David Bahnsen on Debt, AI, and What Actually Creates Value

Jeff Kavanaugh: Global debt has surpassed $300 trillion, with U.S. federal debt alone approaching $40 trillion, more than 120 percent of GDP in rising. Inflation may be cooling, but interest payments on that debt now rival U.S. defense spending. At the same time, AI-driven disruption is accelerating. Over 40 percent of jobs are expected to be impacted by automation and AI in next decade. Capital continues to flood into generative AI, often without a clear path to productivity gains. The headlines are loud but signals are mixed. How can leaders think and act long term in this economic environment?

My guest today, David Bahnsen, studies the macroeconomic environment and financial market implications as he advises on investing responsibly and creating long-term value.

Welcome to the Infosys Knowledge Institute podcast, where we talk with experts shaping business and society with bold ideas and deep insights. I'm Jeff Kavanaugh, and today we're joined by David Bahnsen. David is founder and chief investment officer of the Bahnsen Group, a wealth management firm overseeing more than $8 billion in client assets. He's also a best-selling author, economic commentator, and one of America's most influential advocates for principled capitalism. David, welcome so much.

David Bahnsen: Well, thanks so much for having me, Jeff. Good to be with you.

Jeff Kavanaugh: It's an honor here sir. Setting some context, how would you characterize the current macro environment and what are the signals you think business leaders may be misreading?

David Bahnsen: I think that there are two different questions there that kind of overlap but are separate from one another. I would say that in terms of what business leaders might be missing or whatnot, I don't think it's specific to AI or to technological disruption per se. And it's going to be different across different sectors as well. I mean, as a general rule of thumb, I think that there's always a deficit in corporate America, whether it's small business or big business, there's always the possibility of a deficit as to what genuinely creates value. That there is sometimes a distortion in the mind of lot of business owners and operators as to where value creation comes from. And that can lead to strategic mistakes, it could lead to poor incentives and it can lead to bad decisions that get made. But in terms of the first part of what you asked, and if we start with the just AI side of disruption, I think that there is, like most things with technology, the possibility of overestimating disruption and the possibility of underestimating it. And we've seen this play out many times. Things can go to excess. They can go to over investment. They can go to a misallocation of capital. But then on the other hand, there are plenty of businesses that I think are at risk of the exact opposite of failing to account for what the opportunity set may be. So we live in interesting times, Jeff.

Jeff Kavanaugh: Talking about inflation for moment, how, although it's cooled somewhat, how should CEOs and CFOs be thinking about inflation overall and other risks, especially when it comes to allocating capital?

David Bahnsen: Well, I think that part of the problem with this is the definitions. I've become fond of talking to clients about political inflation versus monetary inflation, because all that really matters to most people is the first part. By political inflation, I basically mean the reality of prices going higher, or in some cases, prices just being high, even if they're not going higher, prices that are high, this now new term around affordability. That's a political vulnerability. It affects quality of life. It affects decisions that are made in the culture. And there's a lot of relevance to it. But then when we talk about inflation in a purely economic term, someone who's more technical and more economically literate and literal, which I tend to be, might refer to the fact that inflation is a monetary phenomenon. So I'll give you a great example of this. We had very low monetary inflation, the overall price level, for many, many years. And yet, home prices, higher education, and healthcare, the three H's, were all moving up at a substantial rate. Somebody could say we're seeing big inflation in higher education and they'd be right. But that's different than saying that we were experiencing monetary inflation. It was more idiosyncratic, it was more particular. All of those things, the inflation was being caused by subsidies, by governmental intervention. Whereas broad-based inflation, which is I think what you're asking about in this question, is in my, I'm a Milton Friedman guy through and through. I believe inflation is a monetary phenomenon.

And so if the money supply is growing quicker than the production of goods and services, you get inflation. If the money supply is growing, but in concert with, in tandem with the production of goods and services, then you don't generally get monetary inflation. But you could still have egg prices going higher if there's a chicken flu going on. You can still have house prices going up, even if other things are not.

So that's why I encourage more business leaders to identify if the price issues they're dealing with, either as inputs into their own production processes or at the consumption level, their end users of product, are they dealing with broad and systemic whole system level inflation or are we dealing with something more particular? And I think that the media and in a lot of cases, the political class has done a very bad job distinguishing between the two.

Jeff Kavanaugh: As a follow-on to that specifically for financial services firms given what you mentioned, that apply differently or any specific you'd want to add?

David Bahnsen: Well, I think that where there's a lot of interest in financial services and capital markets with inflation is what it's often going to mean for interest rates. There is a particular belief that bond yields go in line with inflation. And it stands to reason that if both growth and inflation expectations are moving higher, then you would expect bond investors to demand higher interest to compensate for that. So financial services firms are always dealing with the price of money. And the price of money is impacted by inflation, but it's not only impacted by inflation. And it isn't only impacted by going higher. Okay, there can be significant downward pressure on bond yields as well from disinflationary forces. And this is something that has actually been the far more common trend in the developed world through most of my adult lifetime. We obviously had a period of an exception in the middle of 2022, the end of 2023, bond yields flew higher and the price level flew higher. But for the most part, excessively indebted countries generally face deflationary pressures that put downward pressure on bond yields, and financial service firms are needing to understand that better.

Jeff Kavanaugh: Moving on to linking economics and enterprise strategy, you've spoken about the dangers of economic illiteracy in the business world. What foundational economic truths do you believe executives must relearn or reclaim today to lead more effectively?

David Bahnsen: Well, I hope it's relearning. I do fear that there's a lot of business leaders today that maybe didn't learn it the first time if a lot of their economic education came from university. But I am a real fundamentalist about the fact that all economic activity is the study of human action around the allocation of scarce resources. So we're dealing with the human person, and we're dealing with the reality of scarcity. And that really, I believe, gives a very simple summary statement for what the burden is in economics for business leaders. Trying to understand economics through the lens of an Excel spreadsheet or any kind of econometric measurement or chart.

I think misses out on the human dynamic that actually drives activity. You can use math and science and data reporting to summarize what humans did, but you can never replace the fact that it is human action driving activity, both inputs and outputs, and that fundamentally, humans are rational actors that are responding to incentives and that there is a really tremendous creative spirit in the human person that is the sum, that is the kind of beginning of economic understanding. This may seem very basic to a lot of people, this may seem like something that all business leaders know, but I'm very confident that far too many businesses get removed from the fundamentally human element of economics. And so constantly reminding ourselves that economics at its foundation is the study of human action around the allocation of scarce resources, I think is a wonderful place to start.

Jeff Kavanaugh: I echo that, spending a lot of time in Silicon Valley and other tech companies. You just see the absence of that. You can't quite put an algorithm on that. Getting a little more specific, I think, to your chief lane or little what you're doing at the Vonson Group. Your firm has built a reputation on dividend growth investing. While it's great for investors, can you explain how this approach is relevant not just for the markets, but perhaps for business leaders as well as they think about their companies?

David Bahnsen: Well, I believe that where dividend growth is relevant to the entire business community is in the fact that it forces one to understand that we're dealing with after-tax profits and then what the capital allocation strategy is for any business. Some companies don't have profits. They don't have to worry about dividends. The theoretical thought is that they are focused on getting to a point of profitability. Companies that have free cash flow then have decisions to make.

And one of the things I learned and intensely studying Michael Milken in an earlier part of my adult life is that capital structure is a very important element to a business and that has to do with the balance sheet. But things like dividend growth are a byproduct of use of capital, use of free cash flow. And I believe that dividends hold business owners accountable to their investors and allow for a more prudent, responsible decision-making process that avoids some of the alluring temptation of poor capital allocation.

Jeff Kavanaugh: Beyond that, or at least following up on that, companies face a lot of pressure, they always have, but especially now, to maximize short-term gains or chase speculative growth, perhaps clicks over profits. How can business leaders push back against this pressure and build resilient and more principle-driven organizations?

David Bahnsen: Well, if that pressure is there and the business leaders have to push back on it, where is the pressure coming from? So my rhetorical question is meant to suggest that the pressure is not being put on business leaders. It's coming from business leaders. And the reality is that there are long-term investors who want to see value creation. There are all sorts of economic actors that couldn't care less about quarterly moves in profits or stock price. There are traders, there are speculators in public markets that have a shorter-term time horizon, but in what sense did we empower them to drive business leaders? I believe that what we're doing is begging the question. Where is the incentive and why? How? If a company really is making decisions driven by 90 day periods of time, we know that this has happened in public markets over time and there was a big accounting scandal issue 25 years ago that brought about a lot of regulatory reform, but that there were essentially a lot of companies that were driven by trying to spike the numbers on a quarterly basis.

This is all a decision. That's all a matter of will. We don't have to do that. And so I think investors have a choice to invest in companies that have longer term time horizon than short term. And companies have a choice to decide this day whom they will serve. Will it be short term traders and speculators or will it be longer term investors that believe in the mission and the value creation path of a given business? But I do not accept that there's any structural need for us to be handcuffed to short-term limitations. Where that happens, people are doing it to themselves, and luckily in a market not only as global as ours, but even domestically diverse, in private markets, public markets, and across multi-sectorial investment opportunity, people have plenty of choices as to how they want to allocate capital, and business leaders have all kinds of choices as to whose capital they want to take and what incentives they want to have. Where companies draw up incentives that force attention to the short term that undermines the long term, that was a decision they made. It was not forced upon them.

Jeff Kavanaugh: One of your central themes is that economics is never morally neutral. How should business leaders think about the moral dimension of their financial decisions to be more responsible in this stakeholder-focused world?

David Bahnsen: Well, if my earlier premise is correct, which it most certainly is that economics is the study of human action around the allocation of scarce resources, then I have invited a moral element into the very foundation of economics because that which impacts human beings has a moral dimension. The quality of life, the ethical repercussions of things humans do. And I'm fond of teaching the economics students in the economics classes that I’ve taught, that our aim in economics, from my point of view, my world view, is human flourishing. And there's different language people have used over the years. But that, the allocation of scarcity is never a morally neutral thing. A lot of people say Aristotle was the first to say this, but I assure you there were plenty teaching the ethical dimensions of allocation of scarcity well before Aristotle. And so it starts with that, the understanding that because economics is a human social science, that therefore the way in which humans interact with one another in decisions we make about what is going to either impoverish or enrich in ourselves and serve others and whatnot, how we interact socially, this form of social cooperation that economics is so integrated with, they all carry huge ethical dimensions. And I believe that we have a moment in time where many have chosen to pit this up against the profit motive. And I would argue in a more classically and traditional economic sense that the greatest moral good is served when we focus on the profits of a business and that the profits of a business have to be enlightened by this sort of moral consideration that we generate profits by serving our customers better, by producing goods and services in a more efficient way. I think too many look at it as, let's go do something that's morally neutral, but then with the money we get from it, then we'll do something morally good from there. And my argument is that the production of goods and services is intrinsically moral, because you are only producing goods and services to meet human needs. And that is inherently ethical.

Jeff Kavanaugh: Got it. Going a little deeper, some argue that free markets have lost their quote unquote moral legitimacy. How do you respond to critics of capitalism who say it no longer serves the broader good and what's your case for moral capitalism?

David Bahnsen: Well, I not only don't really like the word capitalism because I think it's very loaded and somewhat incomplete. Marx was the one who liked referring to adherence of Adam Smith as capitalist. That wasn't Adam Smith saying it. And the reason I push back on the word a little bit is that my ism is not capital.

I view capital as a necessary tool in driving human flourishing. I believe capital is a necessary part of free enterprise. But this allocation of scarce resources and this production of goods and services that is all driven by incentives and enlightened by what we know of the human person and so forth, all of that does require capital, but it is, fundamentally, capital is a tool in the bigger process. So I am a defender of free markets. I'm a defender of a market economy. I'm a defender of a free and virtuous society, of a free enterprise system. Capitalism is a word that everybody kind of knows what people mean by it, but I don't know that it is the most helpful term. That said, when you say right now people question if markets have moral legitimacy? I will answer that with the three words I think people are almost always supposed to respond to almost any critique of something in the economic sphere. Compared to what?

That question is the heart of the manner. When people say that two folks in a market transaction did something and they were up to no good, there may have been fraud or coercion or distortion, or they were without fraud and corruption just trying to create something that is actually not good for society, and yet they were freely doing it, it was a market transaction, but it wasn't wholesome, it wasn't helpful for the well-being of society.

I never dispute that in a fallen world those things happen in markets. The question is what is the alternative? If all a market is, is the free association of humans to transact together, isn't the morality or the well-being or the wholesomeness or the constructive, you know, productivity of a transaction. Isn't that going to flow out of the people themselves? So humans can interact in a way that is constructive or they can interact in a way that is not. But when I say compared to what the problem with that critique of markets that sometimes markets make things that we think are unwholesome or don't serve the common good is last I checked, the only alternative to markets does that too times 1000 I think that the Soviet Union and I think communist Cuba and communist North Korea and communist China and socialist welfare states and other experiments of collectivism have hardly invited a superior ethical domain. So the solution is not to throw the baby out with the bathwater and say when we get activities out of free markets that don't meet the moral criteria we hope for in a free society, therefore what we need is less freedom in order to get more virtue. When you take away the freedom, you will get neither the freedom or the virtue. The solution has to be in never letting up on the fact that our aim is both a free and virtuous society. And unfortunately, it is not the burden of markets to do moral formation. That virtue in society comes out of families, out of communities, out of churches, out of schools. There is other mediating institutions in society whereby the moral formation is to come. Markets are going to reflect the type of society we generate. They're not going to create it.

Jeff Kavanaugh: Let's move on to AI since that's a major lane in area of research for us. As an economist and investment advisor, how do you see AI shaping productivity, labor markets, economic growth? Is it truly transformative or just massively hyped?

David Bahnsen: I think it's both going to be transformative and it is currently massively hyped. The problem with the transformative part is that one can believe as I do that it's going to be very transformative but not be able to fill in the blanks of exactly how. There is a very rational and I think justifiable confidence that various efficiencies are going to be created out of AI but the ability to know what those are going to be is first of very fallible, but second of all, immeasurable. And I use the internet as an example. Most people who believed in the mid-90s that the internet was going to be transformative were right, but almost nobody was right as to how, as to what exactly it would look like. Many of the things that people thought would be the transformative elements of the internet proved not to be. And the technology continued to evolve, consumer preferences evolved, and through a lot of trial and error, the overall digital technologies continue to move and broadband continued to move, but the applications evolved in different ways than a lot of people expected. So the transformation was there, the usefulness was there, but how it all played out ended up being different than a lot of people understood. That's why there's so many different companies now than there were 30 years ago, and so many of the companies from 30 years ago are now gone. I expect AI will be very similar, but I do not believe that there is a great deal of clarity right now as to what the benefits of generative AI will be, other than the obvious categories as to where it may allow some parts of the knowledge function to be done cheaper and easier. And I think there will be displacement. But I think that the studies right now attempting to measure in 2050 how many jobs are going to be displaced, I think are wildly speculative and somewhat incoherent.

Jeff Kavanaugh: And related question, we conduct a lot of research ourselves at the Knowledge Institute on AI and related areas. Our research shows AI will disrupt many jobs and augment, we think, many, many others. As it rapidly evolves, how should business leaders think about labor productivity, human capital, and maybe the economic distribution of where that value is created?

David Bahnsen: Well, I think it's going to be very different across different types of businesses. It's hard to paint with a broad brush when it's going to be different in its impact to different sectors. What we saw with the last two major paradigmatic disruptions in the Industrial Revolution and then the Digital Revolution was exactly what you just said, was a certain amount of disruption and dislocation, but that a greater amount of opportunity creation. And I believe AI will prove to be the same. What we saw in a very kind of high-level sense of the Industrial Revolution is it really eliminated a lot of opportunity for people to work with their hands and replaced it with opportunity for people to work with machines. And then out of the Industrial Revolution transition into digital, you had an awful lot of goods, jobs replaced by services jobs. And what the next shift will be with AI remains to be seen, but I believe it will be a shift like that. It will be paradigmatic, but it will, as has been the case through history, be one where there are certain things that are replaced and made obsolete by the ongoing creative destruction of technology and advancement and innovation, and yet there will be all sorts of new doors opening and because I can't get into the specificity of what companies and what industries or sectors, the high level takeaway to me is this absolutely obsessive focus with dynamism. The day and age of people believing they can learn one thing and stay in one area and maintain job security or a company can maintain a protective moat forever, I think is gone. I think it's been gone even before AI, but it's going to accelerate that realization that a lot of America's past dynamism needs to come back. And that may involve people needing to be geographically dynamic or mobile, but also their own skill set being retrainable. And so there are greater adaptability, flexibility along the lines of both skill set and how that is cultivated, but also where it is housed and domiciled. Geographical flexibility is going to be interesting as well.

Jeff Kavanaugh: As AI systems increasingly make decisions that affect markets and human lives, how should we think about AI's moral and philosophical boundaries?

David Bahnsen: Well, AI doesn't have a soul and doesn't have accountability for its moral activity. So the moral boundaries is a distinctly human component, and that's exactly how it should be thought of. So any computer that is doing something immoral, there's a human being behind it. And my view on this is, from a principal standpoint, philosophical standpoint, no different than any other piece of machinery or other digital technology, that the moral inputs are a byproduct of human activity. The incentives, the motives, the structure, the application, the use, that's where the moral connotation comes from. And I think that what we are trying to achieve with AI is like anything else, any other human endeavor, going to carry various principles of right and wrong along with it. And so using a piece of raw material to hurt another human being is wrong and it is not the wrongness of the raw material, it's the wrongness of the human that designed it, used it, etc. And likewise with AI, there has to be societal, some of this could be in the legal apparatus, some may not be inside a regulatory framework, but just within our kind of social contract there has to be moral boundaries. And I would apply that to AI the same way I'd apply it to any physical matter.

Jeff Kavanaugh: You're known not only for your market commentary, but also running a very high performing wealth management firm. How do you translate these economic, moral, and other insights you write about and speak about into practical decisions that drive your own performance as well as client value?

David Bahnsen: Well, the only way that you can do that is to practice what you preach. And in my situation, we believe that we have to model what it is we talk about. When I have strong opinions about business leaders need to behave and their intentionality, having a particular long-term focus, the care that they're going to have for their employees, for their partners, for their investors, for their vendors, for all the stakeholders of their business. And so I think that there are people out there that may study this or have an interest in it intellectually, but the part that is more burdensome is to live it out, to apply it, and then to hold yourself accountable to that. And so that's what the day-to-day challenge is. You know, one of the most important things to me about being a business owner is loving my business. I need to have a passion for what I'm doing, and I do. And so I wake up every day very, very excited. I wake up very early, and I wake up very excited to do what I do. That needs to be infectious. I need to carry that to others. I don't think business leaders should be allowed to have bad moods or bad days very often. They need to portray a message of cheerfulness, an infectious spirit that makes others excited to work at their company.

And so, all of the different philosophical tenants I hold to in the business world, they don't mean anything apart from how I apply it day to day with my own company. that's something that we are constantly trying to evolve in and challenge ourselves to think differently about.

Jeff Kavanaugh: That's a great macro view and the human aspect, the empathetic aspect of that. What about on a personal level, just developing insights? Any tips or insight into how you develop these, connecting the dots, noticing patterns, things like that?

David Bahnsen: Yeah, I think one of the elements that I've had to really work on is not believing that there's a formula for everything. You know, when someone talks about how you have to have rules and you have to have accountability, and then you also need to have empathy for others. And so what is the employee handbook going to say on how you deal with somebody with a sick child or someone who's used up all their vacation time but then has this particular life event? And I really recommend that business owners get comfortable with the fact that there isn't a playbook for those things, that there is wisdom that's required situationally. And so by constantly having the right principles, the right thinking, the right priorities, having a leadership team that you can bounce different things off of, you end up being able to make the right decision, case by case by case, as opposed to trying to codify everything. I think there's a huge pressure in our day and age codify every decision that a business owner is going to make. And I become convinced that it's not only unnecessary, but it's suboptimal.

Jeff Kavanaugh: David, this has been fascinating, a very fascinating discussion. Before we close out, what is the one thing that you'd like to share with our audience?

David Bahnsen: Well, I believe that your audience in particular, there's just a lot of opportunity, a lot of leverage that's embedded in business leadership that goes beyond not only what it means to our own balance sheets, our own net worth, our own profitability with our companies.

There is a production of goods and services that meet the needs of humanity that goes on inside all of our companies. That is the essence of life. These are the things that people wake up to do each day and being passionate about it, being excited about it, and doing it with not only a joy and an infectious spirit, but with a real responsibility for those around us. To me, it's the greatest privilege anybody can have and we ought not take it lightly.

Jeff Kavanaugh: Thank you. Definitely words to live by. David, thanks again for a very thought-provoking discussion. We simply can't do justice here to the depth and breadth of your wisdom. For those that want to know more, I highly recommend David's podcast and macro commentary, The Dividend Cafe, as an introduction to better know the markets and for dividends and your understanding of economic life, to still a phrase. You can find details at Infosys.com/IKI in our podcast section and thank you again David for being part of this and everyone be sure to follow us wherever you get your podcasts.

Yulia De Bari and Christine Calhoun produced this podcast. Dode Bigley is our audio engineer. I'm Jeff Kavanaugh from the Infosys Knowledge Institute. Until next time. Keep learning and keep sharing.