As mentioned earlier this week, Insightview anticipates that the US Federal Reserve will reduce policy rates in September, possibly by as much as 50 basis points [read the article, The Federal Reserve's path of policy rate cuts and the implications for the bond market]. Of this reduction, 25 basis points are expected to support the economy, while the remaining 25 are likely aimed at "appeasing Wall Street", which has already manipulated market rates downward. 
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‌However, this adjustment does not negate that US policymakers face a fundamentally different situation due to demographic headwinds and a drastically altered geopolitical landscape. Moreover, the unpredictable macroeconomic consequences of Artificial Intelligence add another layer of complexity, a topic Insightview attempts to address with a simple yet provocative analysis further down in this article and the YouTube video, The ”possible” macroeconomic impact of AI [freely accessible].

Given that the United States and the EU are in a different position than in the past, there is also a risk that financial markets may draw significant misconceptions. Until now, demographics have proven to be a positive factor in the short term because "nobody is being laid off," or at least fewer than most had expected a year ago. This has mitigated the economic downturn, which, in truth, has yet to materialise as a real economic downturn.
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This trend holds in the United States but is even more pronounced in the Eurozone. This is because the natural attrition of "skilled workers" from the labour market due to age exceeds the number of jobs lost due to low growth. Regarding "skilled workers", immigration has not alleviated the labour shortage as much as politicians and businesses had hoped. This also means, as mentioned many times before, increasing unemployment will be more challenging. In any case, unemployment will rise significantly slower than in previous periods.

Moreover, there is a slight risk, or perhaps chance, in the Eurozone that unemployment may not increase much despite zero growth. Such an outcome could occur if the Eurozone's productivity growth remains negative or near zero. This must be considered because, without immigration, the Eurozone's "potential workforce" will decline in the coming years.
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The above underscores the challenges facing the ECB and the US Federal Reserve. "Higher unemployment" is the ideal scenario for both central banks, which know that unemployment needs to rise to reduce inflation expectations. This objective was briefly achieved in the US, but only due to a sudden drop in the stock market [read the article, The US Federal Reserve is likely more nervous than investors due to a significant decline in TIPS inflation expectations]. However, financial markets will soon realise that if workers do not feel pressured in the labour market, their wage demands will not decrease significantly. If central banks cut rates too quickly, this reality will re-emerge quickly in 2025.

There is no doubt within the ECB about the difficult task ahead, although lower inflation will likely prompt the central bank to reduce policy rates by 25 basis points in September. In the US, the Federal Reserve must also consider Wall Street, making the risk of "policy mistakes" higher. These considerations have also been factored into the overly bullish expectations for rate cuts in the United States [read the Insightview article, The Federal Reserve's path of policy rate cuts and the implications for the bond market].
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‌‌‌Artificial Intelligence has a macroeconomic and political downside that is underestimated

The combination of the above-mentioned factors and numerous geopolitical challenges, such as "decoupling from China", still make Insightview believe that the upcoming rate cuts will result in a "bearish steepening of the yield curve" in 2025. As previously described by Insightview, the "solution" to the West's problems concerning demographics and geopolitics is Artificial Intelligence [watch the Insightview video, Insightview.eu - Is AI a significant opportunity? (Danish and English)].
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However, as has also been mentioned, the macroeconomic effects will not manifest in 2024, 2025, or even 2026. That said, Insightview still sees many opportunities through Artificial Intelligence, which pose a risk to middle-income groups unless they possess the talent or sufficiently high education to exploit these opportunities. This must occur early, as few jobs can be considered "protected" from AI further down the road.

There is no doubt that AI will, in many areas, raise the bar for what will be considered a "good piece of work" in the future, for which an employer will pay an extraordinary salary. Individual workers will need hard work to keep pace with Artificial Intelligence. The bar for what constitutes "extraordinary work" will be raised by Artificial Intelligence. AI will impose heavy pressure on workers to improve their skills. Some well-educated or talented individuals in the middle-income group can benefit from Artificial Intelligence. They could potentially move into the high-income group if they leverage AI effectively. Still, they are also exposed to permanent pressure from AI to avoid falling into the lower-income group.

This raises several other questions that elected politicians and central banks must address now, not tomorrow. Insightview's perspective is that AI will undoubtedly boost productivity and growth. The unanswered question is who will reap the rewards of Artificial Intelligence. The answer is crucial for macroeconomic development.

The most significant risk is a shrinking middle-income group, as AI could force more workers into the lower-income group as artificial intelligence replaces them. On the other hand, those who own the technology will earn more, and there will be no incentive to share with workers. Interestingly, the technology owners will also have a lower marginal propensity to consume [MPC].

Therefore, there is a risk that technology owners will accumulate more income [savings]. We risk seeing a concentration of income/wealth among the highest earners and those with substantial wealth. The increase in their incomes will primarily come at the expense of lower incomes in the middle and low-income groups. The lower and middle-income groups risk job losses and wage declines, which means a full negative impact on private consumption, as these income groups have a high marginal propensity to consume. This implies, all else being equal, that private consumption may decline significantly more in lower-income groups than can be compensated by increased consumption in higher-income groups.

Undoubtedly, tech company leaders can see where things are heading. It is, therefore, likely not a coincidence that American tech companies have been pandering to Donald Trump recently to be on the "safe side" after the election. Regarding the "safe side," it now appears that the same tech leaders are "offside" after Kamala Harris replaced Joe Biden as the presidential candidate [read the article, Harris leads Trump by 5 points in Ipsos poll | Reuters].

Regardless, the risk is that the wealthiest accumulate income and wealth that is not redistributed back into the economy because high-income groups have a low marginal propensity to consume. The critical question then becomes how much of that savings is redistributed back into the economy where it originated in the form of investments.

We are already seeing the rising concentration of income in tech companies reflected in the US stock market, where the largest tech companies' share of the S&P 500 has exploded [watch the video]. Naturally, one cannot rule out that the owners of AI technology are willing to share the gains with their employees. However, unless politicians intervene, there is no built-in incentive for such an outcome. Indeed, why would Artificial Intelligence owners choose to do this?

Why is this discussion relevant for politicians and central banks? There is a real risk that the broader market index is currently overestimating what society will gain from implementing Artificial Intelligence. Although AI is positive for productivity, growth, and technology owners, as mentioned above, there is also a severe downside. There is a real risk that if politicians do not intervene, income and wealth concentration will occur, and so will a concentration of political power, which could render market mechanisms ineffective. This would lower private consumption and reduce the need for innovation when "there are no competitors anyway" [the winners take it all!]. Of course, the latter comment is an exaggeration, but a pattern is emerging.

From the US central bank's perspective, the risk is that if the stock market has these "second thoughts" - outlined by Insightview in this article - so late in the process, where valuations have strayed so far from the underlying economy, the correction could become unmanageable for the central bank. Insightview believes we are heading towards such a possible scenario—although, with the risk of repetition, it does not change the fact that AI is here to stay. 
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‌Another issue not mentioned in this article is that politicians will not sit idly by and watch such a development. If they do, voters in the lower/middle-income group will react with social and political unrest, making the current turmoil in the United Kingdom look like minor skirmishes.

‌16. August 2024 - There will be no updates on August 31-September 9
‌15. August 2024 - China: Everything points towards an 'asset price recession' unless stubbornness is replaced by realism in Beijing
‌14. August 2024 - The Federal Reserve's path of policy rate cuts and the implications for the bond market
‌13. August 2024 - A steepening US yield curve 'assumes' the Federal Reserve will do the 'right thing.' A robust NFIB survey shows why this will not be a classic economic slowdown
‌30. January 2024 - Podcast interview [plus VIDEO] with AI expert: Could Artificial Intelligence turn out to be the panacea to the EU's problems? [English and Danish]
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