Written by: Momir
Translated by: Shan Ouba, Golden Finance
The core view of the artificial intelligence deflation theory
The mainstream view is that artificial intelligence and robotics will significantly enhance production efficiency and create a situation of abundant material wealth, and the surge in production scale will inevitably push prices down under market equilibrium.
This logic seems valid within the realm of microeconomics, but it does not hold up on a macro level. Its obvious flaw is that the theory focuses only on one side of the economic equation — production and prices — while neglecting the complete equation of money supply: MV=PY (where M represents money supply, V represents the velocity of money, P represents the price level, and Y represents total output of society).
Another flaw is the neglect of institutional realities: regardless of how technology develops, central banks around the world always aspire to maintain an inflationary environment.
Why do central banks resolutely combat deflation?
Theoretical considerations
Economists are much more wary of deflation than inflation, stemming from the formation of deflationary spirals — falling prices lead consumers to delay consumption, market demand shrinks, which in turn triggers further price drops. The key lies in the fact that the causes of deflation do not affect the central bank's policy response logic: whether deflation originates from positive shocks like technological advancements or negative shocks like economic collapse, the central bank's response is always the same: act early and intervene decisively.
Motivations at the practical level
Inflation presents a natural advantage for debtors. Currently, all major economies bear huge sovereign debts, which is the inevitable result of government expansionary fiscal spending and the development of welfare economics. Inflation can effectively reduce the real burden of debt. At the same time, inflation is also favorable for asset holders, and the financial sector has a crucial influence on monetary management institutions.
Lessons from globalization: Productivity improvement ≠ deflation
We need not only to discuss this theoretically; history has provided clear reference cases: from the 1990s to the 2010s, the wave of globalization drove a significant increase in productivity.
The actual situation during this period is contrary to intuition: production outsourcing and supply chain restructuring have brought relative material abundance, productivity has achieved leapfrog growth, yet price levels have always maintained an upward trend.
How can this phenomenon be explained? The answer still returns to the money quantity identity MV=PY. When total output Y of society grows significantly, while policymakers still hope to maintain rising price levels P, the market must expand the scale of MV to achieve a new equilibrium — either by increasing the velocity of money circulation V or by increasing the money supply M.
The velocity of money circulation is determined by complex market behavioral factors, while the money supply is a policy tool that central banks can directly control. There is no doubt that policymakers will focus on variables they can control.
From the perspective of the velocity of money circulation, globalization has not only driven productivity improvements but has also spawned large-scale dollar output, further consolidating the dollar's status as a reserve currency, while this process has precisely reduced the dollar's velocity. At that time, the attractiveness of holding dollars was self-evident: export-dependent countries hoped for depreciation of their currencies to enhance competitiveness; the U.S. investment market attracted global capital inflows; commodities were traded in dollars; and the dollar was the main settlement currency in international trade.
To maintain market equilibrium, the growth of the money supply must simultaneously offset the impact of three factors: the decline in the velocity of money circulation, the rise in prices under policy objectives, and the increase in total output of society. In other words, the improvement in productivity and the status of reserve currency allowed the United States to print a large amount of money, yet only triggered moderate inflation. This is also why the U.S. has maintained an annualized money supply growth rate of over 6% for 25 years.
The dollar has even become the most core export product of the United States, with dividends evident in the overall wealth level and the improvement of the quality of life of its citizens. But as Stephen Milan noted, this model also comes with clear costs: dependence on supply chains in strategic areas, the over-expanded financial sector crowding out industrial capacity, and the declining execution capability of large infrastructure projects, resulting in an economy exhibiting a high proportion of services and a continuous decline in the vitality of the real economy.
The Abundant Era: The Combination of Artificial Intelligence and Robotics Technology
Why will the new round of technological revolution change the economic operation logic mentioned above?
The Unchanging Core Factor
Productivity-driven growth: The total output Y of society will continue to increase.
The Federal Reserve's policy guidelines: Regardless of where deflationary pressure comes from — even if it is deflation caused by productivity improvements, the Federal Reserve will respond decisively, and the inflation target will remain unchanged, with price levels P still rising.
The trend of fiscal expansion: Material abundance means people have less work pressure and more leisure time. This will drive up labor prices as more people will choose leisure over work; at the same time, the demand for wealth redistribution will continue to increase, welfare spending will expand, and there may even be a basic income system for all. Continuous economic growth often amplifies social demands for welfare, which means fiscal deficits will continue to widen, typically further driving up inflation and pushing price levels P higher.
The inherent laws of social development: California may be the closest region to true "abundance," and its current situation may indicate how abundance accelerates the decline of social vitality. Abundance can engender radical social development, breaking natural evolutionary pressures. For example, cities dominated by radicals may block new development projects with "NIMBYism," resulting in only the wealthy being able to afford local housing prices, while these cities provide assistance to large numbers of homeless individuals around wealthy areas to showcase moral superiority. Ironically, both behaviors can accelerate the decline of social vitality. Studies on abundant environments for other species — such as Calhoun's "behavioral sink" experiment — reveal a fixed pattern: abundance → decadence → waste. Abundance eliminates survival pressures, and the energy of organisms shifts toward status competition within the species, ultimately leading to a decline in social vitality and a drop in birth rates. In the short term, this will drive up price levels P; 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 power infrastructure requires huge public investment. In the era of globalization, the expansion of production capacity in the United States mainly relies on other countries, while its own investment in physical infrastructure is relatively limited. Restarting domestic infrastructure construction requires a large amount of resources, which will further increase the pressure on government fiscal spending, aligning the political incentive mechanisms with inflation targets and driving up price levels P.
Increased velocity of money circulation: In a truly abundant environment, the importance of savings will significantly decrease, and people's logic may shift from accumulating wealth to optimizing consumption, leading to an increase in the velocity of money circulation V.
Re-derive the money quantity identity
Considering the factors mentioned above, we can derive a new equation change:
Total output of society Y↑: Productivity improvement drives economic growth
Price level P↑: The Federal Reserve's inflation mission, the expansion of the welfare state, large-scale investment in infrastructure
Velocity of money circulation V↑: Decreased savings willingness, increased consumption demand
According to the identity MV=PY, the scale on the right side of the equation will expand significantly. Solely relying on the increase in the velocity of money circulation will not fully digest this growth, and the central bank will inevitably need to further increase the money supply. This result is extremely favorable for asset holders.
Unknown variables: The hegemony of the dollar
One factor is independent of the development cycle of artificial intelligence and robotics technology: in the coming decades, the global role of the dollar may undergo significant changes.
The direction of this transformation 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 United States loses the dollar's status as a reserve currency, the large amount of dollars currently circulating overseas will flow back to the United States. Even if the money supply does not increase, a significant increase in the velocity of money circulation could trigger uncontrollable inflation, while the dividends brought by the abundant era will also be swallowed by currency depreciation.
On the contrary, if the dollar's hegemonic status is maintained, its velocity will continue to be suppressed, and the Federal Reserve will have greater monetary easing space without triggering hyperinflation, while asset prices will continue to rise, wealth will concentrate among a few, and the existing economic rules will continue to prevail.
For asset holders, the optimal scenario is: the dominance of the dollar remains unshaken, the dividends of the abundant era continue to be released, while the central bank's money-printing machine operates quietly behind the scenes.
