After having written about AI for two days in a row, it wasn’t the intention to do so again today. However, developments on the ground are accelerating while those responsible for dealing with the fallout are failing to understand what the immediate implications are.

Two short movies were just made with AIfor pennies, in hours,both more entertaining than anything Hollywood has splurged onto our screens in some time. (The latest trailer for ‘The Mandalorian and Grogu’ underlines Hollywood no longer understands movie- and myth-making, or even The Force behindfonts.) Indeed, Warner Brothers, Paramount, and Netflix are standing in a circle like the gunfighters at the end of The Good, The Bad, and The Ugly (which IS a great movie),… as a giant T-Rex in sunglasses parachutes in to a heavy metal soundtrack to eat them.

Another video showed Chinese robots doing acrobatic kung fu, when their Russian equivalent fell off the stage at its launch as if after too much vodka. Robots like that can do almost any job, 24/7, faster and better than humans. That includes soldiery. With AI, they can learn from us then teach themselves. That’s as serious as a giant T-Rex in sunglasses is trivial.

The Fed’s Barr and Daley addressed AI yesterday. The headline,written by Bloomberg AI, is that neither think this potential revolution makes the case for lower rates.That places them in stark opposition to Fed Chair nominee Warsh even before he gets appointed, and even before other areas of controversy arise within the FOMC, which they will.

Barr’s main argument is that AI means the demand for capital would rise because of strong business investment, while “household savings could fall due to expectations of stronger real wage growth and thus higher lifetime earnings.” Daley noted higher growth would dictate a higher neutral rate in “the standard model” because “the demand for investment would rise relative to the supply of savings.” Yet that analysis --which may well be copied and pasted around other institutions as if by AI agents-- lacks sufficient human, let alone artificial intelligence.

Obviously, AI is going to beinflationaryin some areas - it already is. However, it’s got nothing to do with constraints on CAPITAL in a fiat credit based system with an equity market where ludicrous P/E ratios are normal – indeed, US 10-year yields have been trending down even as AI action has heated up.The real world AI constraints are PHYSICAL: electricity, copper, memory chips, rare earths, etc.

Equally obviously, AI is going to bedeflationaryfor many other areas. Barr echoes the gibberish early AIs spat out in predicting “expectations of strong wage growth and higher lifetime earnings.”Whois going to be earning more with AI?Hollywood types about to be replaced? The swathe of white collar workers going the same way? The blue collar workers who face competition from robots who can do back flips to the building site they labour away at 24/7?

Setting rates high vs AI would mean deeper disaster for those hit by it. Setting rates too low to help those hit by AI would inflame inflation in the areas boosted by it.In short, how the Fed works logically needs to change.However, at least two of the current members of the FOMC are insteadproducing the monetary policy equivalent of ‘The Mandalorian and Grogu’ – reheated nonsense that undermines its own mythic power and collapses its fanbase. Or, maybe, they just don’t want to say ‘May The Warsh Be With You’(?) That could also be the way.

The RBNZ left rates on hold today and said it expects them to stay there – but said nothing about AI.

Meanwhile, the second round of US-Iran talks ended with the Iranians smiling and talking about deals within reach, and a third round pencilled in for two weeks from now to close gaps. Markets liked that. However, the US is still surging military equipment to the region; Iran also insulted and threatened the US yesterday, partially closing the Strait of Hormuz for the first time since the 1980s; and both regional reports and Vice President Vance underlined that Tehran is playing for time while it tries to regain control of its restless population, and is ignoring core US demands. Recall in 2025, Iran offered the US the same deal it’s offering now – and got bombed.

Source: ZeroHedge News