U.S. Deficits and AI Investment Add to Demand for Capital and Higher Rates

Large US federal deficits are coinciding with substantial private-sector investment in artificial intelligence, increasing demand for capital and potentially contributing to higher real interest rates, according to economist Alexander William Salter.

U.S. deficits and AI investment increase demand for capital.

Writing in Fortune, Salter said the federal government was running deficits near $1.9 trillion while private investment in AI infrastructure was also creating substantial demand for financing.

He argued that the two forces are competing for available savings.

The Congressional Budget Office projected a $1.9 trillion federal deficit for fiscal year 2026 in its February baseline.

By July, the CBO had raised its estimate of the full-year deficit to $2.1 trillion, meaning the $1.9 trillion figure should be identified as the earlier projection rather than the latest estimate.

Private investment in AI is requiring significant amounts of capital for data centers, semiconductor production and electricity infrastructure.

Salter argues that when demand for savings exceeds available supply, the cost of capital — reflected in real interest rates — can rise.

Higher real interest rates can have both positive and negative effects. Higher returns can encourage productive investment when they reflect strong demand for capital and expectations of economic growth.

At the same time, persistently high borrowing costs can make it more expensive for businesses and governments to finance investment and debt.

The fiscal effects can compound when higher interest rates increase the government's debt-service costs.

Larger interest payments can contribute to larger deficits, potentially requiring additional borrowing.

Salter argues that the era of exceptionally low interest rates that followed the 2008 financial crisis has ended and that borrowers, including the federal government, must now account for a substantially higher cost of capital.

The CBO's long-term projections also point to rising federal debt and increasing net interest costs. Under its February baseline, debt held by the public was projected to rise from 101% of GDP in 2026 to 120% in 2036.