The rise of the liquidity economy: deregulation, buybacks, and the AI bubble

In 1980 stock price jumped when companies delivered profits by pleasing customers. But gradually the rules that regulated companies started to disappear. Central bankers printing money made stock prices to go up.

• In 1982 buybacks were allowed. Before that it was illegal and considered market manipulation.
• In 1987 the Greenspan put started the idea that monetary policy could protect asset prices.
• The 1998 LCTM bailout made the Fed be a guarantor of market stability.
• Glass Steagal act that prevented investment banks to bet saving account money in high risk bets, was abolished in the 1990s. This played a huge role in the 2008 crisis.
• In 2001 the dotcom bubble and aggressive rate cuts decoupled real economy from asset prices.
• From 1998 to 2001 markets become structurally dependent on liquidity
• From 2008 to 2009 QE makes liquidity the dominant force
• From 2020 to 2021 central banks fully eclipse fundamentals

Cheap money, not productivity or customer satisfaction, became a major driver of stock prices. This is why they live in a fantasy financial world where workers, productivity and customer satisfaction are not needed anymore.

The idea of replacing people also had its own history.

• Beginning in the 1980s, corporations were reoriented around a new ideology: "Maximize shareholder value above all else."
• In the 1990s and 2010s successful automation anecdotical stories created a myth where humans were a bottleneck and automation allowed infinite scalability: industrial robotics in manufacturing, ATMs reducing teller headcount, ERP systems cutting administrative roles, call center automation, e-commerce replacing retail labor.
• Between 2012 and 2020 AI started to deliver results: image recognition, translation, recommendation systems. The myth was expanded to "AI is learning like a human brain, it will think better than humans, AI will be cheap, AI will be reliable, AI will be better than people, AI will replace people"
• The 2023 and 2024 generative AI hype explosion reinforced the myth with "This thing writes, this thing codes, it can replace people". But generative AI hallucinated, made up facts, produced fake legal cases, failed in customer service, introduced new risks.

The "replace humans with AI" today is just a cult with dogma, heresy and a custom made devil: The human worker.

Companies are laying off people, only to regret doing so after some time.

• Deloitte had to make a partial refund to Australian government for a very expensive report containing AI generated errors.
• In the legal field, AI errors in documents presented by lawyers and fake AI generated evidence also are becoming a nightmare for judges.
• McDonald's, Cler, Taco bell, also had disappointing results using AI to replace people.
• AI is not replacing people in big tech. AI spending is. Big tech used to have lots of cash, but now due to AI they have lots of debt, so much that Oracle Credit Default Swaps (which are some sort of credit default insurance) are getting expensive.

AI companies have told us how much they will spend, but not the business model to make all that investment profitable. That is the formula for a bubble. AI companies are having losses, and no business model to survive without investor money being poured in.

So if you ask me, not too long into the future there will be a reality check. People at the top are living a financial fantasy that does not seem to end well.

What do tyou think?