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AI’s Shadow Output Gap
While Washington obsesses over debt and inflation, AI is already ushering in an age of abundance (Part 1)
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The political and economic establishment can’t stop talking about deficits, debt, and the CPI. Capitol Hill hearings, FOMC minutes, and financial news all pulse to the same beat.
Yet this fixation ironically coincides with the arrival of the most powerful productivity engine in human history: generative AI. Its impact is creating a shadow output gap — an invisible but rapidly widening expansion of supply-side capacity. Policymakers, especially at the Federal Reserve, act as if the boom doesn’t exist.
The real risk is not inflation. It is a stealth supply shock that pushes prices, wages, and term premia down. Deficits may prove too small. Monetary policy may already be too tight.
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Productivity Everywhere — Except in the Data
This is Solow’s Paradox, redux: “We see the computer age everywhere except in the productivity statistics.” Only this time the curve is ten-times steeper.
Previous tech waves required hardware diffusion—mainframes, PCs, smartphones. AI requires none of that; it arrives through an app. That frictionless uptake already generates latent productivity that never reaches GDP because it appears as:
•lower input costs (fewer billable hours),
•consumer surplus (time saved, spending skipped), and
•silent substitution (high-skill labor quietly displaced).
Illustrations abound:
•A patient triages symptoms with ChatGPT and skips four clinic visits.
•An analyst masters a new industry without three costly expert calls.
•A five-person start-up closes a seed round with no CFO, lawyer, or recruiter—AI fills those roles off the books.
Each case creates real value, but none is logged as “output.”
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Counting the Invisible Token Economy
Tokens — the fragments of text an AI model processes — are the kilowatt-hours of knowledge work. Track them and you watch the shadow gap in real time.
•Google’s token throughput grew 50-fold year-over-year as usage soared and per-token cost collapsed.
•OpenAI’s models now sit in support desks, research departments, and legal teams worldwide.
•Rapidly falling costs are unlocking accelerating demand across every provider.
The data-center capex from Nvidia, Microsoft, and other hyperscalers is simply the physical expression of this surge.
(1/2). $NVDA $AMZN $GOOGL $MSFT $TSM $CRWV $NBIS
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