The Economy, the Fed, and the Coming AI Renaissance

Subscribe and support us at Underthrow.orgEconomist and commentator Peter St Onge joins host Max Borders for a wide-ranging conversation covering the current economic outlook, monetary policy, healthcare reform, tariffs, and the long-term implications of AI and automation. Here are the key takeaways.The Economy Is Better Than the Headlines SuggestSt. Onge opened with a surprisingly optimistic near-term read. GDP and productivity growth are among the strongest since the 1980s, driven not by domestic government spending—as was the case under Biden—but by foreign investment. Trillions of dollars in foreign and domestic capital commitments are flowing in, partly prompted by Trump’s trade negotiations. The rule of thumb, he noted, is that a trillion dollars in investment generates roughly a million jobs—though the lag between groundbreaking and hiring can stretch on for years.On inflation, the official CPI sits around 2.4%, but the private-sector tracker Truflation—which scrapes roughly 15 million prices in real time—is running below 1%. “That’s about as close to zero inflation as you can get in a central bank regime,” St. Onge said.Why the Fed Will Never Allow Deflation (Even Though It Should)St. Onge offered a crisp Austrian-school explanation of why the Fed is constitutionally allergic to deflation. The Fed’s own models conflate two very different phenomena: the destructive debt-deflation that follows a boom-bust cycle (which the Fed itself causes) and the benign, productivity-driven deflation that characterized America’s economic golden age from roughly 1870 to 1900—a period that saw real wages double and produced the foundational inventions of the modern world.“The only deflation that’s bad,” he argued, “is the one the Fed creates.” The institution, he suggested, uses deflation as a convenient boogeyman to justify keeping the money printer running—a posture that happens to serve Wall Street handsomely.The Most Hawkish Fed Chair Since Volcker?About the incoming Fed chair, Kevin Warsh, St. Onge was cautiously optimistic. Warsh’s signature idea is a “Robin Hood” monetary stance: cut rates for Main Street while simultaneously selling down the Fed’s $6.5 trillion balance sheet to soak up the inflationary pressure. In theory, this means cheap credit for ordinary borrowers without gifting Wall Street an inflation windfall.The catch? Selling trillions in assets would hit bondholders and banks hard, and there’s a finite amount of quantitative tightening the system can absorb before bond markets crack—as they did briefly in 2019 and more dramatically in the UK in 2022. “I love where his heart is at,” St. Onge said. “The question is whether he can actually follow through.”Healthcare: Captured by the Cartel, Unreformable by CongressOn the Affordable Care Act and healthcare reform more broadly, St. Onge was blunt: Congress will not fix it. Every serious reform must pass through veto gates held by the AMA, hospital conglomerates, pharma, and insurers—all of whom have both parties on retainer. The filibuster requires bipartisan agreement, which is impossible when the “Care-tel” is buying on both sides of the aisle.The only reforms that have moved the needle, he argued, are executive orders — like Trump’s most-favored-nation drug pricing rule, which would never have survived a congressional vote. This points toward a broader tension: in a system this captured, can anything meaningful happen through normal democratic channels?The Big Beautiful Bill: A Missed OpportunitySt. Onge graded the recently passed budget legislation as decent on tax cuts—extending business and corporate rate reductions that he views as among the most economically productive changes possible—but a significant disappointment on spending. DOGE identified roughly $1.5 trillion in waste and fraud, approximately equal to the entire annual income tax take. Congress trimmed a fraction of that, then offset even those savings with border security and military spending.“After 50 years of promising to cut spending, they did not cut spending,” he said flatly. His preferred alternative: slash taxes on small businesses (which generate five to ten jobs per dollar compared to large corporations), enact a sunset clause on all regulations, and pass the REINS Act to require congressional approval for major new rules. That combination, he believes, could push sustainable GDP growth to 4–6%—enough to gradually outgrow the debt burden even without meaningful spending cuts.Tariffs: Bad in Theory, Defensible in PracticeAs a free-market economist, St. Onge is philosophically opposed to tariffs—they’re taxes, and lumpy ones at that. But he offered two pragmatic defenses of the current approach. First, they’re working as negotiating leverage: Canada’s 90% tariff on American dairy, Europe’s barriers to U.S. goods, and similar arrangements represent genuine discrimination against American companies. Several trading partners have already reduced barriers in response.Second, the reshoring strategy has historical precedent. Reagan-era pressure brought Japanese automakers to U.S. soil—today, most Japanese cars sold in America are built here. The trillions in announced investments from Korean, Taiwanese, and European manufacturers suggest the same dynamic is underway. “Once they move here, they tend to stay,” he noted—particularly European manufacturers, for whom U.S. cost advantages over Germany are substantial.AI, Robots, and the Future of WorkSt. Onge pushed back on both utopian and dystopian AI narratives. His core argument: AI and robotics will reshape the economy at very different speeds. AI software is effectively free at the margin—a company already paying for ChatGPT can replace junior lawyers or customer service staff with minimal additional investment. Robots, by contrast, require enormous capital deployment: “You need one AI for 8 billion people, but five robots for every McDonald’s.”His reference point is electrification. Electricity was proven superior to steam power around 1890. Half of American factories weren’t electrified until 1920. Installed base and capital costs create enormous inertia even when the superior technology is obvious.The longer-term picture, he argued, is likely to follow the pattern of every previous automation wave: temporary dislocation followed by the creation of more and better-paid jobs. The Industrial Revolution eliminated roughly 90% of existing occupations—nearly everyone in 1800 was a farm laborer—and replaced them with something far better. The AI transition will likely do the same, with a particular expansion in human-to-human services: personal training, childcare, elder care, bespoke craftsmanship, experiences that people want precisely because they’re human-made.“Humans love humans,” he concluded. “That’s what’s going to save us all.”On Bitcoin, Gold, and the Political HorizonOn the recent divergence between gold (up) and Bitcoin (down), St. Onge offered a simple explanation: Bitcoin investors expected more from the Trump administration—particularly a strategic Bitcoin reserve—and didn’t get it. Meanwhile, gold, silver, and AI-adjacent assets are currently competing for exactly the same investor profile: skeptical, technically minded, Fed-hostile. “They’ll be back,” he said of Bitcoin holders.Asked for his magic-wand policy, he didn’t hesitate: abolish the income tax, end the Federal Reserve, and pack the Supreme Court with justices willing to enforce the Tenth Amendment and dismantle the post-New Deal administrative state.Peter St. Onge publishes daily economic commentary at @profstonge on X. This is a public episode. If you'd like to discuss this with other subscribers or get access to bonus episodes, visit underthrow.substack.com/subscribe