Technology is deflationary.

This is the default nature. As technology progressing, the cost per output declines. For example, when we look at the invention of the backhoe, the cost of digging a hole declined a great deal. Just consider how much labor is required to move as much earth as one of these machines can do in a day.

Over the past few years, The Fed has battled rising prices due to the lockdowns and supply chain disruptions. This is further enhanced (negatively) by the conflicts waging in Europe. war is always inflationary.

While the Fed has maintained its path of higher rates, a number of central banks around the world already flipped. Is the Fed about to follow suit?

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Deflationary Technology

Artificial intelligence is on the radar of the central bankers.

Here is a headline:

Federal Reserve Forecasts “AI Will Be Deflationary” To Boost Economy

Of course, the Fed is looking at this as an aid in their fight against inflation. This is certainly the case as it is very deflationary.

Over the past couple years, we discussed how form of disruption are taking place. Technology is advancing at a rapid pace. This means that whatever the central banks were fighting was temporary. In macro-economic terms, this was nowhere near the Great Inflation.

Unfortunately, while the Fed believes this will flip to disinflationary, the results will be much worse.

AI is going to bring on a deflationary spiral. This means that jobs are going to be eradicated in massive numbers. This is something that many contest since they tend to believe that technology always creates more jobs this it destroys. The labor force participation rates, both in the US and globally, tell a different story.

Here is what the Fed had to say:

However, they reasoned that Artificial Intelligence –related technology could also go a long way in mitigating inflation. The application of this innovative technology could bring a significant boost in productivity to businesses and in turn, the economy.

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It will likely bring a significant boost to productivity. The challenge is that it will affect jobs. payroll is one of the largest expenses that most companies have. When change happens things start to turn south in ways that have devastating consequences.

Just look at Japan for the last 30 years to see what it can look like.

Technological Disruption

Probably the best example of how technology can obliterate things is commercial real estate in the U.S.

We have discussed the idea of remote work. That is a technological advancement. Because of that, after the COVID lockdowns, many realized that office life was no longer in their future. This has caused vacancy rates to skyrocket, to the point where they are half of what they were before COVID.

This is a major issue because it affects a great many things.

To start, loans on the real estate is in jeopardy of default. It is a situation that can have catastrophic consequences across the economy.

Next we also have to consider complimentary business that center around the servicing of workers. This includes coffee service, restaurants, dry cleaners, and copier services. As companies reduce their office operations, there is less need for these companies.

Hence, they see their revenues drop.

Of course, this is just one example of what is taking place. AI is going to take things to a completely new level. It is so obvious the Fed is onto it.

The only question is the timing of things. We cannot be certain that AI will directly impact this round of inflation simply due to the fact that it is not in application form. The business use cases are only starting.

That said, give it another couple years and we will see jobs in entire industries decimated. For the moment, this will primarily affect the white collar sector. That said, robotics could follow with its target set on the blue collar jobs.

We are looking at 5 years before the end of the decade. time is moving quickly but automation is going even faster.

The Fed is right: Ai is extremely deflationary.

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