Tuesday, July 16, 2024
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Power demand could ease debt concerns

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The future of electricity demand for everything from electric vehicles to bitcoin mining to artificial intelligence may hold the answer to our debt concerns.

Before you dismiss that statement, let me explain.

One of the main arguments bears make against the health of financial markets and the economy is what they see as a rapid rise in government debt. This rising debt is why they desperately cry “the end of the dollar,” economic chaos, and essentially the end of the United States as a world power. If you look at rising government debt in a vacuum, the concern is understandable.

Of course, the rise in federal debt is due to excess government spending, especially since the pandemic-related shutdowns. The federal deficit has soared, it’s the largest since the financial crisis and the deepest deficit outside of a wartime economy.

It is also worth noting that both the debt and the deficit have increased and economic growth has slowed significantly. The slowdown in economic growth is a key point in our discussion.

in “40 years of economic decline” We discussed the difference between productive and unproductive debt.

The problem is, these progressive programs lack a key ingredient needed for “deficit” spending to be beneficial: a “return on investment.”

Country A Spending is $4 trillion and income is $3 trillion. Country A now has a deficit of $1 trillion. To make up the difference between spending and income, the Treasury must issue $1 trillion in new debt. That new debt will be used to cover the excess spending. But it doesn’t generate revenue and leaves a hole that will have to be filled in the future.

Country B Spending is $4 trillion, revenue is $3 trillion, but the $1 trillion of debt-financed surplus has been invested in projects and infrastructure that generate a positive rate of return. There will be no deficit because the return on investment will make up for the “deficit” over time.

The necessity of government spending is undisputed. What is disputed is its abuse and waste.

John Maynard Keynes was right: for government “deficit” spending to be effective, The “return” from an investment made through debt must generate a higher rate of return than the debt used to fund it.

Currently, the United States “Country A”

Read this carefully as power demand could bring about the necessary changes in debt trends.

Electricity demand surges

As mentioned above, the US power grid has not invested enough in the past few years to handle the burden of growing electricity demand. It’s not just a growing population that needs homes, cell phones, laptops, and computers. But add in electric vehicles, bitcoin mining, and artificial intelligence, and the US’s current power supply will be overwhelmed.

For example, Bitcoin mining requires huge amounts of electricity. As Paul Hoffman points out: Bitcoin Power Dynamics:

“Bitcoin mining’s daily consumption of 145.6 GWh in the United States represents approximately 1.34% of the country’s total daily electricity consumption. Although a small percentage, this is still a huge amount of electricity considering that the United States is a highly industrialized country with high consumption. If you convert this daily consumption to an annual amount, it amounts to 53,144 GWh.”

Bitcoin mining is a relatively small industry, but it has a large impact on electricity demand. “Generative Artificial Intelligence (AI)” That’s a different story. While it’s still unknown how much electricity AI will require, the technology will lead to a significant net increase in electricity consumption in the U.S., according to S&P Global Commodity Insights. Medium recently published some charts detailing that increase.

“AI energy demand is projected to surge from approximately $527.4 million in 2022 to $4,261.4 million by 2032, growing at a robust compound annual growth rate (CAGR) of 23.9% from 2023 to 2032.”Moderate.

“At the same time, the utilities market is expected to expand significantly further, rising from $534 million in 2022 to $8.676 billion in 2032, at a staggering CAGR of 33.1% from 2023 to 2032.”

As S&P points out:

“According to an analysis of data from 451 Research, a division of S&P Global Market Intelligence, electricity demand in the U.S. power market from operational and currently planned data centers is expected to total approximately 30,694 MW once all planned data centers are operational. Investor-owned utilities are expected to supply 20,619 MW of that. To put these numbers in perspective, consider that electricity demand in the lower 48 states is projected to total approximately 473 GW in 2023, growing to approximately 482 GW in 2027.”

So what does this have to do with debt?

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Grow and escape

For decades, we have used deficit spending to fund social welfare programs. These programs are A negative multiplier for economic growth. But in the future, we will need to build electricity infrastructure, and that is a different dynamic. “Return on investment,” Power generation, etc. (geothermal, nuclear, tidal) Alternatively, pay-for-use broadband is good because the long-term revenues generated by these projects pay off the debt over time, and they are labor-intensive, creating demand for jobs, goods, and capital investment.

Since 1980, capital expenditures (CapEx) have declined as economic growth has slowed. The graph shows the average annual change in capital expenditures and GDP over a 10-year period. (Mainly consumption) When the economy slows, demand for capital investment also falls as companies seek cheaper alternatives, such as offshoring, increasing productivity and suppressing wages.

But building infrastructure is very labor intensive, and capital investment is labor intensive and investment intensive. These dynamics change the dynamics of economic growth.

While companies are increasing capital investment to improve power supply, governments are likely to enter the race with further spending bills focused on infrastructure. This is because AI is a critical component in ensuring the defense and national security of the United States. But instead of issuing debt to pay for domestic welfare programs, Debt spent on infrastructure will generate economic growth through labor creation.

The graph below assumes that the U.S. will continue to issue debt at its quarterly average pace in 2021 and beyond. But rather than wasting money, it will focus on productive investments while maintaining its current spending programs and obligations. Assuming conservative growth projections resulting from investments, “Debt to GDP ratio” This rate will start to decline in 2026 and return to more sustainable levels by 2030.

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Bears are constantly sounding the alarm about current debt and deficit levels, but the more dire economic outcomes they predict may not materialize.

Goldman Sachs points out:

“Generative artificial intelligence has the potential to automate many tasks and ultimately boost global economic growth.”“AI will begin to have a visible impact on U.S. GDP in 2027, and in the years that follow will begin to influence the growth of other economies around the world. This prediction is based on the finding that AI could eventually automate around 25% of work tasks in developed countries and 10-20% of work in emerging countries.”

They currently estimate that AI could add 0.4 percentage points to GDP growth in the United States.

Increased demand for labor to boost productivity, productive capital investment, and infrastructure development (This will also increase wages.) It should provide a much-needed economic stimulus.

Will it solve all of the current socio-economic problems facing the United States? No. But it could provide the growth boost we need to jumpstart economic growth and prosperity in the United States not seen since the 1970s.

It may also be enough to prevent the collapse of the United States anytime soon.

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