Will AI poison the public finances of many modern states? There is a real risk that it will.

Yesterday, I circulated a new paper, “Saving for the Machines,” which makes a simple point. Building the AI transformation will require enormous investment. The only way to induce agents to save for that investment is through a large increase in the real interest rate. For instance, in my benchmark scenario, the ten-year real yield jumps from 5.1% to 13.6% on impact.

But that means government borrowing will become much more expensive. Here is a back-of-the-envelope calculation. Take a government that owes 100% of GDP in 2025 (a typical case in Western Europe) and runs a balanced primary budget from then on (not so typical but never mind; I want to build an optimistic scenario). That means the debt ratio changes only with the gap between the real interest rate and growth.

I input the interest rate and the growth rate for my benchmark transition to full automation, and I roll over the debt at the short rate.…