Schumpeter Didn’t Have This Level Of Destruction In Mind

By Michael Every of Rabobank

The tendency for the rate of things to fall

Markets are trying to get past a report on how devastating AI could be for employment. There are push-backs: it ignores resource constraints and Schumpeterian creative destruction, and echoes Marx’s Tendency for the Rate of Profits to Fall. Yet Anthropic just released desk-top plug-ins plugins aimed at HR, design, engineering, ops, financial analysis, investment banking, equity research, private equity, and wealth management, e.g., it can do all the analysis in a spreadsheet, write the report on it, and make the presentation. It seems illogical this won’t see a surge in unemployment even if AI still makes key errors that require experience to spot – the youngest cohort of workers will miss out, meaning they don’t get the experience needed to be useful later.

That’s with existing resources; Schumpeter didn’t have that level of destruction in mind for creatives; and while Marx was wrong, the period post the release of Das Kapital wasn’t one of social stability. Even Bank of England Chief Economist Pill just told Parliament, “My daughter is struggling to find work too,” though he blamed Labour’s taxes on business. The Fed’s Bostic yesterday said he didn’t think the AI threat required rate cuts as a solution even though they have an inflation AND employment mandate. Then again, Bloomberg reports the AI memory shortage may add up to 0.2 percentage points to US CPI, underlining the resource constraint view.

If employment may have a tendency to fall, sadly so do bombs. Russia threatened the UK and France with nuclear strikes after alleging the pair were trying to get a nuclear weapon or dirty bomb to Ukraine: the financial media didn’t notice. It warned of plots to destroy gas pipelines through the Black Sea, following that of the Druzhba oil pipeline to Slovakia this week, which the financial media also didn’t notice. Notably, the US also warned Ukraine not to blow Russian assets up that threaten its economic interests there. Elsewhere, Europe’s VDL insisted the EU would get round Hungary’s veto to deliver Ukraine’s €90bn loan, and an EU Commissioner stressed they were looking at ‘non-standard’ tactics to get Ukraine in faster. Also add Iceland and Montenegro, and won’t consensus EU decision making be harder to achieve, and Russia frictions rise?

In the Middle East, 11 US F-22s are now on the ground in Israel, as Reuters reports Iran is close to buying Chinese supersonic anti-ship missiles. Embassies are sending warnings to their citizens around the region; Turkey is preparing to prevent an Iranian refugee surge at its border. Yet Indian PM Modi will address the Knesset today at 4:30PM local time to signal a strategic trade, tech, and defence alliance (relatedly, Somaliland’s president announced he will make his first official Israel visit in March). It remains to be seen when this war might begin –today, or after market close Friday?– or what then happens, but such an outcome looks more likely than a sudden Peace For Our Time deal. Either way, the impact on energy prices will be notable – either sharply up or sharply down.

In Asia, supplies of key goods have a tendency to fall: China just cut off 20 major Japanese firms off from critical minerals over “remilitarisation” – or, to put it another way, the rapid rearmament the US is pushing allies to embrace. Rather than confront the US directly ahead of a Xi-Trump summit, Beijing –angry with Takaichi– is again testing US resolve via that channel. Taiwan’s ruling and opposition parties also just agreed to advance President Lai’s $40bn special defence budget after months of deadlock: that’s going to be another pressure point given the pledged $20bn of US arms sales to it. How much room does the US have to placate China without showing its allies that it doesn’t stand behind them?

In related geoeconomics, tensions don’t have a tendency to fall: US officials warn of “deep distrust” even as they are trying to stabilize China ties ahead of that key summit. Relatedly, Bloomberg reports a $112bn gap between what China claims it’s exporting to the US and what the US says it’s buying – almost all of it is seen as due to tariff evasion.

German Chancellor Merz is in Beijing seeking “reliable and fair partnership” and to urge China to curb “unfair trade practices” amid his economy’s deindustrialisation. However, the heuristic shows net importers (as Germany now is vs China) only have the ability to pressure net exporters with the threat of tariffs. Berlin, unlike France, is opposed to them – so, what instead?

Europe is closing in on a Mexico trade deal… as the latter grapples with cartel violence and is perhaps months from being locked into a new North American trade deal with a de facto common external tariff directed by the US, as we already see with Mexican tariffs on Asian imports. Similar to the EU-Mercosur deal Europe hasn’t yet agreed to, there is an underlying clash with the realpolitik of the Donroe Doctrine ahead.

The US is eyeing Pentagon AI for its new critical minerals trade bloc’s pricing. It remains to be seen how this will work given the noted disconnect between resource availability and AI, but watch this space… and “because markets” it isn’t. Neither is China’s soon-to-be-announced new energy strategy, which will place its own security at the heart of all future development.

On the other hand, US Secretary of War Hegseth is at war with Anthropic and has given it an ultimatum. Reportedly, he has told the firm that he could not just strip it from the US defense sector if it won’t give him full access, but also label it a supply-chain risk, like Chinese firms, or invoke the Defence Production Act to force it to work with the Pentagon. For anyone but the “because markets” crowd, this kind of outcome was always obvious: new technology has historically always been centred on the military first or been driven by it.

Meanwhile, in Australia CPI doesn’t have a tendency to fall, despite pre-AI RBA models saying it would. In January, seasonally adjusted CPI was 0.5% m-o-m and remained unchanged at 3.8% y-o-y, with the largest contributors being housing (6.8%), food and non-alcoholic beverages (3.1%) and recreation and culture (3.7%). Trimmed mean inflation was 3.4% y-o-y, up from 3.3%. That almost certainly locks in a 25bps rate hike in May after the next round of quarterly CPI data are out. (And note Australia doesn’t have any tariffs: the US, with its controversial tariffs, has headline CPI of 2.4%. What do pre-AI economic models and modellers have to say about that?)

In politics, there are numerous headlines pointing to our volatile times, e.g., the Australian PM being evacuated from his Canberra residence for security. Moreover, in the US State of the Union President Trump: reiterated an aspiration to replace income tax with tariff revenue; proposed shifting subsidies from health insurers to consumers; underlined the prices of US prescription medicines are lowered by increasing the prices in other economies; stated AI datacentres will pay separate, higher electricity prices; flagged opening up the retirement scheme available to federal workers to the private sector; argued to prevent members of Congress from profiting from inside information (“Did Nancy Pelosi stand up if she’s here?”); announced a new War on Fraud under VP Vance; pushed the SAVE America Act which enforces proof of ID to vote; and claimed that 35 million people told him that the Prime Minister of Pakistan would have died in a war with India if not for his involvement. We didn’t get anything on aliens (I’m not joking).

However, Trump underlined that while he prefers diplomacy, Iran is continuing with its “sinister plans” and is refusing to say, “We will never have a nuclear weapon” – and he will never allow them to have one. That sounds like certain headlines may fall on market screens in the near future even if that rhetorical –and literal– bomb wasn’t dropped at the end of the SoTU, as some had thought could complete its political theatre.