Can the rise of machines fix debt, deficits and debasement?

The way we are headed with ageing populations, debts, deficits, fiscal rebirth and currency debasement, we might need to get used to machines……….…

We don’t awlats appreciate the seismic nature of our shifting global economy.

To see it, we can’t look at things in isolation. We need to consider a number of key seismic forces to truly see the scale of the economic transition.

These seismic forces can be grouped as follows:

• Synchronous productivity decline in developed economies caused by ageing demographics.

• Increasing use of disinflationary technologies, including AI, automation and autonomous machines.

• A rebirth of fiscal spending and helicopter money which, when coupled with fractional banking creates more M2 and lendable reserves than are needed and is inflationary.

• Increasing sovereign debt and deficits, requiring more government issuance to run the government and to service new debts and refinance old debts (at higher rates than last time).

• Profound currency debasement and asset inflation resulting from all of the above.

Almost every developed nation is grappling with ageing populations, diminishing workforces, and deflationary technology as well as rising debt levels.

The ageing was always going to happen, but shrinking workforces have been accelerated by Covid deaths, the Great Resignation, and the increasing use of (deflationary) technology (automation, robotics, and AI).

Now the problem becomes a question of how governments can run big economies with fewer people working, overflowing unfunded deficits, and healthcare liabilities to cater for the aged - at the same time as fiat currency is debasing due to bloated money supply and the return of inflationary helicopter money.

The simple theoretical solution to the problem is higher levels of entrepreneurship and productivity that will drive higher levels of GDP and generate higher levels of taxes to pay for it all - otherwise, the world is living beyond its means (which it already is).

Some suggest that the re-regionalisation of supply chains (to avoid another post-COVID/Russia supply shock) and a green transition will create this incremental productivity, or GDP.

It may help a little, but as populations age and technology deflates goods and more services are automated - earnings and taxes fall.

• deficit spending also gets bigger, and either governments stop spending (good luck with that); and/or

• debt has to increase again, and/or

• the machines (i.e., robotics, IoT, automation, and AI) have to make up the missing GDP and create a taxing point for governments.

Interestingly, there are some emerging markets like India and Libya with growing populations and economies that won’t have this problem for quite some time - but they can’t really carry the balance of the world (nor would they want to 🤭).

So, can autonomous machines and programmatic rules produce incremental productivity, reduce the towering stacks of sovereign debt and money supply, and in turn solve the currency debasement issue?

Maybe, maybe not. No one knows. But instead of arguing about it I thought it more interesting to imagine a potential economic construct that might have to exist to enable machines to move us to a programmatic Bretton Woods based on real assets, and not abstracted IOUs like under the current centralised rules-based system.

Instead of we humans representing a factor of production and working for corporations, the machines would do the work and they woud become the machine of production.

In a largely automated world of the future, instead of earning salaries and wages from jobs that can be performed by autonomous machines, ideally, we would each directly own a share of the machines of production that create the GDP, thereby bypassing corporations.

And if the labours of non-sentient machines that do not need to eat, sleep, or earn a standard of human living (but for maintenance) can create GDP that can be tokenised, then each ownership token, or let’s call it ‘GDP coin’ for want of a better term, would be a globally fungible store and means of value exchange. Similar to gold’s role when it was convertible, but different because there’s not enough gold to go around, it’s hard to transport, and it does not generate a yield.

We would each contribute skills and time for a minimum allocation of GDP coin, with higher ownership associated with higher qualities or quantities of contribution to the machine state.

GDP coin would be able to be spent or saved as it would generate a GDP style yield, but it would not be a financial asset. On the contrary, GDP coin would represent a fractional share in real assets that generate fungible productivity/GDP. A hard asset, expressed and exchanged digitally, at the speed of light.

Programmatic royalties (instead of taxes - goodbye IRS and ATO) would flow from GDP coin to governments, that would largely run economies based on a suite of programmatic rules voted on by GDP coin holders.

But under such a system, there would need to be a transition from humans to machines, and a value allocation mechanism amongst humans.

And that mechanism would need to enable the transition from fiat currency to direct fractional ownership of the machines of production, plus a realisation that massive job losses and government supplements would be required initially while we are making the jump.

Maybe it’s a planned transition with a Maastricht style equalisation/allocation mechanism. Or maybe a major global event precipitates, like, for example, a total and profound failure of the fiat system when we get to the point when interest rates flatline and can never again rise above the zero bound (i.e., perfect debasement). Maybe it’s something else.

Whichever way, any transition would require massive fiscal stimulus.

But wait, staying ‘as is,’ would also require massive fiscal stimulus. That’s because central bank stimulus via rates cuts, QE and yield curve control has a limit, i.e., zero interest rates that distort everything, and since COVID fiscal has been reborn and it is now the more dominant playbook.

So, whichever way we turn or stay, we end up with too much unproductive/debased currency. And with that comes higher asset prices. Higher asset prices are not a problem as long as the value transfers into the assets that we would each own a divided interest in, i.e., tokenised machines of production. Rember, there would be no need for corporate ownership via shares.

The political and social mechanism (as well as the tokenomics) to enable all this is difficult to imagine right now, but if you share the view that fiscal dominance and profound productivity and currency debasement is inevitable, then this somewhat dystopian view suggests that the machine state might be a solution to a range of seismic global problems.

Final thought bubbles

I believe that the monetary apparatus that was set up at Bretton Woods in 1944 and the eventual move away from dollar convertibility to gold in 1971 has enabled the creation of a level of global debt that can no longer be repaid in the ordinary course. To solve this will either require debts to again be forgiven/refinanced for longer like during the GFC, and/or for interest rates to tend to the zero bound and stay there.

That means unless more GDP and taxes are generated (perhaps by the machine economy) or there’s less government spending, our system of ‘money and credit by edict’ has a use-by date that’s fast approaching, if it’s not already past.

While the jury is out, perhaps a machine economy fractionally owned directly by us all has the potential to super charge productivity and help solve debt, deficits and profound currency debasement caused by too much unproductive money.

Happy New Year, best wishes to you and your family, and for an end to hostilities in all corners of the world.

Mike 

Next Level Corporate Advisory is a leading Australian corporate development advisor specialising in corporate M&A, investment, finance and exit solutions. With a dealmaking track record spanning three decades, we help family, private and publicly owned entities find, develop and realise value in their businesses and investments.

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