Latest / Money News / Global financial authority sounds the AI alarm 🚨💻

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Global financial authority sounds the AI alarm 🚨💻 · Money News

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  S1: One of the most respected economic institutions on the planet,
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  S1: is sounding the alarm on the AI boom. The Bank
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  S1: of International Settlements says the scale of spending on artificial
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  S1: intelligence infrastructure now resembles previous economic manias. Five major US
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  S1: companies alone are forecast to spend $1.45 trillion on AI
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  S1: infrastructure in the next 12 months, and in Australia, spending
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  S1: on data centres is hitting record levels, especially in Victoria
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  S1: and New South Wales. The warning is that if the
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  S1: investment doesn't deliver the returns expected, the result could be
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  S1: a sharp pullback. Rising unemployment and even, I say, even
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  S1: a global recession. Shane Wright is the senior economics correspondent
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  S1: for The Age and the Sydney Morning Herald. He's written
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  S1: a great piece on all this today, which you can
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  S1: now download at the Sydney Morning Herald. And he's on
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  S1: the line for us tonight. Shane, great to have you
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  S1: back on Money News.
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  S2: Always a pleasure, Scotty mate.
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  S1: The Bank of International Settlements doesn't use language like this lightly. Like,
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  S1: how seriously should we be taking this warning?
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  S2: Yeah, it's one of the really interesting debates that's global
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  S2: in nature at the moment, because there is so much
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  S2: money being pumped into AI and data centres. It is
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  S2: having a macro impact like the US economy would not
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  S2: be growing without it. And in fact, the Australian economy
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  S2: would be struggling without what's going on in New South
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  S2: Wales and Victoria right at the moment. But apart from
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  S2: those who fear a Skynet AI takeover of of this
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  S2: human existence, which is not where not where the BIS
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  S2: has gone, it is more about how much money is
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  S2: being sucked in. And it's a really interesting comparison for
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  S2: those with a bit of economic history. They've gone back to, say,
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  S2: the canal mania of the 1820s, 1830s, then the railway lines,
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  S2: the electrification of the especially of the US that precipitated
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  S2: the Great Depression, the.com boom of the late 90s, which
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  S2: most of us can remember, and now saying, well, the
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  S2: AI boom is showing a lot of similarities to these things,
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  S2: which delivered great benefits, but they precipitated big economic downturns
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  S2: immediately in their wake.
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  S1: You talk about the.com boom. I must admit, I realized
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  S1: there was a.com boom when, uh, I saw a Ferrari
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  S1: driving down the road where my office was in, right
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  S1: in Melbourne, which was called Devnet. And, uh, they hadn't
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  S1: made a cent and then, uh, the cleaner in the
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  S1: office was giving me stock tips. So I, that's a little,
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  S1: a little bit different, in my opinion, Shane, to what
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  S1: the Bank of International Settlements have. But let's, let's talk
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  S1: about the AI investment boom to previous manias. Like, as
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  S1: you said, the.com boom in the 90s, which ended in
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  S1: tears as it did for Avnet and others. Is that
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  S1: comparison fair, like, or is AI fundamentally different?
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  S2: Well, I think the the argument that the BIS is
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  S2: arguing is that it's the amount of money that's spent
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  S2: on the tech. So around dot coms, it was, as
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  S2: I think I can remember at the time, there were
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  S2: like these whole.com things about for, for pets, that would
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  S2: be the next great thing. So people were throwing and
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  S2: it was underpinned by the huge rollout of broadband, uh,
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  S2: that really took off in that late 90s. That was
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  S2: what was going to underpin underpin it so that the,
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  S2: the technology itself, like railways, like canals, like electrification in
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  S2: the 1920s absolutely makes sense. It's just that so much
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  S2: money is going in that you can't make the returns back.
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  S2: And that's the bias argument. There is also, um, and
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  S2: we've seen these reports almost daily now of the amount
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  S2: of money that has to be that is going into these,
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  S2: these data centres that is being built. That means you
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  S2: need chips, you need semiconductors. There is a reason why
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  S2: Apple announced last week that it was pushing up the
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  S2: price of a Mac by 2200 bucks. That Xbox is
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  S2: pushing up the price of its consoles. So because they
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  S2: can't get their hands on these, these really important parts
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  S2: to their tech, because they're going into these data centers.
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  S2: So you're getting an inflationary pulse coming through everything. So
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  S2: it's elevating every price, which means the rate of return
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  S2: you have to make to make it justifiable is getting
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  S2: more and more difficult to meet. But there are investors
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  S2: out there that are prepared to put money into these things.
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  S1: Yeah. It's interesting you say that, Shane, because for the
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  S1: average mum and dad, they do look at end of
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  S1: financial year sales. And one of the things that has
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  S1: been inflationary and has gone up in price has been
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  S1: laptops and computers. And that's been widely reported. And that's
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  S1: exactly in line with what you said. But just talk
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  S1: to me a little bit more about how exposed is
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  S1: Australia to a potential AI investment bust. Like that's obviously
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  S1: the concern, like given how much our own economy is
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  S1: now leaning on data centres, as you said, in terms
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  S1: of land and infrastructure and AI infrastructure spending.
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  S2: Yeah. That's right. And you can see like the size
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  S2: of the investment boom that's going on, particularly in New
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  S2: South Wales and Victoria, is analogous to what went on
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  S2: in the in the 20 tens in Queensland and Western
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  S2: Australia with the mining boom. And so whenever you're talking
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  S2: about such big expensive expenditures, you have to have an
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  S2: eye to, well, what's the payoff? Now, with the mining boom,
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  S2: you could see there was an absolute payoff. But people
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  S2: forget Western Australia. Western Australia went into a recession for
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  S2: three years after from 2014, when the peak of their
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  S2: construction boom came to an end. The mines are operational,
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  S2: so all the activity that underpinned the boom disappeared. And
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  S2: it did weigh on the West Australian economy. For a
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  S2: long time. Queensland, not so much. It's not quite as
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  S2: dependent on mining as what was going on in WA.
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  S2: But you can see you can see the similarities now.
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  S2: That's the that is in the construction and implementation of
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  S2: these things. How the tech provides like this is where
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  S2: the productivity story for the next, say, 20, 30 years,
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  S2: whether this tech transforms the our economy, the global economy,
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  S2: that's to one side. This is what we're in the
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  S2: construction phase and the economic boost and maybe the bust
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  S2: when it comes to an end.
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  S1: Yeah, I acknowledge all of that. I acknowledge the downturn
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  S1: in WA, but the fear that I feel now, and
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  S1: this is from a lot of money news listeners, if
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  S1: we get on text and email, as I said, that
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  S1: there's a lot of fear around AI taking jobs. Now,
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  S1: the BIS says AI competes directly with human dignity and
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  S1: ability away past technologies didn't. So they're in touch with humans.
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  S1: We've already seen huge layoffs in the tech sector. We're
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  S1: starting to see it a little bit in the big banks.
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  S1: It's obviously following the US model because of AI. So
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  S1: is the fear of losing your job to AI justified?
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  S2: Well, I'll take I'll take you back 2 or 300
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  S2: years to the Luddites who campaigned against looms. They weren't wrong. Like,
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  S2: at the end of the day, those craftspeople who were
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  S2: really entrenched intrinsic to the to the, um, textile industry
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  S2: did lose their jobs. Absolutely. That's what they were fighting against. Um,
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  S2: but they got rolled over the rest of the economy benefit.
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  S2: You are absolutely right though. This tech that we're talking about,
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  S2: it's much further up the food chain. And you can
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  S2: see that there are legitimate concerns. We haven't seen there's
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  S2: been some good research. Uh, Isaac Gross out of Melbourne Uni. Uh, sorry,
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  S2: Monash Uni has been keeping track of what's going on with, uh,
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  S2: single touch payroll data. And he has picked up growth
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  S2: in those sectors that are directly, uh, in the, in
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  S2: the flight path of AI. They're not growing as quickly
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  S2: in terms of employment as other sectors, but it's only
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  S2: early days. And I don't think we I don't think
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  S2: anyone has really worked out just how far I can go.
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  S2: And then then you get to this question. Previous technologies
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  S2: which have changed our communities, our economies. We've been able
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  S2: to provide new find new jobs. Whether this one is
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  S2: the one that's different to all the rest. Well, it
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  S2: may take it may only take a couple of years
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  S2: to work out whether that's true or not.
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  S1: Yeah. It's interesting, like, you know, our phones, a camera,
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  S1: it's a calculator, it's a phone, it's a computer, it's
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  S1: a Google, it's everything. So, you know, we can't underestimate AI,
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  S1: but away from AI, I just want to talk about
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  S1: another article you've written, Shane. It's about the RBA's assistant governor,
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  S1: Christopher Kent, outlining how it would handle the next major
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  S1: economic shock. And as I said, people should go to
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  S1: the Sydney Morning Herald and Google Shane. Right. And have
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  S1: a read of these articles. They're absolutely intriguing. You know,
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  S1: talk to me about running fire drills and potentially cutting
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  S1: rates faster next time. Can you explain exactly what that
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  S1: means and what you're actually proposing there?
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  S2: Yeah. So Chris Kent, he was at the bank all
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  S2: through the GFC and preceding the GFC. Um, and remember
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  S2: the reserve Bank through the sorry, not the GFC, through Covid. Yes,
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  S2: through Covid, the reserve Bank stimulus, like people remember, say
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  S2: the 0.1 cash rate and Phil Lowe saying, we're not
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  S2: going to we don't think we'll have to lift rates
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  S2: until 2024. The reserve Bank actually produced more stimulus than
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  S2: the federal federal government. It was it was close to
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  S2: $500 billion in terms of their term funding facilities for
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  S2: commercial banks. So they printed about $188 billion that went
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  S2: to the commercial banks to keep them going through the whole, uh,
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  S2: through Covid. Then their big bond buying program, where they
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  S2: bought up just about every federal and state government bond
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  S2: that they could get their hands on. Yes they have.
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  S2: They've still got $255 billion in government bonds on their
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  S2: books right now. So the bank has gone has been
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  S2: doing a lot of soul searching ever since Covid and
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  S2: pre Covid because they went into Covid with five years.
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  S2: People forget for five years before Covid, they missed their
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  S2: inflation target under the target. They didn't hit 2%, the
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  S2: 2 to 3%, they were under that for a long
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  S2: period of time. A lot of research saying, look, they
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  S2: held rates for two too high for too long. There
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  S2: were people who were unemployed because of that. So you
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  S2: get into this whole, well, how would we do things
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  S2: slightly differently? And so the fire drill that Chris Kent
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  S2: was talking about today is right. We've got these various tools.
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  S2: We may be we may buy bonds, we might go
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  S2: to negative interest rates, which a lot of banks did
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  S2: across the world. There was even a discussion. Do we, uh,
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  S2: do we get into the market buying lots of foreign
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  S2: currency and produce like effectively make money to do that?
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  S2: All sorts of alternative, uh, QE type programs. How would
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  S2: we do that in the future if we ran into
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  S2: a period where lots of deflation, interest rates falling financial
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  S2: sector under control? So it's that's what they're talking about.
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  S2: Like this is I think it's like the local, uh,
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  S2: rural fire brigade. You put them through their drills, uh,
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  S2: to see if they could handle something that's out of
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  S2: left field. This is what the banks are talking about
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  S2: right now.
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  S1: That's an extraordinary similarly to fire literally some sort of
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  S1: fire drill. Just quickly, what does it mean for the
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  S1: average Australian? What's taking place right now.
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  S2: In terms of the reserve Bank in this. Yes, it
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  S2: is making sure that I think the bank um accepts
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  S2: that they did make some mistakes, missteps through, uh, through Covid. Look,
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  S2: and Chris Kent mentioned this. Everyone's perfect in hindsight. Um,
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  S2: and but then you go back to right as late
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  S2: as late 20, 2021, the bank saying we probably won't
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  S2: lift rates until 2024. They started lifting rates in May.
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  S1: There you go, 2022.
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  S2: And they were probably even then, they were maybe 1
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  S2: or 2 months behind where they could have been. There
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  S2: you go. And they and they made a decision in
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  S2: late 2020 to extend the, um, the term facility funding
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  S2: to the commercial sector. They, they think now look, on reflection,
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  S2: we probably didn't need. They effectively doubled it. They went
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  S2: from 90 odd billion to 188 billion. These are large
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  S2: sums of money.
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  S1: I know, I know, and as I said, Shane, it's
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  S1: another look in the mirror from both the RBA and
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  S1: everyone who manages our economy. Shane, thank you so much
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  S1: for your time on this Monday night on Money News.
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  S2: Have a good night, Scott.
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  S1: Shane Wright, senior economics correspondent for The Age and the
• 13:06
  S1: Sydney Morning Herald.