David McWilliams: The first victim of AI is the economy. Welcome to the 2030s

We are in an era of great technological advances, or so say all the tech bros who are championing not just AI but a whole host of technological innovations – from finance and healthcare to supply chain management and communications. In spite of recent stumbles, the share prices of tech companies continue to soar, sucking more and more money into the great Silicon Valley bonanza. Ireland benefits enormously as Europe’s, maybe the world’s, most Silicon Valley-adjacent economy by virtue of all the tech companies based here.The promise of AI, and the reason a few big firms are betting billions on it, is to make the economy more efficient. Robots will do the jobs that used to be done by millions of people.When you think for a moment about this, you must conclude that we are facing an era of mass deflation, where prices fall across the board. If this happens, how will we repay all the debt we have accumulated? READ MOREThis column is about to tell you that possibly the most obvious financial implication of AI will be mass debt default, bankruptcies, bank failures and chaos in the international financial sector. Bear with me, as I outline how this happens. All technological innovations are deflationary because what drives all technology is efficiency. Efficiency is a fancy word for getting more out of less. At the forefront of every technological innovation is falling prices – that’s what getting more out of less means. As prices fall, driven by productivity, wages fall too. In the case of AI, if the promise is to replace wage-earning humans with robots, the impact on falling wages will be more pronounced than anything we have seen before. As most people’s income comes from their wages, this means a significant destruction of ordinary people’s income. In debt dynamics, income is the font of all solvency; without income, you can’t pay back your debts. In a world that is now carrying more debt than ever before, the first victim of AI will be solvency. [ David McWilliams: Sinn Féin’s class-war language is more British than IrishOpens in new window ]Let me give you a historical example of how technological innovation causes deflation: Between 1870 and 1900, wages and prices across the globe fell constantly. This is what economists call a supply-side deflationary shock. Prices don’t fall because demand falls, they fall because we get better at making things cheaper. This period was marked by rapid improvements in key technologies such as rail and steel. Rail freight rates (a cornerstone of the economy at a time when goods production drove economic activity) in the US fell from around 3 cents per tonne-mile in 1870 to around 0.75 cents by 1900. Steel saw a huge boom in output over the same period. US steel production exploded from about 10,000 tonnes in 1869 to one million tonnes in 1880, with 90 per cent of this steel going toward railroads. The price of steel dropped by over 50 per cent between 1867 and 1876, fuelling large growth in the output.Out on the farms, a surge in mechanised agriculture pushed up yields and pushed down prices, in the US. Corn sold for 83 cents per bushel in 1881 and, by 1890, was only 28 cents a bushel. Wheat dropped from $1.19 in 1881 to 49 cents per bushel by 1894. Cotton production also doubled over the period, causing prices to fall from 15 cents to 6 cents. Innovations in refrigeration, along with a significant reduction in transatlantic travel costs, meant that all this surplus US grain flooded into Europe, significantly reducing the incomes of European farmers. The value of agricultural land in Ireland and England fell by 50 per cent in the 30 years to 1900, impoverishing the landlord class and leading to an explosion of financially strategic marriages between posh English and Anglo-Irish gentry to US heiresses with large dowries. Winston Churchill is the product of one such arrangement. Lord Fermoy, once an Anglo bigwig, married the daughter of US stockbroker Frances Ellen Work in what were called “cash for coronets” deals. The Americans got the titles and the landlords got the loot. This couple ended up being the great-grandparents of Diana, Princess of Wales and are direct ancestors of the next king of England. Rich Americans were operating a loot-for-legacy global stud farm because, as always in periods of deflation, the return to financial assets rises relative to everything else. As prices fall and output rises, profits rise, driving up asset prices. On top of that, the lower interest rates associated with the lower levels of inflation make borrowing cheap, so leverage increases. If you are among the few already rich, you can get your hands on these assets as they rise in value. One more thing to consider was that the 1870-1900 period was kicked off by the crash of 1873 and a large slump in railway stocks. The railways were the AI of the day. After the crash in their share price, railway building slowed but, despite this slower pace, railways continued to change the world.AI will do the same, but the AI share mania of today will slump. The shares that fell in 1873 were snapped up by rich Americans who had stayed on the sidelines during the mania. These were the people who had the moolah to pay the dowries to the impoverished posh folk, whose wealth was destroyed by the fall in land prices in Europe. [ Is the US AI bonanza a fundamentally secure investment or an old-fashioned bubble?Opens in new window ]AI will almost certainly follow the railways of the late 19th century and, as was the case then, the legacy will be deflation not inflation. This brings us to debt. If we are facing wage falls, who pays back the debt? Global debt (private and public) recently hit a record high of $353 trillion, with $29 trillion added last year alone. Two-thirds of this rise in global debt was incurred by rich countries’ governments trying to soften the blow of losing competitiveness. Borrowing to cover lost income can only last so long. Something will give. The most probable trajectory is that the AI bubble bursts, which may already be happening, triggered by the crash in Korea in recent weeks. This is followed by wealth destruction in the US as the Americans have bet the Wall Street house on Silicon Valley. Thereafter, the productivity rise associated with AI ensures that deflation sets in, unemployment rises as AI replaces the service jobs of the clerical middle (consultants, lawyers and administrators), leading to falling tax revenue and mass debt defaults. Welcome to the 2030s.