When I was a younger economist, I harboured more apprehensions about the world approaching its demise – or at least the global economy. Yet, paradoxically, as I’ve aged, my perspective has shifted to increasingly acknowledge the gradual improvement of our world over time.

This blog post is a testament to that sentiment, underlining the need to harbour not just optimism but profound optimism about future growth.

Indeed, like many, I am acutely aware of the current global challenges – the draconian regulatory overreach, widespread lockdowns, school closures, and massive inflationary monetary policies, coupled with evidently unsustainable fiscal policies. These phenomena have been prevalent in both Europe and North America, painting a somewhat grim picture of our present circumstances.

Additionally, I have long maintained a sceptical view of China’s economic trajectory, predicting a significant deceleration in its growth. Back in 2014, on this very blog, I expressed doubts about China’s potential to become the world’s largest economy, citing numerous indicators pointing towards a stagnation in growth.

Time has proven these predictions accurate, and the trend seems set to continue unless there is a radical shift in the Communist Party’s approach towards market reforms, democracy, human rights, private property, and free enterprise. Despite the passage of time, my optimism on this front remains reserved.

Equally concerning is the threat from Putin’s Russia and Europe’s heavy reliance on Russian oil and gas, not to mention the increasing trends towards de-globalisation and the sharp escalation in geopolitical risks. In many respects, the current global landscape mirrors the challenges of the 1970s, characterised by geopolitical tensions, economic stagnation, and high, unstable inflation.

However, just as the 1970s gave way to the 1980s, marked by significant supply-side reforms in both the US and Europe, and the adoption of more rule-based fiscal and monetary policies, there is potential for a similar transformation in our current era. These reformative trends, which continued into the 1990s, further accelerated economic growth, suggesting a potential pathway out of our current predicaments…

…and into a future marked by renewed economic vitality and technological progress. It’s essential to recognise that despite the apparent parallels with the past, the world of today is fundamentally different, particularly in terms of technological advancements and global interconnectedness.

I am reminded of my youth in the 1990s

In 1995, I obtained my Economics degree from the University of Copenhagen, shortly after the end of the Cold War.

This period heralded a significant opening of the global economy, with the benefits of a rule-based economic policy, low inflation, and healthy public finances becoming increasingly evident in the latter half of the 1990s and the early 2000s. These developments were not only authentic but also marked a gradual yet transformative shift in the global economic landscape.

The rise of the internet and mobile telephony during this period also represented true technological milestones. Initially, I, like many economists, was slow to recognise the full potential of these advancements and in that sense, I probably was not much different from Paul Krugman, who famously said, “By 2005 or so, it will become clear that the Internet’s impact on the economy has been no greater than the fax machine’s.”

Economists often view technology as a ‘residual’ – a component of growth unexplained by increased labour or capital. However, its critical role in driving growth is far more significant than traditional metrics might suggest.

Despite the challenges of recent years, including the 2008 financial crisis and its aftermath, the drastic responses to the pandemic in 2020-21, and the geopolitical tensions arising from Russia’s actions and China’s authoritarian shift, there is, therefore, reason for optimism.

The year 2023 has witnessed two notable technological breakthroughs: Novo Nordisk’s weight-loss medication and OpenAI’s ChatGPT.

These innovations have the potential to drive significant societal and economic benefits, mirroring the transformative impact of the internet and mobile technology in previous decades. In fact, they might even represent bigger, positive, and long-lasting supply shocks to the global economy.

These developments underscore the importance of technology in overcoming regulatory and economic challenges.

AI will be everywhere in 2024

AI offers the promise of significant productivity enhancements across various sectors, including finance, law, and healthcare. By embracing these technologies, we can potentially address some of the most pressing issues of our time, such as healthcare efficiency and financial regulatory compliance.

As we approach 2024, it’s clear that we are at the cusp of a new era, one that is likely to be characterized by significant productivity boosts from both medical and technological advancements. This potential for growth and improvement, despite the current geopolitical and economic challenges, provides a strong basis for optimism.

Just to give an obvious example of where AI will be making a huge difference – banking. Today, probably 10-15% of all those employed in the European banking sector work with compliance, dealing with anti-money laundering and ensuring banks uphold the enormous amount of financial regulation that has been implemented globally since 2008.

I think it is very likely that the implementation of AI in the banking sector (and the wider financial sector) will significantly reduce the effective burden of this regulation, and I would not be surprised if within the next 1-3 years, we see many banks improve productivity by 10-20%.

We are likely to see this type of productivity gains in other sectors as well. For example, I find it hard to think of any law firm in the US or Europe that will not, within the next year, implement AI as a completely integrated part of their daily work.

Similarly, we are already seeing examples of AI effectively conducting diagnostics on patients better than many doctors in various fields, and going forward, AI has the potential to completely transform global healthcare systems. Perhaps we can finally make a real leap towards prevention rather than treatment of illness.

So AI on its own offers an enormous potential for boosting productivity growth in nearly all sectors of the economy. But that is not the only innovation that is presently boosting global growth.

Novo Nordisk: Boosting the World’s Weightiest Economy

The Danish pharmaceutical company Novo Nordisk – now Europe’s largest company measured by stock market capitalization – has significantly impacted the Danish economy and is set to continue doing so. Its influence, however extends beyond Denmark, particularly through its diabetes and weight-loss medications, Ozempic and Wegovy, with potential significant impact on the global economy, especially the American economy.

Obesity, particularly severe obesity, involves enormous healthcare costs. In the United States, the rate of obesity has increased markedly since the 1980s. Now, approximately 40% of the population is obese, leading to stagnation in average life expectancy and making obesity-related diseases like diabetes and heart disease among the leading causes of death.

A Danish study from 2021 showed that healthcare costs for obese individuals are double those for individuals of normal weight, significantly contributing to the national healthcare burden in Denmark. The reduction of severe obesity through medications like Ozempic and Wegovy could provide a substantial economic boost.

Obese individuals are also less productive, more likely to be unemployed, and earn lower wages. This translates into substantial economic impacts, such as higher rates of work absenteeism among severely obese workers compared to their normal-weight counterparts.

A reduction in obesity in the U.S. could lead to an improvement in the economy. Halving the number of obese individuals could result in a 2% increase in overall wages and a significant rise in GDP if we assume as numerous studies shows that obese women have salaries 10% lower than normal weight women (corrected to age, education and experience).

While the widespread adoption of weight-loss medication in the U.S. is uncertain, especially considering its cost, the potential impact on the U.S. economy is substantial.

From a financial market perspective, increased American economic growth could be reflected in various sectors, particularly healthcare. However, industries like fast food might experience a downturn, as observed in the recent decline in American food and beverage stock prices, coinciding with the rise in Novo Nordisk’s stock.

The potential macroeconomic effects of Novo Nordisk’s medications are significant, not just for healthcare but for consumer spending patterns as well. A shift in spending away from food could redirect funds towards other sectors, potentially balancing the cost of the medication.

In conclusion, Novo Nordisk’s innovations in diabetes and weight-loss medications hold the potential to significantly influence not just the Danish but the global economy, particularly the U.S. Their potential to reshape consumer behaviors and the broader economic landscape is a development worth close attention from both economists and financial market analysts. This underscores the broader theme of our discussion: the transformative power of technology and medical advancements in shaping our economic future.

How it looks in an AS/AD-model

Hence, we have two major positive supply side shocks playing out at the moment and we should expect them to play for some time to come.

We can illustrate that in a traditional AS/AD model (but in growth rates rather than in levels). In the model, we assume that the impact of anti-obesity medicine and AI will have longer-lasting effects on productivity growth and will play out for some time, which we illustrate in the model as a positive shock to the long-run aggregate supply curve (LRAS).

In this model, the vertical axis represents inflation rates, and the horizontal axis shows real GDP growth rates. The initial long-run aggregate supply curve (LRAS) is at point A, where inflation is at p0 and real GDP growth is at y0.

The positive supply shock from the effects on the labor market and the reduced healthcare costs pushes the LRAS curve from LRAS₀ to LRAS₁, which in turn pushes down inflation to p₁ and pushes real GDP growth up to y₁ (point B). This is essentially a simplified version of the real business cycle model where growth is driven by productivity gains and shocks rather than by aggregate demand shocks.

The important thing to notice here is that we are seeing both growth re-accelerate and inflation continuing to decline. If this scenario plays out, I would certainly not be surprised to see US inflation inch down toward 1% and real GDP averaging 3% or more throughout 2024.

This certainly looks like a bit of a goldilocks scenario, but nonetheless, I think that it is a probable scenario for the next 1-2 years. However, it is also a scenario that could challenge the Federal Reserve in the sense that inflation in this scenario will drop below and remain below 2% without any signs of a slowdown in US growth. In fact, we will likely see the opposite.

And this is in many ways what the markets are telling us at the moment with both market inflation expectations inching down and the US stock market continuing to move higher. There can be a number of reasons for this, but it is normally so that when inflation expectations decline the absence of financial market volatility then it is normally good news – news of a positive supply shock.

It should also be noted that while for example the fall of communism starting in 1989 and opening of the global economy was a quite gradual process that last at least 20 years. On the other hand he impact of Wegovy is happening right now and I personally doubt that obesity will be a major global health problem in 10 years and we can only imagine the impact of AI, but it is happening right now and similarly I think we will see the impact on productivity of implement of AI in for example he banking sector very, very fast.

If anything – and I rarely try to second-guess the markets – the markets are not optimistic enough about growth. That being said we are here talking about macroeconomics – not necessarily where markets are headed from here, but I must admit that I am significantly more optimistic about 2024 than I was about 2023 so enjoy the coming productivity boom and happy new year!

Lars Chrisensen

lacsen@gmail.com (contact for media requests and advisory work)

+45 52 50 25 06

For speaking engagements and workshops contact my speaker agent Youandx here.

In an unprecedented move that echoes through the financial world, China has tightened its grip on economic discourse, effectively outlawing negative narratives surrounding its economy. This development came to light in reports circulated by Bloomberg among others on Friday.

According to a memo from the Chinese Ministry of State Security:

“To maintain economic security, we must unswervingly adhere to the socialist economic system… Currently, the economic field has increasingly become an important battleground for competition among major powers, and the international environment is becoming more complex, serious, and uncertain. To promote economic recovery, we must overcome internal difficulties and face external challenges. For example, various ‘clichés’ that intend to sing about the decline of China’s economy continue to appear, which are fundamentally an attempt to use false narratives to build ‘discourse traps’ and ‘cognitive traps’ about ‘China’s decline’ to attack the socialist system with Chinese characteristics.”

In essence, this is a direct command to cease the publication of any pessimistic stories about the Chinese economy, or risk arrest.

This directive also signifies a not insignificant danger for economists and economic journalists in China. How can international banks, for example, those in Shanghai, write commentaries on economic indicators if the figures are not as expected?

For instance, according to November’s consumer price data, China is experiencing deflation—a far cry from good news. To avoid punitive measures, one must either ignore the figure, misrepresent it, or assert that what is bad is, in fact, good.

Having dealt with emerging market economies for over two decades, skepticism towards the accuracy of published data is normal, but I’ve always believed that the discussions around these figures among local Chinese economists were somewhat valid, even if the actual numbers were not always trustworthy.

China’s trajectory towards the suppression of speech and information freedom increasingly mirrors that of North Korea, and it also distinctly suggests that those of us who have been (very) skeptical of China’s economic progress were correct.

As an independent economic advisor, I’ve advised economic-political decision-makers in countries where the press is anything but free. My experience tells me that in such countries, even the powers that be have no real idea of the state of the economy due to the lack of public debate.

This is the path China is rapidly heading down, and it will only worsen the quality of its economic policy.

Therefore, my clear advice to Western companies and investors is this – exit China sooner rather than later.

I regularly hold lectures on China’s economic crisis. If your company wishes to engage with the crisis, I am also available to facilitate internal workshops on the subject. See more information here or drop me a mail (lacsen@gmail.com).

Appendix: Embracing AI in Economic Discourse

I have been using Midjourney to create AI-generated images and illustrations, often with a humorous touch, for my writings and lectures.

While that has been reasonably successful, Midjourney’s interface is not conducive to creativity and back-and-forth interaction with the AI.

However, with the integration of DALL-E into ChatGPT 4.0, the ability to create illustrations has significantly improved.

This morning, I wrote a brief article on Chinese censorship of poor economic data and needed a humorous illustration to accompany it.

So I requested assistance from ChatGPT/DALL-E. Given that the AI could read my article, it produced a draft for a humorous illustration based on it. Below are some examples of what the AI generated.

I find the results quite impressive and funny. However, notice that there are spelling errors, a problem also known from Midjourney (where it is somewhat worse), but I consider these teething issues. Very soon (within a few months), this problem will be resolved—at least judging by the speed of development we’ve seen so far.

Afraid of losing your job to AI? Don’t be – it’s time to embrace technology. It’s fun and enables you to produce a far superior product. Personally, I believe it greatly rewards creativity.

But first, take a look at DALL-E’s quite brilliant humorous illustrations of Chinese censorship. We conquer censorship by confronting it – and laughing at it.

In the ever-evolving dance of monetary policy, the Federal Reserve’s latest meeting has struck a new chord, setting in motion a fascinating interplay of market forces and policy expectations. As an economist deeply engaged in the intricate mechanics of monetary and market dynamics, I find this unfolding scenario a compelling narrative, rich in lessons and insights.

The Fed’s Recent Stance: A Prelude to Change

On December 13, 2023, the Federal Reserve, amidst signs of slowing economic activity and persistent inflation concerns, maintained its federal funds rate. The decision, layered with the Fed’s unwavering commitment to a 2 percent inflation target, reveals a complex picture of resilience and caution in the face of evolving economic indicators.

Scott Sumner’s Perspective: A Friend’s Insight on Monetary Leads

My friend and fellow market monetarist economist Scott Sumner offers a riveting counterpoint to Milton Friedman’s view of monetary policy’s “long and variable lags.” Sumner advocates for the concept of “long and variable LEADS,” a theory exemplified in the recent market reactions.

The mere anticipation of future policy shifts, as suggested by the Fed, has already sparked significant movements in bond yields and stock markets, even before any tangible policy changes.

A Vibrant Analysis: VAR and the Market’s Symphony

To delve deeper into these dynamics, I turned to a VAR (Vector Autoregression) regression analysis. This technique, executed with the assistance of ChatGPT 4.0 and its integrated Python modules, shines a light on the intricate dance between stock prices, housing market trends (using the Case-Shiller index), and nominal GDP.

Let’s take a moment to visualize this intricate dance. The graph below is a representation of the analysis, shows a gradual ascent in housing prices following a positive jolt in stock prices. This upward trajectory sustains above the baseline trend for approximately seven quarters, echoing Friedman’s narrative of a lagged response. Meanwhile, the housing market’s delayed reaction to the financial sector’s immediate moves provides a fascinating spectacle of economic interplay.

The Ripple Effects: From Financial Markets to Real Economy

This narrative of leads and lags in monetary policy is not just an academic curiosity; it paints a vivid picture of the ripple effects across different economic sectors. Financial markets, quick to respond to the Fed’s signals, contrast with the more measured pace of the housing market and broader economic indicators like GDP and inflation.

A Call for Clarity: The Case for Rules in Monetary Policy

This intricate ballet of immediate market reactions and delayed economic responses underlines the wisdom in Friedman’s call for rules-based monetary policy. The lingering effects of 2022’s monetary tightening are intertwined with anticipations of future easing, illustrating the delicate balance central banks must navigate.

In Conclusion: The Art and Science of Monetary Analysis

In essence, the recent FOMC meeting and the ensuing market dynamics offer a rich tapestry of insights into the multifaceted impact of monetary policy. The interplay of immediate and delayed responses, as seen in financial and housing markets, provides a deeper understanding of the timing and scale of policy effects. As we continue to explore these complex rhythms, tools like VAR regression, augmented by AI innovations like ChatGPT, become indispensable in deciphering the nuanced dance of monetary policy.

Acknowledgements

A hat tip to ChatGPT 4.0, a pivotal partner in this analytical journey, underscoring the burgeoning role of AI in the realm of economic research and exploration.