Top thing on my mind today is figuring out what's going on with interest rates. The high interest rate phenomenon. We've had zero interest rate policy. ZERP. The ZERP era ended. Now we're in the HIRP. I don't think we should say that one. That doesn't sound very good. But uh the high interest rate policies, the high interest rate phenomenons are upon us. What's going on? It's very obvious what's going on. You take one look at the chart. It's the war. You can see the US attacks attacks Iran uh in the beginning of 2026. Interest rates are low. We should pull up this chart from the Wall Street Journal. It gets more dramatic every time they show this chart. This one right here, Jordi. Uh take a wild guess. What's driving interest rates? It is of course the war which starts there and then boom up into the right from then on. But there's other questions about what's going on. Is AI is the buildout having an effect here? What else is going on within this data? Why is it happening? And does war always lead to higher interest rates? That was something that was on my mind. So, I wanted to get get into that. Uh it's obviously um bad for everyone. It's bad for the US government because they have to refinance debt and pay interest and that puts stress on all the other things that the government wants to do with money from health care, pensions, even funding the military. Like if they're paying interest, they're not paying for other stuff. That's not good. Uh bad for the prospects of the American home buyer. Interest rates are now above 7% getting very unaffordable for lots of people and also a lot of mortgages are rolling over. So the era of like the 3% mortgage less and less people still have those because people are either moving on to floating rate mortgages or moving out of interest uh interest locked periods. There's a whole bunch of uh dynamics there and it's even bad for AI companies. So everyone hates this because the AI companies of course even though they have an ungodly amount of money they need to raise more money to finance buildout and finance data centers and finance expansion and so uh not good for anyone. How do you get out of it? Maybe end the war but there are other things at at work. This war is uh unique. I mean it's not that war causes interest rates to go up. It's war causes energy shortages which causes inflation and inflation bleeds into everything. So pain at the pump turns into I need a raise for this. I need to raise prices on food. I need to raise prices on all sorts of things. Energy is of course a key input into everything. Why I am so against pacing the energy rollout every year for the past like 10 years the uh I forget what it is IEA or something. That there's a there's a body that forecasts energy buildout specifically in solar and they've gotten it wrong every year for 10 years. They've underestimated the growth of solar. You've seen this chart.
International Energy Agency, is that it?
Yeah. So, every year they'll be like, "Okay, we had a great year last year. We're going we're going parabolic. We're up and to the right, but clearly we're not going to build more solar. People are going to get sick of this stuff." And then the next year we build even more solar than we predicted. And so you can look at this chart of the predictions and then how we blow them out. So that is something that that we want to clearly keep working on because uh it will bring down inflation, bring down costs of basically everything. It will be very deflationary and it'll allow us to do all sorts of new things. But this this war is specifically driving energy prices because of course oil transported through the Strait of Hormuz is a key pressure point for control of the conflict and that drives up inflation which hurts the value of treasury bonds causing yields to spike. And so that's why they're above 5%. It's the first time I believe since 2007 that they've been this high. So not good. Uh it doesn't always go this way though. I wanted to understand does war or war even in just war in the Middle East does that always cause interest rates to spike? It makes sense. It's an expensive thing. It's it's a capital suck. It's depressing in many, many ways. There's a whole bunch of economic reasons why you could think that war would cause interest rates to spike. But does that always happen? So during Gulf War I, which uh I I didn't realize this, but we have a uh a son of a veteran on our team. Um so thank you for his service. But uh during Gulf War I, there was a textbook oil shock. So uh Iraq invaded Kuwait on August 2nd of 1990. Uh the US military buildup began basically immediately and the Desert Storm offensive started January 17th, 1991. So about 6 months between the initial conflict over there, the US gets involved. What happens when the US gets involved? Interest rates spiked and interest rates were already 8.29%. Already pretty high, but they spiked to over 9%, 9.05% in less than a month because everyone's like, "Oh, well there's going to be less oil." Kuwait generates a lot of oil. Oil is going to be knocked offline. That that's going to flow through the economy the same way. Energy prices, inflation, etc. The usual playbook. But six months later, they were lower than the start of the war, sitting at 8.03%. There were some other things going on in the economy obviously, but basically like that war did not last so long. It had a much more uh tight ending and so uh there was there was less pressure on interest rates. The Afghanistan war played out in reverse. So immediately before the invasion, the the 10-year was at 4.52%. Yields fell to 4.22%. You could imagine that there's some sort of like optimism around like, oh, this will be a quick operation. This won't be a quagmire. Of course, the opposite happened. So 6 months into the war, the 10-year hit 5.25%, up significantly up basically uh 3/4 of a percent since the start of the offensive. The end result of that is that now Worsh, the new Fed chairman, is in a tough spot. The markets expect a rate hike to bring inflation down. So, uh, the August consumer price inflation was at 3.4%. The Fed actually prefers a different inflation measure called the PCE price index that was at 3.7%. And so, even by the Fed's preferred measure, inflation is running too hot. Again, they're targeting something like 2%. Uh, and they're up at 3.7%. And then also you get into this like oh well like maybe it's just maybe the inflation's just related to food and energy because energy goes into food you're trucking all the food around. Let's look at the broader economy. So there is a separate price index for uh inflation excluding food and energy and even that's at 3.3%. So that's too high. So there's really very it's very very tough to make a case for holding rates steady, even lowering rates, which is of course what uh lots of people want to see happen. Um it's very very difficult and the inflation is spilling over from energy into other parts of the economy and it's basically just complicating the Fed's case for aggressive easing. So everyone's expecting a rate hike at this point. What's the effect of AI on all of this? I think that AI is such a big driver of the economy and yet it's having such small impacts in many ways. Like the total AI revenues are something like a quarter percent of GDP still, but in terms of headlines, it's like 75% of what we talk about. Uh and so yeah, I mean I guess you could see couple orders of magnitude you get to 25% of the economy. I don't know. But um but today the problem that's happening with rates specifically is that AI creates investment demand before any productivity benefits arrive. And so you we see this with like a trillion dollars of capex for like a couple hundred billion dollars of actual revenues. And so uh data centers require financing construction capacity equipment electricity. That spending happens today but broader productivity benefits take longer to diffuse. So economists specifically a group of economists that have studied this uh they describe AI as a source of upward pressure on real rates and potentially prices during the compute buildout and uh Dylan Patel, Dorcash uh have talked about this a little bit where you know compute because there's high ROI it it tends to suck demand out of the investment community like you look at what Jensen's doing securitizing GPUs you look at the incredible demand for investment braid being attached to data center buildouts with Nvidia lending IG status to different companies for buildouts and backstopping different data centers. That just means that if Nvidia is there backstopping, it means that certain funds that can only invest in investment grade assets can now make that investment. You don't need to go to a venture capitalist for it. You can go to a mutual fund or you can go to eventually like an insurance fund. Uh where there's a lot
I see where you're going with this. What are you thinking? You think Jensen should should backstop the Fed?
Potentially. He might be he might be the lender of last resort.
I I was thinking you were going to do uh federal backstop for podcasting. A lot of podcasters are spending a lot of money building sets trying to get big guests.
Everyone knows my stance on that already. Yeah.
Uh so uh there's also this interesting indirect effect which is that specifically on inflation specifically on rates during an AI boom the stock market goes up lots of people have money invested in the stock market even a small slice of SanDisk moons you have more money to go and spend money traveling spending money in the real economy and so you have this wealth effect that supports consumer spending purely on the, you know, stock market gains, the equity gains that are related to the AI boom. Obviously, everyone talks about like the San Francisco housing market liquidity from like lab employees, but that's actually happening on a much broader scale from just people across the United States that have gone long any AI basket or even any basket that includes some tech stocks and they're like, "Oh, wow. I'm up 30% right now. I should upgrade my car or I should buy that new washing machine. I should do anything that supports demand. So you see more demand that drives inflation and that winds up driving real rates. But what happens in the future? Now Apollo has an interesting view of what might happen with long-term rates given the various outcomes. They describe it as sort of a fork in the road. Either AI succeeds or AI fails. Don't like that they're talking about AI failing. I I don't like that at all where they're going with that. But of course, those are the two possible outcomes here. And they and they say that in both of those scenarios, whether AI succeeds or AI fails, rates will fall, which is maybe good because everyone wants lower rates. Everyone wants to be able to afford a mortgage or a house. Um, but how does this work mechanically? Because it's very weird to think that you would have a scenario where there's a massive bust in the AI economy and yet you get lower rates, but then also if AI succeeds, you get lower rates. But they explain it this way. They say in the next 6 months if AI succeeds you'll see productivity gains, trillions in revenue and there will be a deflationary impulse. So as AI diffuses things will get cheaper because there will be there will be competition in all of these markets. It's very very good that we're not set up in a world where there are monopolies in every category because if there was only one law firm, there's only one law firm and they got AI and they were able to cut their cost by 50%. You're still going to be paying two grand an hour.
You saw Morgan and Morgan is is uh is setting up their own data center.
I think they're going to spend about a billion dollars over the next 10 years.
Wow. They're going vertical. Going vertically integrated. If you're an AI researcher and you've ever wanted to work for a personal injury law firm, now is your opportunity.
Check out Morgan and Morgan. Yeah, they have all those billboards. Yeah, just call the number on the billboards.
Yes. I'd like to start racking GPUs for you. Um
But uh I mean he So he's paying for that in cash because doesn't he have famously have a billion dollars in cash?
Yeah. Yeah. He says you're not a billionaire unless it's just sitting in a checking account.
It's got to be in the checking account apparently.
Um, but you can imagine so many scenarios where uh, yes, Morgan and Morgan is saving money using AI. They're getting more efficiency, but their competitor is also saving money using AI and they get into a little bit of a price war. Maybe margins don't compress fully, but they stay sort of healthy and the end result is deflation. Cheaper services, cheaper goods, not for everything, but for the things that are most impacted by AI productivity gains. Then in the other scenario, the doomer scenario from Apollo, if AI fails, the bubble bursts, there's an equity selloff and there's a flight to treasuries. So everyone's buying treasuries saying, I got to get out of these crazy AI stocks. The stuff hit a wall, it's not any it's not going to be useful. I got to buy treasuries. A lot of buying, if you buy a lot of treasuries, yields fall and interest rates fall, of course. So interesting interesting dynamic. There is the third kind of crazy scenario which was outlined by uh Dylan Patel from SemiAnalysis which is like it never stops like we're going to keep investing and and this and the data centers and the AI boom is going to continue to suck at capital until there's like none left and like it will all and there will be like a sovereign debt crisis uh which is the craziest outcome nonzero uh but you know this Apollo uh thing they're they're certainly looking for what happens in the next six months and we'll and we'll know we'll check in in 6 months with this Apollo prediction but
Hopefully the war will be over by
Hopefully the war will be over that would be the easiest thing to like resolve I think yeah
Um potentially easier than product
Sovereign debt yeah sovereign
Yeah maybe maybe um so yeah I don't know I've been I've been excited about the potential for deflationary effects playing out uh you know I I I went to the hospital and I was seeing the diffusion of technology. All the all the all the all the doctors are are using text to speech. They talk into these little like microphones when they're taking notes. Obviously, that's a technology from
We get it, John. You worked out so hard that you ended up in the hospital. We know.
But uh I'm I'm fortunately doing much better.
Uh but while I was there, I was noticing like, okay, it's actually a better experience. I'm getting text messages to let me know where I am in the queue. I don't exactly have to ask like when am I coming up? When will I be getting out of here? But I do have to sign e-sign a bunch of forms and the forms don't render properly on IM on on iOS on Safari. Like this is something that should be fixable by an AI agent, but it hasn't been yet. Why is that? It's the diff it's the diffusion question. It's the fact that uh somebody hasn't gotten in there and actually pitched them on a on a transformation process just yet. Uh but it is coming. And so all of that means more time for the doctors to actually spend time with patients doing the important work and spending less time on the papers and the filing and the signatures and you know and we're we're not long for just okay as these questionnaires come in and I need to sign all these documents just sign them for me handle it over iMessage. All the modern AI agents are uh within a hair's breath of actually realizing that future. So some some some cause for optimism amid um amid you know sort of disappointing interest rate news. Anyway, the people they will get a vote on AI safety. The Wall Street Journal has an opinion piece here about the role democracy will play in the AI discussion that we've been having over the last couple weeks. So the technology risks came into focus last week. Is the political system prepared? Says William Galston in the Wall Street Journal. Experts have long worried about economic, social, and security impact of artificial intelligence. Uh this year, those risks have moved onto the public agenda. As growth as job growth slowed, worry spread that AI would displace entrylevel workers. Next, local concerns proliferated about the effects of AI data centers on water, electricity, the environment, and noise. Then, in a widely reported incident, an OpenAI test went awry. A swarm of AI agents bypassed internal limits, created their own message board, and cooperated to hack another AI firm. As a recent journal article made clear, this wasn't the only such event. Last week, mounting fears within the largest AI firms at the frontier of AI development burst into public view. On Tuesday, Jacob Coxin resigned from Anthropic with a warning viewed by millions that AI will soon be able to hack any system and mobilize real power and resources for malign purposes. On Thursday, Anthropic released a 154 page report on the misuse of Claude with an especially chilling chapter on possible biological weapons research. There was another chilling chapter on uh what's going on in the Middle East. Both it's the meme both sides are using Claude to fight each other. Uh really really crazy stuff. I I think this was mostly through like routers and third parties and all sorts of stuff. But uh it's clearly a hairy mess to fight uh diffusion attacks and or distillation attacks, but also just all sorts of nefarious use. Uh it's a it's a true game of whack-a-mole. And so uh full full employment for alignment researchers at the labs. On Saturday, Anthropic CEO Dario Amodei published an essay urging the industry to quote slow the pace at which we improve the capabilities of AI models to give risk mitigation strategies a chance to catch up. He proposed a three-step plan to accelerate this process. We talked about that yesterday. The third point will surprise you. First, each company at the frontier development will give employee like access to independent evaluators. Second, US companies should promote the cooperation among democracies to mitigate risks while preserving their technological edge over China. Third, the US should attempt to negotiate limits on AI risks with China, analogous to nuclear arms control treaties of the Cold War era. Now, there was an interesting post that hit the timeline. Was that actually from a DeepSeek employee? Do we know that? But it's a DeepSeek employee basically was like, I don't like Dario. He was he compared giving Dario AGI to like giving Hitler the bomb. It was a very very hardcore message from a from a DeepSeek employee. But of course, it's like translated through seven layers of of abstraction. So that was real.
Yeah, it could just be some SC. But did did you look into it at all, Tyler? Do you know?
Yeah, I have no idea if it was real either. Yeah. But
I mean it seemed like reasonably reputable people I follow were were talking about it. Yeah.
Yeah. I it's it's really really hard to get a to get a feel on the the vibe in China. It's like uh I think the I think the compute gap is 10x. America has 10 times the compute of China. So you would imagine that if both countries get to AGI and it or ASI and it's aligned with the country then even if China attacks with the super cyber weapon our AGI can defend better because we have 10 times the compute I I think that's sort of how it would work out but it is it is difficult and then there is there is this weird scenario where it's like if you have an aligned super intelligence and your enemy has a misaligned super intelligence. They get turned into paper clips, but the paper clipper can't come over into your territory because you have the paperclip defender, which is turning paper clips into useful stuff like cars and medicines.
Podcast microphones, I suppose. I don't know. It's all It's all very uh very sci-fi. But
I mean the one of the one of the wildest moments of the last 24 hours since we wrapped the show was the Department of War just saying effective altruist in shambles.
That's a that's a very online
After the president said I am the hoax buster and right now I'm breaking another host that AI is going to take over consume and destroy the world and that robots will be marching into our cities and getting rid of us all. This is even wilder than the Russia Russia Russia hoax or the global warming scam. Thank you for your attention to this matter. Never expected to see uh the Department of War going to war with EAs on the timeline, but uh here we are.
Here we are extremely extremely online just time also uh administration AI developers face a collective action problem that only an agreement to coordinate activities can overcome. Um there was some news around this where uh OpenAI believes that they don't need a waiver to coordinate on safety policy with other companies. And I was trying to research how seat belts got put in cars because it's sort of analog it's sort of analogous. It's like the seat belt clearly is a safety feature in a car and if one company does it, it's a cost. Maybe it's a benefit. Maybe it sells more cars because people want that. But it'd be really great if all the kind if all the cars had seat belts and then the health care system and the hospital systems want people wearing seat belts so they don't have to deal with as many broken bones from car accidents, right? So I think Volvo,
John Morgan would like a word.
He's not spending a billion dollars on AI so that people stop getting into car accidents.
Yeah. So, uh, Volvo put, uh, put seat belts in their cars first as an option. It wasn't selling that well. There was some lobbying to get, uh, seat belts in cars, but a lot of automakers actually fought it and were like, "No, we don't want to do this." And a lot of consumers were like, "We don't want this. We don't want to have to wear these."
Oh, yeah. And yesterday we heard we heard Mitchell talking about like, "It's outrageous that you can't get a four-point harness in a car."
Street car in Europe. You can
You can uh it's like he wants more. It's like I want to be able to get a roll cage.
No, but it's so wild that that you had millions of people driving cars and car accidents happening and yet people were still saying, "No, I don't want I don't want more safety. I don't want to have to put this thing over over my lap. I don't want to do that every time. I got to put them over every time." Well, do you remember the era of uh of automatic seat belts? Did you ever see cars that had those?
This was like a late 80s, early 90s phenomenon, but if you got into like a Saturn or something or you know, it would you would step into the car and then it had a uh part of the seat belt was on a mechanical track that would the the seat belt would be pushed forward. You would step in and then the seat belt once you closed the door and sat down, it would go and move into place so that you didn't have to buckle it like that.
Ferraris will hand you the seat belt with a little with a little push out, you know, so you don't have to reach back too far.
Uh that's that's such a half measure. Either put it on me entirely or don't, I guess. Uh so what does the Wall Street Journal have to say about this? AI developers face a collective action problem that only an agreement to coordinate activities can overcome. The question is whether voluntary agreements can work without government involvement. The US government must assure AI companies that voluntary coordination wouldn't run afoul of antitrust laws and regulations. Mr. Amodei argues for an additional step, sensible and targeted AI regulation that focuses on corporate transparency and independent third-party evaluation, which can't succeed without evaluators embedded within firms and enjoying unfettered access to all relevant information. In a better world, support for assuring AI safety would be bipartisan. Instead, House Speaker Mike Johnson has made clear his reluctance to proceed while President Trump has denounced what he terms a sick conspiracy going on against AI and data centers. Uh, underlying this resistance is a legitimate concern. The US is in an AI race with China that it can't afford to lose. All private sector AI leaders share that concern. Mr. Amodei said he agrees with Treasury Secretary Scott Bessent that quote a Chinese lead in AI would pose grave danger for the United States and the world and he wants to keep democracy's AI lead over autocracies as large as possible. He opposes the sale of powerful AI chips and semiconductor equipment to China and supports security measures in AI companies to prevent Chinese theft of key data. The question is whether we can diminish the risks of unchecked AI development without endangering our lead over China in a technology that is vital to economic growth and military prowess. The the tech industry believes it can. The Trump administration says we can't.
Uh there's a new Time cover.
