Krugman warned that a collapse in AI investment could leave the economy caught in a liquidity trap, a scenario he considers especially concerning.
He identified persistently elevated inflation and rising long-term government bond yields as the other pressures. Krugman said inflation could force the Federal Reserve to significantly raise short-term interest rates. He also pointed to concerns about a possible debt crisis alongside the rise in long-term yields.
Krugman said the AI boom could prove to be a bubble and singled out the liquidity-trap scenario as a particular concern if investment collapses. His post also named stagflation and a debt crisis among the potential dangers. He said the risks were possibilities to consider, not a forecast of what will happen.
To explain why he expects economic downturns to recur, Krugman recalled that some economists had once argued major recessions were a thing of the past. He cited the long boom of the 1960s and the Great Moderation, which ran from the mid-1980s through the 1990s; later events, he wrote, undermined those claims.
Krugman argued that the U.S. economy would eventually face a slump that was severe, prolonged or both. The post outlines three possible sources of trouble but does not identify a next decision or economic indicator to watch.
