how much growth we will need?
AI speed-to-revenue accelerates
👉👉👉Reminder to sign up for the Weekly Recap only, if daily emails is too much. Find me on twitter, for more fun.
Apologies for the late delivery. I’m a little under the weather yesterday and today, so I missed the scheduled send
Can the US grow its way out of debt?
Wells Fargo asks the question that all the people wanna know: can we grow our way out of debt?
The answer, according to Wells, is basically “no:”
Wells expects the deficit to continue to grow in both the base and bear cases, but will, at-best, breakeven in the bull case.
In the baseline projection, it assumes 2.1% real GDP growth, 2% inflation and an average interest rate on the national debt of 3.7% over the next 10 years . . . the federal budget deficit steadily widens from its present value of 6.4% of GDP to roughly 8% by 2034. The debt-to-GDP ratio rises from 98% to 126%, surpassing the all-time high of 106% reached during World War II.
In the pessimistic scenario, real GDP growth is just 1.6% on average over the next decade, while the average interest rate on the national debt is 4.0% . . . budget deficits as a share of GDP hit 10% by 2034, and the debt-to-GDP ratio surges to 140%.
In the “optimistic” scenario, we assume real GDP growth averages 2.6% and the average interest rate on the national debt is just 3.4% over the next decade . . . the federal budget deficit as a share of the economy remains roughly unchanged from current levels in the years ahead. The debt-to-GDP ratio continues to climb, hitting 114% in 2034.
So, even “optimistically” with 2.6% average GDP growth, and 3.4% interest rates, “the federal budget deficit as a share of the economy remains roughly unchanged.”
Well, that’s the news you wanted to hear to start your week, I’m sure, but the truth is you probably already had a hunch.
Of course, forecasts are just forecasts (for better and for worst), so none of this is gospel, but we do have a bit of a hill to climb.
AI Speed-to-Revenue
The good news though is that the Deus Ex Machina ending continues to cook.
Some recent data from the payments company, Stripe, offers some insight into quite how much cooking AI is doing (relative to prior tech-driven leaps forward).
Speed-to-revenue for AI cos is much faster than SaaS:
Median time to $1M ARR and $5M ARR are both ~33% quicker for top 100 AI companies than their top 100 SaaS peers.
The shift if even more pronounced for the most recent vintage of AI cos:
It took about 3x as long for pre-2020 companies to achieve the same milestones as post-2020 companies.
That’s some pretty impressive stuff, and a good sign for GDP-growth that’s at least 2.6%, if not more.1
Of course, there are some caveats. For example, I don’t believe these are inflation-adjusted dollars, plus, some chunk of this growth is effectively subsidized by the hyperscalers and/or VC who are selling compute for less than it costs.2 Also, ARR in AI-land is notoriously fickle, where there is both a lot of trialing, and questionable defensibility.
But all those caveats aside, and AI is selling like hot-cakes relative to peers. And it’s only a matter of time before actual productivity gains start showing up in earnings and operating margins (and the anecdotes, especially among some of the PE roll-up guys, abound).
Previously, on Random Walk
AI is not taking white collar jobs
No, AI is (probably) not taking your jobs. Post-ZIRP took your jobs.
Secondaries will not save VC (reprise)
An OG of venture secondaries enters the chat, plus some actual data. Did you know, it's a seller's market out there? Bet ya didn't.
Random Walk is an idea company dedicated to the discovery of idea alpha. Find differentiated data, perspectives and people, and keep your information mix lively. A foolish consistency is the hobgoblin of small minds. Fight the Great Idea Stagnation. Join Random Walk. Follow me on twitter. Follow me on substack:
It’s a really good sign for Stripe, which has now gone from tollbooth on e-commerce to tollbooth on AI. Wild stuff.