AI Could Solve The Inflation And Growth Problems Of The World Economy — A Bullish Trend For Bonds And Stocks

Traders and investors looking to central banks to solve the inflation problem of the world economy are looking in the wrong place. Instead, they should look at the spread of artificial intelligence (AI) systems. These systems could set the global economy into a virtuous cycle of higher growth, employment, and consumer as well as investment spending while lowering inflation and interest rates. It's an ideal environment for both stocks and bonds.

"The notion of a virtuous cycle—wherein improvements in one domain precipitate enhancements across others—is particularly salient," Patrick Fan, professor of business analytics at the University of Iowa's Tippie College of Business and an AI expert, told International Business Times.

"In the AI-economic nexus, elevated growth could beget higher employment and income levels, spurring increased consumer spending and investment and fueling further economic expansion. This cycle has the potential to underpin sustained economic growth and broad societal welfare," Professor Fan said.

Dr. Tenpao Lee, professor emeritus of economics at Niagara University, is of a similar opinion.

"As is the case with previous radical technologies, AI could fuel productivity gains that would expand the productive capacity of the world economy," he told IBT. "The advancement of technology will shift the aggregate supply curve to the right and enhance overall production capacity with higher GDPs (economic growth) and lower prices (lower inflation)."

To illustrate his point, Dr. Lee points to the industrial revolution in the late 19th century, mass production of manufacturing in the early 20th century, and computer networking in the late 20th century.

"As a result, the global economy evolved with two features: economies of scale and massive specializations across countries with so-called 'global supply chains.' All countries were better off with the global economy," he added.

Professor Fan provides further insight into how AI stands poised to elevate the productivity potential of the world economy. "This potential stems from AI's capacity to automate routine tasks, refine complex operational processes, and engender novel business methodologies," he said.

McKinsey estimates that AI-enabled supply-chain management has helped companies cut logistics costs by 15%, inventory levels by 35%, and service levels by 65%.

Also, McKinsey finds that AI-driven demand prediction to supply chain management cuts errors by 20% to 50% compared to traditional methods. These efficiencies translate into reduced lost sales of up to 65% and lower rates of stockouts. In addition, AI forecasting can reduce warehousing costs by 5% to 10% and lower administrative costs by 25% to 40%.

Meanwhile, Professor Fan sees AI expanding the world economy's productive capacity. "This implies an economy's enhanced ability to produce a greater volume of goods and services, potentially elevating living standards and optimizing resource allocation efficiency," he said.

A higher capacity, in turn, is a boon to economic growth. "As efficiencies and output capacities increase, so too does the generation of output and income, which typically correlates with advancements in employment, wage levels, and investment prospects," he added.

"Generative AI technologies have the potential to fuel economic growth by enabling healthcare services, consumer interactions, and businesses to improve efficiency, reduce costs, and innovate to produce better outcomes through personalization and proactive responsiveness," added Michael Ashley Schulman, CFA, Partner & Chief Investment Officer, Running Point Capital Advisors.

Most importantly, expanding productive capacity will ease inflation pressures arising from supply-side bottlenecks, wage pressures, and an eventual monetary easing.

"This scenario could unfold if the supply of goods and services escalates more rapidly than demand, exerting downward pressure on prices," Professor Fan said. "However, it is imperative to acknowledge the intricate dynamics between technological advancement, productivity, and inflation, which are also subject to influences from monetary policy, global supply chain intricacies, and labor market conditions."

David Damiani, CFA, a chief investment officer and financial officer at Balentine, is skeptical about AI's potential to fuel a virtuous economic cycle. "It's a complex calculus because any potential for a virtuous cycle is highly dependent on AI being applied purposefully in an ethical way," he said.