Ep 72 | Brian Wesbury | Can AI Make a Pencil? | ROI Podcast

Brian Wesbury discusses the implications of a new Fed Chair, how the conflict in Iran may impact inflation, and whether or not AI can make a pencil.

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Transcript

Warsh Named Fed Chair

Ryan 0:14

Well there's a new Fed chair coming in. There's a war in Iran, and there's also a lot of questions swirling around artificial intelligence today. I've got Brian Westbury, Chief Economist at First Trust, to help me think through many of these issues and more. Thanks for joining us on this episode of the First Trust ROI podcast. We're recording this on May 14th. It'll go live on Memorial Day or the day after. And as we're recording it, uh Kevin Warsh was just approved to be the next Fed chair. As we stand right now, Jay Powell says he's gonna stay on till the end of his term. Right. So uh I'm I'm curious what you think the implications are of a new Fed chair. Uh you wrote a piece that was something to the effect of um Fed chair and name only or something like that. Exactly. So uh I don't know. Talk talk to us a bit about what the implications are of a new Fed chair if Jay Powell's still in the room.

Brian 1:11

Yeah. I mean, normally if uh a chairman of the Fed, I mean this kind of in a way goes back a long ways, but in in our modern era, Greenspan, he was collegial, he uh wanted to bring people along. I it's sort of in a sense that I know the Supreme Court is divided among uh on political lines, but there typically is a leader who kind of convinces people of the legal argument. And and it's maybe a different person each case, but uh and then there's you know Roberts is the head of the Supreme Court. So usually the head of the Fed, the chairman, has some sway over other members and can convince them to go a certain direction. But we saw three dissents in the last meeting, and it seems pretty clear that Powell uh uh uh out of the seven members on the board, Powell has four that are sort of on his side, and there are two that are on Warsh's side. And most people believe that Warsh wants to cut rates, Powell doesn't, and and so that's probably the lines that this will be divided along. Uh however, it's pretty hard to argue right now for a rate cut. We just had a huge CPI number, a huge uh producer price index number. Inflation, you know, maybe because of the war in Iran uh and the Strait of Hormuz, uh maybe because there's more of an inflation problem, but it's gonna be pretty hard to convince everybody to cut rates. So so maybe Warsh won't even try, but but Powell is sticking around just to be a I I believe just to be a thorn in the president's side. And he he just wants to make sure that they don't cut rates. And he feels and and and then there's a another group of people, and that's all the presidents of the of the regional banks, some of whom get to vote, but the pr the chairman of the board, uh, which will now be Walsh, has a lot of control who uh over who those presidents are. And and so most of them are aligned with Powell today, too. So he's got a lot of of power. Walsh can begin to undermine that. Um as chair, he uh he has control over what committees on the Fed you're assigned to, where your office is, whether you get I mean, he might take away Powell's parking space, for all we know. Um so it this could end up being a very, very interesting time. My bet is that Warsh plays it uh pretty coolly and doesn't start a fight because I think that could end up uh harming his entire chairmanship if he starts a big fight right now.

Powell Stays And The Fed Splits

Ryan 3:58

Is that because of credibility? Is that why he would that that's how it would be?

Brian 4:02

I think credibility, but also if you have uh if you have a big fight on the Fed, it's not like hockey where the fight can get the team all fired up and they play better. This one is like, whoa, what is happening here? And then you have a hard time sort of uh uh uh uh bringing everybody in line. You you just it the Fed has c always been collegial. And maybe Powell is changing that a little bit because and he I know he blames the president, but I actually think Powell has all the blame. Uh he he got involved in politics. Uh he funded massive government spending, he tripled or was involved along with Bernanke and Yellen in tripling the money supply, which increased inequality in America. Those two things affected the political world. No wonder politicians are coming after the Fed. Uh when the when the Fed finances government spending through quantitative easing, they're playing politics. I I uh uh you know when Powell claims that Trump is violating the independence of the Fed, I I put the blame at Powell's feet because he he literally got involved in politics. In other words, you you it's not a one-way street. It's it's not that the Fed gets to play uh uh part of the the the fiscal policy game, but the politicians aren't allowed to play the monetary policy game. It it if you get one, you get both. I I wish Powell wouldn't have done what he did because I I believe in an independent Fed. Politicians should not be in charge of monetary policy, but because Powell got himself involved, so I mean, he financed half of all COVID spending with quantitative easing. That's what created the inflation that we had. Uh he also increased inequality in America, which I believe has uh affected the political world. It's turned the youth against the Gen Zers against the baby boomers. Uh Mom Donnie got elected as uh mayor of New York, a socialist, and basically by the Gen Zers, like the 18 to 29-year-olds. And and and so Powell is the one that affected politics. No wonder politicians are going after them, uh after him. And um, and that's why he's he claims he's sticking around to defend the independence of the Fed. And I think Warsh has to play this carefully because you don't want a bunch of dissent, you don't want a bunch of arguments. It it could affect the collegiality of the Fed for a long time into the future.

Ryan 6:44

So you think that it has a lot to do with this sort of adversarial relationship with Trump that that uh Powell wants to stay on? So he he said it basically out, right? Trevor Burrus How did that develop, though? Because Trump did appoint him as chair of the Fed, right? Right. And and so is it just because he's been too slow or you know he hasn't been uh as quick to cut rates as as Trump wants?

Brian 7:08

Well, I think there's there's a whole bunch of an investigation that that was also took place? There's a whole bunch of things that have happened, and I I won't I mean probably could write a book about it all, uh but even though it's only la it's only been around for three years or something, you know. But yes, Trump appointed Powell. Um but but when uh Kamala Harris was running for president, Powell cut rates twice just before the election. And that was viewed by many in the Trump camp as being a a direct attempt to

QE Turns Monetary Policy Political

Brian 7:40

help the Biden uh Harris uh uh uh administration get her elected. So that's number one. And they I think they got really mad about that. And then he didn't cut rates as much when Trump was president. Trump is a developer, and I don't know any developer who doesn't want 0 percent interest rates. And so I I don't think we should have 0 percent interest rates or even 1 percent interest rates or even 2 percent interest rates. Inflation is above that. So he's uh Trump has pushed for lower rates. Uh the Powell has a pretty good case. Uh unemployment is 4.3 percent. Inflation numbers last month were uh specifically were really high, and and so a rate cut doesn't make a lot of sense today. And and and and then on top of all that, because the Fed tripled the money spy, it increased its balance sheet by sevenfold. And and then they chose to spend $3.7 billion fixing the Fed's headquarters in Washington, D.C. I mean you can build two NFL football stadiums for for this. And and and Trump is aghast at that price tag. Uh and and so so there's a there's a whole list of things. And then and then and then Trump did two things. He went after Lisa Cook, who's a member of the Fed, uh, for uh ha claiming that her home that she bought was uh was she was gonna live there and it was never meant for that and got a lower mortgage rate, and and he went after her. The Supreme Court intervened and said, you can't do that. Uh and then the second thing is he sued uh Powell for misleading Congress about the cost of this building. Um I I I don't know how to judge either of those cases, and I'm not trying to, but that's what Trump did, and it made Powell mad, and so he's not going to leave. By the way, there are only two chairmen in history that haven't left. That's what I was gonna ask you next. Yeah. And I I I don't know the complete story, but it was the the the Fed was just started. And I think uh, you know, so you put seven members on it, uh, one of them has to be chairman, because yeah, every board has to have a chairman. And and I think what they they thought back then was, well, you get to be chairman for four years. It's like it's like you're the HOA or you're the CPA society, and you you become the vice chair, and then you become the chair, and then you move down, and then you're chair emeritus, and and so he just stuck around. It wasn't for any political reason. The second one was Eccles, who was from Salt Lake City, and the in fact the Fed's building is named the Eccles Building. Um he stuck around because he disagreed with Truman. And so this it was very similar to what Powell is doing uh today. But uh I I think they both have a little bit of blame in this fight, uh, but I I really do go back to this quantitative easing, got the Fed uh it's almost modern monetary theory. When the modern monetary theory says we can print as much money as we want, sell as much debt as we want, spend all the money we want, and nothing bad will ever happen. And that and and and we can the economy isn't growing as fast as it could because we don't do modern monetary theory. It's the craziest theory ever. It's not modern, it's not monetary, it's not a theory, it's just printing money. And and by doing this, Bernanke, Yellen, Powell, uh, great financial crisis, then the co COVID, uh the Federal Reserve grew the government more than it should have been allowed to grow at much lower interest rates than it should have been allowed to borrow at. And it created inequality, which I believe has affected elections and politics in America. And then, as as I said already, government is bigger than it should be. And they were able to finance it at zero percent short rates and one and a half percent long rates, and uh and as a result, it's really the Fed that I believe violated the independence because it got itself involved in politics and fiscal policy. Um and and and no wonder politicians have come after them. Because if if you march over into the other guy's field territory, they're gonna push back. And then Powell says, Oh, we have to make us you have to let us be independent. In other words, let the Fed do whatever it wants, and you can't ever stop us. You can't do anything. And and that, if if we know anything about Trump, you tell him something like that, he is not gonna like it.

Scarce Versus Abundant Reserves

Ryan 12:27

So one of the things that we've talked about before is the shift that the uh Fed had from uh scarce reserve policy to an abundant reserve policy. And I'm curious what Kevin Warsh's take on that will be. Is it is there what are the odds that under a Walsh um chair chairmanship that we see a shift back towards a scarce reserve policy? Is that something that could happen or or no?

Brian 12:52

I think we'll get closer, but I don't think we'll go all the way. Um uh Kevin Walsh was a member of the Fed in 2008. He voted for quantitative easing. Um by the way, if you read the minutes of all those meetings, uh Walsh is on record during those meetings saying that the banking system is broken. The whole model of doing business is broken. I found this fascinating because really it it it the banking system wasn't broken. It was the accounting rules, marked to market accounting, that led to all it it took subprime loans were a real problem. But they were about 400 billion. We could have absorbed that like i it it shouldn't have taken down the banking system. What caused that to become an inferno was marked to market accounting. And and we don't need to go into the podcast before.

Ryan 13:44

I don't know.

Brian 13:45

I don't think so. But we it it's it's what took the the fire of subprime and made it an inferno. And and it's because we had illiquid assets that were cash flowing at 70 cents on the dollar, but mark-to-market accounting was making them worth 18 cents because we had illiquid markets, and so people are selling assets that should have been worth 70 uh at 18 cents. And if they didn't sell them, they had to take the loss as if they had sold them.

Ryan 14:18

And that's what created So made the banks seem insolvent basically because of the and they were never insolvent.

Brian 14:24

And by the way, just to go down this road a little bit, we passed uh uh uh um quantitative easing in September of 2008. TARP was passed in October of 2008, and between then and March of 2009, the market fell another 40 percent. It is a myth that quantitative easing saved the economy. Uh what happened in March is we finally changed mark-to-market accounting rules, and that's when the stock market bottomed, that's when the economy bottomed, and that's when banks stopped going bankrupt and started being able to raise capital, uh, which they should have been able to do all along, but nobody would touch them with a 10-foot pole as long as mark-to-market accounting was in place. So Warsh is there in Washington. By the way, I visited him in his office when he was a governor of the Federal Reserve in 2008. And I told him he had don't do TARP, don't do QE, change mark-to-market accounting. And he told me it's too late. It's too late, it it that's not the problem, we have to do this. So he witer he voted for quantitative easing, all right? And uh since then he left the Fed. Uh he has criticized the Fed a lot for its quantitative easing after the great financial crisis, after 08 in 09 and 10, and then especially during COVID, and he does want to move the Fed back to a less abundant reserve position. But I I believe, especially if you read kind of between the lines of all his speeches, what he basically says is the initial QE that I voted for was right. It was all the QE after that that was wrong. So so what I think he's gonna do is is roll back some of it, but not go all the way back to a scarce reserve

Mark To Market And The QE Myth

Brian 16:24

model.

Ryan 16:24

QE, QE uh two, QE three, how was it a trilogy of QE three?

Brian 16:28

Yes, it was. And then there was QE COVID. Yeah, there was QE1, QE two, QE three, and then we had QT for a while. Then we did QE COVID, and now we've done a little more QT, and I think he's gonna keep doing QT. And then one of his ideas, and I think this is a good idea, is that in the the Federal Reserve did QE, so what they do when they do that is they print money, and the way they get it into the system is they buy treasury debt. Um and they're not allowed to buy it directly from the treasury, so the the banks buy it first, then they buy it from the banks. Uh and they bought all kinds of different stuff. They bought long bonds, they bought short bonds, they bought T-bills, and uh and and one of the Warsh's idea is to have the Fed not hold longer dated securities. And and he thinks maybe well uh the Fed should only hold T-bills. And uh which is an in uh that I think that would be better. It's almost like a stable coin. You know, when people issue these stable coins, they have they're supposed to hold T-bills to back up every dollar. And and and they're basically both liquid, uh, cash or T-bills, and and so that would make sense. You know, right now the Fed has almost a trillion dollars of losses on its books uh due to uh the fact that they bought all those 10-year treasuries, 20-year treasuries, 30-year treasuries at one, one and a half, two, two and a half percent interest rates, and now the ten the 30-year is five, and the ten years four and a half. So they have losses from the holding those bonds. And and this is a whole nother thing that that the the Fed is losing money, has lost money on its holdings, and and it's all because of this quantitative easing, abundant reserve policy, and and and this is a whole nother reason for politicians to want to go after them because we've financed this deficit that the Federal Reserve is running, and taxpayers have done it. You know, in in in the Bank of England has to count i i it it the same thing happened there. They did QE, they bought bonds, now they're paying banks interest, and they're paying banks more in interest than they're earning on from their bonds, which means they're making a loss every year. And in in England, they run that loss shows up as part of the deficit, the the true government deficit, the budget deficit. In the United States, they play games, all right. The Federal Reserve has an account uh where they it's it's called a deferred asset, and it's negative by about $200 billion. And they how you have a loss that you get to call an asset makes no sense, but we should be counting that as part of the deficit, but we don't. And uh and so uh that that's a whole nother reason for politicians to be mad at the Fed.

War In Iran And Oil Shock Risk

Ryan 19:31

So you mentioned earlier that part of the challenge of trying to argue for cutting rates at this point is uh higher oil prices feeding through to inflation. Obviously, that's got a lot of ties into um the instability in the Middle East and the war in Iran and all of that scenario that I think there's a lot of uncertainty that that surrounds that. Um and so I'm I'm curious what your take is on sort of the backdrop. Uh I I think, from my opinion, it wasn't communicated that well to the public when when the US decided to go to war with Iran. Right. Um, you know, whether or not that was a good decision, setting that aside. So I'm just curious your take. Like what's why did the why did the president decide to actually do that, knowing full well that it was going to have an impact on oil prices, probably feed through to inflation, and he was gonna have a harder time cutting rates.

Brian 20:25

Yeah, I I think he did it. So the one thing I mean I think you're right. Initially, the the communication wasn't there. Um like it just happened. One surprise. One night it happened, right? But after the fact, Marco Rubio's done a very good job. I thought J.D. Vance has done a good job. Heg Pete Hagseth has done a good job of explaining. You know, for 47 years, uh, this this regime, the Molas, um uh basically funded terror around the world. They fund Hamas, Hezbollah, they they have been trying to build a nuclear weapon, and and we sort of turned the other cheek, or how however you want to say it, we we we've we've b tolerated th this happening. And uh and we we really haven't pushed back. And presidents have been, I think, fearful of doing it for exactly the reasons you mentioned, and that is it's gonna shut down the strait, and 20 percent of the wo the world's oil goes through there, and oil prices are going to go up, and we know that that's that's political kryptonite. And and I I think President Trump has just decided that there are a few things in this world that he is going to get done. And he looks at Iran as being sort of the center of the problems in the Middle East. And they they fund all of these terrorist organizations, they're constantly. fighting Israel. They they they chant death to Israel, death to the USA, and and so President goes president says you y y y you're gonna say death to USA, it's gonna be death to you. And and I I I actually think this is uh this is a a good policy that we should be going after them. The the the the problem is that Iran because of oil prices let's say they know we don't have the political will to to to stick to it. And so that's why they don't ever negotiate in good faith and and I I you know right now we're in this ceasefire the straits still closed I I I don't think the Iran is going to negotiate in good faith. I think it's gonna take even more war to to push them to a place where they will negotiate in good faith. And and and maybe what that means is the IRGC is the military arm in Iran and then there's the Moas and they report to the Moas but at some point I think you're gonna find a group in in the military who if you promise them enough oil money will will they will splinter and maybe take over the country and give up these nuclear weapons that they are building and the uranium that they have enriched to sixty percent. And so so but but I don't think it's gonna happen overnight. And so I I still think this conflict is going to escalate again. You know I know we're we're not gonna release this for another ten days or something like that but but uh and maybe it'll happen before then maybe we'll have maybe peace will have broken out. But one of the things that did happen is that the UAE split with OPEC and which is I believe a direct result of this and so uh you know people say things like don't play 7D chess I'm like what are the other four D's you know um but it it's just power. It's it's like we're gonna exert this power because we can and um we busted right through all the Russian and Chinese air defenses they have nothing left we control the skies uh which which is I'm sure not making China and Russia happy but but we have proven that we have the world's strongest military and and I think Iran's going to have to give in to this and the probably the way it's gonna end up happening is that the military is going to kick the mulas out and take control and they'll probably get rich from it. There's a bunch of them that will because it's a lot of oil because uh the the longer this thing's la last the more pain there is in Europe the more pain there is in Iran uh their economy is already in shambles uh and and I think the closer the Mid East gets to peace uh believe it or not it it's kind of uh amazing to think that of all people in the world President Trump might might be able to engineer a a relatively solid peace in the Middle East and I think the UAE leaving OPEC is a really good sign that they're that that because that free markets are about going it on your own. You don't form cartels you don't and that's what OPEC is and and they've used their oil uh to gain power and wealth but we are now the world's largest world exporter in the United States. We're also the world's largest producer of of oil and natural gas. And so so it i I think it was a good time to do this and I think the benefits of it in the longer run are going to be very positive. But I don't think that the volatility is over. I think I think it's going to pick up again before it's finally over.

Ryan 26:00

So do you think then that the Trump administration will have uh like let's let's say this is all um part of the plan and it's it's uh ultimately a net positive good thing. Right. Will they actually have the political will to carry it through given that there's midterm elections coming up in November and you know there's a lot of division in uh with respect to whether or not it's a good idea.

Brian 26:22

Right. I hope so. And I mean it's seemingly we're uh we're seemingly we're willing to take the pain right now. And and uh we know oil prices are I'm I am certain that this administration wants this thing over before November and oil prices coming down. And I am also certain that Iran knows that and and so it's a a test of wills you know it's like Trump hates being hates that taco phrase you know Trump always chickens out you know and um and and just having having somebody say that probably makes it more likely that he won't uh end it in unless until he gets his desired outcome. If he does uh I I think that would be damaging to the world. And so he you know presidents always have a choice do I do I do the thing that's politically expedient or do I think that that do the thing that I think is right for the long run and the best thing in the w for the world. And it seems like right now he's trying to cut down the middle road and um but I I think Iran is going to make him is going to force him force his hand before this is all over. I think they they think they can play a game the longer game and wait us out politically and I I I don't have any basis for saying this. I haven't been in meetings I don't you know I but I I just have a feeling he's not going to back down on this one. I think he really does believe it's like the key cog in the machine that if you can turn this one thing in a good direction it changes the whole Middle East for the

Oil Prices Versus Money Supply Inflation

Brian 28:09

better.

Ryan 28:09

Okay so let's say that oil prices do stay high for longer and you've explained to us before that the relationship between the money supply and inflation is it's you know it's really too much money in the system that causes inflation. Right. M2 surge during uh period during COVID which caused inflation um it's since come down though right and it's it's accelerated a bit now but it's we're still probably on trend a little bit below the long-term average. Yeah even below trend. So does that mean what does that mean for inflation if oil prices are higher but M2 is under control, what does that mean for inflation?

Brian 28:48

The consumer price index is typically when you know when people say inflation they go, what's the CPI up? And but but we have to remember that's just a number. That's that's not inflation. Like that you know it's it's a we we measure prices but but it it's it's just a number. And and and when oil prices jump like they have it's going to go up. That doesn't but but you can't have inflation without money printing. So what happens is if you if everyone keeps driving the same amount um of miles that they drove before oil prices went up then that means we have less money to spend on other things like dining out or movie tickets or or sporting events or anything. And and so what what will happen is you can have an initial spike in the inflation numbers just because it's a number it's like you put in a bigger gas price and it it goes up. But but over time if there's less demand for other things because people are spending more on energy then those prices should fall. What you don't want to do is if you have an oil price spike it it it drives up the cost of oil probably slows the economy down and some central banks raise rates into that oh oh no the CPI is going to be higher so we have to raise rates. That's like a double whammy on the economy because higher oil prices are already dampening. Now you have higher rates other central bankers uh they say well higher oil prices are up so that's gonna slow the economy down we're gonna cut interest rates and print more money to let us absorb that and that's the way you get permanent inflation because you when you monetize the higher oil prices that's what leads to inflation so so right now if we keep the money supply contained which it is right now it's growing about four and a half percent a year. It's slower growth than it than when Bernanke was chairman it grew about six percent a year during that period. So this should be a money supply growth rate that slowly brings inflation down. And so even though we've we're gonna see a month or two of higher CPI prints underneath there's changing demand for other goods and I think those prices will tend to come down and I think we're gonna see the CPI uh the consumer price index numbers uh moderate in the months ahead.

Why AI Cannot Make A Pencil

Ryan 31:23

Okay it's funny we we were uh I was listening to you you just gave a speech um and you were talking about AI and um you had said that you asked AI for example to write the Constitution or whether or not it could do that. Right. I was listening and I I just recently asked AI to do something that was inspired by you by the way and I asked AI if it knew how to make a pencil. Because you've got that uh you I think you handed out the iPencil uh family tree or something like that.

Brian 31:55

Leonard Reed back I want to say in the 50s wrote iPencil and I can't wait to see what hear what hear what it says but let me let me ask you let me AI can make a pencil? No. AI see that's one of the things you know Elon Musk I'm actually going to back up and make a bigger point about this real quick. I remember in the late 90s so remember what was going on in the late 90s we're putting uh fiber optic cable everywhere think the Lord we did I mean internet's so much faster today but all those companies went under we also uh there was Wintel so Windows uh Microsoft and Intel got together and that's when we got powerful laptop computers desktop computers that changed the world uh and but that doesn't mean the market didn't get ahead of itself it these these were unbelievably great inventions they changed the world thank goodness we have them I'd never want to go back to AOL and dial up modems and you know how slow that was we all remember that um and and and and that was a a a really good thing I think the same thing is going to be true of AI as well uh that it's gonna change the world for the better as long as it doesn't nuke us like you know take over like how and um and uh uh but anyway having having said that uh this this this oh oh this is why I went down that road back back then in the 90s Mary Meeker Joe Battapaglia God rest his soul uh abbey joseph cohen they were they were saying things like we will never have a recession again because of all the technology and now today we hear things like uh you'll never have to work again and and and and so can ai make a pencil well may maybe a robot can but but if you but if you make it invent one like who AI's not going to invent a pencil because it doesn't need a pencil. We invented pencils because we needed them and and then the reason this is that's such a great question it's a really good question to ask AI is Leonard Reed uh back in the 50s wrote I pencil and it was it's a fantastic piece everybody should get it it's a little short essay but it's like nobody knows how to make a pencil yeah because like no like there's somebody makes the yellow paint somebody that gets the the graphite somebody that makes the the rubber out of the trees for the eraser the little uh brass band that goes around it you know and and no one single person knows how to do all of this the cedar that you know that they use to m to make the wooden pencil no one person can do it it's millions and millions of people that get together to make a pencil and and so how is AI gonna ever organize all of that the the I I'm really worried about AI because it probably thinks it can make a pencil and it can't and it it will convince itself that it knows better than us and that's what happened during COVID uh uh uh Fauci was out there telling us he knew it was six feet he knew mass work he knew the vaccine stopped the disease he all of which were wrong and and and then we had this group think that forced everybody to do things and I I feel like AI is going to be groupthink on a on a massive scale you know and and it it scares me a little bit because it it won't go against the consensus because that's what it reads. All it does is read the consensus. And if that's all that's in the New York Times and the Washington Post and ABC and CBS and NBC it it's going to push us down a road that's uh that is um I I I think fraught with peril.

Ryan 35:54

Yeah. It's trained to infer what it's been taught is the right answer. Yeah. Essentially exactly and I I think in that Leonard Reed essay it said something like only God can make a pencil. Right. So now the question is is AI becoming some sort of digital god?

Brian 36:09

And I think that's what some people kind of they view it as superintelligence where anyway I'll tell you why it's not superintelligence because it it all it knows is what it scraped from the internet. We have not gotten to this general model where it can think on its own, invent new things and and and so that's why it could not make a pencil. If you just left it to run the world it we'd have no pencils.

Ryan 36:34

Trevor Burrus Okay if you ask AI how to make a pencil it can give you the blueprint in seconds but here's the catch AI is the ultimate librarian not the ultimate not the ultimate entrepreneur it can tell you how the pencil was made but it cannot feel the markets itch for new in new invention nor it can replace nor can it replace the millions of individual choices that respond to real world scarcity in time. So it it basically says that the invisible hand that we you know our market economy is based on is not um AI can't do that.

Brian 37:09

Trevor Burrus Right and it can't um and that it has no imagination and people claim that it will get to that but but what entrepreneurs do is is they take the mosaic of the world and and they reorganize it in a in a different way. So you take you know aluminum and steel and you make it into a spaceship that can go to Mars all right you like like you you take the mosaic all these pieces are there like the Romans had all the pieces to make a 747 they they had everything. Yeah um we we didn't we didn't invent any new things. I mean we we m we took all the things on the earth and we put them together to make a computer chip to make a wing to make a jet engine but the Romans had all those pieces but they couldn't do it. And so the question is is can AI actually get creative enough to come up with like I think that's well put by uh uh Gemini w to come up with a new product that people need want or desire um with without it having existed before and AI can't do that yet.

Ryan 38:20

Yeah I think one of the things that it's good at so far and you know obviously none of us really knows what direction it's going but one of the things that it's good at is looking at huge reams of data looking at relationships and then maybe inferring based on those relationships something else. And what I mean let me give you an example. So um there was the um alpha fold project you've probably heard about that where they figured out the three dimensional structure of all sorts of proteins and it's really based on the relationship of how amino acids come together in really complex shapes and based on all that really complex information you infer well if you put these amino acids together they form into these shapes. And so you can establish sort of a best guess of what these unknown three dimensional shapes are going to be based on these other relationships. And I think that sort of thing is a really powerful example of what AI can do and bring more information. But to your point I think there's a lot that is being overestimated about what AI is actually going to be able to do from a creativity standpoint or certainly being able to develop synthetic knowledge that builds on other synthetic knowledge and anytime you introduce error rates they compound over time.

Brian 39:37

Right.

Ryan 39:37

Right? Exactly and so that's a challenge.

Brian 39:39

Yeah once there's a bad piece of information and then it c continues to operate on that it it compounds. It gets worse and worse and worse and out of control. It's kind of the way I think of it is that everybody's watched that video of that bridge that gets caught in the windstorm and and then eventually breaks apart because the harmonics of the of the waving of the bridge back and forth just blows it up. And and that's what happens when you put garbage in uh into a model and then it keeps referring back to that bad piece of data and then it just compounds it all those problems. It it scrapes the internet and and that's why it couldn't write the Constitution because it reads Hume and Locke and Aristotle and and and Adam Smith but it also reads the New York Times and the Washington Post and as a result it doesn't have it doesn't have a a philosophical baseline to be able to write a document like the Declaration of Independence. It was you know it was uh inspirational and and so far AI has not proven to me to be inspirational at all.

Ryan 40:50

And and again we could take this is a longer philosophical question of people that are a lot smarter than me but it seems like whatever whoever doing is doing the training to say that this is actually true, this is not true, this is more true, this is less true, this is the right answer, you're getting you know a reward token for this and not for that if you're going to make a claim that this article from uh the New York Times is equally as true as you know Thomas Quinas or something like that, then you know then then it is going to give you with whatever whatever you tune it however you tune it based on those truth claims is what your output is going to be exactly that's why I I do not think an AI could ever write a Constitution like our founders did ever.

Brian 41:35

Because because they scrape the the the web and they and and they are filled with all the arguments over the last 250 years against the Constitution and they will take them as equal to the arguments for the Constitution.

AI Jobs Fears And Profit Hype

Ryan 41:53

And and then you end up having no new thought so there's been a lot of uh fear mongering I would say but um certainly discussion about the impact on the economy over the long term especially um employment and the fear that AI is going to replace all these white collar jobs and you're gonna have a lot of people that don't have to work or can't work right and we're gonna have to come up with some universal basic income and you know there's all sorts of snowball effects of that. Right.

Brian 42:26

I think I know what your take is but I'm I'm curious do you think that AI is going to have a long-term impact on um on labor or is I mean it will I mean if you go back over history every invention you know so so the Leadites I mean this goes back to the 16th seventeenth century in in the UK they they were putting in looms to to do knitting and it used to be done by a bunch of people like sitting around in front of a foot powered loom and they did it by hand. And and so they burned down these factories because they were taking all these looming jobs or buggy whips you know when you invented automobiles what happened to the bug but every time we've invented a new thing what's cropped up is other jobs that that to support it to build it to to grow it or we've just moved on and most of the time this is a really good thing. Like for example uh there used to be a a job uh in in the world in in America uh called a train coupler all right and so the the buckles that that hook train cars together were literally uh like like two circles and you put a big steel pin in between them when they got lined up and when you interviewed a lot of times the owner of the railroad would go, let me see your hands. And if you had all your fingers you probably weren't very experienced. In train coupling. All right. It was a really dangerous job. And and then we invented automatic couplers. And and and thank goodness, because what a terrible job to, you know, just have a job that you're gonna lose a finger at some point. And so so every time we've invented something new that takes away jobs, it's created more wealth, more opportunities, someplace else where people add value to the world. And and I get it, you you know, you're trained as a uh a software coder, and and now uh AI can code faster than you. And and and and if you if you think I'm only a software coder and now I don't have a job, well then you do want a UBI. You uh well just pay me because like you just took away everything. But but there's going to be something else, something else for people to do. There's always more work in the world to do than there are people to do it. Yeah. All right, and and and that's just something I believe to be true. And I I get it, AI sounds different, but I uh for some reason I don't I don't think AI is gonna be able to fix my plumbing. All right. I mean, and maybe some robot can be trained to do plumbing, but I mean plumbers are amazing to me. I mean, you I swear, the pro here's where the problem is. And the plumber's like, the problem's not there. Like I I take some two seconds to look at your system and they know exactly what's wrong with it. Um every once in a while you get a problem with it, it's more complicated. But can you really train a robot to to be able to figure that out? I I I find that hard to believe. Also, if nobody has to work, does that like what does that mean? Is there a 55-gallon drum on every corner and you just reach in? I, you know, I need a new car, you pull a new car out. Yeah, I need a motorcycle, you pull a motorcycle, I need a pizza, like I need a you know, ham sandwich. Everything, anything you want is in this 55-gallon drum, and you don't have to make any of it. I I I I that's you know what that is, is that socialism. That's what that's kind of the promise of socialism. You don't have to work, everybody's the same, but everything will be available. And I I I I just find that really hard to believe that we're anywhere near anything like that, and that anything like that will ever happen. Yeah.

Ryan 46:28

Well, I mean, it wasn't that long ago that we were a I mean, the vast majority of the population was involved in agricultural. Mm-hmm. You know, they were farmers. Yeah, eighty, ninety percent. Um it's three percent. If you were to tell them about everything that's happened between then and now, they would probably think the same thing. Right. Right? If you but obviously there's and and uh to your point about software engineers, there's been a lot of layoffs announced recently, but I just saw there was a statistic on um the number of job openings for software engineers is has actually recovered quite a bit and is actually quite a bit. Because they're now going into writing software for AI. These these people that aren't necessarily their job is getting replaced, well, there's other jobs to replace them with.

Brian 47:14

Exactly. Yeah, I think AI is gonna be it uh I mean I'm worried we're ahead of ourselves. I uh um I want to get this story in here because I think it's important. You know, back in 1999, Ford Motor Company made a um uh deal with Oracle and they were gonna move their supply chain online. So if like they used to have a building filled with people just moving paper back and forth, like invoices, payables, receivables, like shipping instructions, deliveries, you know, all that stuff to handle all $80 billion worth of stuff they bought every year. And if they moved all that online, they were gonna save 10%, which is eight billion dollars a year. And then everybody thought, oh my gosh, buy Ford, because they're gonna make their profits are gonna go up by eight billion. Well, they never did, because Volkswagen did the same thing, and Toyota did the same thing, and GM did the same thing, and then they all cut their prices. Or or better way to say it is they didn't raise them as much as they could. They took the the eight billion actually ended up in consumers' pockets, not Ford's pockets. And that the same thing is gonna happen with AI, I believe. I I think we're overestimating the profitability. It's like we're acting like it's gonna be able to do everything, and then these AI companies are gonna gather all the profits from everything anybody else does, because they're gonna they're gonna do it all. And uh and but that will never be true because there's a bunch of AI companies and they're all gonna lower their prices. Um and so so you know the and and they're gonna pay less for chips. Like right now, they'll pay anything for chips, right? They just want to build data centers, they'll pay anything, it doesn't matter. And at some point that won't be true because the competition on price will start to kick in. And competition means that the profits that everybody thinks are there aren't gonna be there.

Ryan 49:09

All right. The time has flown by once again. I've got one final question for you, Brian. Um, and it's more of a philosophical question. Um I think everything that we're talking about, universal basic income, you know, fears about AI, the the wealth gap between the very wealthy and and those in the K-shaped economy. Right. Um, all of that has created sort of a mistrust of capitalism. Yep. And you are one of the defenders of capitalism. So how do you foresee getting past that as a society? How I mean what how do you how do you build uh more of a trust in the capitalist system?

Restoring Trust In Capitalism

Brian 49:48

Yeah, it's uh it's really difficult. And I think we're at a a true crossroads in this country. You know, the if if you look at right now I I think the number is 19%. Uh it's really close to that. If it's not 19, it might be 18, but uh percent of all personal income in America is uh transfer payments. It it's it's it's from the either taxation or borrowing, and then the government pays it to people. So so if you if we kind of think about that, that means 19 people are in the wagon and 81 people are pulling the wagon. And then that's even unfair because 13 of those 81 work for the government, so they're kind of in the wagon too. So, in other words, it we have way fewer people pulling the wagon and way and the wagon is much heavier because more people are in it. And that means we grow slower, right? The the heavier the wagon, the fewer people pulling, the slower it goes. But but that's not really what I worry about the most, because if you're in the wagon and you shouldn't be in the wagon, you know, I I I truly believe that God put us here to in his image to be creators, to serve our fellow man, but but if you're sitting in the wagon, you're letting your fellow man serve you. And and so what happens is I think at that point souls start to die. And and people are disappointed and they feel entitled and they and they're envious, and they're and and and so all of that starts to grow. Then you throw on top of that, like there's no doubt, capitalism itself does create inequality. Elon Musk keeps getting richer faster than me, all right? But that is because he's adding value. So that's a good kind of inequality. But the the kind of inequality that comes from the Federal Reserve tripling the money supply, you know, baby boomers have been saving for 40 years. They own a home, they own assets, investments, triple the money supply, they win. If if you're if you're young and you I mean, you just haven't had time to save. I'm not saying you're not a saver, you you just don't have the assets. Um, and a lot of people complain about not being able to afford a house, et cetera. But that that's not even what I'm talking about. You're just young. You've only been working for two or three years, you haven't saved a lot, but triple the money spike, the price of beef is up 3x, your your income went up because of inflation, you know, it kept up, but you're not any better off. And so we've created this inequality that has nothing to do with capitalism. And I believe I take it back to the Federal Reserve's it's the Fed's fault. They tripled the money supply. So if we have people in the wagon that aren't supposed to be in the wagon, we have seventh generation welfare recipients. The the war on poverty was an absolute, utter failure. And and now we've created more inequality because of bad monetary policy. This is there are more young in America who believe in socialism today than I think ever in history. Even compared to the 30s or the you know, flower power of the sixties. We we w and and it's because of the inequality that the Fed created. And and so we we have souls dying, we have uh people starting believing in socialism, envy growing, uh and and we just haven't done anything. We we keep going along just to not upset the apple cart. And and it's gonna take uh a really brave politician or group of politicians to alter that course. You know, otherwise we're on sort of a autopilot to just bigger and bigger and bigger government, which I think in the end, uh um this is how this is how societies end. I'm not trying to be big Debbie Downer here, and you know, but this is how societies end. We have to change it. And what I would say is that America always does. I mean, I love Winston Churchill's quote. He goes, America, America always does the right thing, but only after exhausting all the other possibilities. And and so, like, I'm I'm hoping and praying that that statement stays true uh in these years to come.

Ryan 54:26

Hopefully we don't have to do all the wrong things and exhaust all the uh those

Final Takeaways And Farewell

Ryan 54:30

possibilities. But um yeah, that's well that's that's a hopeful message. Hopefully um, you know, there's some sort of um Reagan-esque figure that's that steps up. Because I think in the 1970s, you know, all that that period of time, um there was certainly the malaise of you know big government spending and some of the things that you've argued against. And um it seems like throughout the course of the 80s that that got somewhat fixed, right? Right. Yeah, absolutely. It did. So it can happen. It can. Well, hopefully it does. Um we'll have to do this again. Thank you for uh spending some time with us on the podcast. And thanks to all of you as well for joining us on this episode of the First Trust ROI podcast. We'll see you next time.