550: The Only Economists Worth Listening to Right Now

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If you spend enough time listening to economists, you’ll notice something interesting.

They rarely agree.

Over the years on the Wealth Formula Podcast, I’ve interviewed economists from across the spectrum—Keynesians, Austrians, monetarists, market practitioners, academics. Some are bullish about the next decade. Others are extremely pessimistic.

But there’s one thing that almost all of them have agreed on in private conversations.

The entire economic outlook changes if artificial intelligence dramatically boosts productivity.

And that possibility is no longer theoretical.

The Latest Jobs Report Was Weak

Last week’s employment report came in significantly weaker than expected.

Instead of adding jobs, the U.S. economy lost about 92,000 jobs in February, when economists had expected modest growth. The unemployment rate ticked up to 4.4%, and several sectors showed surprising weakness.

Even healthcare, which has been one of the most reliable job creators in the entire economy for years, actually lost roughly 28,000 jobs last month.

There are explanations floating around for this. Some point to strikes and temporary disruptions. Others point to geopolitical issues or policy changes.

But there’s a bigger question worth asking: Is this the very early sign of something structural?

In other words—are we already starting to see the early effects of AI-driven productivity changes?

The Wild Card That Changes Everything

Every economic model—every single one—is based on assumptions about productivity.

If productivity grows slowly, you get one set of outcomes.

If productivity suddenly accelerates dramatically, you get something entirely different:

• Faster economic growth

• Lower production costs

• Strong deflationary pressures

• Potential disruption to labor markets

And that’s exactly what AI could bring.

Some economists believe the next decade could look sluggish because of demographics and debt.

Others think inflation and fiscal pressures will dominate.

But almost all of them admit the same thing:

If AI dramatically increases productivity, their forecasts could be completely wrong.

The Fed’s Risk

There’s another implication here that matters for investors.

If AI is already starting to push productivity higher and costs lower, the Federal Reserve could easily misread the signals—just like they did during the inflation surge a few years ago.

Central banks tend to react to data after the fact.Technology moves much faster.

If policymakers underestimate the economic impact of AI, they could once again find themselves behind the curve.

Fortunately, it appears increasingly likely that Kevin Warsh may become the next Federal Reserve chair, and he is widely viewed as someone who takes technological change and productivity dynamics seriously.

That could matter a lot.

This Week’s Episode

This week on the Wealth Formula Podcast, I interview another economist—one who leans heavily toward the Austrian school of economics.

On many issues, his outlook is quite skeptical about the future of monetary policy and debt.

But what was fascinating is how the conversation evolved toward the end.

Even he acknowledged that his entire outlook depends on what happens with AI.

In other words, even the skeptics recognize that this technology could fundamentally reshape the economy.

And if that happens, many of the assumptions investors rely on today will need to be reconsidered.

Listen to the full episode now.

The only forecasts that matter right now are the ones that understand how profoundly AI could change the economic landscape.

And that story is just beginning.

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Transcript

Disclaimer: This transcript was generated by AI and may not be 100% accurate. If you notice any errors or corrections, please email us at [email protected].

Now some people are worried about AI causing a demand side deflation. Uh, actually there are a couple of essays in recent weeks that went viral warning that, you know, AI is gonna eliminate a bunch of white collar jobs. Consumers are gonna be out of a job, they’re not gonna spend that much. And, you know, down goes aggregate demand.

That’s not gonna happen. I can confidently say that’s not gonna happen.

Welcome everybody. This is Buck Joffrey with the Wealth Formula Podcast. Coming to you from Montecito, California today. Before we begin, I wanna remind you that there is a website associated with this podcast. It’s wealthformula.com. That’s where you want to go. If you are interested in participating, uh, in this community beyond just listening.

That’s where we have lots of different links and, uh, opportunities including the accredited investor club. All you gotta do there is click and sign up and you’ll be part of the club. You gotta do a little onboarding. Once you do that, you get access to all sorts of, um, private deals, private deal flow costs, you nothing.

So get on board. Go to wealthformula.com. Sign up for the investor club now, as for today. We’re gonna talk, uh uh, in this interview with yet another economist. Right now, if you spend enough time listening to economists, you’ll notice something interesting, which is they rarely disagree, right? Which is a little unnerving, and I guess that’s why it’s a social science rather than a science.

Over the years, we’ve had lots of them, right? We’ve interviewed economists like. Ians Austrian, Monets, market practitioners, academics. Some are bullish about the next decade. Others extremely pessimistic. But the thing is, there’s one thing that almost all of them have agreed on, at least in their little private conversations they have with being were not on air, which is the entire economic outlook changes.

If artificial intelligence dramatically boosts productivity. The reality is that’s not really a theoretical thing anymore. Let’s talk a little bit about, uh, the latest jobs report. So, uh, as I’m recording this, this would be last week, maybe a few days before that, but the employment report came in significantly weaker than expected.

Instead of adding jobs, the US economy actually lost about 92,000 jobs in February. And, uh, of course, economists had expected modest growth. Unemployment rate ticked up to 4.4%. Still not terrible, uh, but higher. Several sectors have showed surprising weakness, though even healthcare, which has sort of been the darling of the unemployment space.

You know, very reliable creator of, of jobs, uh, in the economy for years. Actually lost 28,000 jobs last, last month. Now there are explanations floating around for this. Some people are pointing out strikes, temporary disruptions, geopolitical issues, policy changes, whatever. But there is a bigger question worth asking, and I’m gonna keep pounding on this ’cause I keep talking about this nonstop.

Is this the very early signs of something structural? In other words, are we already starting to see the early effects of AI driven productivity changes? Now, every economic model, I mean, every single one is based on assumptions about productivity. And if productivity grows slowly, you know, you get one set of outcomes.

But if productivity suddenly accelerates dramatically, which. Many predict with ai, you get something entirely different. You get faster economic growth, lower production costs, strong deflationary pressures, and then potential disruption of the labor markets. And that’s exactly what AI could bring in my opinion will bring.

Some economists believe the next decade could look sluggish because of demographics and debt. Remember, we had ITR economics and those guys talk about the depression in the 2030s. Others are are still talking about inflation and fiscal pressures will dominate, but again, almost all of them admit the same thing.

The AI issue that dramatically increases productivity. If that indeed happens, your forecast could be completely wrong. Now there’s another implication here that matters for investors now, and that is if AI is already starting to push productivity higher and cost lower, the Federal Reserve could easily misread the signals just like they did during the inflation surge a few years ago.

You know, central banks tend to react to data after the fact, but the thing is that technology actually moves a lot faster, and if policy makers underestimate the economic impact of ai. Guess what? They could once again find themselves behind the curve, and that wouldn’t be surprising. But fortunately, it appears likely that Kevin Warsh the, uh, president Trump’s choice for the next, uh, fed chair is gonna be, uh, you know, he’s, he’s hopefully gonna get nominated.

And the good news about him is he’s widely viewed as someone who takes that AI issue very, very seriously and is concerned about unemployment and deflationary pressures. This week what we’re gonna do is we’re gonna talk to another, uh, economist. This one leans, uh, more heavily towards sort of the Austrian School of Economics, hard money, that kind of thing.

And on many issues, his outlook is quite skeptical about the future of monetary policy and debt. But I think what gets really fascinating is the divergence of that conversation, um, towards the end of this, you know, podcast. Even he acknowledges that his outlook really depends on what happens with ai. In other words, even skeptics recognize that this technology could fundamentally reshape the economy.

And if that happens, many of the assumptions investors rely on today, well, we’ll need to be reconsidered. Anyway, that is going to be the show today. I think it’s a very interesting topic. We’ll have that for you right after these messages.

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Welcome back to the show everyone. Today. My guest on Wealth Formula podcast is Professor Alexander Salter. He’s a Georgie g Snyder, professor of economics at Texas Tech University’s Royals College of Business, and a comparative economics research fellow at the Free Market Institute.

His work focuses on monetary economics, political economy, and institutional analysis, and he’s the author of Money and the Rule of Law and the Political Economy of Distributism. Distributism. Is that a word?

That is a word. Although not what most people know. Good job getting it right the first time.

Very good.

Very good. Well, thanks for joining us.

I’m really happy to be here. It’s gonna be a fun conversation.

Yeah. So, you know, you, you’ve written about money and the rule of law, obviously that’s what your book, one of ’em is called. In plain English, what does that mean and, and why should investors care whether our monetary system is governed by clear rules versus, you know, discretion of policy makers?

Great place to start. Rule of law basically means that public policy is conducted according to clear, general and predictable rules. This is not radical at all. This is exactly what we expect from all organs of public policy and democracies, especially constitutional democracies. But if you look at how monetary policy in the United States work as it’s conducted by the Federal Reserve, this is not how it works.

Monetary policy is conducted on a discretionary basis by top bureaucrats with minimal accountability to the public, and they really do try to surprise markets because it’s when you can surprise markets that monetary policy has its greatest effects. So I and my co-authors in money on the rule of law think that this is fundamentally misguided.

We should not want to do monetary policy by discretion. We should want to put it on a firm, rule based framework. Markets know what to expect and investors can have some credibility and security, especially earning, for example, the purchasing power of money gen, uh, long-term contracts and long-term capital allocation scenarios becomes very important.

Yeah, so. The government plays sort of a, I don’t know, sort of a, a surprise you to change the market’s kind of role, right? They’re, you know, they’re, they’re trying to dictate that role rather than giving a roadmap and letting people do, you know, what, what they think is, uh, the right thing under a certain circumstances.

Yeah, I think that’s right. I think monetary policy makers have exceeded their role as a referee of the financial or commercial game. They wanna be a player of the game, especially in the post 2008 monetary policy operating framework. They really are involved. Credit picking winners and losers, and this is very different.

A monetary policy that is general predictable and non-discriminatory. Really, monetary policy should be boring. Central banking should be very straightforward, credibly commit to what you’re going to do with total spending in the economy, where you’re going to feed dollar purchasing power, how it’s gonna behave over time.

The Central Bank has almost complete control over those two variables. If you could credibly specify a path for those variables that would provide a lot of economic certainty, which households, businesses, civil society organizations, everyone could use to form the basis of rational economic planning.

Instead, you have forward guidance about interest rate rates, which is not really something that the central bank can control in the long run anyway. Again, there’s a lot that they’re trying to keep under wraps. They don’t want to be out guessed by the market, but of course, that’s exactly why a Fed watching is such a lucrative market segment.

Right, right. You know, you mentioned debt. Of course, we’re running very large deficits even, uh, during periods of economic growth. Um, at what point is the government debt really begin to influence the Federal Reserve? Because, you know, we hear. Obviously the Fed is independent, right? The Fed is independent, and in the meantime we’ve got, we’ve got some serious problems, uh, on the fiscal side of things.

So is it, is it truly independent? Can it continue to be independent?

Great question. So in terms of legal independence, a lot of people don’t realize this, but the Fed is among the world’s least independent central banks. The Fed was created by Congress. The 1913 Federal Reserve Act, Congress has since modified that act, I think about 200 times, and it could do so again if it chooses.

So compared to many other central banks, we’ve deliberately less political installation in terms of central bank oversight under the very basic theory, which is correct in my view. Even institutions that are run by experts have to have democratic accountability at some point. Now in practice, legislators have not been very willing to hold central banker to account.

I think that that’s a problem, and I would like to see that change, especially when we’re talking about factor factors pertaining to the government debt. Because as you pointed out, the debt is already a problem for the Federal Reserve. If you look at the extraordinary money printing. The Fed engaged in starting in 2020, the COVID years, right, trying to stabilize markets as they were rocked by the Coronavirus pandemic.

A lot of that went into purchasing, newly issued government debt. The Treasury would auction off new debt, sell it to private buyers. The Federal Reserve would then turn around and buy that debt from the private buyers and ultimately put it on its balance sheet. Ultimately, over 50%, about 55% of the new debt that was created between 2020 and 2022 ended up on the Federal Reserve’s balance sheet that is financing the deficit By printing money, it doesn’t matter that it’s roundabout.

It is running the printing press to meet the treasury’s obligations. And quite frankly, it is uncomfortably close to Banana Republic territory, and I think that we really need some deep institutional reforms to not get caught in a fiscal monetary spiral that could create either crippling inflation or you’d be in the uncomfortable position where the government simply can’t service its debts.

And given that the entire world currently views treasury debt as a safe asset. If the value of that asset, which underpins all major portfolios across the world, becomes called into question, we’re gonna have some serious problems.

I’m curious what you think the right thing to do is, because, you know, I think about like the new, the, the incoming fed, uh, president of war.

He seems to be, I mean obviously he’s a smart guy, but he also seems to be a guy who is in general agreement with the Trump administration about directionality of rates and that kind of thing. And I’m just curious on your thoughts on that, because I mean, a lot of people are looking at this as a, you know, political appointment.

Well, it’s always a political appointment, right?

That’s

right. That’s right. But in reality. Do you see this as a, a different type of marriage between, uh, uh, a fiscal and monetary policy? Potentially.

A lot of people are worried that this appointment, if it goes through. We’ll Mark a turning point, a phase change in the relationship between the Fed chair and the presidency.

Now, presidents have always, always tried to pressure fed chairs for the president’s preferred monetary policy. Uh, LBJ famously took the fed chair at the time to his private ranch and pushed him up against the wall and basically said, you’re gonna do what I say you’re gonna do. Of course there was the relationship between President Nixon and Arthur Burns on the eve of the 1972 presidential election.

Even President Reagan wanted to pressure Volcker for accommodative monetary policy when he thought it was in his political interests. What we’re seeing here is the potential for influence on fed chairs by the executive branch, by the president, to be overt and constant. Now Wars has said that he wants short rates to come down, but he also wants to shrink the Fed’s balance sheet.

Return to something more like the pre 2008 operating framework when the Fed’s balance sheet was comparatively sh small and reserves were more or less scarce. Whether or not you can do both of those two things at the same time is an open question that’s gonna require some complex financial engineering, and it’s probably going to require the Fed share to get more involved with yield curve manipulation.

Then really the central bank should be involved in that’s messing with relative prices. Ask any economist what monetary policy should not do. It should not skew relative prices, but wars seems committed to trying to normalize monetary policy by doing exactly that. It’s dangerous. There might be a payoff.

Of course, the risk is in trying to do the right thing, you’re going to make things worse, and even if you get there, you have looming pressure from President Trump or whoever succeeds him in 2028. For my money, I would much rather see Congress rather than the presidency take the lead on reforming the Fed.

I wanna see actual substantive legislative changes to the Fed’s mandate. Specifically, I want everything off the Fed’s plate except stabilizing the purchasing power of the dollar. We don’t need the full employment mandate. It’s redundant at best, dangerous at worse. We don’t need the moderate long run interest rates plank of the fed’s mandate.

Redundant at best, dangerous, at worse. The one thing the Fed can control and can do a pretty good job at is controlling the price level, the general expensiveness of goods and services. So let’s focus on that. And leave other organs of public policy to make, for example, allocated decisions.

You mentioned that WARS is talking about bringing short, short-term rates down and trimming the balance sheet.

Explain to people who are not economists why that’s a challenging thing to do and what the pitfalls are.

The difficulty is you really ultimately have to bring short rates down while allowing long rates to rise. If you’re gonna shrink the bed’s balance sheet, there’s no way to do that other than normalizing monetary policy, engaging in what’s called quantitative tightening.

You’re either gonna have to sell assets or what’s more likely is you’re just going to allow those assets on your balance sheet to mature and not continue purchasing. Just don’t roll them over In the short run that is going to raise long-term yields on the long-term securities that disproportionately occupy the Fed’s balance sheet.

Now at the same time, war says that he wants to use monetary policy to bring short rates down so you can sort of see that’s operating at both ends of the yield curve. You’re compressing it, so to speak, and that’s very difficult to do, especially because when markets become wise to what you’re doing and wars is said publicly that this is his goal.

So it’s not exactly a surprise. Structural economic forces. Have a way of forcing interest rates, yields on capital to go to levels consistent with their supply and demand fundamentals, regardless of what policy makers want them to do. That’s gonna be the tough thing here. Uh, you also have to worry, of course, about whether war gets the job in the first place.

Taking a half step back here, current chairman, Jerome Powell, his term is up in May. But he does not rotate off the Board of Governors. He simply stops being fed Chair. Now, traditionally fed chairs resign from the Board of Governors when their terms are up, but given the bad blood that exists between Powell and Trump, he might simply relinquish his chair as he has to do under law, but still keep his seat under the Board of Governors.

And if he does that, there will be no open seat for President Trump to appoint Warsh two. So that could open up a whole new front in the war over the control of the Federal Reserve. And again, the danger with this is partisan politicization of monetary policy. I think that we should distinguish that from basic politically induced reform to defense mandate from Congress, which I view as good.

I don’t wanna see the president metal and monetary policy. I think that we have pretty good evidence that that’s going to create some bad outcomes for financial markets.

So how should we think when you, you talked about, uh. If war is able to trim the balance sheet, how should we think about the bond markets responding, uh, to all this?

I mean, obviously we have, my audience here is a lot of investors and they’ll look at things like mortgage rates that are and, and on, on bond markets. So at what point mm-hmm. You know, do investors start demanding a higher risk premium because they’re unsure about, you know, long-term fiscal path?

Well, the Fed stops rolling over the Fed’s balance sheet, continuing to renew purchases of similar assets.

Uh, yields are gonna have to go up at least in the short run. And so in terms of all long-term assets, right? Capital markets are connected by prices. By interest rates, you can’t affect one long-term asset rate in isolation. So I would expect long-term treasuries to go up. I would expect mortgage rates to go up too.

I think that wars has been very clear that that’s what he wants to happen, at least in the short run. In so far as that’s driven by a lack of public demand that’s forcing up all prices. Private buyers who is willingness to pay for capital to rent capital is unchanged, are probably gonna get pinched by higher capital prices in the short run.

So, and I can understand that they’re probably not too wild about this.

Yeah, I mean, I also can’t imagine why, uh, that the Trump administration would be crazy about this because if, if bond yields go up. I don’t think that’d be a particularly popular political maneuver. Am I missing something there?

Right.

So there are have been some noises from the Trump administration that they want to, it’s not really refinancing, but I can’t think of a better concept to describe it. So we’ll call it that. They want to change the maturity structure of US government debt. There’s a lot of stuff maturing, short run. They wanna try and roll that over and turn that into long run debt.

Because until pretty recently, long run rates made that a pretty attractive proposition. Uh, you could make the argument that 10, 15 years ago, whoever was running the treasury back then, I think it was Janet Yellen. If I’m remembering correctly, uh, made an error in not taking the steps necessary to lengthen the maturity on average of US government debt to take advantage of those more comparatively beneficial interest rates, which would’ve been a real boon to the taxpayer.

Basically means that interest costs in the debt would be much lower today than they otherwise would have been, but now that there’s already pressure on long-term rates to rise, now that we have war saying that he wants to shrink the balance sheet, now that we have turmoil in global, uh, capital markets, given the recent events in the Middle East, which I fully expect to increase investor uncertainty for the foreseeable future.

That’s gonna make government borrowing pinch more than it otherwise would. Now, the gamble that you’re making is that if wars can ultimately pull this off, that’s gonna give you breathing room on the short rate market, which is eventually going to reverberate in a lower risk premium in the long term market.

But that requires a lot of things to go right in order for that plan to succeed. That seems pretty complicated. You’re counting on a lot of things that are all hard to do, each going off flawlessly. Can it be done? Sure. Should you count on that? Not in government work, I don’t think.

Going back to the idea of, you know, fiscal pressure shaping monetary policy and that situation, like who loses savers?

Borrowers, asset owners. Wage earners. Who, who loses?

Yeah. Basically anybody who’s stuck into a long rate. If we get what economists call fiscal dominance of monetary policy, that basically means the central bank is going to be indirectly financing deficits by printing money. You can talk about all the complicated policies and trades that people will make.

At the end of the day, it’s running the printing presses to cover Uncle Sam’s obligations. We know what the results of that are gonna be. Prices are gonna go up faster, inflation’s gonna go up faster. So anybody on a fixed income, anybody who’s locked into a long-term debt contract, right? Long-term creditors, on that side of the arrangement, they’re not gonna be too happy with this.

They’re going to see their rate of return really eaten into by a much weaker dollar than they expected when they actually executed that contract. Of course, you’re gonna have corresponding beneficiaries on the sides of people who are borrowing. People who are in financial contracts that might have an adjustable rate, they probably won’t be off too bad.

But what really scares me about this going forward is not if it’s probably going to be the case, that inflation is going to be higher for the foreseeable future, but also the variance in the inflation rate is going to be higher for the foreseeable future. A lot of people forget, at the beginning of the 20th century, it was not uncommon for large corporations to issue 100 year bonds, 100 year government debt.

Nobody does that anymore. 30 years is pretty much the longest you can expect. Why? Because a hundred years ago, well, more than a hundred years ago now, at the beginning of the 20th century, we were on the gold standard. You can print paper, but you can’t print gold, and so that anchors the long run price level.

If you’re on a gold standard, that pins down the dollars purchasing power, so you can afford to engage in those very long-term contracts, which is really good for promoting capital allocation, right? That’s a strong source of economic growth. If you can give people that kind of certainty. You can’t have that anymore.

And if anything, that certainty is going to become less feasible if the variance of the inflation rate starts moving around because the central bank is forced, because the treasury is running too much debt to use its monetary operations to pay Uncle Sam’s ongoing fiscal obligations. You know, in all these scenarios you talked about, is there any scenario in which you don’t see the dollar being debased?

Any scenario in which the dollar is not debased, I think the best that you can hope for is steady and predictable inflation. The best case scenario is that we get back to something like one and a half to 2% inflation every year for the foreseeable future. Note, though that we’re not there yet, we still haven’t won the post pandemic war on inflation, right?

If you go and look at the recent price index releases. The consumer price index is looking more or less favorable, but the one that the Fed uses called this P-C-E-P-I, personal Consumption Expenditures Price Index, which is a just a different way of keeping track, uh, calculating the expensiveness of consumer goods and services.

Inflation, by that measure is still running at close to 3%. So we’re talking about undertaking all these radical monetary policy changes. We haven’t even won the last war. What are we talking about? Opening up a front of the New War. I think that we should really focus on one thing at a time.

In the meantime though, that like the tenure was down, you know, down pretty well.

Was it just over four? Why is that? Why? Why did that happen?

At least so far, you must expect that investors have muted expectations about the demand for government debt. That probably reflects some combination of lower inflation expectations, some combination in confidence in Uncle Sam’s ability to continue to repay.

That can happen in the short run. In the long run, you have to worry still because the fundamental structural obligations have not been fixed. Interest costs on the debt are still, is still one of the single largest items in the federal budget costs more than the Department of Defense. That’s crazy.

Long-term Social security, Medicare, Medicaid. We know that that’s going to be trillions of dollars of expenditures every year that we just don’t have the money for. So the money’s gonna have to come from somewhere, gotta have to raise taxes, lower spending or print money, some combination of all three of those things.

And ultimately, I think that if we don’t fix our fiscal problems, the only feasible trajectory. For interest costs on the debt and interest prices themselves is upward.

You know, a lot of people talk these days about the potential issues with credibility of, uh, the dollar.

Yeah.

Um, if Congress ultimately ends up getting more influence or the president gets more influence over the dollar, uh, what does that mean for long-term monetary credibility?

If Congress actually gives its act together? Enacts beneficial reform to the Fed’s mandate. I think that that will increase public confidence in the dollar. Right now, the Fed has a triple mandate, stable prices, full employment, moderate long run interest rates. Suppose we do what I advocate be done, and we get rid of two of those planks stabilizing the dollars.

Purchasing power. That’s the sole responsibility of the Fed. If you get that enacted in legislation. That can be really durable. ’cause executive orders change depending on, you know, what party holds the oval. But legislation is durable. That probably would be incredibly hard to appeal if it were actually enacted.

So I think that that would be really good for credibility about the dollar, future purchasing power. But if we’re just playing presidential football between Republicans and Democrats, between what we want fed chairs to do, that’s the opposite. You can’t have any long-term insurance about what the dollar’s gonna do.

If Republicans wanna do one thing every four years, and Democrats wanna fundamentally take things in a different direction the next four years, you can’t have partisan fortunes determining the course of monetary policy and continue to expect a robust foundation for financial markets. That’s a recipe for disaster.

So you hear all this and you’re an investor at home and you think, I’m trying to make decisions 10 to 20 years out. What framework can people use in this, um, in this current situation? Um, not suggesting, you know, financial advice, but rather how do you, how do you approach this as somebody who’s looking at your own investments?

Mm-hmm. And you know what to do about long-term financial planning.

At a certain level, the market will ultimately force fiscal discipline of some kind. Uncle Sam, simply because you’re not gonna be able to make all those unfunded liability payments and continue to sustainably pay, uh, bond holders more than we’re paying for the national defense.

Well, it can’t go on forever. Won’t go on forever. And so I think that over the very long run, 10 years plus, there’s still a reasonable case that you want to be long on securities, on equities. Uh, I myself have a very simple investing strategy. I have very, very low index, uh, very, very low fee, broad-based index funds.

I have zero confidence that I’m gonna be able to beat the market. A lot of people think that they’re going to be able to time the purchase of inflation hedges, right? You’re gonna be able to get into crypto at the right time, get into gold or silver at the right time. I don’t think that you can do that predictably, if you think you can more power to you, maybe I should take some advice from you.

But even given all the problems that we have. Given that there has to be a course correction at some point, I think that any of those course corrections make broad-based index funds the best long run purchase that you can continue to make if we get our act together. Financial markets are gonna do pretty good.

If we don’t get our act together, everything is gonna be terrible. But my guess is just a broad portfolio that tracks the market as a whole is going to perform less poorly than everything else.

It’s interesting. Uh, one of the, uh, things I read, um, about wars is, is one of the, uh, things that he sees happening over the next decade is, you know, he’s, he really believes that the AI revolution is going to be extraordinarily, uh, deflationary hit these, right?

It would that balance off some of the potential risks that you’re talking about?

Potentially, depending on why it’s deflationary. A lot of economists are afraid of all kinds of deflation, but that’s wrong. What’s really damaging to an economy is demand side deflation a sudden and unanticipated collapse in what we call aggregate demand, total dollar spending on goods and services.

That was the cause of the Great Depression. That was why the 2008 financial crisis lasted as long as it did, and why the hangover was as long as it was. There’s another kind of deflation that we experienced for most of the second half of the 19th century in the United States, and that is supply side deflation.

If we get better at making goods and services across the board because there’s general technological improvement, because we discover new natural resources, whatever, that’s actually salutary, that has a good effect. We’re actually using up fewer resources to make the goods and services that we can consume.

Prices should reflect that in a market economy, and in fact, prices will reflect that in a market economy. So what we might refer to as that secular deflation caused by supply side improvements, that’s something that we should welcome. It’s something that we should not try and use monetary policy to fight against.

Now, will AI give us that? If AI results in broad-based productivity improvements all across the economy, yes, I think that you could make a case that the rate of growth of prices will either slow down and could even turn potentially slightly negative. That’s a supply side deflation, and I welcome it. Now some people are worried about AI causing a demand side deflation.

Uh, actually there are a couple of essays in recent weeks that went viral worrying that, you know, AI is gonna eliminate a bunch of white collar jobs. Consumers are gonna be out of a job, they’re not gonna spend that much. And, you know, down goes aggregate demand. That’s not gonna happen. I can confidently say that’s not gonna happen.

’cause it doesn’t even make sense in an accounting sense, let alone an economic one. Suppose that that actually happens. Suppose that AI does automate a bunch of white collar jobs and unemployment goes up because of it? Well, that means that a bunch of business firms that were previously paying wages now have a pot of money left over.

What are they gonna do to that? It’s gonna go into profits, and when it goes into profits, it gets paid out to investors, holders of capital. So it’s gonna get channeled into investment. So demand as a whole does not decline. Its composition changes. You’ll see a fall in consumer spending, but a rise in investment.

And so the overall level of total, total spending in the economy should remain more or less unchanged. Now, that doesn’t mean that we shouldn’t worry about AI for moral or political reasons, right? If a bunch of people are suddenly out of a job, that could be a political problem and we should have compassion from those.

Who suddenly find their human capital worthless because of technological developments. That’s hard. We might wanna find ways to help them retrain to relocate. That’s a valid public policy conversation, but it is not a macroeconomic catastrophe. We’re not looking at a second grade depression here. I’m telling you right now.

That is not in the cards.

Well, it’s interesting ’cause it sounds like. Depression for some, a boom for others,

right? And so that means that in the aggregate, it’s a wash. And so you should focus your public policy response on helping the losers. But that’s not about preventing a depression. That’s about just helping people retrain and redevelop human capital that can continue, allow them to compete in the 21st century economy.

The language of e uh, economics, it’s a distributional concern. You’re worried about who has what slices of the economic pie, but it’s not like the overall economic pie is contracting. In fact, it’s growing still.

So you could have 10% unemployment and. Booming in a booming economy,

you could actually have both of these things.

Yes, we have never seen that. And the reason that I think that we’ve never seen that is because we’ve never actually had macroeconomic institutions that are doing the demand side stabilization work that you would need. I think the Federal Reserve for all of its faults knows how to get the basics of that right.

And another reason that you’ve never seen it before is that the political process simply would never allow it. Right. Mass unemployment of that kind would be so politically catastrophic that the political system for electoral reasons would never allow the economic system to unfold in that direction.

It, it’s a sort of a weird thing, you know, it’s a fascinating thing to think about because you do, you know, you do point out that you would get this incredible production and investors would do well, but. There has to be, there has to be people out there. There have to be a lot of people who can spend.

Right, so what, so what? That wouldn’t create an imbalance at that point, or is it just I don’t think so. No.

You do have some economists who argue something like, um, white collar workers, those who are well off, but not necessarily wealthy. Their propensity to consume. Is higher than the very wealthy who save a lot of that.

And so if you lay off people who are doing more consuming than saving, that could potentially have a detrimental effect on demand. But again, that’s only looking at half the ledger. The whole point of the financial system is to take savings and channel them into productive capital. You usually don’t see money just sitting in bank vaults unused.

The whole point of banks is to take that capital that’s pooled and put it into investments. If that’s not happening, there’s something wrong in the background with the financial system, with the money and banking system, and so that rather than AI is your ultimate problem. Again, that’s something that did happen in the early days of the Great Depression and also in the 2007, 2008 Great Recession.

You could absolutely have financial sector problems. For other reasons, uh, such that banks and financial allocators are not doing their job at allocating capital, but AI won’t be the reason they’re not allocating capital. It’ll be something else. They could potentially happen at the same time, but they’re conceptually distinct problems.

What do you think’s gonna happen over the next

decade? Just curious when, I mean, it’s a very complex world and you’ve, you know, you’ve outlined some of the, I guess, more traditional. Macro macroeconomic perspectives on this, but when you overlay what we just talked about, it becomes extraordinarily complicated.

I think AI is gradually going to eliminate some jobs that right now have people doing what you might call white collar algorithms. Tasks that at least right now do require an advanced education, a college degree in some business relevant discipline, perhaps. Uh, putting together balance sheets, discounting cash flows, right?

Making a marketing slide deck about consumer psychology and consumer demand. I could see AI replacing a lot of that, but not all of it because you’re still going to need people to decide. What assumptions do you make that the AM model is training on? What are the likely scenarios to which you apply that model?

And so while I do think that there will be some sectoral imbalances that’s not fundamentally different from other significant technological improvements that we’ve seen in the past, right? The internal combustion engine, electricity, the internet spreadsheet software, I think AI could potentially be at least as big.

As all of these things, but I don’t think it’s going to eat the world, so to speak. I think it’s going to cause a bumpy transition for some, and we’re gonna need to retool, especially in college business programs. But I think that on the whole, I’m cautiously optimistic about ai.

But in terms of your, your previous discussion, how, you know, just in terms of the, the market forces and, uh, fiscal monetary.

Uh, issues the, the, the, the deficit. How does it impact all that? If, if it ends up being as big as everybody seems to think it’s,

that’s an interesting question because those potentially could run in opposite directions. If we do get a boost to growth from ai, that’s additional economic activity that when it’s taxed, can help address the deficit problem.

So in that sense, uh, the degree which AI transformative and might cause like job problems also lessens the deficit and debt problems. To the extent that I is just another technological improvement, we might get a little bit more growth and that will help a little bit in terms of generating the tax revenue that we need to pay our bills.

But it’s not gonna fundamentally solve the problem. If you push me on my sentence prediction, I think that on the fiscal side we’re going to some restructuring of entitlement programs such that people who have claims are not gonna get all the money they think they are. They’re gonna get something like.

95, 90 cents on the dollar, there’s going to be some reduction in the growth path of discretionary federal expenditures, and there’s probably gonna be some more money printing to try and smooth things over. So I foresee a slightly higher inflation rate over the next five to 10 years to try and deal with those difficulties at the same time.

You know, that’s inconvenient. It’s not what we would want, but it’s not catastrophic. And if it coincides with a. Moderate, but not earth shattering productivity boost that we get from AI and similar technologies. I think that on the whole, we are in a sustainable place because the great thing about being Uncle Sam is that you never actually do have to pay all your bills.

As long as the growth rate of debt gets slower than the growth rate of the economy. That’s fundamentally sustainable. Households have to pay back their debt. Governments don’t, right? If you’re trustworthy, you can just roll it over forever. That’s exactly why Uncle Sam hasn’t had a debt crisis in the past, right?

Free market. Guys like me have predicted, you know, nine out of the last zero fiscal crises. We’re always saying that one is just around the corner, and it hasn’t been because we’ve underestimated the borrowing capacity of Uncle Sam. I think based on what we’ve learned, there is a possibility for a soft landing, but that soft landing is comparative.

It’s going to come with faster dollar depreciate. Which is going to bite harder for people on the lower end of the socioeconomic spectrum, but it’s also going to come amidst significant change in terms of what entry level jobs especially look like in the white collar sectors.

Fascinating stuff, Alex, uh, really do appreciate you being on, um, again, uh, the, the books, uh, money and the Rule of Law and the Political Economy of Distributism.

Thanks. Yes, thank you very much. You make a lot of money, but are still worried about retirement. Maybe you didn’t start earning until your thirties. Now you’re trying to catch up. Meanwhile, you’ve got a mortgage, a private school to pay for, and you feel like you’re getting further and further behind. A good news.

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Welcome back to Show everyone. Hope you enjoyed it. And uh, again, I think this is a, we live in very interesting times, uh, which I think is actually a Chinese curse, right?

It’s like, may you live in interesting times. But yeah, we live in very interesting times and it’s hard to know. What is gonna happen? However, uh, in my opinion, this issue with AI is this is inevitable, right? Inevitable. Certainly in productivity gains. I’m not exactly sure how it’ll affect the labor, labor markets, and how quickly.

I think a lot of that is gonna depend on how quickly people adapt to all this stuff. Anyway, hope you enjoyed it. And that’s it for me. This week on Wealth Formula Podcast. This is Buck Joffrey signing off. If you wanna learn more, you can now get free access to our in-depth personal finance course featuring industry leaders like Tom Wheel Wright and Ken m.

Visit wealthformularoadmap.com.