The Illusion of AI-Driven Growth
Global Growth Projections and AI Investment
The projections are in, and they paint a picture of slowing global growth through 2026. The US is expected to outperform Europe, but even here, growth is expected to be subdued, around 1.5% in both 2025 and 2026, despite massive AI investments. China, while slowing, still outpaces both with 4.7% and 4% growth respectively. What's interesting is the implicit faith being placed in AI to be a growth engine, especially in the US. Spending is projected to reach $375 billion in 2025 and $500 billion in 2026. But is this faith justified?
The Reality of AI Returns: An MIT Study
The MIT study should give everyone pause. 95% of the 300 organizations surveyed reported zero return on their GenAI investments, despite a collective $30 to $40 billion sunk into the technology. Zero. That's not a rounding error; it's a flashing red light. This discrepancy between projected AI spending and actual returns is a key point. Are we looking at a tech-driven boom, or a very expensive bubble inflated by hype?
Tax Cuts, Debt, and the Underlying Problem
And this is the part of the report that I find genuinely puzzling. If the returns on AI investment are so poor, why the continued optimism in growth forecasts? One possible explanation is the "One Big Beautiful Bill Act," the extension of tax cuts passed in May 2025. Tax cuts can juice the economy in the short term, but they also add to the national debt. The US federal deficit is projected to increase from 6.4% of GDP in 2024 to nearly 9% by 2035. Debt-to-GDP is projected to rise from 98% to 134% over the same period. What happens when the sugar rush wears off?
The Debt Dilemma and the Fed
Moody's Downgrade and the Burden of Debt
Speaking of debt, the Moody's downgrade of the US' long-term issuer rating to Aa1 (from Aaa) in May 2025 is another worrying sign. This follows similar downgrades from S&P and Fitch. The market seems to be shrugging this off for now, but bondholders are likely to bear the ultimate burden of this growing debt. Federal interest payments are expected to rise from 18% of revenues in 2024 to 30% by 2035. That's a massive chunk of the budget going simply to service debt, leaving less for everything else – infrastructure, education, defense.
The Future of the Federal Reserve
Then there's the looming question of who will replace Jerome Powell as chair of the Federal Reserve in May 2026. Christopher Waller is mentioned as a potential candidate. Economists are already expressing concern about political pressure influencing the Fed's independence. Markets, understandably, prefer an independent thinker at the helm. But in the current political climate, can we realistically expect a completely apolitical appointment? An independent Fed is crucial for maintaining confidence in the US economy, especially with the growing debt burden. If the Fed is perceived as being too closely aligned with political interests, it could trigger a flight to safety, further destabilizing the economy.
Inflationary Pressures and Conflicting Signals
The elephant in the room is inflation. Economists are worried about the potential impact of the growing US debt on inflation and interest rates. The reintroduction of tariffs by the Trump administration, and their continuation and broadening by the Biden administration, hasn't helped. Average tariffs are estimated at around 18%, compared to 2.7% in 2024. While a federal appeals court has questioned the legality of these tariffs, they remain in place for now, adding to inflationary pressures. It's a mess of conflicting signals and unsustainable trends. Uncertainty Clouds Global Growth Rate - Global Finance Magazine
The Inevitable Reckoning
The Strained Global Economy
The global economy is like a rubber band being stretched. Tariffs, debt, and questionable AI investments are all contributing to the strain. The US may be outperforming Europe in the short term, but at what cost? The long-term consequences of this fiscal policy are potentially severe. And if the MIT study is any indication, the promised productivity boom from AI may be further off than we think, or perhaps just a mirage. The question is not whether the rubber band will snap, but when, and what the fallout will be.
Data-Driven Delusion
Facing the Truth: Unsustainable Practices
The narrative of AI-driven growth is a comforting lie we tell ourselves to avoid facing the truth: unsustainable debt and protectionist policies are creating a fragile and unbalanced global economy.
