AI to run the economy

There have been a number of articles recently about how wonderful it will be when AI runs the economy. It will (according to these pundits) optimise resources, respect ecological necessity and forward plan for booms and busts.

I’m sorry to say I disagree entirely. 

I was interested to see that MPs who use ChatGPT for answering their constituents are getting a lot of hate mail telling them they are rubbish and he/she wouldn’t be voting for someone who thought so little of their constituents that they couldn’t be bothered either to read what said constituent had written, nor respond personally to their concerns. I can’t say I’m surprised. I read a nice thing the other day, aimed at AI. Why would I bother to read something that no one had bothered to write?

AI has its uses but I have mentioned before AI on customer services. My own experience is ages spent trying to get the moron to understand what was wanted and when, after 40 minutes or so when you finally get to a sentient human being, it gets sorted in moments. I wouldn’t be at all surprised if the smarter firms revert to real people for customer service. This aspect of business regularly tops the list of why people go with certain businesses and if you don’t do it the way people want you will very quickly find people will vote with their feet – one of the joys of Capitalism.

And this, surely, is the whole point. Economic activity is made up of hundreds of billions of individual decisions made by billions of people. You would be right in thinking that some of those decisions are neither logical nor rational, but they are valid decisions and have a bearing on different outcomes. It seems to me that AI will be the equivalent of a bunch of left wing economists trying to make things work but putting things into strait-jackets. AI is of course backward looking and uses that previous information in its so called forecasts. But real world activity is unlikely to slavishly adhere to previous information. That is the whole point of human progress – something is done differently or in a different way which moves humanity forward.

As ever, it is the price mechanism that allocates resources in the most efficient way, not a statement from an algorithm that has no actual connection with markets. I particularly liked when McDonalds had to do away with AI in its ordering systems as it kept delivering bacon with ice cream. And I am in no way denigrating individuals who like that combination. I can think of at least one pregnant lady who ate nothing but ice cream smothered in butter for several months. Yuk as far as I am concerned, but her choice.

These are macro economic trends, and there is another which may very well soon have a significant impact on what happens economically in the world.

When the pandemic broke out, the FED in the United States parked $2trillion in what is known as RRP (Reverse Repo Rate) funds. In essence it is a means for the FED to keep its interest rate within a particular band – if banks are bidding up for funds, the FED sends in the RRP and similarly if no one is buying they pull it back. As reported the other day, this very large sum of money is running out – in fact it probably already is gone on the swings and roundabouts but everyone is keeping quiet.

Why is that? Very simply, when it’s gone, there will be no backstop long-term finance to smooth interest rates. Potentially that means that rates will try to rise. The only way the FED can control that is by creating more money – remember QE?  This would be it back on steroids.

Now that has huge implications for the American economy and by extension that of the world. Inflation (already not in any way under control) would rip again. As I’ve said before central governments love inflation for two reasons. The first is the real value of their borrowings fall and hence less has to be paid back. And secondly, if you build inflation into what you say you are spending, it looks as if you are being a wonderful give away government. Absolute nonsense of course. And as of now the REAL interest rate is nowhere near high enough to affect the real world. We are absolutely in a too little too late world yet again. Oh, and did you see some of the MSM postulating what would happen if the IMF were called in. Why would that be do you think? Softening up the electorate for their arrival? And it’s starting to be mentioned more and more.

One of the more interesting correlations that have popped up is that the Bitcoin price tracks the world liquidity index quite closely. We have been on the up here for a while and that has without a doubt helped the Bitcoin price. But we are arguably starting to move back from that as governments around the world realise that they have a choice. Print LOTS more money to keep the merry-go-round humming away and landing serious serious inflation and penury on future generations, or the alternative is to risk political annihilation but try to manage a decline. The good Old Lady of Threadneedle street has (for no discernible good reason) lowered interest rates, which has already lead to inflation making more headway. The BofE for some time has had no idea what it is doing anyway so perhaps it doesn’t matter too much as everyone seems to be ignoring it, apart from a bunch of slavish MSM hacks. And the government is now paying more than 5.6% to borrow money, and the Bank just reduced it’s own rate to 4%. Sensible – NOT! Someone just said Britain was paying moron premiums to borrow money which is completely unsustainable.

And very soon we will have Rachel’s budget. Actually, it won’t be her’s, it will be as dictated by the bond markets in less time than it takes to read. As France found under Pompidou, the UK  won’t enjoy being out of step with world financial markets.

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