Australia\u2019s Central Bank is worried about a lot of things in our economy right now. Inflation, unemployment, house prices. Those are just a few of them. But underneath it all is a menacing presence that could make those other issues look \u2026 little.<\/p>\n
Artificial intelligence is arriving in our lives super fast. Is it the most rapid technological revolution yet? Maybe.<\/p>\n
The next chart shows just how quickly companies have decided to embrace our new robot helpers -slash- overlords. <\/p>\n
Last year, plenty of firms had never used AI. This year, almost all of them have. About 40 per cent of firms now have moderate or deep adoption of AI. This chart shows just one year!! Imagine where we will be in five years.<\/p>\n
Having considered this, the RBA has two big warnings for us. First, they warned markets could crash. <\/p>\n
\u201cIf the returns to AI investment disappoint, some asset prices (including equities and corporate debt) will be exposed to sharp repricing and possibly disorderly adjustments.\u201d<\/p>\n
Disorderly adjustments is just a fancy way of saying: Massive Crashes. <\/p>\n
Which matters because the global markets are being propped up by a handful of huge AI companies. Many businesses in the world are struggling, some are going well enough, while a few big tech firms are going absolutely ape.<\/p>\n
It\u2019s tempting to stock up on microwave popcorn and prepare for a nice big schadenfreude session. Watching the mighty fall often gives us a lovely warm feeling. But I have some bad news. Australia owns absolutely heaps of these big companies. I was shocked to hear this, but five per cent of all Australian financial wealth is now in AI firms.<\/p>\n
Why? That is shown in the next chart: Australians simply own a lot of foreign shares. Our superannuation system is so gigantic it dwarfs our local sharemarket. Super funds have to buy foreign companies just to have somewhere to put all our money. The American market has proved an excellent investment and if your super fund bought into it, you ended up with lots of AI exposure.<\/p>\n
This basically means that if AI crashes, we get hit. And because the funding is complicated and murky, the fall out could be ugly.<\/p>\n
But that isn\u2019t even the big risk the RBA is worried about.<\/p>\n
What is keeping them awake is not what you think \u2013 it is not that our jobs are replaced by AI. The risk is AI gobbles up all the money, leaving interest rates higher for everything else.<\/p>\n
Firms will be \u201ccompeting for scarce savings, pushing up interest rates\u201d the RBA says.<\/p>\n
There\u2019s a limited amount of money to lend in the global economy. In the last twenty years we\u2019ve been nowhere near the limit, and interest rates have fallen. Interest rates are just a price, the price of borrowing money. Lots of money available, low price. Less money available, high price. We even had zero interest rates a few years ago. But that is now ancient history and we could be moving into an era where money (aka capital) is scarcer and the \u201cneutral\u201d interest rate is even higher.<\/p>\n
\u201cThere is tentative evidence of this happening with AI; our estimates for the neutral rate have risen in recent years and bond yields have increased over the past couple of months with market participants citing strong demand for capital as a key driver.\u201d<\/p>\n
This also comes when populations are falling in Japan and China, with more old people and fewer working people. The era of Asia being a huge source of saving (the \u201csavings glut\u201d) that the rest of the world could borrow from, that may be coming to an end.<\/p>\n
Australia has survived pretty well in an era of falling interest rates and rising global markets. What happens to us if both those trends reverse? Can we hack it in a world of rising rates and crashing global markets?<\/p>\n","protected":false},"excerpt":{"rendered":"Australia\u2019s Central Bank is worried about a lot of things in our economy right now. 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