AI and interest rates

[John Clark]

Events of the last year have not turned out as economists thought they would, they thought the US was heading for a recession but that hasn't happened, and they all thought inflation would remain stubbornly high but for the last 3 months it is only been at 2.2 %, and the Federal Reserve considers 2% to be the perfect amount of inflation. But there's something that has surprised economists even more, they expected interest rates to remain low but instead they are higher than they've been in over 20 years, even higher than they were during the 2008 global financial meltdown. What's really unprecedented is that by analyzing the spread between the price of ordinary bonds and bonds indexed to changes in the Consumer Price Index the market is telling us that for the last six months investors believed inflation is under control; in the past this has always led to long term interest rates going down, but that is not happening. So what is different this time?

I think the difference is AI. I think the market, that is to say the collective wisdom of investors, is telling us that in 10 years it will take far fewer dollars to remain alive or even to achieve a middle-class lifestyle than it takes today to do the same thing, and perhaps it won't take any dollars at all. So a dollar today will be far more valuable to you than it will be 10 years from now. So if I'm gonna loan you a dollar today I will demand a very high interest rate to make it worth my while, and if you're not willing to pay it I'll just spend that dollar on myself today.   

 John K Clark    See what's on my new list at  Extropolis

icp

[smitra]

Productivity increase due to AI has yet to materialize. Systems like
ChatGPT are not all that useful for the economy as a whole, because if
you are a manager or programmer and you earn $300,000 per year and you
can now do more work per hour, you are not going to work less hours and
take a pay cut for working less. You are just going to do more things,
so the costs of having you employed stays the same. Productivity
measured by the rate of production of goods will not go up, because
ChatGPT s not replacing people at the factory floor, at least not yet.

For ChatGPT to boost productivity would require that the managers take a
pay cut and work less. They could then perhaps supplement their income
by doing hands-on work that's difficult to automatize on the factor
floor. But that's obviously not going to happen.

The reason why there has been no recession so far is because the Biden
Administration has been spending massive amounts of money to stimulate
the economy:

https://www.bloomberg.com/news/articles/2023-08-06/bidenomics-boosts-the-us-economy-fanning-soft-landing-hopes-inflation-fears#xj4y7vzkg

And this in combination with the fact that many companies used the
opportunity to refinance their debts and home owners refinanced their
mortgages at low rates before the FED started to raise rates. This has
increased the lag effect of the FED hikes. But the hammer will still
come down, it will only take a bit longer. There will be companies that
get into difficulties who previously could ahve been easily saved by a a
cheap loan who now cannot get a cheap loan. So, even if refinancing is
not an issue right now, the higher rates can still bite.

The refinancing wall is, however, still going to hit hard next year and
in 2025. The FED will not have cut rates all that much unless the
economy would already have tanked. The situation looks quite bad:

https://www.youtube.com/watch?v=0vkGjSybTLg&t=728s

And with bond yields having increased recently, this situation has only
gotten worse.

Saibal

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[John Clark]

On Mon, Oct 2, 2023 at 9:26 AM smitra <smi...@zonnet.nl> wrote:

> Productivity increase due to AI has yet to materialize. Systems like ChatGPT are not all that useful for the economy

That's because GPT-4 was only introduced a few months ago, and right now it's as stupid as it's ever going to be.  But it's inevitable that a machine that is as smart as a man is going to make a huge impact on the economy. 

> The reason why there has been no recession so far is because the Biden Administration has been spending massive amounts of money to stimulate
the economy:

Then why is the rate of inflation coming down so fast?  And why is the market telling us it expects inflation to stay low for the next few years at least? By the way, under the Trump administration the national debt increased by $7.8 trillion, so far the Biden administration has increased it by 4.7 trillion. And the recent ridiculous stunt about extending the debt limit and shutting down the government is proof that  Republicans like buying expensive things just as much as the Democrats do, the only difference is the Democrats are willing to pay for the things they buy but the Republicans refuse to pay when the bill comes due and then they call that fiscal responsibility. The USA is the only country in the world where the legislature has the vote twice, first they have to vote if they wanna buy something, and then if they decide to buy it they have to vote again about if they're going to pay for it when they get the bill. That's nuts.  

>  the hammer will still come down, it will only take a bit longer.

Economists have predicted 15 of the last 5 recessions, and the record politicians have about predicting recessions caused by the economic policies of the other political party is not any better. 

> ChatGPT s not replacing people at the factory floor, at least not yet.

I agree, but it's only a matter of time, and I'm not talking about centuries or even decades.  

 John K Clark    See what's on my new list at  Extropolis

h6g

[spudb...@aol.com]

Side issue on economics. Inflation only occurs when there is no Return On Investment, ROI. In Technology, and I will use Medical, if successful at all, there is an immediate, intrinsic, ROI. In this manner both Keynes and Friedman are correct! We can also achieve this via printed money aka electrons to bank's servers, via energy, transportation, space, ad materials sciences. 

In other words, cash Back! Vote up or down as you like it, but give your reasoning if you feel it?

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.

[spudb...@aol.com]

Shouldn't simply be AI, but 3D printing and perhaps, the arrival of Drexler's nanofabricators? If it's just AI, it'll will be harnessed for the super rich alone, and the difference between the rich and the rest of humanity will vastly expand. An Elysium Eath. 

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[John Clark]

On Mon, Oct 2, 2023 at 6:11 PM 'spudb...@aol.com' via Everything List <everyth...@googlegroups.com> wrote:

> Shouldn't simply be AI, but 3D printing and perhaps, the arrival of Drexler's nanofabricators?

I agree, AI will accelerate everything.  

> If it's just AI, it'll will be harnessed for the super rich alone and the difference between the rich and the rest of humanity will vastly expand.

That would certainly please people like Donald Trump, but it's not going to happen because the super rich are irrelevant, in fact the entire human race is irrelevant. Like it or not it's only a matter of time before AI will be harnessed by AI alone. There is simply no way you can permanently enslave something that is much smarter than you are and who keeps getting smarter every day.  

John K Clark    See what's on my new list at  Extropolis

kgs

[spudb...@aol.com]

His domestic and foreign policies were better than Joey's have been, that you are giving further evidence of the non-rationality of the Dem voter-Which is Fine! Because we are now that way also!

With Joey? High Inflation, Functionally Open Borders, Higher Crime. Threat of War with Russia. 

Now John, give me your summary of Joey's triumphs? 

On progress, because of who Joey and Don are, I am not confident that either could give us a conversation about LLM's, QC's, and the lot? For, me, a wee peasant, this is the only way to fly!

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[John Clark]

On Tue, Oct 3, 2023 at 5:57 PM 'spudb...@aol.com' via Everything List <everyth...@googlegroups.com> wrote:

> His [Trump's] domestic and foreign policies were better than Joey's have been,

Bullshit. Because of Trump's bungling during the Covid crisis at least half a million Americans died unnecessarily. 

Trump reneged on the Iran nuclear deal, even though he admitted they were still in full compliance, because he said it did not permanently prevent Iran from developing nuclear weapons and they might still do so in 10 to 25 years. But as a result of that idiotic decision we don't have to wait for 10 to 25 years, for about a year now Iran has had all the parts necessary to build several nuclear bombs,  and if they haven't already done so (and they probably have) they could assemble all those parts into working devices in about two weeks.  

 

> With Joey? High Inflation, 

For the last three months inflation has been running at  2.2%, about as low as inflation ever gets, or ever should get.  

 

> Functionally Open Borders,

Trump's only suggestion on how to improve things is military airstrikes on Mexico, just the sort of stupid thing you'd expect from Trump.   

> Threat of War with Russia

Except for a couple of years in the 1990s when Russia seemed to be heading towards democracy, there has been a constant threat of war with Russia since 1946, today thanks to the Republican hero and Trump's best friend Vladimir Putin, Russia is now more totalitarian than it ever was under Khrushchev or Brezhnev, you'd have to go all the way back to Stalin to find something comparable. Oh and by the way,  Putin's Russia started the largest war in Europe since World War II by invading one of its neighbors . You keep talking about China being the big baddie and long-term you may be right, but right now Russia is the larger threat.

 

> Now John, give me your summary of Joey's triumphs? 

The Trump administration kept talking about "Infrastructure Week" but it became a running joke because it was all talk, he never actually got anything done, but Biden managed to pass a $1 trillion bill to repair decaying roads and bridges, and improve the nations broadband Internet service because it is currently a disgrace, the slowest of any major industrial nation.  

Biden passed the $280 billion CHIPS and Science Act to fund Basic research and development to aid semiconductor manufacturing. And Biden is trying to overcome intense Republican opposition to a bill that would lower prescription drug costs and raise taxes on the super ultra mega rich.

Biden rejoined the Paris agreement on climate change on his first day in office. Biden ended the war in Afghanistan, something that Trump had been saying we should do for at least a decade but didn't actually do because he was too cowardly to face the political heat that he knew it would generate.

Biden has restored America's global leadership. Trump nearly destroyed NATO and if he had been reelected I have no doubt he would have succeeded in doing so, but today NATO is stronger and more united than it's been in 50 years. And Biden has refused the rollover and play dead as Trump did whenever he was confronted with Vladimir Putin, instead he is taking the lead on imposing sanctions on Russia for its aggressive war on Ukraine.  

John K Clark    See what's on my new list at  Extropolis

ylo

 

On progress, because of who Joey and Don are, I am not confident that either could give us a conversation about LLM's, QC's, and the lot? For, me, a wee peasant, this is the only way to fly!

On Tuesday, October 3, 2023 at 07:44:34 AM EDT, John Clark <johnk...@gmail.com> wrote:

On Mon, Oct 2, 2023 at 6:11 PM 'spudb...@aol.com' via Everything List <everyth...@googlegroups.com> wrote:

> Shouldn't simply be AI, but 3D printing and perhaps, the arrival of Drexler's nanofabricators?

I agree, AI will accelerate everything.  

> If it's just AI, it'll will be harnessed for the super rich alone and the difference between the rich and the rest of humanity will vastly expand.

That would certainly please people like Donald Trump, but it's not going to happen because the super rich are irrelevant, in fact the entire human race is irrelevant. Like it or not it's only a matter of time before AI will be harnessed by AI alone. There is simply no way you can permanently enslave something that is much smarter than you are and who keeps getting smarter every day.  

kgs

[smitra]

On 02-10-2023 19:06, John Clark wrote:
> On Mon, Oct 2, 2023 at 9:26 AM smitra <smi...@zonnet.nl> wrote:
>

>> _> Productivity increase due to AI has yet to materialize. Systems
>> like ChatGPT are not all that useful for the economy_

>
> That's because GPT-4 was only introduced a few months ago, and right
> now it's as stupid as it's ever going to be. But it's inevitable that
> a machine that is as smart as a man is going to make a huge impact on
> the economy.
>

Yes, I agree. But I do think that making progress in automatizing
hands-on work is going to prove more difficult than letting an AI do
purely digital tasks. There is 100% freedom in the virtual environment
an AI has to operate in, but the real world is what it is.

>>> The reason why there has been no recession so far is because the
>> Biden Administration has been spending massive amounts of money to
>> stimulate
>> the economy:
>
> Then why is the rate of inflation coming down so fast? And why is the
> market telling us it expects inflation to stay low for the next few
> years at least?

I do agree with what you wrote below about the way the GOP has an is
causing trouble. The reason why inflation is coming down fast now is a
combination of lower energy prices plus also the FED hikes starting to
have an effect. The stock market and the bond market are telling
different things about what to expect, and the bond market tends to be
right most of the time. The stock market has moved into a bubble due to
the fast FED hikes and the fact that the FED is never going to return to
the previous policy of zero interest rates (ZIRP) and quantitative
easing (QE) on a permanent basis outside of a recession.

The fundamental problem was that after the 2008 financial crisis,
central banks ended up not just temporarily implementing a ZIRP + QE
policy, but that this became a permanent measure. Many economists had
warned that this was bound to go wrong Sooner or later a problem would
occur for which you would normally require a stimulus in the form of
ZIRP and QE and because we would already be doing that, other measures
that are much more inflationary would be require. And then curbing the
inflation that would inevitably crop up would be extremely painful
because that would require reversing ZRP + QE under more difficult
conditions.

And that's pretty much what happened in the aftermath of Covid. The
economy is now in trouble because interest rates are now much higher and
will be kept high with only moderate rat cuts next year. Particularly
the smaller cmpanies have lots of debt and many of them need to
refinance next year.

Doing ZIRP + QE for over a decade has forced many smaller companies to
take on lots of debt due to competition. A company cannot just decide to
not take on lots of debt at low interest rates to boosts profits,
because they would end up outcompeted by competitors who then would do
that. If ZIRP + QE would be a short term policy to get the economy out
of recession then this dynamics would not be in play. But because it was
done permanently under good economic conditions, this has caused a
significant part of the economy to be no longer profitable without ZIRP
+ QE.

This has then caused the stick market to move into a bubble. The stock
market reached its peak in late 2021 early 2022. The valuation of stocks
is basically an extrapolation of where the economy is expected to be in
the future. And that was the based on the expectation that ZIRP and QE
would continue to be the FED's policy indefinitely. But the FED hiked
rates very fast and realistically the FED is never going to return to
ZIRO + QE. Tis means that the stock market is enormously overvalued. It
did correct down on 2022 but then later rise sharply to current levels.

Investors don't what to lose their money, the recession didn't come as
fast as was expected. Many traders who were short became wrong footed,
the market was pumped up and they had to cover their shorts. But now
reality is slowly sinking in, companies will not make the sort of
profits that can justify the current valuation of stocks, and the market
will end up going down. As long as the market is overvalued, all the
investors taken together make less money per invested dollar. So, after
some ups and downs, the market will end up going down to a low enough
level from which it can generate reasonable returns for investors. But
the problem is that it has to sink to very low values for that to
happen:

https://www.youtube.com/watch?v=j-9yz_1mJME&t=1085s

This means that either the stock market has to crash, or it will end up
going sideways for a very long time. I think the latter scenario is more
likely, but ether way this does have consequences for the real economy,
because the value of pensions are going to go down if the stock market
goes down, or doesn't grow as it normally does for a long period of
time, which then affects spending.


Saibal

> By the way, under the Trump administration the
> national debt increased by $7.8 trillion, so far the Biden
> administration has increased it by 4.7 trillion. And the recent
> ridiculous stunt about extending the debt limit and shutting down the
> government is proof that Republicans like buying expensive things
> just as much as the Democrats do, the only difference is the Democrats
> are willing to pay for the things they buy but the Republicans refuse
> to pay when the bill comes due and then they call that fiscal
> responsibility. The USA is the only country in the world where the
> legislature has the vote twice, first they have to vote if they wanna
> buy something, and then if they decide to buy it they have to vote
> again about if they're going to pay for it when they get the bill.
> That's nuts.
>

>> _> the hammer will still come down, it will only take a bit
>> longer._

>
> Economists have predicted 15 of the last 5 recessions, and the record
> politicians have about predicting recessions caused by the economic
> policies of the other political party is not any better.
>
>>
>
>>> ChatGPT s not replacing people at the factory floor, at least not
>> yet.
>
> I agree, but it's only a matter of time, and I'm not talking about
> centuries or even decades.
>

> John K Clark See what's on my new list at Extropolis [1]
>
> h6g

>
>>
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