Interest Rates, Artificial Intelligence, and Money Supply
It’s becoming clear that the historic rise in current interest rates will likely persist higher for longer. It could also take some additional monetary policy to slow inflation, and by design the economy and markets. Yet we’re witnessing a new bull market driven primarily by the speculation that A.I. will create increased productivity, and by default increase company profits. I thought it would be prudent to jump on board the A.I. wagon and become more productive myself. I mean, if I’m going to be replaced by a computer software, why wait? Let’s get this thing rolling.
I decided to have a conversation with my eventual successor, and my obvious first question to Chat GPT is one that’s on everyone’s mind, “What happens to an asset when the cost of financing increases?” Here’s how the thought experiment unfolded with the help of A.I.
- “Decreased demand: If the cost of financing rises, it can make borrowing more expensive for individuals and businesses. This can lead to decrease in demand for assets that are typically purchased through borrowed funds, such as real estate or vehicles. Reduced demand can result in lower prices and slower sales, potentially affecting the value of the asset.”
This isn’t surprising. If something costs more, some buyers can’t afford it. But Chat GPT mentioned supply and demand, and this piqued my interest. What happens when there’s a dislocation in supply and demand? Let’s say demand significantly surpasses supply. Think the Canadian housing market.
- “Prices increase: When demand outpaces supply, the scarcity of the product or service drives prices upward. As buyers compete for limited resources, sellers have the advantage and can raise prices. This price increase reflects the market’s attempt to balance supply and demand.”
This isn’t all that ground-breaking. But what about the “other” monetary policy that’s quietly unfolding? The reduction of money supply.
Would a decrease in money supply help to find supply and demand equilibrium?
- “A decrease in money supply would decrease purchasing power. With less money available in the economy, individuals have fewer resources to spend on goods and services. Increased borrowing cost as banks and lending institutions have less money available to lend. It may also lead to deflationary pressures.”
Just like FOMO on the way up, deflation may be exacerbated by people delaying purchases in hopes of getting lower prices.
From everything Chat GPT is telling me, this monetary period seems to have plenty of headwinds. And yet the market shakes off these fears and continues to gain. The reality is no one knows what the market will do in the short term, not even A.I. But if we remain true to our primary mandate of knowing what we own and what it’s worth, living through uncertain times becomes more about learning lessons and less about stressing over the downside. And making five per cent in cash is nice, too.
Sam Sommer, B.B.A.
Investment Funds Advisor
Bio
sam.sommer@raymondjames.ca
www.consenheim.ca
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