Although the pools of money that these companies and sovereign issuers draw from aren't exactly the same, they are adjacent. As to when too much is too much, we'll know it is too late to do anything if the U.S. Fed uses its emergency powers to lend to the AI companies.*
From the Wall Street Journal, October 7:
Apollo, Blackstone and Goldman Sachs among lenders in talks to finance megadeals worth tens of billions of dollars apiece
Big players in artificial intelligence are lining up a series of blockbuster financing deals to pay for computing hardware, part of a rush for capital as data-center build-outs race forward.
In recent weeks, Broadcom has been working to arrange more than $50 billion in financing for OpenAI’s custom artificial intelligence chip, which the firms are developing together, according to people familiar with the discussions.
Apollo and Blackstone are among the lenders Broadcom has talked to about participating in the deal, people close to the situation said. Talks are early and the size of the deal could change.Separately, Oracle is in talks with Apollo and Goldman Sachs to arrange money for a big purchase of chips, people familiar with the matter said. And SpaceX has talked to lenders in recent days about a $40 billion chip financing for Nvidia chips, according to a person familiar with the discussions. The Financial Times earlier reported on the SpaceX talks.The wave of deals reflects the mounting cost of building AI infrastructure. Cloud providers such as Amazon Web Services and Oracle have traditionally financed computing hardware through their own cash flows. For their AI build-outs, the companies issued hundreds of billions of dollars of bonds, pushing the public debt market to its limits. Now, some buyers are turning to Wall Street investment firms to help fund purchases totaling tens of billions of dollars per deal.There is also a new group of chip buyers, including OpenAI and Anthropic, who don’t have the financial firepower to purchase their own hardware. Leading AI labs historically rented the bulk of their computing capacity from cloud providers, but they now want to own more of their own infrastructure to help lower costs and reduce their reliance on other firms.The new Broadcom financing for OpenAI could include several gigawatts of OpenAI chip capacity, one of the people familiar with the discussions said. The deal is expected to close before the end of the year. OpenAI’s chip program, known internally as Nexus, includes custom chips named after types of peppers, with the first- and second-generation versions known as Jalapeño and Serrano....
Oh Mama, can this really be the end...
-Bob Dylan
Back in February we posted "Doom and Gloom: What Can the Federal Reserve Do? Part II" which quoted from a 2005 paper by the Federal Reserve:
From the Wall Street Journal:
-Bob Dylan
Back in February we posted "Doom and Gloom: What Can the Federal Reserve Do? Part II" which quoted from a 2005 paper by the Federal Reserve:
We left part I at the "Money Rain" section of the Fed paper Monetary Policy When the Nominal Short-Term Interest Rate is Zero.
The paper's conclusions are worth an extended exerpt.
9 Conclusion
...When the nominal Treasury bill rate is at zero, the Federal Reserve could attempt to provide a stimulus to aggregate demand through effects in addition to those from increases in the monetary base. The Federal Reserve could purchase assets other than Treasury bills, such as U.S. Treasury bonds or foreign government debt. Even if these assets are perfect substitutes for U.S. Treasury bills, purchases of them could have a stronger stimulative impact than purchases of Treasury bills because of signalling effects."
...A similar effect is present if the Federal Reserve were to write options in an attempt to communicate its desired path for the Treasury bill rate.That post went on to look at another paper, this one from the Dallas Fed:
But with discount window loans whether in the form of advances or discounts the Federal Reserve can accept as collateral (and therefore make liquid" for a depository) a wide variety of assets that the Federal Reserve cannot purchase. A potentially serious limitation on such loans is that it has apparently been the intent of Congress that the Federal Reserve not take onto its balance sheet the credit-risk of the collateral: The Federal Reserve could turn to the depository for full payment of the loan.
The Federal Reserve can bypass depositories and lend directly to individuals, partnerships, and corporations (IPCs). However, the Federal Reserve must and there to be "unusual and exigent" conditions and the IPC receiving the loan must be unable to secure credit from other banking institutions. It seems the intent of Congress was that the Federal Reserve should make such loans only to credit-worthy IPCs. With the Federal Reserve not taking credit risk onto its balance sheet, private- sector loan markets would still incorporate all credit risk into any new loans to households and businesses|preventing any decline in credit-spreads, which may be elevated should the economy be at the zero bound and should the economy be weak. Nonetheless, loans by the Federal Reserve to depositories and to IPCs could provide some liquidity for the credit instruments used as collateral and thereby could lower liquidity premiums. Even if these restrictions on accepting private-sector credit risk were surmounted, or relaxed by an act of Congress, direct involvement by the Federal Reserve in the credit allocation process would raise a number of difficult issues...
...The goods & services solutionThe post ended with a Bernanke speech detailing more options. So no, this isn't the end, but God help us all if it gets to the "stuffing bottles with currency and hiding them in played out gold mines" option.
Why not have the Fed just conduct an open market purchase of real goods and services? Even more so than exchange rate intervention, this strategy would represent a direct stimulus to aggregate demand. As posed, though, the strategy has a major drawback: it violates the Federal Reserve Act. The Fed isn’t authorized to purchase goods and services, apart from those needed for the operation of the Federal Reserve System. The strategy can be implemented, however, by coordination with fiscal policy-makers. The Federal government, for example, could purchase goods and services and finance the purchases with new debt, which the Fed in turn would buy–in technical terminology, the Fed would ‘monetize’ the resulting debt....What if the assets in the “not allowed” column were “allowed”, though? This point is not moot, since aggressive use of the discount window–under certain emergency provisions in the Federal Reserve Act–can allow the Fed to sidestep, to some extent, the restrictions which apply to open market operations.Even if the legal constraints were not present, however, it’s not necessarily desirable to have the Fed acting in markets for corporate debt or mortgages. Whatever benefits there might be from such actions would have to be weighed against the cost of putting the Fed in the business of allocating private sector credit–a task for which the Fed has no particular expertise, and which would likely subject the Fed to unwelcome political pressures.
Interesting, no?
From the Wall Street Journal:
Fed to Lend Directly to Companies for First Time Since Great Depression, Hints at a Rate Cut; Stocks Fall as Dow Hits 5-Year LowThe Federal Reserve said it will bypass ailing banks and lend directly to American corporations for the first time since the Great Depression, and it hinted strongly at further interest-rate cuts -- a cocktail of unconventional and conventional remedies for an economy whose prognosis is deteriorating rapidly.
The historic and potentially risky move of lending to nonfinancial corporations, the latest in a string of extraordinary steps taken by the Fed over the past month, carries the government deeper into the role of propping up private markets. Investors remain unconvinced any of it will work....
....MUCH MORE (many posts on potential extraordianary actions)
