Renowned macroeconomist Kenneth Rogoff, a professor at Harvard University, warned that the current investment boom in artificial intelligence (AI) is likely to collapse, urging South Korea to secure its fiscal capacity in preparation. He expressed concerns about expansive fiscal policies that rely on the expectation of permanently low interest rates.
Speaking at a seminar for Bank of Korea employees in Seoul on November 12, Rogoff stated, "The AI bubble will inevitably burst, and the process will be very painful. However, it is uncertain when it will happen. Prices could triple before it bursts."
Rogoff, who previously served as the chief economist at the International Monetary Fund (IMF), acknowledged South Korea as a major beneficiary of the AI industry boom but emphasized the need to be wary of the shocks that could follow a bubble collapse.
He likened South Korea to the "suburbs of Silicon Valley," noting, "If the bubble bursts, it will be very painful for South Korea as well." He added, "You cannot keep increasing spending every time the situation looks good. Such circumstances are highly volatile."
Rogoff particularly stressed that even if corporate profits and asset prices rise due to the AI boom, these should not be considered sustainable sources of fiscal revenue. Expanding fiscal spending in line with economic booms could reduce the capacity to respond to future economic downturns or financial market shocks.
He also criticized the structural low-interest-rate theory that emerged after the global financial crisis, stating, "There has been a widespread belief that the government can create everything for free with large fiscal deficits and that central banks can simply buy government bonds."
Rogoff cautioned, "While it may be somewhat accurate to say that interest rates will remain at 0% indefinitely, the cost of maintaining debt will also increase. If the situation is misdiagnosed, there could be adverse effects when interest rates rise later."
Using long-term real interest rate data, Rogoff refuted the notion that low interest rates are a permanent structural change in the economy. He explained that while private and public sector debt surged after the global financial crisis, leading to slower growth and lower interest rates, this could be seen as a lingering effect of the crisis.
Looking ahead, he predicted that geopolitical instability, investments needed for environmental transitions, populist policies, and accumulated debt burdens could drive real interest rates higher.
Rogoff also drew a line against the optimism that productivity improvements from AI innovations will resolve national debt issues. He noted, "If productivity rises by 1%, real interest rates will also rise by 1%, which means that the burden of government bond interest could also increase alongside revenue growth from economic expansion."
However, he clarified that emphasizing fiscal sustainability does not necessarily mean advocating for indiscriminate spending cuts. Rogoff stated, "Highlighting fiscal soundness does not automatically support austerity; it is essential to distinguish between necessary fiscal spending and reckless fiscal expansion."
Last month, Bank of Korea Governor Shin Hyun-song pointed out regarding fiscal spending, "If temporary resources lead to ongoing expenditures, it will be challenging to reverse them later."
* This article has been translated by AI.
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