We have aggressive deficit spending in place. The administration is discussing an additional 45% in defense spending. Let’s say the AI bubble pops. (Which I don’t think will be because AI is useless, but because there’s no path to profitability). Even if the magnificent seven collapse in value (Nvidia loses well over half their value, and Meta, Microsoft, and so on have large drops). I think that would start a change in spending as people see their wealth evaporate. I think it would also put a lot of pressure on banks that have loans, or loans to private equity, to fund data centers that will not be needed. Or OpenAI or Anthropic declare bankruptcy. This should be enough to push toward recession.

However, we have cut taxes (albeit largely on a group of people who just accumulate wealth rather than spend more to stimulate the economy). We are engaged in aggressive deficit spending, although slightly smaller as a share of GDP. Spending on defense largely mandates spending on US suppliers. Also, especially if Trump is able erode away Fed independence, we will get substantially lower rates. Even if the AI bubble bursts, we may be pre-staging the kind of counter-cyclical spending needed to keep the economy afloat. We would almost need the AI bubble to unwind in order to counter the inflationary impulse coming into the economy. In a way, this will prove if Keynes was right, that in the face of economic slow-downs, you can just dump money into the economy to get out of it.