The central banks' race against the machines

Yesterday the Reserve Bank, for the ninth time, left the cash rate on hold at the lowest level since 1960  lower than during all the terrible recessions in between.

Yet far from being in recession, GDP growth in today’s national accounts is likely to be 1 per cent for the March quarter, possibly more. What’s more, inflation is near the top of the RBA’s target band of 3 per cent.

The reason for this weird state of affairs is plain: rates are super-low everywhere else, which is keeping our exchange rate “high by historical standards”, according to yesterday’s monetary policy statement, “particularly given the decline in commodity (iron ore) prices”.

We are in a new world order where savers are robbed and borrowers rewarded with near-zero interest rates, and despite economic recoveries in both Europe and the United States -- along with booming sharemarkets -- there is no sign of this changing.

In fact tomorrow, following yesterday’s shock fall in German inflation, the European Central Bank is expected to cut its key interest rate from 0.25 per cent to 0.1 per cent, and perhaps take its deposit rate negative -- that is, charge banks to leave money with them.

This year government bond yields around the world have tumbled afresh, confounding the experts who, almost to a man and woman, had predicted that bond yields would start to rise this year as inflation started to respond to economic recovery.

The reason we are in a “new normal” of super-low interest rates is not because of weak demand, which is what central bankers are used to manipulating, but because of the impact technology on supply -- specifically the replacement of humans with machines.

Automation is suppressing employment, wages and inflation and will do so for a decade or more to come. Machines don't need pay rises, they don't get bored at work and go on Facebook, and they turn up every day.

It is wonderful for the owners of capital because 10 years ago there was an historic and permanent disconnect between wages and productivity: they used to move in tandem but for a decade wages have flatlined while productivity continues to rise.

The result has been rising profits and corporate cash flows, and declining real wages, in turn resulting in growing inequality.

None of this has anything to do with the GFC and its aftermath, although lingering caution has separately had the effect of suppressing consumer demand and business investment while increasing savings.

But while post-GFC caution is gradually dissipating, automation is going to a whole new level.

Robots have already replaced many jobs in manufacturing; manufacturers that have not replaced their workers with machines, such as the Australian car industry, won’t be around very long.

Now artificial intelligence, big data and super-fast analytics are replacing white-collar jobs -- analysts, lawyers, journalists, even soldiers.

This “race against the machine”, to quote the title of the 2011 book by Erik Brynjolfsson and Andrew McAfee, is neither something to lament or fight – it just is. The rest of the book’s title is: “How the Digital Revolution is Accelerating Innovation, Driving Productivity, and Irreversibly Transforming Employment and the Economy”.

This is the reason that, six years after Bank of America acquired the bankrupt Countrywide Financial on June 5, 2008 as part of the unfolding credit crisis, interest rates are still at historic lows and still being cut in Europe.

In essence, central banks are trying to protect borrowers and banks from the impact of automation.

In the second half of the 19th century, the wave of automation known as the Industrial Revolution caused consumer prices to fall consistently for several decades.

The deflation eventually caught up with the economy in the 1890s with a depression as deep and long as the one in the 1930s.

Central banks are now desperately trying to prevent a repeat of the 1890s, when falling prices led to a debt deflationary spiral in which consumers put off purchases because prices were falling and debtors found that the real value of their debts rose, instead of falling with the value of money.

Will they succeed? Probably, but yesterday’s inaction by the RBA and tomorrow’s action by the ECB show that the fight is not over.