Sound Money, Artificial Intelligence, and the Pope

How to safeguard the human person in the time of artificial intelligence? It is hardly a surprise that Pope Leo XIV in answering that question in his first encyclical does not include money as part of the solution. More is the pity.

The present unsound money regime has abetted vast malinvestment in the digital revolution now in its AI phase. Malinvestment takes various forms and is driven by mal signalling in capital markets caused by monetary inflation. Alongside the legal and constitutional backbone of the free-market economy falters. The build-up of the surveillance state is one consequence. All of this endangers “the human person”.

Malinvestment in the digital and AI revolution includes a serious distortion of the innovation process. Wildness substitutes for the steady guidance of the invisible hands which is intrinsic to free markets under sound money.

A tremendous charge occurs into the forest of the unknown. Death zones form around the biggest enterprises which potential new entrants cannot cross. In many industries investment success for a business means applying special industrial expertise in applying digital technology to build a moat which protects supernormal profit from competition. In the bubble markets created by virtually non-stop monetary inflation, monopoly and moat profits are the dazzling prize which entices frantic speculation key sections of the equity market and more broadly.

Turning back is not possible. This would mean the engine of innovation going into reverse once some of the big negative aspects of the revolution become evident albeit after a considerable time lag. These aspects include flaws which require application of cybersecurity and the terrifying scope for bad actors to gain control. Older technologies which could have sustained themselves as an alternative, at first through lower prices and subsequently through adaptation to the new awareness of the innovations’ faults and dangers, have disappeared. Over wide swathes of human activity, it is digitalization or nothing.

The digital revolution has continually swept aside essential survivor restraints in the free-market capitalist order which protect against destructive forces. The actual pathologically rapid pace and spread of digital innovation is symptomatic of deep monetary malaise. Virulent asset inflation featuring irrational exuberance amidst desperation for yield has fuelled the wild ride of the digital revolutionaries. They have got far ahead of the guardians and guardrails which in a free-market order uphold property rights while defending free entry and more broadly freedom against abuse by monopolistic crony capitalists.

The roaring excitement in the capital markets of irrational exuberance deafens the Jeremiahs who may be warning prophetically about the ultimate serious downsides of the new technology – including the huge scope for bad actors to make use of it. Hence the technological revolution undergoes metamorphosis into a wild social economic experiment. This is a reign of terror from the perspective of the ardent believers in the ideals of a free society and its capacity to deliver widespread enduring prosperity.

The Pope’s silence on money is ultimately unhelpful to those believers at a time of rapid advance in AI. A powerful coalition in the political arena between sound money and religious or secular movements which extol human uniqueness and sanctity might still emerge. But there is no fast road in sight to that destination. In the meantime, the unsound money regime has growingly powerful support. 

One key source of regime support is Big Tech which has gained so much from unsound money. A further factor, even if implicit rather than evident, in the unsound money regime’s staying power is geopolitical calculation. The charge to the engine of innovation which unsound money produces, even if dangerous from the perspective of liberty and ultimately general prosperity, might help sustain a lead for the US over China. Some supporters of unsound money might count on inflationary finance to make possible big increases in US military spending.

The emergence in the US of a religious-ethical coalition to oppose unsound money would have some historical precedent. In the late 19th century, there was the immigrant German catholic support for sound money in the US (see Murray Rothbard). But we should note big differences from then. Unsound money in the 1890s was a potential threat (were the Bryant-led Democrats to win elections) rather than an actuality. The great technological advances of the 1870s/80s had occurred under sound money not monetary inflation. The religious-sound money coalition then was striving to defend a present benign status quo against an unsound money menace. 

A political coalition including sound money is now largely conjectural rather than factual. The advocates of sound money would make progress by demonstrating to their anxious co-citizens that the longest asset inflation (running since the early 2010s) in US history has fed irrational exuberance especially in the pursuit of monopoly profit which digitalization is prone to generate. Investors gripped by irrational exuberance do not give weight in their calculations to possible hazards of the new technology to emerge with a considerable delay beyond the early phases. 

There is no indication of a cool breeze entering the monetary environment any time soon. In fact, the opposite: supply shocks such as the present energy supply disruptions from the Gulf, bring usually bouts of asset inflation in their wake once the disruptions go into reverse. The Fed takes advantage then of the fall in recorded CPI inflation to affect a monetary injection. Notorious examples include the Great Asset Inflation of 1986-9 following the crash of oil prices in the mid-1980s; or more recently the post-pandemic monetary injections and related new impetus to asset inflation.

Then we have the chorus inside and outside the Fed expressing a view shared by its new Chair that the AI productivity miracle by reducing CPI inflation provides scope for a correspondingly easier monetary policy. But there may be no miracle, meaning double hazard from anticipatory easing. And if the miracle does occur, under sound money prices should fall in general, rather than being sustained or allowed to rise courtesy of monetary injection.

Finally, there is the looming monetary hazard of the Warsh Fed entering an Accord with the Treasury to slim its balance sheet. This accord would mean some version of the Fed exchanging its portfolio of long-maturity bonds at the Treasury Window in exchange for newly issued T-bills, then selling these in the market to shrink the outstanding total of reserve deposits at the Fed.

But this huge exchange of T-bills for reserve deposits would have little monetary effect, given that interest-bearing reserve deposits and T-bills in the present system are such close substitutes for each other. If as is likely the Fed further down the road justifies rate cuts by the slimming in its balance sheet, that would be new impetus to monetary inflation. True monetary reform would consist of measures to enhance the attractions of monetary base (whether reserve deposits or cash), including the curtailment of deposit insurance and too big to fail. 

Bottom line: even if the Pope had identified sound money as an essential ally in a campaign to safeguard the individual in a time of artificial intelligence, he would have struggled to identify any group in the political arena pressing for this in a coherent or effective form. Yet papal advocacy of sound money could be a catalyst to the emergence in the long run of a winning coalition for the sanctity of the individual. Who knows, that coalition may yet get the blessing of the Pope in a future encyclical?