Economic Theory and Acadmics — Alpha.Sources

Crowding out and AI debt issuance

Analysts and economist are, broadly speaking, offering up four separate reasons for the continued rise in developed market, and in particular, US bond yields. A resurgence in inflation due to the negative supply shock in global energy markets as a result of the US-Iran war, loose fiscal policy with little or no credible plan for any near-term consolidation, a reflection of improving underlying growth and rising productivity—linked to the AI investment boom—lifting the real neutral rate for “the right” reasons, and more specifically in the context of AI, rapidly accelerating AI debt issuance “crowding out” government debt issuance, lifting the cost of capital for the sovereign.

The idea that AI debt issuance is now a key driver of rising bond yields via a “crowding out” effect has captured a lot of attention in recent weeks with key Wall Street analysts and publications offering evidence to support the claim. The FT’s Toby Nangle, however, is not so sure, and in a recent FT Alphaville piece he sets out to rebut the claim.

Fiscal dominance is here, or is it?

One of the more useful AI tools that I have set up recently is a bi-weekly macro and demographics theme scout, which collects material on a given topic and runs through a number of recent and older sources, and synthesises this material into a brief essay, as well as a text to speech (TTS) document so that I listen back with the ElevenLabs text-to-speech app.

I thought it might be useful to recycle some of this material on the blog. One of the topics my AI scout landed on earlier this year was fiscal dominance, and whether developed markets are now slipping into this regime after a long period in which monetary dominance—activist monetary and passive fiscal policy—was the norm. I would frame the question like this. Has fiscal largesse during Covid, the subsequent fiscal support to protect against sequential global supply shocks in energy, and more generally deglobalisation and a focus the government balance sheet as a strategic lever for economic security pushed monetary policy into a Sargent and Wallace world of "unpleasant arithmetic”?

Here is the essay with some additions by me and more recent contributions.

December 23 - Currency Crisis Models

The economics of currency crises has evolved through successive “generations” of models, each reflecting the historical experience and intellectual climate of its time. From the fixed exchange rate collapses of the 1970s to the financial crises of the 1990s and beyond, economists have sought to explain why speculative attacks occur, how they unfold, and what policy choices can prevent or exacerbate them. The three generations of models—spanning from mechanical balance-of-payments inconsistencies to self-fulfilling expectations and financial fragility—together trace a trajectory from deterministic to strategic and behavioural understandings of crises. Yet, in a modern world of complex capital markets and hybrid monetary regimes, each generation’s insights also reveals its limitations.

December 22 - Business Cycle Theory

The economics of business cycle theory revolves around understanding the recurrent fluctuations in aggregate economic activity—expansions and contractions—that characterize market economies. These cycles, while irregular in timing and amplitude, display certain regularities in employment, production, investment, and prices. Over the past century, economists have developed two main traditions in explaining them: one empirical and inductive, epitomised by the work of Geoffrey H. Moore and Victor Zarnowitz; the other theoretical and deductive, culminating in Real Business Cycle (RBC) theory. The contrast between these approaches highlights a broader tension in macroeconomics between data-driven description and model-based explanation.

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