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Tags: interest rates | inflation | artificial intelligence | u.s. economy

Higher Rates, Inflation & AI Will Define the US Economy

Higher Rates, Inflation & AI Will Define the US Economy

Peter Morici By Wednesday, 14 February 2024 09:20 AM EST Current | Bio | Archive

The post-COVID economy is emerging as pandemic-era savings run down, tempered by work-from-home and new patterns of consumer behavior stifling returns.

Holiday season sales increased 3.7% — but with headline inflation at 3.2%, that was a modest improvement over 2022. Most paid higher prices for necessities and restaurant meals but scaled back gifts to stay within budgets.

Credit card debt and car loan delinquencies are rising. Banks are threatened by maturing loans to troubled companies and on commercial real estate with high vacancy rates.

As households and banks consolidate finances, a few quarters of GDP growth in the range of 1% should be followed by a rebound and then to a steadier 2% or more.

Inflation and interest rates won’t revert to pre-COVID levels.

Derisking trade, the transition to green energy, tougher building codes; shortages of land, skilled workers and materials for home construction; and financial indiscipline at publicly supported institutions like universities are costly.

Even without stimulative macroeconomic policies, those will combine to make 2% inflation a tough target to sustain.

U.S. and European governments will be challenged to control deficits by trimming spending and raising taxes, which are already at historically high shares of GDP.

Central bankers may feel pressure to monetarize debt to enable more government spending — especially on imperatives like the green transition and defense. At the Federal Reserve, history indicates the institution will be jealous of its credibility and reputation.

Long-term interest rates will rise if politicians fail to accomplish spending reform. Guns vs. butter and work incentives/productivity vs. welfare/entitlements are tradeoffs with discomforting national security and political consequences especially in the present political climate where appreciably higher taxes are unlikely.

Over the last 50 years, the 10-year Treasury rate averaged about 6% but from the 2008 financial crisis to last year, the rate only averaged 2.5%.

Large government deficits and capital requirements to build out green energy, artificial intelligence, and accommodate more retirees drawing down stock and fixed income investments; plus the need to fortify infrastructure to withstand climate change, will pressure supplies of new savings.

Importantly, building out new technology costs more these days.

Google was launched with initial funding of $25 million. Microsoft helped establish OpenAI with an initial investment of $1 billion in 2019 and now has committed $13 billion to the firm.

To accommodate large learning models on its Azure cloud service, Microsoft built supercomputing capabilities with tens of thousands of pricy Nvidia graphics chips.

In 2024, the Treasury benchmark will settle near 4% but longer-term may be pushed up further as the economy picks up steam again.

That’s not alarming. Investments in green energy and artificial intelligence (AI) will give us a cleaner and more capital-intensive economy. Higher nominal and real interest rates will reflect stronger growth and a higher return on capital and in part, a bit more demand and inflation.

Innovations that help us make things more efficiently and improve the quality of lives are usually disruptive. AI will accelerate job redefinitions and displacements but create new opportunities and a more productive labor force overall.

The New York Times is suing OpenAI for training large learning models on the newspaper’s publicly available archive of news stories. As this column has argued, that is akin to telling aspiring writers they may not read Nora Roberts (a.k.a. JD Robb) without paying her royalties if they hope to pen successful romance and suspense novels.

It’s the old story of the weavers trying to block automated looms — or as is more fashionable in our times, limiting change through administrative or court imposed regulations.

In contrast to The Times, Associated Press and the publisher of Politico and Business Insider have reached content access agreements with OpenAI.

AP is using AI to broaden its quarterly financial reporting from 400 to 4000 firms. That enhances the value of its products and better secures the livelihoods of its journalists. In turn, that has increased trading activity, liquidity and funding opportunities for smaller firms.

AP is using AI to do good in addition to doing well.

Large language models offer journalists opportunities to greatly expand the number of events and observations they assimilate in writing stories — beyond what they can glean by searching the internet and interviewing individuals on their own. This should increase the quality and quantity of their analytical work.

Similar applications can assist reinsurance companies in assessing the fairness of claims, the IRS in detecting fraud, and skilled white collar workers in many other industries.

By the end of the decade, the AI revolution could boost productivity — as much as 1.5 percentage points annually. Importantly, the AI boost to GDP will offer western governments an escape from their fiscal binds.

The temptation to overregulate will be great, but neither governments nor private sector can see what’s coming next. It’s better to mostly rely on markets to sort the chaos and optimize change.

Peter Morici is an economist and emeritus business professor at the University of Maryland, and a national columnist.

© 2024 Newsmax Finance. All rights reserved.

AI will boost productivity, while GDP growth will offer governments a way out of their budget problems. The post-COVID economy is emerging as pandemic-era savings run down, tempered by work-from-home and new patterns of consumer behavior stifling returns.Holiday season...
interest rates, inflation, artificial intelligence, u.s. economy
Wednesday, 14 February 2024 09:20 AM
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