Traders and investors looking to central banks to solve the global economy's inflation problems are looking in the wrong place. Instead, we should look to the proliferation of artificial intelligence (AI) systems. These systems could bring the world economy into a virtuous cycle of higher growth, employment, consumer and investment spending, while lowering inflation and interest rates. It's an ideal environment for both stocks and bonds.
“The concept of a virtuous cycle, where improvement in one area drives improvement in other areas, is particularly salient,” said Patrick Huang, a business analytics professor and AI expert at the University of Iowa's Tippy College of Business. He told the International Business Times.
“At the nexus between AI and the economy, increased growth could lead to higher employment and income levels, encourage increased consumer spending and investment, and foster further economic expansion. This cycle is driven by sustained economic growth. “It has the potential to support a wide range of social welfare,” said Professor Huang.
Dr. Tengpao Li, professor emeritus of economics at Niagara University, agrees.
“As with previous radical technologies, AI has the potential to drive productivity gains and expand the global economy's productive capacity,” he told IBT. “Advances in technology will shift the aggregate supply curve to the right, increasing overall productive capacity through higher GDP (economic growth) and lower prices (lower inflation).”
To illustrate his point, Dr. Lee cites the industrial revolution of the late 19th century, the mass production of manufacturing in the early 20th century, and the computer networks of the late 20th century.
“As a result, the world economy has evolved with two characteristics: economies of scale and large-scale specialization across countries with so-called 'global supply chains.' All countries are better off in the global economy,” he added.
Professor Huang will provide further insight into how AI is poised to enhance the global economy's productivity potential. “This potential comes from AI’s ability to automate routine tasks, refine complex operational processes, and create new business methodologies,” he said.
McKinsey estimates that AI-powered supply chain management has helped companies reduce logistics costs by 15%, inventory levels by 35%, and service levels by 65%.
McKinsey also found that AI-driven demand forecasting in supply chain management reduces errors by 20% to 50% compared to traditional methods. These efficiencies reduce lost sales by up to 65% and reduce out-of-stock rates. Additionally, AI predictions can reduce warehousing costs by 5% to 10% and administrative costs by 25% to 40%.
Meanwhile, Professor Huang believes that AI will expand the global economy's productive capacity. “This means that the economy's ability to produce more goods and services is strengthened, potentially increasing living standards and optimizing the efficiency of resource allocation,” he said. said.
Improving production capacity, in turn, benefits economic growth. “As efficiency and production capacity improve, so too does production and income generation, which typically correlates with advances in employment, wage levels and investment prospects,” he added.
“Generative AI technologies can improve the economy by enabling innovations that improve healthcare services, consumer interactions, and businesses efficiency, reduce costs, and create better outcomes through personalization and proactive response. It has the potential to drive growth,” added Michael Ashley Schulman, CFA and partner. Chief Investment Officer of Running Point Capital Advisors.
Most importantly, capacity expansion will ease inflationary pressures arising from supply-side bottlenecks, wage pressures, and ultimately monetary easing.
“This scenario could play out if the supply of goods and services expands faster than demand, putting downward pressure on prices,” Professor Huang said. “However, it is essential to recognize the complex dynamics between technological progress, productivity and inflation, which are also influenced by monetary policy, the complexity of global supply chains and labor market conditions. ”
David Damiani, CFA, Valentine's chief investment officer and financial officer, is skeptical that AI can foster a virtuous economic cycle. “This is a complex calculation because the potential for a virtuous cycle depends largely on whether AI is applied intentionally and in an ethical manner,” he said.
