Acceleration and the Economy

The Real Estate Espresso Podcast

Acceleration and the Economy

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Acceleration and the Economy

Welcome to the Real Estate Espresso Podcast, your morning shot of what’s new in the world of real estate investing. I’m your host, Victor Menasce. On today’s show we’re looking at our human ability to forecast nonlinear effects and in particular, how this relates to economic forecasts.

We’re accustomed to looking at the world in very linear ways. When we see a car approaching, most people are pretty good at estimating whether they have enough time to cross the road, as long as the car is traveling at a constant speed. But if the car’s accelerating, virtually all people have a very hard time assessing whether it’s safe to cross the road or not. That’s the difference between linear and a nonlinear system. Nonlinear systems have some form of acceleration or deceleration associated with them.

We see these types of systems all over the place. Over the short term if the acceleration is small, people have a tendency to make a linear approximation which is accurate enough over the short term. Examples of accelerating systems are all around us. The rate at which artificial intelligence is learning is accelerating. Some people predict that AI systems will be more capable than humans in time, but how much time? The estimates vary widely. Some say while within a decade. Some are even saying one to two years away. The reason for the variation in estimates is because there’s acceleration at play.

Inflation is another metric that is difficult to quantify because of acceleration. What will the dollar be worth in 10 years? We don’t know because inflation accelerates the devaluation of the dollar and the euro and virtually every other currency.

The U.S. government also makes regular updates to the financial health of the Social Security System. It’s no secret that the math which funds the Social Security System is breaking down. When social security was first conceived there were 16 people in the workforce for every one person collecting benefits. Demographics have changed and today there’s less than three people contributing for every one person collecting.

The U.S. Department of the Treasury is the lead agency that issues the annual report on the health of the Social Security System. This report is prepared by the Board of Trustees of Social Security and the Medicare Trust Funds, which includes the Treasury Secretary as the managing trustee, along with the Secretary of Labor and Human Resources. The most recent report was just published which projects the financial status of these trust funds that support Social Security and Medicare and they play a key role in informing Congress and the public on the long-term viability of the programs.

Only a couple of years ago the Treasury was forecasting social security would be out by 2035. The most recent forecasts brought that date forward by two years to 2033. Now you might be thinking, what’s the big deal? It’s not like the government can abandon 80 million people. They will have to find the money somehow even if it means increasing deficit spending.

Never mind the fact that the current 184 million people who contribute to Social Security will not come close to funding the 80 million people who will be collecting benefits. So when you state it that way the shortfall is so obvious, but when we start to look at all of these things together and aggregate, they really do represent uncharted territory in our history.

The economy is driven primarily by consumption rather than supply alone. After all we call it laws of supply and demand for a reason. Supply and demand ultimately need to match one another. They cannot remain out of balance for very long. And right now the assumption is that the number of people in the workforce is not going to change dramatically over the next couple years. Whatever workforce loss happens as a result of retirements they’re hoping will be offset by immigration.

We know that for the economy to grow the population needs to grow. Shrinking working population means shrinking the economy and this too is a nonlinear fact because it reduces tax revenues, reduces payments into Social Security and Medicare.

The entire process of borrowing money, which governments do quite liberally, involves spending future income today. That assumes that the future income will be there, but that’s not necessarily true.

The next nonlinear fact we need to look at is the rate at which artificial intelligence is going to replace jobs that are currently performed by humans. We don’t know precisely what work AI can realistically replace. The industrial revolution replaced a lot of manual labor with machinery. It didn’t eliminate manual labor for all tasks but for those repetitive tasks that can be easily programmed, machines have replaced humans. The theory was machines could replace labor but not thinking. Humans would continue to be brains behind the work performed but we know now that some knowledge work has already been replaced by AI and that proportion is only going to increase.

So what happens to the falling demand for employees that have been replaced by AI? What is to become of our society? Will we become a communist society where senior citizens are reliant on government handouts in retirement and working age people are also dependent on government for universal basic income because humans are increasingly unemployable AI is so much cheaper reliable and scalable. If you need 100 programmers to write a piece of software you can get AI to perform the majority of the work today with a minimum of human intervention.

We also have government spending accelerating faster than GDP and with a deficit that’s growing faster than the economy can sustain the interest payments alone, forget about the principle, when we add all of these moving parts together we have the makings of a government debt that is colliding with reality.

We can’t precisely see when that’s going to happen because the effects are nonlinear there’s acceleration involved. This financial crisis will happen slowly at once and then all of a sudden that’s the effect of acceleration as you think about that.

Have an awesome rest of your day go make some great things happen. We’ll talk again tomorrow.

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