Photograph Source: Boaventuravinicius – CC BY-SA 3.0

Since everyone who is anyone is writing about France’s fiscal situation, I thought I would throw in my two cents. The basic story is that with the recent jump in interest rates, France’s fiscal situation looks very difficult to solve. Unlike the United States, it does not print its own currency. This means that its finances can be better compared to a state like Florida or Ohio than a country like the United States or Japan. Printing money to cover the tab, even at the risk of inflation, is not an option.

While that part of the France crisis story is undeniably true, it is worth digging a bit deeper. Higher interest rates are a worldwide phenomenon. The rise has been larger in France than elsewhere, presumably because investors view its default risk as growing; the cause of the rise lies elsewhere. According to the smart money, the main cause of higher interest rates is the massive demand for investment resulting from the AI boom/bubble.

That means France’s fiscal problem is in a very fundamental way tied to the AI bubble in largely the same way as the deficit/debt problem is in the United States. As I argued last month, this means that we really don’t have to worry about it because the AI boom/bubble will take care of it one way or the other.

The boom/bubble story leaves two options. One is that the promise of AI is real and it will juice productivity growth in a way we have never seen before. The other is that AI is all hype from flimflam artists like Elon Musk and Sam Altman.

AI is a Bubble

Let’s take the latter........

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