What happened
Nomura, an international financial institution, released a research report stating that the large-scale development of artificial intelligence has become an important engine for US economic growth, but it is also putting pressure on the US economy in several ways.
The report highlights risks from the AI boom, including rising chip and electricity prices fueling inflation, a surge in chip and technology equipment imports widening the trade deficit, and large cloud computing companies issuing substantial bonds, which pushes up US Treasury yields.
Due to net capital inflows and AI-driven stock market gains, the US net international investment position liability has increased significantly. Nomura analysts estimate that this liability now accounts for 80% of the total net assets of all net creditor countries.
Why it matters
The report suggests that if AI development falters, it could expose the rising risk premium in the US, potentially triggering a major correction in US capital markets. Given the large exposure of foreign investors to US stocks and the leverage and circular financing within the AI ecosystem, such a correction could evolve into a 'global risk-off event'.
The report argues that the pillars supporting the 'irreplaceable' status of US dollar assets are weakening, with declining trust in US fiscal and trade policies, security guarantees, and the independence of the Federal Reserve. This could have significant implications for global investors.
The report warns that the US relies heavily on foreign capital inflows to finance its widening fiscal and current account deficits, but these twin deficits are unsustainable. The rising debt burden is like a 'time bomb', and pressure is accumulating.
Key facts
Nomura's report says AI development has become a key engine for US economic growth but also brings risks.
Risks include higher chip and electricity prices, a larger trade deficit from tech imports, and higher Treasury yields from corporate bond issuance.
US net international investment position liability has surged to 80% of the total net assets of net creditor countries.
The report warns that a setback in AI could lead to a major US market correction and potentially a global risk-off event.
The report notes that trust in US fiscal and trade policies, security guarantees, and Fed independence is declining.
What to watch next
Watch for any signs of AI development stalling, which could trigger a sharp repricing of US assets and a potential global market selloff.
Monitor changes in foreign investor behavior towards US assets; even moderate de-risking could lead to dollar depreciation, according to the report.
Keep an eye on US fiscal and trade policies, as well as Fed independence, as these are pillars of dollar asset appeal that are weakening.