Author: Momir
Translation: Shan Oppa, Golden Finance
Core Views of the Artificial Intelligence Deflation Theory
Mainstream views suggest that artificial intelligence and robotics will significantly enhance production efficiency, creating a situation of abundant material wealth. The surge in production scale, under market equilibrium conditions, will inevitably drive prices down.
This logic seems valid within the realm of microeconomics, but it fails on a macro level. The obvious flaw lies in the fact that this theory focuses solely on one side of the economic equation—production and prices—while neglecting the complete monetary quantity identity: MV=PY (where M represents the money supply, V represents the velocity of money, P represents the price level, and Y represents total output in society).
Another flaw is the disregard for institutional realities: regardless of technological advancements, central banks around the world are always eager to maintain an inflationary environment.
Why Central Banks Firmly Resist Deflation
Theoretical Considerations
Economists are far more wary of deflation than inflation, stemming from the formation of a deflationary spiral—falling prices lead consumers to delay spending, which shrinks market demand and further triggers price declines. The key point is that the causes of deflation do not affect the central bank's policy response logic: whether deflation arises from positive shocks like technological progress or negative shocks like economic collapse, the central bank's response remains consistent: act early and intervene decisively.
Real-World Motivations
Inflation naturally benefits debtors. Currently, all major economies are burdened with massive sovereign debt, a result of government expansionary fiscal spending and the development of welfare economics, while inflation can effectively reduce the real burden of debt. Additionally, inflation is favorable for asset holders, and the financial industry wields significant influence over monetary management institutions.
Globalization's Lessons: Productivity Increase ≠ Deflation
We need not explore this solely from a theoretical perspective; history provides clear reference cases: from the 1990s to the 2010s, the wave of globalization drove a significant increase in productivity.
However, the actual situation during this period contradicted intuition: production outsourcing and supply chain restructuring brought relative material abundance, and productivity achieved leapfrog growth, while the price level consistently maintained an upward trend.
How can this phenomenon be explained? The answer returns to the monetary quantity identity MV=PY. When total output Y increases significantly, and policymakers still wish to maintain an upward price level P, the market must expand the scale of MV to reach a new equilibrium—either by increasing the velocity of money V or by increasing the money supply M.
The velocity of money is determined by complex market behavior factors, while the money supply is a policy tool that central banks can directly control. Undoubtedly, policymakers will focus on the variables they can manage.
From the perspective of the velocity of money, globalization not only promoted productivity increases but also led to large-scale dollar outflows, further solidifying the dollar's status as a reserve currency, while this process actually reduced the velocity of the dollar. At that time, the appeal of holding dollars was evident: export-dependent countries hoped for currency depreciation to enhance competitiveness; the U.S. investment market attracted global capital inflows; commodities were traded in dollars; and the dollar was the primary settlement currency in international trade.
To maintain market equilibrium, the growth of the money supply must simultaneously offset the impacts of three factors: the decline in the velocity of money, the rise in prices under policy objectives, and the increase in total output. In other words, the increase in productivity and the status of the reserve currency allowed the U.S. to print money extensively, yet only triggered mild inflation. This is precisely why the U.S. maintained an annualized money supply growth rate of over 6% for 25 years.
The dollar even became the most core export product of the U.S., with the dividends it brought reflected in the overall wealth level and quality of life of the American people. However, as Stephen Milan documented, this model also came with clear costs: dependency on supply chains in strategic sectors, an overly inflated financial industry crowding out industrial capacity, and a continuous decline in the execution capacity of large infrastructure projects, resulting in an economy characterized by an excessively high proportion of services and a persistent decline in the vitality of the real economy.
The Age of Abundance: The Combination of Artificial Intelligence and Robotics
Why will this new round of technological revolution change the economic operating logic mentioned above?
Unchanging Core Factors
Growth driven by productivity: Total output Y will continue to rise.
The Federal Reserve's policy guidelines: Regardless of the source of deflationary pressure—even if it is deflation caused by productivity increases—the Federal Reserve will respond decisively, with the inflation target remaining unchanged and the price level P continuing to rise.
The trend of fiscal expansion: Material abundance means reduced work pressure and increased leisure time for people. This will drive up labor prices, as more individuals will choose leisure over work; simultaneously, the demand for wealth redistribution will continue to grow, expanding welfare spending, and even potentially leading to the introduction of a universal basic income system. Continuous economic growth often amplifies societal demand for welfare, which means fiscal deficits will continue to widen, typically further pushing inflation up and the price level P continuing to rise.
The inherent laws of social development: California may be the region closest to true "abundance," and its current state may foreshadow how abundance accelerates the decline of social vitality. Abundance can give rise to radical social development trends, breaking natural evolutionary pressures. For example, cities dominated by radicals may use "NIMBYism" to block new development projects, ultimately making it so that only the wealthy can afford local housing prices, while these cities provide assistance to large numbers of homeless people around wealthy areas to showcase moral superiority. Ironically, both behaviors accelerate the decline of social vitality. Research on abundance environments for other species—such as Calhoun's "behavioral sink" experiment—reveals a fixed pattern: abundance → extravagance → waste. Abundance eliminates survival pressure, and the energy of organisms shifts to status competition within the species, ultimately leading to a decline in social vitality and a decrease in birth rates. In the short term, this will push the price level P up; in the long term, a declining population will gradually weaken the upward pressure on prices P and total output Y.
Upcoming Changes
Increased infrastructure investment: The construction of energy, hardware, and computing infrastructure requires massive public investment. During the globalization era, the expansion of U.S. production capacity mainly relied on other countries, with relatively limited domestic infrastructure investment. Restarting domestic infrastructure construction will require substantial resource investment, further increasing the fiscal pressure on the government, aligning political incentives with inflation targets, and pushing the price level P up.
Increased velocity of money: In a true abundance environment, the importance of savings will significantly decrease, and people's behavioral logic may shift from accumulating wealth to optimizing consumption, leading to an increase in the velocity of money V.
Re-deriving the Monetary Quantity Identity
Considering the above factors, we can derive a new equation change:
Total output Y↑: Productivity increases drive economic growth
Price level P↑: The Federal Reserve's inflation mission, the expansion of the welfare state, and large-scale infrastructure investment
Velocity of money V↑: Decreased willingness to save, increased consumption demand
According to the identity MV=PY, the scale on the right side of the equation will expand significantly. Relying solely on the increase in the velocity of money will not fully absorb this growth, and the central bank will inevitably need to further increase the money supply. This outcome is extremely favorable for asset holders.
Unknown Variables: The Dollar's Hegemonic Status
There is one factor independent of the development cycle of artificial intelligence and robotics: the global role of the dollar may undergo significant changes in the coming decades.
The direction of this change remains highly uncertain: Stephen Milan advocates abandoning the strong dollar policy; Scott Bessenet supports the development of stablecoins, believing they can further solidify the dollar's dominant position. The path the U.S. ultimately chooses will have profound implications for all economic variables.
The logic here is very clear: if the U.S. loses the dollar's status as a reserve currency, the large amount of dollars currently circulating overseas will flow back to the U.S. Even if the money supply does not grow, a significant increase in the velocity of money could trigger uncontrollable inflation, and the dividends brought by the age of abundance will be eroded by currency depreciation.
Conversely, if the dollar's hegemonic status is maintained, its velocity will continue to be suppressed, allowing the Federal Reserve greater room for monetary easing without triggering hyperinflation, asset prices will continue to rise, wealth will concentrate among a few, and the existing economic rules of the game will continue to prevail.
For asset holders, the optimal scenario would be: the dollar's dominant position remains unshaken, the dividends of the age of abundance continue to be released, while the central bank's money printing machine operates quietly behind the scenes.
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