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June 25, 2025 5 mins

On today’s show we are looking at our human ability to forecast non linear effects and in particular how this relates to economic forecasts. We are accustomed to looking at the world in very linear ways. When we see a car approaching most people are pretty good at estimating whether they have enough time to cross the road as long as the car is travelling at constant speed. But if the car is accelerating, virtually all people have a very hard time assessing whether it is safe to cross the road.

That’s the difference between a linear and a non linear system. Non linear systems have some form of acceleration.

We see these types of systems all over the place. Over the short term, if the acceleration is small, people have a tendency to make linear approximations which are accurate enough over the short term.

The US government makes regular updates to the financial health of the social security system. It’s no secret that the math which funds the social security system is breaking down. When social security was first conceived there were 16 people in the workforce for every one person collecting benefits. Demographics have changed and today there are less than 3 people contributing for every person collecting. Another non-linear effect.

We know that for the economy to grow, the population needs to grow. Shrinking working population means shrinking economy. This is a non-linear effect. 

The industrial revolution replaced a lot of manual labour with machinery. It didn’t eliminate manual labor for all tasks. For those repetitive tasks that can be easily programmed, machines have replaced humans. 

The theory was that machines could replace manual labor, but not thinking. Humans would continue to be the brains behind the work performed.  But we do know that some knowledge work has already been replaced by AI and that proportion is only going to increase. So what happens to the falling demand for employees that have been replaced by AI? What will become of our society? Can we truly forecast the economy that is being impacted by so many non-linear factors?

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Transcript

Episode Transcript

Available transcripts are automatically generated. Complete accuracy is not guaranteed.
(00:01):
Welcome to the Real Estate Espresso podcast, your morning
shot of what's new in the world of real estate investing.
I'm your host Victor Minash. On today's show we're looking at
our human ability to forecast non linear facts and in
particular how this relates to economic forecasts.
We're accustomed to looking at the world in very linear ways.
When we see a car approaching, most people are pretty good at

(00:23):
estimating whether they have enough time to cross the road as
long as the car is travelling atconstant speed.
But if the car is accelerating, virtually all people have a very
hard time assessing whether it'ssafe to cross the road or not.
That's the difference between linear and a non linear system.
Non linear systems have some form of acceleration or
deceleration associated with them.

(00:43):
We see these types of systems all over the place.
Over the short term, if the acceleration is small, people
have a tendency to make a linearapproximation which is accurate
enough. Over the short term, examples of
accelerating systems are all around us.
The rate at which artificial intelligence is learning is
accelerating. Some people predicted AI systems
will be more capable than humansin time.

(01:04):
But how much time? The estimates vary widely.
Some say well within a decade, some already saying even one to
two years away. The reason for the variation in
estimates is because there's acceleration at play.
Inflation is another metric thatis difficult to quantify because
of acceleration. What will the dollar be worth in
10 years? Well, we don't know because
inflation accelerates the devaluation of the dollar and

(01:27):
the euro and virtue every other currency. the US government also
makes regular updates. The financial health of the
Social Security system. It's no secret that the math
which funds the Social Security system is breaking down.
When Social Security was first conceived, there were 16 people
in the workforce for every one person collecting benefits.
Demographics have changed, and today there's less than three

(01:48):
people contributing for every one person collecting. the US
Department of the Treasury is the lead agency that issues the
annual report on the health of the Social Security system.
This report is prepared by the Board of Trustees of Social
Security and the Medicare Trust Funds, which includes the
Treasury Secretary as the managing trustee along with
Secretary of Labor and Human Resources.
The most recent report was just published which projects the

(02:10):
financial status of these trust funds that support Social
Security and Medicare, and they play a key role in informing
Congress and the public on the long term viability of the
programs. Only a couple of years ago, the
Treasury was forecasting Social Security would be out of money
by 2035. The most recent forecast brought
that date forward by two years to 2033.

(02:30):
Now you might be thinking, what's the big deal?
It's not like government can abandoned 80 million people.
They will have to find the moneysomehow, even if it means
increasing deficit spending. Never mind the fact the current
184 million people who contribute to Social Security
will not close to funding, will not come close to funding the 80
million people who will be collecting benefits.
So when you stated that way, theshortfall is so obvious.

(02:52):
But when we start to look at allof these things together in
aggregate, they really do represent uncharted territory in
in our history. The economy is driven primarily
by consumption rather than supply alone.
After all, we call it laws of supply and demand for a reason.
Supply and demand ultimately need to match one another.
They cannot remain out of balance for very long, and right
now the assumption is that the number of people in the

(03:14):
workforce is not going to changedramatically over the next
couple of years. Whatever workforce loss happens
as a result of retirements, they're hoping we'll be offset
by immigration. We know that for the economy to
grow, the population needs to grow.
Shrinking working population means shrinking economy.
And this too is a nonlinear effect because it reduces tax
revenues, reduces payments into Social Security and Medicare.

(03:37):
Entire process of borrowing money, which governments do
quite liberally, involves spending future income.
Today that assumes that the future income will be there, but
that's not necessarily true. The next non linear effect we
need to look at is the rate at which artificial intelligence is
going to replace jobs that are currently performed by humans.
We don't know precisely what work AI can realistically

(03:57):
replace. The industrial revolution
replaced a lot of manual labor with machinery.
It didn't eliminate manual laborfor all tasks, but for those
repetitive tasks that can be easily programmed, machines have
replaced humans. The theory was that machines
could replace labor, but not thinking humans would continue
to be the brains behind the workperformed.

(04:18):
But we know now that some knowledge work has already been
replaced by AI, and that proportion is only going to
increase. So what happens to the falling
demand for employees that have been replaced by AI?
What is to become of our society?
Will we become a communist society where senior citizens
are reliant on government handouts in retirement and
working age people are also dependent on government for

(04:41):
universal basic income because humans are increasingly
unemployable. AI is so much cheaper, reliable,
and scalable. If you need 100 programmers to
write a piece of software, you can get AI to perform the
majority of the work today with a minimum of human intervention.
We also have government spendingaccelerating faster than GDP and
with a deficit that's growing faster than the economy can

(05:02):
sustain. The interest payments alone.
Forget about the principal. When we Add all of these moving
parts together, we have the makings of a government debt
that is colliding with reality. We can't precisely see when
that's going to happen because the effects are nonlinear.
There's acceleration involved. This financial crisis will
happen slowly at once, and then all of a sudden that's the

(05:24):
effect of acceleration. As you think about that, have an
awesome rest of your day. Go make some great things
happen. We'll talk to you again
tomorrow.
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