“AI does not create one global business cycle — it creates different monetary regimes inside the same economy.”
The most consequential new development is coming from China, and it materially sharpens the framework we have been building. Until now, the dominant central-bank problem has been a single sequence: AI capital formation drives electricity, infrastructure and credit demand, which builds inflation pressure and lifts neutral rates. China is showing the mirror image.
On 19 September, Huang Yiping, a member of the People's Bank of China's Monetary Policy Committee, warned that AI could actually worsen China's structural imbalance between strong supply and weak domestic demand. AI is already strengthening Chinese exports and productive capacity, but if consumption does not keep pace, faster automation and productivity could intensify excess supply rather than generate inflation.
That gives us a more powerful formulation of the Great Split: the same AI shock can be inflationary in capital-scarce economies and deflationary in demand-scarce economies. This is important because it means there may be no single global AI monetary regime.
The U.S.–China Monetary Divergence Is Becoming Structural
Two sequences, two central banks
Today's PBOC Decision Fits That Pattern
The inverse of the Fed's problem
A New General Theory Of AI And Inflation
Where the bottleneck lies decides the regime
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If the constraint is capital, electricity, GPUs, grids and construction, then AI drives an investment boom into scarcity, producing inflation and higher rates. This increasingly describes parts of the United States, UK and Europe. signal: Where capital and power are the bottleneck, AI is inflationary.
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If the constraint is consumption, credit demand and household confidence, then AI drives productivity into excess supply, producing lower prices and requiring easier monetary conditions. This increasingly describes China. signal: Where demand is the bottleneck, AI is deflationary.
Europe Sits Dangerously Between The Two Regimes
The worst possible combination
The Investor Implication
A two-dimensional framework
Where is the bottleneck?
Capital? Power? Compute? Labour? Demand? The answer determines whether AI reads as an inflationary or deflationary shock in a given economy.
Where does the productivity surplus go?
Into higher margins, higher wages, lower prices, more investment — or excess capacity? This second question may become decisive. AI productivity does not automatically create corporate value; if AI accelerates supply faster than demand, productivity becomes deflationary competition.
The emerging global architecture
- United States: AI → capital scarcity → higher R*.
- China: AI → supply abundance → deflation risk.
- Europe: AI → infrastructure scarcity and slow diffusion → competitiveness risk.
- The new question is no longer whether AI raises productivity, but where AI creates scarcity and where it creates surplus.
- China is the first major economy where a central-bank policymaker is explicitly articulating the supply-side deflation risk.