.S. is about 1.34% of the total daily power consumption in the country. Despite the small percentage this is still an enormous amount of electricity, keeping in mind that the U.S. is a heavily-industrialized country consuming a lot. When we extrapolate this daily consumption to a year, we get 53,144 GWh.”
However, Bitcoin mining is a small fraction of the buildout needed compared to Artificial Intelligence.
“AI energy demand is projected to surge from approximately $527.4 million in 2022 to a substantial $4,261.4 million by 2032, with a robust compound annual growth rate (CAGR) of 23.9% from 2023 to 2032.” – Medium.
But this isn’t just about “Data Centers.” The future will be the buildout of “AI Factories,” as we saw post-WWII. As more and more companies adopt Artificial Intelligence, every company competing in E-commerce, science, medicine, manufacturing, or service delivery will need to adopt AI, either directly or indirectly. These “AI Factories” owners will be at the top of the food chain.
Investment Opportunities Abound
The physical infrastructure of roads, buildings, power grid, housing, etc., must scale as AI factories come online. Currently, the U.S. has 2,700 data centers in 2024, per Statista, but industry experts estimate a 50% increase is needed by 2030 to support AI growth. Building a hyperscale data center costs $1-2 billion, according to CBRE Group, and requires land, construction, and advanced cooling systems to manage heat from high-performance chips. This buildout necessitates improved broadband infrastructure, as AI applications require low-latency, high-bandwidth networks. The Federal Communications Commission (FCC) notes that 5G coverage must expand to 90% of the U.S. population by 2028, up from 70% in 2024, to support AI data flows.
For investors, the opportunities will be broad. Sure, companies like Amazon (AMZN), Meta (META), Microsoft (MSFT), and Google (GOOG) will be the AI factory owners, but there is more to the story. The infrastructure requirements will be enormous to build these factories, including the utilities required for the electricity provision. This makes natural gas pipelines like OneOK (OKE) and nuclear power like GE Vernova (GEV) exciting opportunities in the future. Furthermore, Blackrock (BLK) is heavily investing in infrastructure (roads, buildings, power grid), and such requires a lot of heavy machinery that will benefit companies like Caterpillar (CAT), Deere (DE), and United Rentals (URI).
Furthermore, the hardware supply chain is critical. According to Gartner, AI relies on specialized chips like Nvidia’s (NVDA) A100 GPUs, which saw a 141% demand increase in 2024. The 2022 CHIPS and Science Act allocated $52 billion to boost domestic semiconductor production. However, McKinsey estimates that the U.S. must double its chip manufacturing capacity by 2030 to reduce reliance on foreign supply chains and meet AI needs. This requires new factories, skilled labor, and raw materials like rare earth elements, often sourced globally.
Conclusion
While investors can profit from the coming infrastructure boom, the deficit narrative will also be positively impacted.
From the deficit narrative perspective, this all suggests that the future is potentially much brighter than most imagine. The infrastructure buildout for AI data factories can drive economic growth by creating jobs, stimulating industries, and enabling AI-driven productivity gains. As noted above, increasing growth only marginally would stabilize the current debt-to-GDP ratio. However, boosting GDP growth to 2.3%- 3% annually would vastly improve outcomes. Furthermore, if interest rates drop by just 1%, this could reduce spending by $500 billion annually, helping to ease fiscal pressures.
Significant money-making opportunities are on the horizon for investors. For individuals, the coming strategic investments, workforce development, and sustainable energy policies could improve economic outcomes while resolving deficit concerns.
Don’t let misplaced deficit fears rob you of a potentially fantastic wealth-building opportunity.
For more in-depth analysis and actionable investment strategies, visit RealInvestmentAdvice.com. Stay ahead of the markets with expert insights tailored to help you achieve your financial goals.
Lance Roberts is a Chief Portfolio Strategist/Economist for RIA Advisors. He is also the host of “The Lance Roberts Podcast” and Chief Editor of the “Real Investment Advice” website and author of “Real Investment Daily” blog and “Real Investment Report“. Follow Lance on Facebook, Twitter, Linked-In and YouTube Customer Relationship Summary (Form CRS)
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