The Dividend Cafe - Inflation vs. Deflation in an Age of AI

Episode Date: July 24, 2026

Today's Post - https://bahnsen.co/3TdOnKh David Bahnsen discusses whether the U.S. has shifted from the 1990–2020 disinflation era to a higher structural inflation range, engaging Dr. Lacy Hunt’s view that the prior 1.5–2.5% equilibrium may have broken toward 3.5–5% as globalization wanes. Bahnsen argues globalization aided disinflation but wasn’t the sole driver, emphasizing Hunt’s framework that rising government debt lowers money velocity, crowds out productive investment, and suppresses long-term growth. He questions whether deglobalization is truly structural, citing industrial-policy efforts as often half-hearted and inconsistently enforced. Turning to AI, he notes build-out is capital- and energy-intensive and can be temporarily inflationary, but sees two longer-run outcomes that both lean disinflationary: a favorable productivity-driven supply shock, or a recessionary bust if AI disappoints. He concludes the dominant backdrop remains excess government debt and spending depressing growth. 00:00 Welcome and Setup 00:28 Inflation Beyond Headlines 02:23 The Disinflation Era 1990-2020 04:08 Lacy Hunt and Debt Dynamics 06:35 Was Globalization the Driver 09:15 Is Globalization Really Ending 12:23 AI as the New Productivity Wave 14:02 Funding the Buildout 15:11 Two AI Outcomes Deflation Either Way 19:19 Final Takeaways and Signoff Links mentioned in this episode: DividendCafe.com TheBahnsenGroup.com

Welcome to the Dividend Cafe, weekly market commentary focused on dividends in your portfolio and dividends in your understanding of economic life. Hello and welcome to the Dividend Cafe. I am your host, David Bonson. What a beautiful weekend. It is going to be here in New York City. And what a topic we have for you today in the Dividendon Cafe. The subject of inflation is not exactly a new topic in the new cycle in the Dividing Cafe. and my investment writing and my economic study. It is a conversation that you can hear in a lot of different places, but we're not really just talking about inflation this week. Another question around our oil price is going higher or lower,

our grocery prices going higher or lower, is cost of living going to hurt the president or not hurt the president? All of those things, actually, they're all fine. They're all legitimate topics to a certain degree. I'm not sure everyone always approaches them in good faith, but they're certainly subjects that are relevant to regular people, to those studying the economy and those trying to make investment decisions. But at a deeper level, the broad secular, and what I mean by secular is non-cyclical, a long-term structural dynamic, wherein there is a sort of equilibrium range about prices.

This is a question that I think we need to address. Are we looking at a change in what the structural equilibrium has been for something as important as inflation? And when you factor in the AI conversation and expectations for what this artificial intelligence transformation means to the economy, to productivity, to economic growth, and therefore how that trickles down to its impact on the price level, this stuff is very, very important for our next iteration of macroeconomic development, economic growth, quality of life, but also for investors trying to make decisions around whether or not there are paradigm shifts coming and things as important as interest rates and so forth that take their P's and Q's largely from expectations about inflation, deflation, et cetera.

So I want to set this up around the kind of historical reality of a pretty prolonged period of a declining growth rate of inflation that the United States had. And we're going to refer to this for sake of argument as the 1990 to 2020 period. it more or less did begin. You could argue it started a little earlier. You could argue it went a little longer, maybe 2022. But I don't believe that it is in bad faith to suggest that around the fall of the Soviet Empire, the end of the Cold War,

the subsequent introduction of China and certain economic reforms they had, but as well as their entrance into the WTO and far more liberal trade with China, but also in addition to those various globalization dynamics, with the Cold War ending and with China, and its ascent into the global economic order, you also had an unbelievable advancement in technology. And the digital revolution,

which led to the internet, which led to the cloud, which led to a number of things that obviously enhanced. Well, not only technological advancement, but as a result of that created pathways of productivity enhancement. Well, this was narrowly disinflationary, and I don't deny that for a second. One of the great influences on me in this whole topic, someone who I've done multiple podcasts with at my Capital Record podcast, someone who I've quoted

in the Dividing Cafe many times, someone who I've read religiously. I would imagine everything that he's ever written academically and for popular distribution. And someone who I've enjoyed a great deal of private conversations with over the years as well is Dr. Lacey Hunt, who is a living economist, and I say living because I have many, many, many more influences in my own economic training that are not living, that I do who are living. But Lacey is one of the few champions and giants on whose shoulders I stand that is still with us, thank God. But Lacey has done a lot of profound work over the years, sometimes very out of consensus about the effects of fiscal and monetary policy interventions on economic growth, on the intersection of

debt, of velocity of money, of these various components that have impacted not only our understanding of the price level, but in a lot of ways have confounded people's theories of the case. And Lacey is firmly convinced me over the years that excessive government borrowing crowds out productive investment, and it serves as a detractor of long-term economic growth. I think his work here, in my opinion, is unparalleled. Lacey has recently come to propose that the long-term equilibrium of inflation between, let's call it, one and a half and two and a half percent, has now been broken and will revert to a three and a half to five percent. range, which would be far higher than bond markets are expecting far higher than many economists

are expecting. And when Lacey proposes something that is out of consensus, I pay attention because his out of consensus views were right for several decades. And his theory behind those things was right and something that has been deeply instructive to me in my. economic and financial thinking. I want to explore this topic along the lines that Lacey did, which is the suggestion that globalization was the primary cause of this disinflation and that globalization is now broken. Therefore, it would stand a reason that if globalization accounted for prior disinflation and globalization is now gone, therefore the prior disinflation is set to be gone as well.

I do not accept the premise that globalization was the sole cause of prior disinflation. I find it incontestably true that it was a factor, particularly in the first half of this 30-year period, the sort of 1990 to 2005-2006 range, whereby I would suggest that there was significant enhancement in productivity, greater access to supply chains. downward cost to capital, downward cost of labor, enhanced global distribution networks, all of which enhanced productivity, and served as a disinflationary force in the global economy, where the U.S. was a primary beneficiary. I do not accept, though, that that was the only phenomena. And, of course, one of the people who has been most instructive in me understanding this is Lacey. borrowing from Irving Fischer's famous quantity theory of money, the money supply times its own

velocity is equal to the price level times the total supply or total output in the economy. Lacey is the one who is algebraically reconstructed this to point out that the declining velocity is why we have not seen a higher price level as some would expect given money supply growth. and that the reason for declining velocity is the excessive government debt and is serving as a drain on productive growth in the economy. And that is very much a theory that I hold on to and believe and therefore don't accept the globalization causation as existing on its own. So the question then becomes when you have a multi-causal consideration of disinful. and you suspect one of those causes breaking up, does that mean that the entire theory of the case is breaking up? And I would suggest that we do not know that that is the case. And I also would

suggest, by the way, that is very important that even the initial premise around globalization now waning and dying, as some would say, is a prediction, not a description. I'm willing to pretend it's true for the sake of dissecting this argument. But I don't believe that it is entirely true. I think that changes in supply chain management, certainly ideas around semiconductor fabrication, our relationship with China, obviously the terror of protectionism that the current administration has implemented in certain ways. All of these could create structural increases in the cost of production. But that isn't to say that they have. And I will read to you from today's Dividend Cafe, the written version, my description

of the current administration's flirtations with industrial policy, forcations that Lacey rightly believes to be undermining of this whole project. But I would also point out that oftentimes they appear to be, and I quote, half-hearted, poorly implemented, anything but structural, not codified into law, erratically enforced. and lacking in the substance needed to suggest that they will become perpetual and embedded. Now, I fully agree that there's been an increase in the rhetoric on these things. The rhetoric suggests a less globalized supply chain efficiency. The rhetoric could lead to higher structural costs as it pertains to our manufacturing, our logistics, our trade.

but market discipline seems to me to constrain these political impulses and has done so quite effectively thus far. Whether people view that as a good thing or a bad thing, I view it as a descriptive thing. Now, I'm not suggesting there's been no marginal movement, but I am suggesting that we are making a pretty big assumption to assume that the entire contribution to, disinflation, that globalization represented over the last 30 years has now not only gone, but reversed. And I'm not sure that a whole generation of enhanced productivity from these various efficiencies are obsolete. But let's pretend for a moment that is the case. I think we're now up against a problem, a conundrum, if you will, that we have potentially a change in one contribution. to disinflation throughout my adult lifetime and another contribution to disinflation

that is actually worsening, not improving, that it is not reversing, it is doubling down. And that is the excessive indebtedness that crowds out private sector investment, savings, and the light. So what many have suggested is where we're going to shift our conversation. topic to now is that the AI issue is the game changer, that much like Lacey has talked about globalization as a huge contributor to enhanced productivity 30 years ago, that there is now AI on the horizon ready to do the same. And yet, at the same time, despite the potential for productivity gains, which would be disinflationary, before those gains can occur, but I'll quote Lacey word for word here, AI is extremely capital and energy intensive. It requires massive

investment in data centers, semiconductors, electrical transmission infrastructure, cooling systems, and high-performance computing hardware. All of this is totally true. So essentially the argument goes something like this, that before we get to the good stuff, The capital demand, energy demand, and resource demand to feed the boom substantially exceeds available supply, and that is intrinsically inflationary. All fair enough. So the AI optimist would say that infrastructure build out is temporarily inflationary, but long-term deflationary as cost per unit of output falls substantially if AI lives up to its billing. That's the consensus view. Inflationary pressures first, deflationary benefits later. Now, I want to point a couple of things out here. First of all, demand for capital is most

certainly rising faster than our domestic supply of savings. That is true in the current moment. And I agree that monetary expansion will not create the resources that are needed for capital formation. So how AI infrastructure will be funded is a genuine risk. But I also do believe as a disciple of Michael Milken, that capital is never the scarce commodity, that where there is a, shall we say, productive use for dollars, we will find dollars that human capital is the scarce commodity and that when human capital finds something opportunistic, it will create the financial capital necessary. But the demand for energy, labor resources needed in the current moment does exceed supply that does generate short-term inflationary pressures,

and I would argue those are somewhat specific to certain sectors. The impact, the magnitude, the timing of all these things that's very debatable, but the general structure of the argument here is all fair enough. But where does this go post-build-out? Once the AI ecosystem has been resourced, are we looking at a potential renaissance of disinflationary forces, enhancing productivity, creating better growth, and absorbing through greater output a lot of the inflationary pressures that we're talking about?

Well, I would suggest that there's a couple possibilities here. I think both lean into a deflationary outcome, and yet one is very good and one is very not. And this is what the kind of summary of today's Dividy Cafe is going to be. going to be. Essentially, if the production of goods and services experience a cost reduction because of AI, that's what everyone is fighting for, everyone is arguing for, everyone is believing. That is absolutely, undeniably, a deflationary force in the economy. More output per unit of labor is the definition of greater productivity. So, just as Lacey argues, that that productivity out of globalization, fostered disinflationary period previously. If that were to be the outcome from AI, then that is a very

positive and healthy disinflationary dynamic that we have to look forward do. Cheaper labor cost, enhanced competition would push prices lower. And if that doesn't happen, then it means the whole AI thing was a joke, was a bust. So then you say, okay, well, what if that happens? Now, first of all, I want to be clear, as critical as I am, of the froth, excess, irrationality in the current AI investment story that you see here and now where a lot of things are invested on the basis of hype instead of rational consideration. I'm very critical of that, but I've always been bullish on the eventual outcome of AI potential and this enhanced productivity.

But if you want to use a half-empty glass, let's assess. that these things don't materialize. Let's assume trillions of dollars are invested to a failed end. That would be awful for the investors who are exposed to it, obviously, and it would most certainly be recessionary for a season. What is another word for recessionary? It is perhaps one of the most anti-inflationary things any of us have seen. If you were to have a boom of this side, bust, nobody will be calling that inflationary. And I am not saying this in a good way. I quote as we conclude Lacey's concluding thought that absent a sustained recession or a favorable supply-side shock or a prolonged period of monetary restraint, the broader structural backdrop suggests inflation and

treasury yields trending upwards. Well, the sustained recession, part would be a bad outcome from an AI bust that would actually not suggest inflation or higher treasury yields. But he also mentioned a favorable supply side shock. And I would love to believe that that's still in the cards and that that could be one of the outcomes. I'm willing to take his third caveat off the table, as he would too, I'm sure. That is a prolonged period of monetary restraint. I don't think any of us are expecting policymakers to fundamentally get religion anytime soon. But my point is that whether it is a good or bad causation out of AI, meaning a recessionary failure or something else, what I would like to suggest to you is that you have two

different possibilities out of this AI conundrum and both lean more into the disinflationary side. And yet one is very good and one is very not good. My summary of this topic is as simple as this. The structural dynamic of the U.S. economy is one of excess government debt and spending. That dynamic has proven to put downward pressure on both nominal and real economic growth for over 20 years. I don't believe that has changed. The potential for change out of the current AI moment, on the other hand, is opportunistic in one sense, but recessionary and risky on the other. In both cases, good or bad, disinflationary. Thank you for listening to David Bonson's Dividend Cafe. I thank you for watching, reading, and listening, and I would love to see you again on Monday.

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