Statement: if AI crashes where will the capital go?
Claim: people will just choose to not invest capital at all
Response: that’s the opposite of what we know about supply/demand. When a supply of something (desirable investments), goes down, with demand steady, prices go up
It’s the same thing that happened during zero interest rate environment - huge supply of capital, few places to put it, so it piled into tech which drove up prices
So I guess my answer to “where will the capital go?” is “the next best thing” which drive up prices of that thing
> Claim: people will just choose to not invest capital at all
No. Claim: People will have less capital to invest.
Most portfolios are not cash-heavy. They own assets. If they want to invest in something they borrow against the assets or sell them and get cash. If the assets' prices crash they can't get as much cash for those assets.
Cost of borrowing - which is what you're referencing from the ZIRP era - is another factor into how much people can borrow against assets. But if the assets themselves trade at an average P/E of 20 instead of 40 then people can only borrow half as much money at 1% interest rates.
Claim: people will just choose to not invest capital at all
Response: that’s the opposite of what we know about supply/demand. When a supply of something (desirable investments), goes down, with demand steady, prices go up
It’s the same thing that happened during zero interest rate environment - huge supply of capital, few places to put it, so it piled into tech which drove up prices
So I guess my answer to “where will the capital go?” is “the next best thing” which drive up prices of that thing