Why Everyone is Getting AI Economics Wrong

Artificial intelligence continues to be one of the most contentious topics in investing economics politics and business. And I've finally figured out

business. And I've finally figured out why so many people disagree about what the impacts of artificial intelligence will be on the economy. You have some

people saying that it's going to bring around a utopia where nobody will ever have to work again. There will be universal high income available for everybody where all of your wants and

needs are met by robots. Essentially,

all of life will be like an all-inclusive cruise ship that is managed by machines. On the other side of the spectrum, though, you have people saying that it will bring about a

dystopia with the most extreme wealth inequality this world has ever seen.

with a few technocrats holding the control of all the world's resources and everybody else destitute, no longer able to get any jobs because the robots do all the jobs, which means that most

people will have no income to be able to afford anything they need. And the

fundamental misunderstanding that contributes to these extreme views is not recognizing that technology is deflationary, yet we live in an

inflationary world. So the question is

inflationary world. So the question is what happens when an unstoppable deflationary force impacts an immovable inflationary wall? Once you understand

inflationary wall? Once you understand this, you'll be able to see how this plays out into the future. So first,

what do I mean by AI being deflationary?

AI is just a tool. It is just technology. There is no qualitative or

technology. There is no qualitative or categorical difference between AI and any other technology humans have ever invented or innovated. Starting back at the beginning, we have the first

original invention that caused a creation of wealth, which was fire. If

you look at like gorillas and monkeys, they spend and pretty much every animal actually, they spend 100% of their time looking to acquire food. One of the

reasons for this is because the nutrient density of raw food is pretty low.

Another reason for this is that if all of your warmth is coming from just caloric intake and you don't have any external source of warmth, you need a higher caloric intake. And so fire being

used as a technology or a tool allowed people to cook their food and get more nutrients out of their food for the exact same level of work. It also

reduced food born illnesses, which allowed you to spend more time doing more productive things, maybe even living longer. And you didn't need to

living longer. And you didn't need to consume as much food because you were getting some of your warmth from that fire rather than just burning the calories. And so what fire did was

calories. And so what fire did was allowed humans to get more with less.

That is the definition of growth. And

it's why growth and deflation in reality are two words describing the exact same thing. More output, less input. Getting

thing. More output, less input. Getting

more for less. Now, kind of the next big leap from there you could say was farming. Instead of having to go out and

farming. Instead of having to go out and find our food from hunting and foraging, spending all that energy and all that labor going out and trying to find it, we brought the food to ourselves, put the animals in cages, planted the

plants, the fruit trees, and the vegetables that we wanted near our homes, and we cultivated them. This gave

us way more abundance of food than we had ever had. It gave it to us where we needed it. So, we didn't have to spend

needed it. So, we didn't have to spend as much time going out just to procure food. we could spend more of our time

food. we could spend more of our time and more of our labor doing other things that we wanted or needed more like shelter and clothing and again maybe just having an easier time staying

alive. This innovation spread across the

alive. This innovation spread across the world known as the agricultural revolution and again was a big leap forward in terms of growth, getting more

for less. And it is deflationary because

for less. And it is deflationary because it requires less of your human labor, a lower cost in human labor terms to get the things that you want. Instead of

humans having to spend all day hunting and foraging, now we spend less time working for food and we can allocate that to more productive things. Another

step up from there was the invention of things like tractors. So now instead of needing dozens or maybe even hundreds of people to work a farm, now you have machines that can do the work of dozens

or hundreds of humans just with one person operating the machine. Not only

that, but maybe it does it even better.

So you get more food output with far less human input. This industrial

revolution obviously infiltrated everything, not just food production. We

got steam engines that moved trains that increased the ability for humans to transport goods and themselves all across the world and the nation instead of having to walk and ride a horse. And

that allowed goods that were more cheaply produced in one area to be transported to another area. And even

with the cost of transportation included, it was now cheaper to get it from a farther location. Again, the cost of everything starts to go down when you calculate it in terms of human labor.

The amount of time you have to spend working and doing something in order to get the stuff that you want and need goes down over time. This is the story of all of human history. By the way, as

humans invent and as humans innovate and as humans find new ways to produce more things more efficiently, the cost of acquiring the stuff that we want, in other words, wealth goes down. The

invention of electricity meant that lighting and heating were much more accessible because that thing that people wanted was more abundant now by getting it from electricity instead of

candles and lamps meant that we got more for less. By the way, all along this

for less. By the way, all along this process, the people who were involved in producing those things that became obsolete did lose their jobs. This is

the part of innovation and creation that people don't like to acknowledge. It's

called destruction. Joseph Shumpeder

famously coined the term creative destruction and it's because those are two sides of the coin of progress. You

cannot get more for less unless you do away with the thing that was causing you to get less for more. Candle makers lost their jobs making candles because people started buying light bulbs instead. It

would have been a disaster if the government had stepped in and said, "We need to protect the candle makers from losing their jobs. They're important to our economy and we need to outlaw and regulate electricity and light bulbs so that these people are protected. That

would have been preposterous. Even very

simple things like plastic being invented from fossil fuels. That

actually saved the turtles. Most people

don't realize that turtles were on the verge of going extinct because we were using their shells for things that we use plastic for today. And that allowed the turtles to start thriving again

because we no longer needed to go through the costly process of acquiring turtles just for their shells. So

unfortunately for all of you environmentalists and tree huggers out there, fossil fuels and oil saved the turtles. And so many of the things that

turtles. And so many of the things that we use technology for today, and by technology in this sense, I'm talking about like modern-day electronics like laptops and iPhones, these give people

access to things that we didn't even have the ability to have access to even 50 years ago for any cost. And now even the poorest people in our society have

access to these things. Again, progress,

growth, deflation, it's all just getting more for less. Today on Earth, we have the same amount of resources that we've always had throughout all of human history. We're able to get a lot more

history. We're able to get a lot more wealth from those resources than we ever have been able to in the past. Now,

because we're talking about the real definitions of deflation and growth and progress here, I know that it can be a little bit jarring because every time you go to the store, every time you look at a price, the number has gone up. And

so, it doesn't feel like life is getting cheaper. It doesn't feel to most people

cheaper. It doesn't feel to most people like you're getting more for less. And

that is true. We are going to talk about that in a moment. But when you measure things over the long term, 10, 20, 30, 40, 50 years, 100 years, 500 years, thousand years, the story of humanity is getting more for less. When you measure

it in terms of the amount of human labor required to get those things and every step along the way, when we are able to find a way to replace human labor in one area with machines, it means those human

jobs become irrelevant. And the

long-term story of human history is that people then just start doing other things that are more productive instead.

Higher output. Now, the last piece that we have to talk about when we're talking about the long-term history of deflation is that just because specific jobs get replaced by machines doesn't mean that

those specific people actually don't have a job anymore. Consider the

computer. And I don't mean by the computer like a laptop. What I mean by computer is the job that was done by humans to take a pencil and a paper and

do calculations by hand. In other words, compute. That was a job. Whether you

compute. That was a job. Whether you

were at a bank or a grocery store or you were an engineer, it was a fairly common job, especially at larger businesses, to be a computer. It was your job to

literally do math by hand on paper. Now

a rational person a 100red years ago if you were to tell them hey in the future there will be a machine that will be able to do all the math that any person

computer today can do and do it way faster do way better and do way more math. That person would rationally

math. That person would rationally assume that the person who was responsible for being a computer would then be out of a job. But that's not actually what happened. Those people by

and large became programmers. You ever

see the movie Hidden Figures that talks about the black women at NASA who are responsible for putting the first man on the moon? Well, that is exactly what I'm

the moon? Well, that is exactly what I'm talking about here. Instead of just being replaced by machines, those people became way more productive than they ever had before by using the machines

themselves. Not only that, but it

themselves. Not only that, but it actually lowered the barrier to entry for positions like that because since it was so much more productive, it increased the ROI on hiring a person

like that, which meant that now lowerkilled people had the opportunity to get into positions where they could use those tools and be way more productive than they could be without

those tools. What that means boiled down

those tools. What that means boiled down into realworld actionable talk is that innovations breed job increases on net

overall. Most jobs that people do today

overall. Most jobs that people do today did not exist a 100red years ago, let alone thousand years ago. The only way we can get to a point where humans are doing jobs that they actually want to do

is if we can outsource all the human labor that we don't want to do to machines. This is a good thing, not a

machines. This is a good thing, not a bad thing. And now the segue to the

bad thing. And now the segue to the world that we actually live in where prices go up because up until fairly recently in history about 1913

prices actually went down over time.

Real prices like the number on the price tag over time would go down for everything. When you look at basically

everything. When you look at basically the entire history of the 1800s, we have a lot of data from those time periods.

And as long as you take out the civil war where they actually instituted a fiat currency, the greenbacks, that's why there was a spike of inflation there. If you take that out, the entire

there. If you take that out, the entire 1800s, basically up until about 1910, maybe 1913, prices went down. This is

the price of everything. Food, shelter,

clothing, transportation, the cost of living continuously went down. What that

also meant was that wages went down.

Pretty much every year, your salary, your hourly wage, the amount you got paid for the work that you do would go down. today that would scare that would

down. today that would scare that would terrify people. But the thing is the

terrify people. But the thing is the cost of living dropped more. So right

now if your salary goes from 100,000 to 105,000 over the course of one year, but your cost of living goes from 100,000 to 110,000 over that same time period, you're actually falling behind. The way

that it would work historically though is that your cost of living would drop by more than your wages would drop by.

And so, yes, your salary might drop from 100 grand down to 95 grand, but your cost of living would drop from 100 grand down to 90 grand. This meant that your savings continually gained in purchasing power. So, you didn't have to worry

power. So, you didn't have to worry about risking your assets, your savings on investments that were too risky just to keep up with inflation. And it meant you could just focus on increasing your skills, working hard, saving, and then

investing in a good investment when you finally came around to it. people

weren't required to be part-time financial adviserss and part-time investors just to be able to keep up with inflation. Now, the downside to

with inflation. Now, the downside to this is that asset prices would fall as well. When you think about something

well. When you think about something like a house, that is something that falls apart. It is literally in physical

falls apart. It is literally in physical reality a depreciating asset. It's

something that requires maintenance, repairs, upkeep, and over time as more and more of them are made, the abundance of that thing goes up, the scarcity goes down, which means the value relative to everything else will go down. If you

have a renter in there, the rent would fall pretty much every year. But

overall, the cost of living went down far quicker because the abundance was increasing so much more. This was real growth. And all that ended in 1913. When

growth. And all that ended in 1913. When

we get into the modern world where the entire economy is built on an inflationary foundation. Today, money is

inflationary foundation. Today, money is lent into existence. Every dollar in circulation, every dollar in every bank account and brokerage account and 401k

came into existence through a loan. You

deposit $1,000 into your bank account.

Your bank takes, let's say, $900 of that, loans it out to somebody else through a credit card loan or a mortgage, and then that person when they receive that money and their bank as a

deposit, it gets reloed out by that bank again, over and over and over and over again. Even though your bank account on

again. Even though your bank account on your app or on a computer screen, it says you got $1,000 in there, they didn't leave it there. They took it and they're out there doing something with it. Which means if you and everybody at

it. Which means if you and everybody at the bank try and get your money back, it's not actually there. The same dollar is rehypothecated over and over and over again, relent out from person to person

to person, representing what looks like a new deposit every step of the way. But

again, it's the same dollar just being relent over and over and over again.

Those deposits aren't actually real.

Now, in the practical sense, they're real because you can go get it and you can spend it. But again, if everybody tried to do it at the exact same time, it's not there. This is what leads to bank runs and why banks collapse and the money is just gone because it was never

there in the first place. Historically,

when this would happen, a bank run would happen, the bank would collapse, the money would just not be there, and so the money that people thought was there would disappear and you get a contraction and you get a deflationary collapse because now there's no more

fake money running around keeping prices up. This is exactly what happened in the

up. This is exactly what happened in the Great Depression. The easy credit

Great Depression. The easy credit environment of the 20s caused the roaring 20s. there was a false expansion

roaring 20s. there was a false expansion of the money supply through easy credit.

And then once the first default happened or the first person just decided to pay back instead of reinvesting that money along the way, as soon as that expansion stops, it starts to violently unwind.

The money that people thought was going to be there won't be there. So, they

default and you get a deflationary default collapse. After the Great

default collapse. After the Great Depression, the Federal Reserve vowed to never let something like that happen again. In fact, even Milton Freriedman,

again. In fact, even Milton Freriedman, the person that many people say, you know, champion of free markets, when he made the claim that inflation is always and everywhere a monetary phenomenon, when he was making that claim, he was

saying that because he was saying the Federal Reserve should have never let the Great Depression happen because inflation is the opposite of deflation.

It's a monetary phenomenon. They should

have just printed the money to stop it.

You print enough money that bids prices up enough where a deflationary collapse stops in its tracks. And that is what the Fed vowed to do, which is never let a deflationary collapse like the Great Depression happen ever again. Which is

why they always lean on inflation rather than letting things get even close to deflation. It's why they target 2 3%

deflation. It's why they target 2 3% instead of 0%. It's because if the money supply doesn't keep increasing, it violently contracts. Every dollar that

violently contracts. Every dollar that is lent into existence eventually has to get paid back with interest, which means all inflation today is future deflation baked into the cake. So if you stop

increasing the money supply that future deflation starts to happen and unwinds the whole thing. They have to keep printing. They have to keep on borrowing

printing. They have to keep on borrowing money into existence. They have to keep that going and have to keep that number going up. Otherwise everything collapses

going up. Otherwise everything collapses in a collapse way bigger than the Great Depression. Which means today growth is

Depression. Which means today growth is measured in number go up. Because if the money supply keeps on going up the cost of living keeps on going up which means your money is losing purchasing power.

If money is losing purchasing power, the number of money that you have has to keep on increasing faster than it's bleeding. In other words, if your cost

bleeding. In other words, if your cost of living goes from 100,000 to 110,000, you have to make sure that your salary goes from 100,000 to at least 111,000.

And that's true for assets, that's true for wages, that's true across the board because growth is now measured in the number going up. So, we have to invest to keep up with the money printer. We

need our asset prices to continue going up. We need our salary to continue going

up. We need our salary to continue going up. And if anything threatens that and

up. And if anything threatens that and the good old central bank steps in and inflates away all the pain. So we have the entire economy now built on an inflationary foundation. One where the

inflationary foundation. One where the money printer has to keep on going to make the numbers go up. Otherwise it all evaporates. It all collapses. However,

evaporates. It all collapses. However,

we have a new very strong deflationary force that is rearing its head. AI. It

is technology just like all technology before it that decreases the real cost of wealth. So what happens when that

of wealth. So what happens when that unstoppable deflationary force hits the immovable inflationary wall? Well,

historically the answer is that deflation always wins. When you look at prices across thousands of years, the inflationary fiat regimes always fail.

It just takes decades and sometimes even centuries for it to play out. We read

about it in a couple of pages in a history book, but it doesn't happen quickly. Case in point, in 2020, they

quickly. Case in point, in 2020, they expanded the US money supply by 25% in one year. And there were a couple of

one year. And there were a couple of years of pretty high inflation, and we're still feeling the effects of that.

But the dollar is still being used globally, still being used domestically.

People are still denominating their debt and their salaries in dollars. People

are still paying their taxes in dollars and receiving payments for goods sold in dollars. There's been no

dollars. There's been no hyperinflationary collapse, and we're 5 years in now. These things take much longer to play out than most people think. It is true that AI will bring

think. It is true that AI will bring real growth and by growth I mean getting more for less. It is also true that that

means prices of some things will go down including wages for certain skills. It

is also true that that will result in the end cost of those goods going down because large profit margins that result from that breed competition. If I can

get the business from the consumer by decreasing my profit margin a little bit and I will and it causes a race to the bottom. Unfortunately, we also have the

bottom. Unfortunately, we also have the inflationary government to deal with because as people lose jobs and as prices start to go down, those are two things that the government doesn't want

to see. In fact, the government has told

to see. In fact, the government has told the central bank that their two main jobs are to make sure that people don't lose their jobs. That's maximum

employment so that the government can have a maximal tax base and stable prices. In other words, make sure prices

prices. In other words, make sure prices continually increase. And so the world

continually increase. And so the world in which we have people losing jobs and the stuff that should have gone down in price actually doesn't is one that the government steps in with universal basic

income, stimulus checks in order to offset the pain of those jobs going away. But what that will really do is it

away. But what that will really do is it will keep the cost of everything from going down. Now, if that's the way that

going down. Now, if that's the way that things do play out, then it does accelerate the timeline of the dollar not being used anymore. However, there

is kind of a thread the needle possibility that I think a lot of people are not considering that the government inflates just enough to just mostly

offset the deflation. similar to what we saw with the internet. Just like the cost of TVs decreased insanely rapidly over the last couple of decades, we

should have seen the same cost decrease across the board with everything. But

the money printer fired up basically just enough to prevent that from happening. Sure, we got a few financial

happening. Sure, we got a few financial crises along the way, but that only resulted in a little bit of extra wealth inequality. And it's my bet that they

inequality. And it's my bet that they will try to thread the needle in the same way going forward into the future.

just slightly outprint the growth. Which

means that if you want to be able to win this game no matter what happens, you have to be prepared for both the inflation and potential deflation. You

have to own assets that will increase in real purchasing power no matter what.

You have to learn skills to increase your income faster than you lose purchasing power no matter what. There's

no world in which you can just learn one skill and hope to ride that out for the rest of your life. Because if you try to do that, you will end up being a victim.

Prioritize increasing your income radically every single year. Then make a hard rule to never outspend your income.

Produce as much as you can. Consume as

little as you can. Take the difference.

Invest it in assets that will protect you from both inflation and deflation.

By the way, to protect yourself from deflation, you just have to make sure that the income from that asset or the growth from that asset is more than the real cost of living, which means the

asset price still might drop. You just

need to make sure it doesn't drop more than your cost of living goes down by.

And if that seems too hard or too complicated, I mean, what is the alternative? You can't control the way

alternative? You can't control the way that the world goes. You can't control what other people do. You can't control what technologies are being produced. We

can only study history and try and get a good idea of what that means for the future. That way we can be as prepared

future. That way we can be as prepared as possible. As always, thank you so

as possible. As always, thank you so much for watching.