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Krugman: A Bursting AI Bubble Could Push the U.S. Into a Liquidity Trap
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Economist Paul Krugman warned that a bursting AI bubble would deliver a much larger shock to the economy than the IT bubble collapse of the late 1990s, which pushed the U.S. to the edge of a liquidity trap. He noted the Federal Reserve has far less room to cut rates now, with the current Fed funds rate at only 4 percent. Krugman argued that if massive AI spending constitutes a bubble and it bursts, he cannot see how the U.S. could avoid plunging into a liquidity trap, a situation in which the Fed lacks the tools to pull the economy out of a slump. In that scenario, he said, the economy is likely to remain depressed for years.
Source report
A bursting AI bubble would be a much bigger shock to the economy than the bursting IT bubble at the end of the 1990s, which brought us to the edge of a liquidity trap, according to Paul Krugman.
Yet the Fed has much less room to cut rates now than it did then: the current Fed funds rate is only 4 percent.
So if huge AI spending is a bubble, and that bubble bursts, Krugman says he can't see how the U.S. can avoid plunging into a liquidity trap — a situation in which the Fed simply lacks the tools to get us out of a slump.
If this should happen, the economy is likely to remain depressed for years.
— @paulkrugman
Source
GaryMarcusWestern