Generative AI (i.e., AI that can create text, video, etc.) has the potential to drive innovation across a wide swath of sectors.

In the next several years, generative AI will have huge impacts on the “pharmaceutical, manufacturing, media, architecture, interior design, engineering, automotive, aerospace, defense, medical, electronics, and energy industries,” according to UBS analyst Michael Briest, who cited a report from Gartner.  

Briest said the Gartner report stated, “Generative AI will impact marketing, design, corporate communications, training, and software engineering by augmenting these supporting processes that span many organizations.” 

He also said Gartner made five bold predictions about how AI will accelerate innovation at companies from now until 2027. Those predictions include the following: 

1. By 2025, more than 30% of new drugs and materials will be systematically discovered using generative AI techniques;

2. By 2025, the use of synthetic data will reduce the volume of real data needed for machine learning by 70%;

3. By 2025, 30% of outbound marketing messages from large organizations will be synthetically generated, up from less than 2% in 2022. We note that Salesforce recently announced the release of its Einstein PT to generate personalized emails to customers on behalf of salespeople, specific query responses on behalf of customer service professionals, and targeted content for marketers;

4. By 2027, nearly 15% of new applications will be automatically generated by AI without a human in the loop, up from 0% today; and

5. By 2026, over 100 million humans will engage robo-colleagues (synthetic virtual co-workers) to contribute to enterprise work.

Briest said in UBS’ view, “The breadth of effects that Gartner expects almost confers general purpose technology (GPT) status on generative AI, akin to printing, electricity or railroads. As with these earlier innovations, generative AI is likely to have a significant effect on the labor market.” 

With all this innovation expected to unfold this decade, it requires fewer workers. Goldman told clients last month that hundreds of millions of jobs are expected to be displaced by AI across the US and Europe. Another advisory firm wrote in a separate note, “We think there is a more than 50/50 chance AI will wipe out all of humanity by the middle of the century.” 

Could this be why?: AI-Controlled Drone Goes Rogue, “Kills” Human Operator In Simulated US Air Force Test

Briest has provided a peek into a future driven by AI. However, this accelerated innovation may bring about significant job loss and increasing dominance by machines. 

More details in the full UBS note are available to pro subscribers in the usual place.

Authored by Ted Snider via The Libertarian Institute,

In the very early days of the war in Ukraine, Ukrainian President Volodymyr Zelensky was open to negotiating a peace. A proposed peace could have ended the war before tens of thousands of Ukrainians died and Ukraine’s infrastructure was devastated, on terms that satisfied Kiev’s goals. But the United States pressured Ukraine to go on fighting in pursuit, not of Ukraine’s goals, but of larger American ones.

Putting an end to Ukraine’s negotiations with Russia, State Department spokesperson Ned Price remarkably said, “This is a war that is in many ways bigger than Russia, it’s bigger than Ukraine,” and insisted that Ukrainians go on fighting and dying for “core principles.”

The United States got its way. Now a year later, with the war not going well for Ukraine and the country getting more and more desperate, Ukraine is forced to retreat to pursuing its own goals. Ironically, that is increasingly taking the form of escalating the war in a way that now endangers American goals.

Ukraine is now pursing its own security interests in a way that is extraordinarily dangerous to U.S. security interests. And they seem to be disregarding U.S. restrictions in pursuing them. Months of American permissiveness and failure to say no to Ukraine at each crossing of a red line has seemingly emboldened Ukraine to ignore U.S. limits and conditions on the use of American-supplied weapons.

One of the key goals of the Biden administration is to stand by Ukraine for as long as it takes to defend their sovereignty and territorial integrity. That is Joe Biden’s promise to Ukraine. But a second key goal is to avoid being drawn into a direct war between NATO and Russia. That is Joe Biden’s promise to Americans. A recent wave of Ukrainian attacks on the territory of Russia—not Donbas or Crimea, but the internationally recognized territory of Russia—threatens that promise and threatens the security of Americans.

Ukraine has long promised “not to target Russian territory with weapons provided by the West.” They recently reiterated that promise, saying British supplied long range Storm Shadow cruise missiles “will be used only within Ukrainian sovereign territory and not inside Russia,” and when they provided the United States “flat assurances” that F-16 fighter-bombers won’t be used inside Russian territory.

But Ukraine did not keep those promises. In pursuit of their goals—understandably, since the U.S. insisted they postpone those goals and go on fighting the Russian military in pursuit of American goals—they have crossed the red line of U.S. limits and conditions on the use of American-supplied weapons and struck inside Russian territory. This defiantly independent military strategy is increasing the danger that the United States and NATO could get drawn into a war with Russia.

On May 3, two drones were disabled over the Kremlin in what Russia views as an attack on Russia and an attempt to assassinate President Vladimir Putin. Ukraine denied involvement, insisting, “Ukraine wages an exclusively defensive war and does not attack targets on the territory of the Russian Federation.” Zelensky said categorically, “We don’t attack Putin or Moscow. We fight on our territory. We are defending our villages and cities.”

But Kiev’s insistence that it kept its promise not to strike inside “the territory of the Russian Federation” was disingenuous. The New York Times has reported that U.S. intelligence agencies now believe that the drone attack was carried out by “one of Ukraine’s special military or intelligence units.”

Russia has signed an agreement with Belarus to begin deploying tactical nuclear weapons there, and a group of pro-Ukrainian fighters from Russia has attacked sites in the Russian region of Belgorod using what appears to be U.S.-made armored vehicles.https://t.co/9CiDAI46yG

— Truthout (@truthout) May 25, 2023

And that strike was only the boldest in a series of recent strikes inside Russia’s borders. In the same month, Ukraine has struck a military training ground and an oil refinery in Russian territory. In December, Ukraine carried out two attacks on Russia’s Engels air base.

On May 23, a raid was carried out from Ukrainian territory into the Russian region of Belgorod. For two days, the Russian military fought them back across the border. Pictures of the attack suggest that U.S. armored vehicles were used in the raid.

Ukraine has denied any involvement in the attack. Denis Nikitin, who also goes by the name Denis Kapustin, is the head of the group that claims responsibility for the raid. His group carried out an earlier excursion on two towns in the Bryansk region of Russia on the Ukrainian border on March 2. At that time, he said, despite similar Ukrainian denials of support or involvement, that the “cross-border raid he’d conducted from Ukraine into Russia had the endorsement of Kyiv.” He told The Financial Times that Ukrainian authorities signed off on the attack. “Yes, of course, this action was agreed,” he said, “otherwise it couldn’t have happened.” He went on to say, “If I did not co-ordinate it with anyone [in Ukraine’s military]…I think we would simply be destroyed.”

Despite the public disavowal, a Ukrainian military official has privately acknowledged “co-operating” with the attackers.

Washington seems to be expressing frustration with its apparent loss of control over Kiev. Chairman of the Joint Chiefs of Staff Mark Milley said that while he “can’t say with definitive accuracy…whether that’s U.S. supplied equipment or not…I can say that we have asked the Ukrainians not to use U.S.-supplied equipment for direct attacks into Russia.” The State Department complained that “We have made very clear to the Ukrainians that we don’t enable or encourage attacks outside Ukrainians’ borders.” And U.S. National Security Council spokesperson John Kirby “hinted at frustration in Washington,” saying, “We’ve been pretty darn clear: We don’t support the use of U.S.-made equipment for attacks inside Russia…we’ve been clear about that with the Ukrainians.”

Nonetheless, the Associated Press reports that on May 27, despite the multiple very public reminders from Washington, Ukrainian attacks inside Russia’s went on. Several drones were reportedly shot down en route to the Ilsky oil refinery in Russia’s southern Krasnodar region. Two people were reportedly killed by Ukrainian shelling of the town of Almaznaya. And local officials said that, once again, Belgorad “came under attack from Ukrainian forces on Saturday.”

At the beginning of the war, the United States pushed aside Ukrainian interests and insisted that Ukrainians fight and die in pursuit of American goals. The ironic blowback from that is, fourteen months later, Ukraine is pursuing security concerns created by that insistence in a way that is in direct contradiction to U.S. security concerns. The United States seems to have lost control of Kiev, and Ukraine is now pursuing its own goals in a way that ignores American goals by increasing the danger that NATO could get drawn into a war with Russia.

The economics of operating a first-class cabin on the next-generation long-haul aircraft no longer makes sense to Qatar Airways, according to Chief Executive Officer Akbar Al Baker, who Bloomberg quoted during an interview in Istanbul on Saturday. 

First-Class

Al Baker said there would be no first-class section in its future Boeing Co. 777X fleet. He said the future is business class:

“Why should you invest in a subclass of an aeroplane that already gives you all the amenities that first class gives you… I don’t see the necessity.”

Qatar’s fleet of 777X with only business (branded as “Q-suite” product) and economy class is set to replace the airline’s Airbus SE A380s as it eventually retires all ten. 

Q-suite

The move to phase out first class on long hauls comes counter to Deutsche Lufthansa AG, Qantas Airways Ltd, and Air France, who are beefing up high-end offerings. 

What’s behind the downshift? Al Baker said the first-class section “doesn’t justify the returns.” 

Authored by Kevin Stocklin via The Epoch Times (emphasis ours),

A pledge by the Biden administration in December 2022 to take “more than 100 actions” to impose significantly tighter environmental standards on consumer goods is now becoming reality, and consumer groups are predicting a future in which Americans pay more for products that do less, while manufacturers warn of shortages and supply chain breakdowns.

“You’re seeing, just in the last few months, new rules from the Biden administration about clothes washers, dishwashers, and other kinds of kitchen appliances, and in every case, you’re talking about a tightening of already very, very tight standards,” O.H. Skinner, executive director of the Alliance for Consumers, told The Epoch Times.

“That will make it so that nearly the majority of the current products on the market don’t meet the standards and have to be redesigned or removed from the market,” Skinner said. “Everyday things that people actually want are going to get more expensive or disappear, and the products that will be available will be more expensive but not better. People are going to wonder why life is worse.”

These new regulations (pdf) from the Department of Energy (DOE) come on top of new Environmental Protection Agency (EPA) emissions regulations on cars and electric utilities, and efforts to ban gas stoves, which critics say will have similar consequences in those industries. Many of these new regulations will be finalized by next year and would give manufacturers several years to comply.

In December 2022, the White House announced that “the Biden-Harris Administration has surpassed its goal to take 100 actions in 2022 to strengthen energy efficiency standards for a range of appliances and equipment to lower costs for American families.” The announcement touted 110 new regulations enacted by federal agencies on “everything from air conditioners and furnaces, to clothes washers and dryers, to kitchen appliances and water heaters—as well as commercial and industrial equipment.”

According to the Biden administration: “Once finalized, these standards will reduce greenhouse gas emissions by an estimated 2.4 billion metric tons, equivalent to the carbon emissions from 10 million homes, 17 million gas cars, or 21 coal-fired power plants over 30 years. The projected consumer savings from these standards would be $570 billion cumulatively, and for an average household this will mean at least $100 in annual savings.”

These actions follow a familiar pattern: rumors of new directives, followed by official denials, followed by draconian diktats. For example, reports that the Consumer Product Safety Commission would ban gas stoves over alleged safety concerns sparked a public outcry in January, which was met with denials by the Commission, together with media ridicule, that any such thing was being contemplated. This was then followed by new environmental standards from the DOE that would ban the manufacturing of 50 percent of the gas stoves available on the market today.

The DOE rules elicited criticism from House Republicans, who in a March 21 letter to Granholm called the regulations “a blatant back door attempt to ban gas appliances enjoyed by millions of Americans.

“Your attempt to ban gas appliances has no basis in law or within your jurisdiction,” GOP representatives charged. “The Department of Energy has enjoyed bipartisan support, your actions to appease the Biden Administration’s radical climate agenda does not reflect well upon the Department.”

While consumer advocates doubt that these new measures will save Americans money, appliance makers say consumers will not be happy with the products that are left to buy.

New Appliances Will Be ‘Closer to 1950s’ Than to 2020

Instead of allowing appliance manufacturers to innovate products for features that consumers want, “they are literally going to have to redesign products that will look closer to the 1950s than they do to 2020,” Association of Home Appliance Manufacturers spokesperson Jill Notini said.

Manufacturers say they have been trying to work with the DOE to moderate the new rules, citing a tradition of cooperation between agencies and industry when developing new standards, but they say they are hitting a wall with the Biden administration.

Among what one industry executive called “an avalanche” of new rules are regulations that force dishwasher and washing machine manufacturers to cut water use and energy consumption by one-third. In addition, new DOE rules would effectively eliminate 98 percent of all top-loading washing machines on the market today, would mandate that the machines be larger, and remove the central agitator that increases cleaning performance.

Manufacturers say these rules would add $200 to the cost of a washing machine, and would also halt the production of less expensive clothes dryers that don’t meet strict federal Energy Star efficiency standards. Microwave ovens are also on the list of targeted appliances.

Led by Tennessee Attorney General Jonathan Skrmetti, 21 state attorneys general wrote to DOE Secretary Jennifer Granholm on May 2 to “register their concern with the Department of Energy’s new attempt to control what appliances Americans can buy.”

“The administration’s plan to micromanage people’s choices of everyday kitchen appliances will result in fewer choices, less functionality, and higher costs for consumers,” Tennessee Attorney General Jonathan Skrmetti told The Epoch Times.

“The regulations are legally faulty because they rest on poor reasoning and shaky facts,” Skrmetti said. “This kind of bureaucratic overreach lies far outside the scope of the federal government envisioned by the Constitution.”

The AGs’ letter criticizes, among other things, the DOE’s “blind reliance” on estimates by the Interagency Working Group on the Social Costs of Greenhouse Gasses that are “fundamentally flawed and are an unreliable metric on which to base administrative action.” In addition, the AGs charge that the DOE orders violate Constitutional principles of federalism, “ignores consumers’ reactions and preferences,” and “dismisses the costs manufacturers will incur to comply with the proposed standards.”

Liberal States Join in Pushing Green Agenda

Regulations are not only coming down from federal agencies; left-leaning states are also instituting bans on internal combustion engine (ICE) vehicles, gas stoves, gas heating, and other fossil-fuel-powered products. In response to state auto emissions mandates, Stellantis, which owns the Dodge, Chrysler, and Jeep brands, said it will reduce shipments of gas-powered cars to states including California, New York, Massachusetts, Vermont, Maine, Pennsylvania Connecticut, Rhode Island, Washington, Oregon, New Jersey, Maryland, Colorado, Minnesota, Nevada, Virginia, and New Mexico in order to comply with new emissions rules in those states that seek to force consumers to switch to EVs over the next decade.

Read more here…

Ukrainian leadership continues touting that it will “get back what’s ours” – in the recent words of the country’s chief military officer, Gen. Valerii Zaluzhnyi. President Volodymyr Zelensky is additionally telling Western press and officials that “we strongly believe that we will succeed.”

Zelensky recently spoke to The Wall Street Journal about the much anticipated counter-offensive, but which comes after the significant loss of Bakhmut last month. “I don’t know how long it will take,” Zelensky told the newspaper. “To be honest, it can go a variety of ways, completely different. But we are going to do it, and we are ready.”

But the longer and greater delay before it is actually launched, which will be sure to feature ample Western weaponry, the more doubt is likely to build. Kiev and its allies have been touting it with much bravado, and yet nothing has materialized in terms of a major advance or gains. Zelensky cautioned in the interview that “the time will soon come when we will move to active offensive actions.”

He also stressed that “we can’t wait for months” on further much-needed advanced weapons from the West, which has recently included approval of Abrams tanks and F-16 jets from European partners, but for which Ukrainian operators must undergo extensive training. Zelensky’s impatience has been on continual display despite the West having already spent tens of billions in defense funding and weaponry for Kiev.

Admitting the persistent difficulty of superior Russian airpower, Zelensky conceded that “a large number of soldiers will die” in the counteroffensive but still emphasized that his troops are “stronger and more motivated” than Russia’s.

As of three weeks ago, Zelensky was still saying his country “needs more time” to prepare for the counteroffensive. It begs some questions: is he waiting on approval or coordination from the West? Is the Ukrainian side desperate at this point to maintain morale simply by touting a future offensive? Is Kiev indeed waiting for heavier weaponry to come through from the West?

Meanwhile, Ukrainian government official accounts are openly taunting Moscow…

Ukraine’s intel operators appear to be taunting Russia here that the counteroffensive won’t be announced but could begin at any time…Ukraine’s Ambassador to the US @OMarkarova joins @FaceTheNation this morning. https://t.co/ftA0XL4Ra9

— Margaret Brennan (@margbrennan) June 4, 2023

Currently, the Ukrainian president is applying the pressure more than ever for his Western backers to see Ukraine enter NATO, or at least to provide immediate and firm security guarantees. 

“Our future is in the European Union. Ukraine is also ready to be part of NATO. We are waiting for NATO to be ready to accept Ukraine,” he said Thursday to journalists just ahead of a summit of the European Political Community in Chisinau, Moldova. He additionally demanded that Ukraine receive security guarantees “now” and emphasized the best way to ensure this is acceptance into NATO.

Authored by Jonathan Turley,

Howard Law Professor Justin Hansford addressed the United Nations Permanent Forum on People of African Descent last week and called for the establishment of a United Nations Reparations Tribunal that could order the payment of reparations to African Americans.

Professor Hansford objected that white lawyers and politicians have been allowed to control this debate in the United States for too long:

But so far we have left it to the scholars of the past, the lawyers of the past, the white scholars, white lawyers, to determine the bounds of our legal imagination, to determine the narrow structures that we will use to determine what justice looks like for our own people.

So I come to you today with a novel proposal, that we begin to think our own thoughts, propose our own vision of justice, and implement that justice, as part of the Permanent Forum on People of African Descent.

It is not clear what Professor Hansford meant when he suggested that a  United Nations program for reparations should not only be crafted but “implemented” by people of color.

Professor Hansford notes in his address that the United Nations previously recognized the need for reparations for victims of racism and cultural genocide.

The speech to the United Nations is part of growing calls for action on reparations after years of study and proposals. As task forces in states like California have issued recommendations for payments, the demands are presenting a challenge for Democratic politicians who have long campaigned on such payments as a moral imperative. That bill has now come due but politicians like California Gov. Gavin Newsom have sought to pivot away from demands from his own Reparations Task Force for massive payments.

It may be too late for this effort as activists demand actual payments, including up to $5 million for each eligible citizen in cities like San Francisco.

Now Professor Hansford is calling on the United Nations to order such payments by the United States. It is an interesting pitch to countries that were directly involved in the slave trade or enslaved other people in their own histories. Reparations would appear to apply to many of the same countries and might be looked at with some skepticism and concern in their own capitals.

Professor Hansford is a scholar who has written extensively on critical race theory. He has been an advocate for not only reparations but “police abolition”:

“Well, yes, when I think of police abolition, I think that it’s the right word. I think about the abolitionists that we saw in the 19th century — Harriet Tubman, Frederick Douglass — and their work, which was our destiny as a people, to be free. And I think that’s part of the same tradition. I think that it’s the same work. I think that the systems that we’re facing today are continuations of the systems that the abolitionists in the 19th century worked against. So, yes, I support that. I think that has to be the ultimate goal.”

I have serious objections to these views, but value the debate. Indeed, part of the effort to combat the intolerance for opposing viewpoints at schools like Howard University is to allow a more robust debate on these issues.

Reparations is a debate that we should have as a nation, including in Congress.  Recently, Democrats introduced a bill demanding $14 trillion in reparations.

I have major misgivings over the legal and policy basis for such payments, but welcome any forum for a free and civil debate. The United Nations did not offer an opposing view on this question, which is often the case on our campuses.

Professor Hansford called on the United Nations to stop “cultural genocide” and to end the “continuation of slavery” through means like “mass incarceration” in the United States.

The Biden Administration nominated Professor Hansford to work with the United Nations Permanent Forum on People of African Descent (PFPAD) for the 2022-2024 term. Hansford is the only American representative.

Here are Professor Hansford’s remarks:

Insurance giant Allstate has stopped writing new policies for homeowners, condominiums and commercial structures, citing wildfires, higher costs of construction and higher reinsurance premiums, the SF Chronicle reports.

The company, the fourth largest casualty insurance provider in the state in 2021, said the pause on new policies was “so we can continue to protect current customers,” according to spokeswoman Brittany Nash in an email to the outlet.

“The cost to insure new home customers in California is far higher than the price they would pay for policies due to wildfires, higher costs for repairing homes, and higher reinsurance premiums,” she wrote in a follow-up email on Friday.

The cost of rebuilding has increased with inflation, but Allstate can’t adjust prices quickly due to state regulation, Nash wrote.

The pause began last year but appeared to receive only a passing mention in industry publications. The Chronicle learned of the development this week, after reviewing an Allstate rate increase request to the California Department of Insurance. -SF Chronicle

The move follows a similar measure by State Farm – the largest property and casualty issuer in the state – which announced in late May that it would stop issuing new homeowner policies, citing inflation, wildfires and rising reinsurance costs.

The Chronicle suggests that the decision by both companies suggests there may be insurance industry woes in the state that are more severe than the public is aware of.

“State Farm is unusual in that it announces such underwriting actions. It is not required by law and most insurers do not,” said Rex Frazier, president of the Personal Insurance Federation of California, an association of insurers, in an email to The Chronicle over the weekend. 

Frazier told the outlet on Thursday that the only required public disclosure is when insurers ask the California Department of Insurance for rate increases.

In recent years, AIG and Chubb, which insure higher-end homes, have pulled coverage in some areas of the state.

Consumer advocates have noted that there are still more than 100 insurers doing business in California, even as many big names pull out.

But homeowners in high-risk fire areas may have a harder time finding coverage, leading to more usage of the FAIR Plan, a state-offered “insurer of last resort” meant as a temporary safety net that covers only fire insurance and generally costs more than other plans. 

Many insurance companies have already stopped renewing policies in fire-prone areas after fires in 2017 and 2018 devastated communities and resulted in large payouts. -SF Chronicle

Would this be happening if California’s leadership had spent the last several decades clearing dead brush and reducing the state’s wildfire risk?

Authored by MN Gordon via EconomicPrism.com,

Much of legislative activity is grossly overcomplicated.  This is because honest governance is missing from the process.

The simple and honest way to put headspace between the debt and the debt ceiling is to run a budget surplus and use the excess to pay down the debt.  The politics of the moment make this impossible.

Unless something radical happens, the Senate will soon pass the debt ceiling bill.  Perhaps by the time you read this, it has already happened.  Are you happy?

You shouldn’t be.  Not if you believe in small, limited government, greater freedom and autonomy, and future prosperity for your kids and grandkids.  If you believe in these things, then raising the debt ceiling is a direct assault on your sensibilities and way of life.

Alas, most Americans don’t give a rip that the debt ceiling was raised.  They’re too busy running up their own consumer debt to care what Washington’s doing.  And like the federal government, when they run out of money, and max out their credit cards, they borrow more.  For tomorrow never comes.

Without question, U.S. consumers have buried themselves under a huge mountain of debt.  The latest report from the New York Federal Reserve shows that total household debt has eclipsed $17 trillion for the first time ever.

Of this, $12.04 trillion is mortgage debt, followed by $1.60 trillion in student debt, $1.56 trillion in auto debt, and about $1 trillion in credit card debt.  Other debt, at $510 billion, and home equity line of credit, at $340 billion, round out the debt pile.

This $17 trillion achievement has been attained at a time when the personal savings rate is just 4.6 percent.  This is almost half of the 8.9 percent personal savings rate averaged over the last decade.  What’s going on?

Are Americans trying to keep up with the Joneses?  Are they just trying to pay their bills?  Or has a deeper psychological shift occurred?

Currency Destruction

Americans have suffered the highest wave of consumer price inflation in 40 years.  Are they spending money with the sole intent of getting rid of it before it becomes worth less and less?

Currently, we don’t think the American psyche has been damaged to this extent.  Consumers are more likely spending their savings and running up debt in an attempt to maintain inflated living standards.

Yet further bungling of Fed monetary policy could motivate people to accelerate their spending.  At this very moment, the economic stars appear to be aligning in a way that could compel Fed Chair Powell to do something dumb.

Specifically, in Q4 of this year, it’s very likely that reported gross domestic product (GDP) will show a contraction for two consecutive quarters.  Politicians never want to head into an election year with the economy in a recession.

Thus, by late-fall, numbskulls like Elizabeth Warren and Bernie Sanders will be screaming for the Fed to do something.  To slash interest rates and buy Treasury bonds.

But what if the consumer price index is still above 4 percent – double the Fed’s preferred target?  Will the Fed acquiesce to the politicians?

What then?  Does another wave of raging consumer price inflation then wash ashore?  Do consumers then start dumping their dollars in earnest?

These are the sorts of dreadful questions that must be asked in a world with fiat currency and politicized monetary policy.

In the interim, American consumers have dug themselves into a deep hole.  The pathway way out involves saving money and paying down debt.

Yet elevated consumer prices make this especially difficult.  Moreover, there’s little incentive to save money when it’s in a currency that’s being systematically destroyed.

Price Deflation

Remember, getting consumers to spend by debasing the currency was the intention of monetary policy all along.  The way the government policy makers view it, saving money is bad for the economy.

Their short-sighted logic is that saving money means less spending.  And less spending, in an economy where consumer spending accounts for over 70 percent of GDP, could lead to deflation.

Deflation, in essence, means a general reduction of prices.  As opposed to inflation, deflation allows consumers to buy more goods or services tomorrow with the same money they have today.  Savvy consumers will then delay purchases in anticipation they can buy more for less in the future.

For example, if you’re in the market for a new car, now may be a good time to delay your purchase.  A recent report from UBS estimates that there’s an excess of 5 million vehicles that will require price cuts before they are sold.  We knew $1,000 per month car payments wouldn’t last.

With respect to the cycle of deflation, lower spending leads to less income for businesses and producers.  This, in turn, leads to less production, worker pink slips, higher unemployment, and GDP contraction.

The real damage from deflation, however, is to leveraged businesses and individuals.  As asset prices deflate, along with profits and incomes, the ability to service existing debt becomes harder and harder.  Eventually, mass bankruptcies occur.

This is problematic for lenders and bankers and can push them to insolvency.  Ultimately, it can lead to a financial crisis, breakdown in the credit market, and an economic recession or depression.

On the Importance of Deflation and Depressions

This all sounds rather grim.  And it is.  But, nonetheless, it doesn’t mean deflation should be ignored or avoided.

Deflation and depressions, like colon polyps, are a part of life.  And should be faced with dignity and grace.

Moreover, after an extreme episode of government sponsored inflation, deflation and an economic depression are precisely what are needed to bring prices, incomes, supply and demand, and wants and needs, back into balance.

Perpetually attempting to forestall deflation and depressions by pumping credit and piling up debt has erected an economy that is totally unworkable for hard-working families.  Moreover, it has completely obliterated the middle class.

Politicians may not like deflation, as it increases the odds that they’ll lose their cushy jobs.  Still, just about every family out there could use some relief on their weekly grocery bill.  This relief would be better delivered by deflation rather than issuing more and more EBT cards.

Similarly, after a decade of asset price inflation, prospective first-time home buyers would benefit from house price deflation.  Not only would houses be more affordable.  House prices that are more in line with incomes would free up more cash for savings, investments, and wealth building.

It’s difficult to get ahead when half of your after-tax income is going to pay the mortgage.  Deflation would make this possible.  What’s more, deflation would also make penny candy possible again.

The point is the policy makers got it all wrong.  Spending money to juice GDP growth does not lead to greater societal wealth.  It leads to inflation, price distortions, supply gluts, wealth disparities, and over indebted consumers and businesses.

Real wealth – for individuals, businesses, and the economy as a whole – comes from capital formation.  And capital formation starts with spending less than you make and saving the difference.

The savings can then be invested in new businesses or in existing profit-generating businesses.  This is how wealth is created.

Unfortunately, an episode of deflation would result in a lot of good people losing their jobs.  We don’t like it.  But over time this would free people up to pursue more useful endeavors.

In closing, price deflation and an economic depression are needed to restore the economy to a place where people can get on with the business of improving their lives through incremental capital formation.  So long as they have a stable currency, political freedom, and the discipline to do it.

*  *  *

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Update (1205ET): OPEC+ members in Vienna have agreed to extend crude production cuts into 2024.

Additionally, Saudi Arabia committed to an additional voluntary cut of 1 million barrels per day as part of this agreement. 

Russia will extend its voluntary oil production cut of 500,000 barrels per day until the end of December 2024, Reuters reported, citing Russian DeputyPrime Minister.

The agreement was made after various OPEC African members delayed the meeting following their concerns over “productions quotas from which cuts are calculated, with some African nations still objecting to the proposals,” according to Bloomberg. Still, members overcame the issues and agreed on a broader deal. 

Revised baselines for African countries had been a “key unresolved issue,” according to RBC’s Helima Croft. 

Bloomberg, Reuters and the Wall Street Journal have been barred from attending the headquarters for the meeting. Reporters continue to interview delegates on the sidelines.

It seems that OPEC+ members are prepared to cut production, with Brent crude trading in the range of $75-$80 per barrel, a price zone that the cartel appears to be defending. 

The next OPEC+ meeting will take place in Vienna on Nov. 26.

*   *   * 

Oil prices were trading up on Friday afternoon as shorts got a little nervous heading into the OPEC+ weekend, with new rumors circulating about the group’s discussions about another 1 million bpd in production cuts.

The OPEC+ group is scheduled for three separate meetings beginning this weekend and concluding on June 4.

While the general sentiment has been that the group will keep the status quo as far as production targets are concerned. But Saudi Arabia’s Energy Minister has made boisterous threats against oil’s speculators in the runup to the meeting, saying that shorts will be “ouching”.

On Thursday, Reuters suggested that the OPEC+ group would be unlikely to deepen its production targets at the meeting this weekend.

But late on Friday, Reuters suggested that OPEC+ was indeed discussing an additional output cut of around 1 million barrels “among possible options” for the meeting on June 4.

“Everything is on the table,” Iran’s OPEC Governor Amir Zamaninia told reporters in the Austrian capital.

Crude oil prices were already trading up ahead of the meeting, but increased even more in the afternoon hours, bringing Brent crude to $76.32 at 4:20 p.m., a $2.06 per barrel increase on the day. WTI was trading at $71.90 per barrel at that time.

A supply reduction of as much as 1 million barrels a day is the most likely outcome, according to RBC’s Chief Commodities Strategist Helima Croft.

“We think that the continued macro worries and soured sentiment will lead the group to make another downward adjustment,” she said in a note.

But Saudi Arabia appears to still be in control of OPEC+, and The Kingdom could decide to make good on his threats to punish short sellers for their speculative trades that fly in the face of market fundamentals.

“I keep advising them (referencing oil speculators) that they will be ouching, they did ouch in April, I don’t have to show my cards. I am not a poker player…but I would just tell them watch out,” Saudi’s energy minister said late last month in the runup to the meeting.

As a reminder for why there could be some “ouching”. Bloomberg shows, the trading positions of hedge funds and other non-commercial traders are at the most bearish levels since at least 2011 across a combination of all major oil contracts…

Finally, while hedge funds are betting that OPEC is quietly overproducing and exporting much more than their recent quota permits, a recent update by Goldman Sachs shows that bears may be in for a very rude awakening, as seaborne net exports by OPEC countries which announced a cut in April have finally tumbled by over 1mmb/d over the past 2 weeks.

OPEC+ has suggested with its latest moves that its sweet price spot is around $80-90 per barrel, so it is trying to keep prices around that level.