Postcards: The Truth Behind the Coming Inequality and Money Destruction (Davos Update)

The IMF warned this morning that Artificial Intelligence will impact 40% of jobs globally and drive inequality. Yet, they don't understand their role in all of it.                                                                                                                                                                                                                                                                                                                                                                                                                 Forwarded this email? [Subscribe here]() for more You are a free subscriber to Postcards from the Florida Republic. To upgrade to paid and receive the daily Republic Risk Letter, [subscribe here](. --------------------------------------------------------------- [Postcards: The Truth Behind the Coming Inequality and Money Destruction (Davos Update)]( The IMF warned this morning that Artificial Intelligence will impact 40% of jobs globally and drive inequality. Yet, they don't understand their role in all of it. [Garrett {NAME}]( Jan 15   [READ IN APP](   Dear Fellow Expat: This week, I’m paying close attention to the nonsense drifting out of CNBC journalists as they cover the World Economic Forum. More importantly, we’ll discuss what you can do in response to their plans for us here. While the billionaires fly their private jets to Switzerland to talk about climate change and inequality, we’re here in the Florida Republic waiting to react to the news. We have a day off - but unusually cold weather. It’s a good day to practice field hockey with my daughter. Before we do, let’s look at the headlines out of Davos. The first headline of the event comes from the International Monetary Fund - which states that Artificial Intelligence will impact 40% of all jobs in the world - and drive inequality in the process. Let’s unpack this statement. [Upgrade to paid]( They Still Don’t Get It “We are on the brink of a technological revolution that could jumpstart productivity, boost global growth and raise incomes around the world. Yet it could also replace jobs and deepen inequality,” IMF chief Kristalina Georgieva said. The IMF is calling on policymakers to tackle this issue. That should be great… ugh. First off… technology raises living standards - as has been the case since the plow arrived on farms in the United States in pre-industrial times… or further back to the aqueducts delivered water to Roman villages, and indoor plumbing graced the city of Ephesus two thousand years ago. It’s not the technology that drives the inequality. It doesn’t work that way. Technology is deflationary - which, in turn, creates abundance. When you get more of something for less… that’s not inequality. Inequality is driven by who benefits from the spoils of the technology… and the policies deployed in response. The classical Marxist economist will tell you that the technology’s owner benefits the most from it—the person who owns the means of production. But is that necessarily true? The buyer (user) is getting more for less. So, how is it that not a fair transaction? The seller (developer) benefits from scale - the sheer number of people using the service, even at low fees, will develop larger financial outcomes for the owners of the companies developing the products. Again, it’s hard to call this inequality because both parties benefit - and there are a lot of buyers on one side of the equation. So - where is the inequality? First - it may be found in how much profit the company generates off the technology and whether that productivity gained from AI aligns with employees' wages. If productivity increases because of AI but wages remain stagnant, those associated financial gains go to the company's shareholders. That’s the crux of what groups like Oxfam attempt to target. I argue this would be easier if companies offered their employees bonus potential in stock to capture the profits - but most employees don’t want to take that equity risk. Income is a guaranteed payday - equity risk is not. I’ve had conversations with people who’ve suggested that General Motors could solve many of their problems if the unions were compensated in GM equity and everyone shared the same risk-reward. Companies are too short-sighted. As are the employees who need wages - and forcing companies to pay a government-guaranteed “living wage,” - as it’s called - would only drive more AI adoption and greater unemployment. Here’s a chart from the Chief Economist’s expectation of Generative AI in 2024. Look at the “decoupling of productivity from wages.” Only 30% of these economists believe that this will happen in 2024. The reality is that 100% of them should feel this way… since the trend of technology and wages has existed since the computer mainframe's introduction in the 1960s. Here’s a chart of productivity versus waves just up to 2010. It’s gotten worse in the last decade. The fact that we came off the gold standard in 1971… seems to be an issue. That’s because the real driver of this inequality comes from the government's policy response and the Federal Reserve. We can [dive into the fiscal policy matters]( and the Gold Standard another day… But as I’ve noted, the entire global financial system is built on fiat debt. And when deflation arrives for an economy, the U.S. dollar's purchasing power INCREASES while the debt's real cost increases as well. The real cost of existing debt goes up. And that’s what central bankers behind a centralized Keynesian debt-based system fear. A deflationary debt spiral where there isn’t enough money to refinance all that debt that is coming due. So - what do they do? The Federal Reserve and other central banks intentionally destroy debt and the currency (a debt instrument) by [engaging in Inflation Targeting](. They paper over the deflation with more debt - and they do so aggressively. This is the [entire point of Quantitative Easing](. As a result, this easing (which aims to knock deflation out of the economy) ends up providing ample liquidity to the financial system - which pours into risk assets like equities. The more deflationary the event…, the greater the easing response… which helps pump this market up, creates new debt and enables more credit access to prevent a crunch across the financial system. It’s a vicious cycle. And the people who benefit the most… are the [10% of Americans who own 93% of all equities in the stock market.]( This has been the story of the equity markets for the last 30 years. It’s fitting because each year, the private group Oxfam releases a report right at the start of Davos on the current inequality in the system. Here’s the stark reality of what’s happened in just a few short years: "The world's five richest men have more than doubled their fortunes from $405 billion to $869 billion since 2020 —at a rate of $14 million per hour— while nearly five billion people have been made poorer,” the report read. I wonder if that had anything to do with shutting down the global economy… and then pumping [tens and tens of trillions of dollars]( in debt globally into the financial system. Just a coincidence, right? Yet, once again - this very basic thing on monetary policy flies right over everyone’s head. So, How Does This End? The future will likely see a few things. - First, a massive swell of debt in the U.S. economy to paper over the pending inflation from Artificial Intelligence. That will likely come in the next five years (targeting 2028). The U.S. debt could easily surpass $48 trillion by then. The question is whether AI can help us grow out of this debt hole. Some believe it’s still possible. - Second, GREAT companies with strong ROIC and great management will deploy AI and benefit greatly from enhancements to their balance sheets. While there’s plenty of focus on the AI software companies, look to the real users of this technology, like (DE)]( or [Domino’s Pizza (DPZ)]( that will see productivity growth. - Third, inflation targeting drives up the cost of things that matter (nominally), like food, land, energy, and education. Invest accordingly in those spaces. If you thought homes were expensive now, wait until the Fed turns the inflation targeting up to address the AI use cases. People keep arguing that AI and automation will drive down the cost of producing a home, but that doesn’t help the millions of Americans who bought homes in the middle of an explosive post-COVID market. The Fed won’t allow home prices to crash because it would blow up this debt-riddled system. Remember, the American Dream of owning a home is just convincing people to buy into a massive debt system that creates mortgages, sells them, and makes new capital for more loans. - Fourth, the natural Washington D.C. response won’t be to address the impact of inflation targeting head-on. It will be to start using more direct payment programs like Universal Basic Income (UBI). This is a problem because UBI will be politicized, and we’ll likely see the government pay more people to sit on the couch while they collect votes. If the Workforce Participation rate hits 50% in the next decade (an outside possibility) due to AI, the country will face a crisis of confidence. People need purpose, and writing a check doesn’t provide that purpose. - Fifth, AI’s best use case would be to tap into the government systems to identify waste and eliminate programs that do the same thing. A reformer who understands the impact of AI should use this as a campaign message. Maybe in 2028… but I don’t think we have a smart enough politician to see that government spending must come down. - Sixth… YOU MUST be exposed to equity markets. The real hedge against this is the same as over the last ten years of QE. Equities benefit the most - but don’t be afraid of investing in the “Real Economy” because the needs of humans do not change. Great businesses in shipping, energy, and real assets will ALWAYS matter. As always, we’ll dig deeper into these subjects because this is how the world works in the post-2008 financial crisis. They will continue to blame capitalism for these ills - but the reality is that they killed capitalism in 2008. Since then, we’ve been operating in a bizarre centrally planned economic system that rewards failure, fuels inequality through inflation targeting, and chastises anyone who points out the instability of our path. Other Highlights from Davos - The economic surveys - which typically don’t carry much silliness - offered an outlook for the year ahead. About 43% of the Chief Economists anticipate weak economic growth in North America, but 77% expect weakness in Europe. Once again, Europe is a mess because of its industrial policies and basic economic structure, which has one monetary policy for 28 nations with individual fiscal policy (tax) systems. This is why the EU will ultimately fail. - “[It is now necessary to think in trillions.]( That’s the day's quote from a new whitepaper on how to address “climate change.” The quote argues that countries aren’t doing enough to reduce emissions and that previous COP events are all talk. That’s it… Just keep throwing money at the grift. That will solve it. - Bill Gates wants to spend more of America’s money in places where he has strategic interests. "I'm a huge believer in more generosity to poor countries, to help them with their climate challenges," Gates said. "The U.S. government is the biggest player, and getting the group in that maintains generosity, spends that money well for health and climate challenges. I hope we achieve that." Once again… throw more money at the problem, taxpayers. - The Oxfam report had a few ideas to address global inequality. They include “businesses based on fair trade and worker cooperatives instead of being structured around benefiting shareholders.” In addition, they argue that "A more equal world is possible if governments shape the market to be fair.” I can’t imagine anything dumber than communes and more government policies to make things “fairer.” They should start by ending the central banks. - A [5-minute Uber ride]( in Davos costs $40. - Politico wrote an article with part of the subhead reading: “The 12 bad boys of the World Economic Forum…” How does anyone take this publication seriously? I’ll be back if anything changes. Stay positive, Garrett {NAME} Secretary of Defense Disclaimer Nothing in this email should be considered personalized financial advice. While we may answer your general customer questions, we are not licensed under securities laws to guide your investment situation. Do not consider any communication between you and Florida Republic employees as financial advice. Under company rules, editors and writers cannot recommend their positions. The communication in this letter is for information and educational purposes unless otherwise strictly worded as a recommendation. Model portfolios are tracked to showcase a variety of academic, fundamental, and technical tools, and insight is provided to help readers gain knowledge and experience. Readers should not trade if they cannot handle a loss and should not trade more than they can afford to lose. There are large amounts of risk in the equity markets. Consider consulting with a professional before making decisions with your money.   [Like]( [Comment]( [Restack](   © 2024 Garrett {NAME} 548 Market Street PMB 72296, San Francisco, CA 94104 [Unsubscribe]() [Get the app]( writing]()