AI appears to be both massively deflationary *and* inflationary. Which effect will win? When? **The deflationary case is straightforward**: AI dramatically increases productivity, making goods and services cheaper. "[Intelligence] capability per dollar will drop 100x/year," according to Will Depue at OpenAI.[^1] Already, "excluding rent, it is possible to survive and be entertained astoundingly well on very little."[^2] Ben Thompson frames this as abundance approaching infinity—AI becomes so productive that it makes most things essentially free.[^3] **But the inflationary pressure comes from capital demand**. As I explored in [[Real interest rates may increase in the next 10 years]], AI means capital can now "wake up" and make more money. A world where capital is self-replicating becomes massively more in demand. Money follows supply and demand just like everything else, so as demand for capital rises, its price (interest rates) would rise, causing inflation. One resolution: both could be true in different phases. Massive upfront capital investment (inflationary pressure on rates) could eventually yield such abundant AI capabilities that the deflationary effects dominate. But if scaling laws continue and there's always a more expensive, more capable model to build, capital demand might stay permanently high. [^1]: Will Depue (OpenAI), quoted in [AI #126: Go Fund Yourself](https://read.readwise.io/read/01k10et2v9vm0r4fnkr7jzhnqa) by TheZvi [^2]: Zach Coelius, [Twitter](https://twitter.com/zachcoelius/status/1459713470593572864) - "We are seeing the tremendous deflationary power of technology in living color now. Excluding rent, it is possible to survive and be entertained astoundingly well on very little." [^3]: Ben Thompson, [Meta's AI Abundance](https://read.readwise.io/read/01jfjqwawarch3sh8tyt8k5xza) - "Stratechery from the beginning has been focused on the implications of abundance and the companies able to navigate it on behalf of massive user bases — the Aggregators. AI takes abundance to infinity, and Meta is the purest play of all." --- ## Changelog ### [[2025-10-13]] Removed reading list and explanation. ### [[2025-10-10]] #Question: What historical precedents exist for technologies that were simultaneously deflationary for end products but inflationary for capital requirements? Did electrification or the internet follow this pattern? - [The Death and Birth of Technological Revolutions - Ben Thompson](https://stratechery.com/2021/the-death-and-birth-of-technological-revolutions/) (2021) - Carlota Perez framework: massive capital investment followed by golden ages across tech revolutions. - [AI Datacenter Energy Dilemma - Dylan Patel](https://semianalysis.com/2024/03/13/ai-datacenter-energy-dilemma-race/) (Mar 2024) - Infrastructure buildout and power requirements limit AI scaling, not chips. - Dylan Patel's SemiAnalysis is preeminent authority on AI infrastructure and datacenter economics. - [Economics and AI take off - Casey Handmer](https://caseyhandmer.wordpress.com/2025/08/19/economics-and-ai-take-off/) (Aug 2025) - How cumulative capital increase drives GDP growth through technological transitions. - Casey Handmer bridges practical tech development with abundance economics thinking. - [Will data centers crash the economy? - Noah Smith](https://www.noahpinion.blog/p/will-data-centers-crash-the-economy) (Aug 2025) - Massive AI datacenter boom compared to historical bubbles: will compute providers profit? - [Pipes to Bits: A tale of two infrastructure booms - The Atomic Investor](https://www.theatomicinvestor.com/p/pipes-to-bits-a-tale-of-two-infrastructure) (Recent) - Dotcom telecoms versus today: Big Tech evolved from asset-light to infrastructure architect. - Financial analysis newsletter with detailed charts on infrastructure capital intensity shifts. - [Making It Up in Volume - BoxCars AI](https://blog.boxcars.ai/p/making-it-up-in-volume-how-the-ai) (Apr 2024) - Global Crossing's $47B valuation echoes today: overinvestment creates cheap infrastructure despite failures. - AI strategy analysis comparing current infrastructure boom to 1990s telecommunications. - [Power and Progress - Daron Acemoglu & Simon Johnson](https://samataindia.org.in/data/books/Power-and-Progress-Our-Thousand-Year-Struggle-Over-Technology-and-Prosperity-(Daron-Acemoglu-Simon-Johnson)-(Z-Library).pdf) (2023) - Industrial Revolution to electrification: capital formation patterns and benefit distribution across transitions. - [Electrifying equality - CEPR](https://cepr.org/voxeu/columns/electrifying-equality-how-electricity-adoption-boosted-inclusive-growth-early-20th) (May 2024) - Electricity helped lower-skilled workers catch up—opposite of robotization effects today. - Centre for Economic Policy Research publishes peer-reviewed economic research. - [Automation and New Tasks - Daron Acemoglu & Pascual Restrepo](https://concetticontrastivi.org/wp-content/uploads/2024/06/acemoglu-restrepo-2019-automation-and-new-tasks-how-technology-displaces-and-reinstates-labor.pdf) (2019) - Task-based framework: automation displaces labor while creating new tasks simultaneously. - [There was no great stagnation - Works in Progress](https://worksinprogress.co/issue/there-was-no-great-stagnation/) (Mar 2025) - IT benefits systematically mismeasured: comparing advances to writing and printing press. - Publication challenging stagnation narrative by examining digital age measurement problems. ### [[2025-10-10]] #Question: If AI makes most labor cheap but capital stays expensive, how does that change optimal investment strategy? Should you still diversify into "dumb capital" like real estate, or does everything tilt toward owning the means of intelligence production? - [Economics and AI take off - Casey Handmer](https://caseyhandmer.wordpress.com/2025/08/19/economics-and-ai-take-off/) (Aug 2025) - Analyzes what remains scarce in post-scarcity: material abundance arriving faster than expected. - Casey Handmer bridges practical tech development with abundance economics thinking. - [Rent vs Buy, AI Transition Edition - Jeremiah England](https://jeremiahengland.substack.com/p/rent-vs-buy-ai-transition-edition) (Dec 2024) - Should you buy real estate if AI automates labor? Structure depreciation vs land appreciation. - Independent analyst with financial models comparing rent vs buy under AI automation. - [AI, Jobs, and the Great Migration 2.0 - BlueLake Capital](https://bluelake-capital.com/post/ai-jobs-and-the-great-migration-2.0) (Sep 2025) - Which housing markets benefit as AI displaces 6-50% of workers by 2030. - Professional multifamily real estate investment firm providing strategic demographic analysis. - [Grand Transitions: How the Modern World Was Made - Vaclav Smil](https://spectrum.ieee.org/modern-world-vaclav-smil) (2019) - Energy transitions take 50-70 years requiring massive infrastructure investment before productivity gains. - [Winners and Losers: How AI Will Reshape Property Sectors - High-Yield Landlord](https://www.high-yield-landlord.com/p/winners-and-losers-how-ai-will-reshape) (Recent) - Real estate becomes MORE valuable as tangible scarcity in virtual world. - Professional REIT investment newsletter with sector-by-sector recommendations. - [Post Capitalism and Post Scarcity - Casey Handmer](https://caseyhandmer.wordpress.com/2020/11/14/post-capitalism-and-post-scarcity/) (Nov 2020) - We already have post-scarcity for electricity and computation. Housing could be next. - [Housing and wealth-building - Noah Smith](https://www.noahpinion.blog/p/housing-and-wealth-building) (Jan 2021) - Land value versus structure value: how economic shifts affect real estate investment. - [Lessons for Today from Past Periods of Rapid Technological Change - UN DESA](https://desapublications.un.org/file/126/download) (Mar 2019) - Tech breakthroughs take decades to affect economy due to required complementary investments. - Peer-reviewed research from United Nations Department of Economic and Social Affairs. - [Ray Dalio's All Weather Portfolio & Diversification Strategy - Multiple Sources](https://www.fool.com/investing/how-to-invest/famous-investors/ray-dalio/) (Ongoing) - 15 uncorrelated investments to balance growth assets versus inflation hedges under uncertainty. - [The World After Capital - Albert Wenger](https://worldaftercapital.org) (2021) - Scarcity shifted from food to land to capital to attention as tech advances. - Albert Wenger is partner at Union Square Ventures, prominent early-stage VC firm. ### [[2025-10-10]] Inflationary vs deflationary?