Interest Rates Spike, Politicians Take Sides on the AI Safety Debate, Time’s AI Cover | Diet TBPN

0:01John Coogan: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 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. Take one look at the chart. It's the war. You can see the U.S. attacks Iran 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, Jordy.

0:44John Coogan:Take a wild guess. What's driving interest rates? It is, of course, the war, which starts there and then, boom, up and to the right from then on. But there's other questions about what's going on. is AI, is the build-out 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 into that. It's obviously bad for everyone. It's bad for the U.S. 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.

1:22John Coogan:Like if they're paying interest, they're not paying for other stuff. That's not good. Bad for the prospects of the American homebuyer. 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 locked periods. There's a whole bunch of 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 build out and finance data centers and finance expansion.

1:59John Coogan:And so not good for anyone. How do you get out of it? Maybe end the war, but there are other things at work. This war is 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, I forget what it is, the IEA or something, the, there's a, there's a body that forecasts energy build out specifically in solar and they've gotten it wrong every, every year for 10 years, they've underestimated the growth of solar.

2:50John Coogan:You've seen this chart, right? International Energy Agency. Is that it? Yeah. IEA. 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 into 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 we want to clearly keep working on because it will bring down inflation, bring down costs of basically everything.

3:20John Coogan:It will be very deflationary. And it will allow us to do all sorts of new things. But 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. It doesn't always go this way, though. I wanted to understand, does war or war, even just war in the Middle East, does that always cause interest rates to spike?

3:53John Coogan:It makes sense. It's an expensive thing. 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 I didn't realize this, but we have a son of a veteran on our team. So thank you for his service. But during Gulf War I, there was a textbook oil shock. So Iraq invaded Kuwait on August 2nd of 1990. The U.S. military buildup began basically immediately, and the Desert Storm offensive started January 17th, 1991. So about six months between the initial conflict over there, the U.S.

4:35John Coogan:gets involved. What happens when the U.S. 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's going to flow through the economy the same way, energy prices, inflation, et cetera, 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 that war did not last so long.

5:11John Coogan:It had a much more tight ending, and so there was less pressure on interest rates. The Afghanistan war played out in reverse. So immediately before the invasion, 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 six months into the war, the 10-year hit 5.25%, up significantly, up basically three quarters of a percent since the start of the offensive. The end result of that is that now Warsh, the new Fed chairman, is in a tough spot.

5:50The markets expect a rate hike to bring inflation down.

5:54John Coogan:So 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%, 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 inflation, excluding food and energy.

6:31John Coogan:And even that's a 3.3 percent. 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 lots of people want to see happen. 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 something like a quarter percent of GDP still.

7:13John Coogan:But in terms of headlines, it's like 75 % of what we talk about. And so, yeah, I guess you could see a couple of orders of magnitude. You get to 25 % of the economy. I don't know. But today, the problem that's happening with rates specifically is that AI creates investment demand before any productivity benefits arrive. And so we see this with like a trillion dollars of CapEx for like a couple hundred billion dollars of actual revenues. And so data centers require financing, construction capacity, equipment, electricity. That spending happens today, but broader productivity benefits take longer to diffuse.

7:50John Coogan:So economists, specifically a group of economists that have studied this, they describe AI as a source of upward pressure on real rates and potentially prices during the compute buildout. And Dylan Patel, Dorakash, have talked about this a little bit, where compute, because there's high ROI, it tends to suck demand out of the investment community. You look at what Jensen's doing, securitizing GPUs. You look at the incredible demand for investment grade being attached to data center build-outs with NVIDIA lending IG status to different companies for build-outs and backstopping different data centers.

8:29John Coogan:That just means that if NVIDIA's 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 where there's a lot more capital. I see where you're going with this. What are you thinking? You think Jensen should backstop the Fed? Potentially. He might be the lender of last resort. I was thinking you were going to do a federal backstop for podcasting. A lot of podcasters are spending a lot of money building sets, trying to get big guests.

9:03Everyone knows my stance on that already. Yeah. So we can move on.

9:08John Coogan:So 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 stock market gains, the equity gains, that are related to the AI boom. Obviously, everyone talks about the San Francisco housing market liquidity from 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.

9:59John Coogan: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 don't like that at all. where they go with that. But of course, those are the two possible outcomes here. 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.

10:42John Coogan:Everyone wants to be able to afford a mortgage, afford a house. But how does this work mechanically? Because it's very weird to think that you would have a scenario where there is 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 six 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 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.

11:29You saw Morgan & Morgan is setting up their own data center?

11:33John Coogan:No. Wait, really? 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, check out Morgan & Morgan. They have all those billboards. Yeah. Just call the number on the billboard. Yes, I'd like to start racking GPUs for you. But, I mean, so he's paying for that in cash? Because doesn't he 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. You've got to be in the checking account, apparently.

12:09John Coogan:But you can imagine so many scenarios where, yes, Morgan & 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 sell-off, and there's a flight to Treasury, so everyone's buying Treasuries saying, I've got to get out of these crazy AI stocks.

12:50John Coogan:The stuff hit a wall. 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 dynamic. There is the third kind of crazy scenario, which is outlined by Dylan Patel from Semi Analysis, which is like it never stops. Like we're going to keep investing and the data centers and the AI boom is going to continue to suck at capital until there's like none left. and there will be a sovereign debt crisis, which is the craziest outcome. Non-zero. But this Apollo thing, they're certainly looking for what happens in the next six months.

13:34John Coogan:And we'll know. We'll check in in six months with this Apollo prediction. Hopefully the war will be over by then. Hopefully the war will be over. That would be the easiest thing to resolve, I think. Yeah. Potentially easier than product. Sovereign debt. Yeah, sovereign debt. Driver of world peace. Yeah, maybe, maybe. So, yeah, I don't know. I've been excited about the potential for deflationary effects playing out. You know, I went to the hospital, and I was just seeing the diffusion of technology. All the doctors are using text-to-speech. They talk into these little, like, microphones when they're taking notes.

14:13John Coogan:Obviously, that's a technology from… We get it, John. You worked out so hard that you ended up in the hospital. Yes, that's true. But I'm fortunately doing much better. 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 e-sign a bunch of forms and the forms don't render properly 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?

14:46John Coogan:It's the diffusion question. It's the fact that somebody hasn't gotten in there and actually pitched them on a transformation process just yet, 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 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 within a hair's breadth of actually realizing that future.

15:24John Coogan:So some cause for optimism 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 of 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. This year, those risks have moved onto the public agenda. As job growth slowed, worries spread that AI would displace entry-level workers.

16:08John Coogan: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 open AI 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 Coxson 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.

16:49John Coogan: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 what's going on in the Middle East. It's the meme. Both sides are using Claude to fight each other. Really, really crazy stuff. I think this was mostly through like routers and third parties and all sorts of stuff, but it's clearly a hairy mess to fight diffusion attacks or distillation attacks, but also just all sorts of nefarious use. It's a true game of whack-a-mole. And so full employment for alignment researchers at the labs.

17:26John Coogan:On Saturday, Anthropic CEO Dario Amade 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, U.S. companies should promote the cooperation among democracies to mitigate risks while preserving their technological edge over China. Third, the U.S.

17:57John Coogan: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 a DeepSeek employee basically was like, I don't like Dario. He compared giving Dario AGI to like giving Hitler the bomb. It was a very, very hardcore message from a DeepSeek employee. But of course, it's like translated through seven layers of abstractions. I had no idea if that was real. Yeah, it could just be some psyop. But did you look into it at all, Tyler?

18:31John Coogan:Do you know? Yeah, I have no idea if it was really there. Yeah. I mean, it seemed like reasonably reputable people I follow were talking about it. Yeah. Yeah. It's really, really hard to get a feel on the vibe in China. It's like, 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 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 think that's sort of how it would work out. But it is difficult. And then 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 paperclips.

19:24John Coogan:But the paperclipper can't come over into your territory because you have the paperclip defender, which is turning paperclips into useful stuff like cars and medicines. Podcast microphones. Podcast microphones, I suppose. I don't know. It's all very sci-fi. I mean, one of the wildest moments of the last 24 hours since we wrapped the show was the Department of War just saying effective altruists in shambles. That's a very online phrase. 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.

20:05This 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 the Department of War going to war with EAs on the timeline, but here we are.

20:19John Coogan:Here we are. Extremely, extremely online. Just time. Also, administration. AI developers face a collective action problem that only an agreement to coordinate activities can overcome. There was some news around this where OpenAI believes that they don't need a waiver to coordinate on safety policy with other companies. And I was trying to research how seatbelts got put in cars because it's sort of analogous. It's like the seatbelt 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 cars had seatbelts.

21:05John Coogan:And then the health care system and the hospital systems want people wearing seatbelts so they don't have to deal with as many broken bones from car accidents. Right. So I think Volvo. John Morgan would like it. Yeah, probably. He's not spending a billion dollars on AI so that people stop getting into car accidents. Yeah. Yeah, so Volvo put seatbelts in their cars first as an option. It wasn't selling that well. There was some lobbying to get seatbelts in cars, but a lot of automakers actually fought it. And we're like, no, we don't want to do this. And a lot of consumers were like, we don't want this.

21:46John Coogan:We don't want to have to wear these. No way. Oh, yeah. And yesterday we heard Mitchell talking about like, it's outrageous that you can't get a four-point harness in a car. In a streetcar. In Europe, you can. You can. 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 you had millions of people driving cars and car accidents happening, and yet people were still saying, no, I don't want more safety. I don't want to have to put this thing over my lap. I don't want to do that every time. I got to put them over every time. Do you remember the era of automatic seatbelts?

22:26John Coogan: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 ferraris will hand you the seat belt with a little with a little push out thing? So you don't have to reach back too far. That's such a half measure.

23:01John Coogan:Either put it on me entirely or don't, I guess. 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 U.S. government must assure AI companies that voluntary coordination wouldn't run afoul of antitrust laws and regulations. Mr. Amade 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.

23:39John Coogan:In a better world, support for assuring AI safety would be bipartisan. Instead, House Speaker Mike Johnson had made clear his reluctance to proceed while President Trump has denounced what he terms a sick conspiracy going on against AI and data centers. Underlying this resistance is a legitimate concern. The U.S. is in an AI race with China that it can't afford to lose. All private sector AI leaders share that concern. Mr. Amadei 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.