What effect do you think an AI boom would have on inflation?
It seems like it would be deflationary, since it would drive down the cost of goods and labour, though it might cause inflation in finite resources like commodities and land, so perhaps the net effect could go either way?
(I partly ask because a common framework in investing for thinking about the what drives asset prices is to break it into growth shocks, inflation shocks, changes in investor risk appetite and changes in interest rate policy. If AI will cause a growth shock and deflation shock, then normally that would be seen as positive for equities, ambiguous for real assets and nominal bonds, and negative for TIPs.)
At what time horizon? For anything over a year, I’d default to the quantity theory of money: inflation should roughly equal the rate of money supply growth (i.e., a central bank choice) minus real rates of economic growth. Increasing the money supply at 30% per year is easy, so if the Fed wanted to avoid deflation it seems like it could. The short-run during such a dramatic regime change could become whacky.
What effect do you think an AI boom would have on inflation?
It seems like it would be deflationary, since it would drive down the cost of goods and labour, though it might cause inflation in finite resources like commodities and land, so perhaps the net effect could go either way?
(I partly ask because a common framework in investing for thinking about the what drives asset prices is to break it into growth shocks, inflation shocks, changes in investor risk appetite and changes in interest rate policy. If AI will cause a growth shock and deflation shock, then normally that would be seen as positive for equities, ambiguous for real assets and nominal bonds, and negative for TIPs.)
At what time horizon? For anything over a year, I’d default to the quantity theory of money: inflation should roughly equal the rate of money supply growth (i.e., a central bank choice) minus real rates of economic growth. Increasing the money supply at 30% per year is easy, so if the Fed wanted to avoid deflation it seems like it could. The short-run during such a dramatic regime change could become whacky.