Deflation: The Economy’s Greatest Threat Right Now

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The most pernicious economic force of our time is deflation, and it’s back with a vengeance. Technology created deflation. I’ve been writing this for almost 40 years. Computers rot like fruit on a warehouse dock.

Deflation: The Economy's Greatest Threat Right Now

It’s Moore’s Law in action.

It’s not just about silicon. As I wrote many years ago, the economic abundance fostered by Moore’s Law infects every area of technology. Even software, the cost of which keeps rising because it’s handmade, costs less as its use is scaled. 

This puts pressure on the prices of all goods and services. Technology lets us substitute for other goods — solar grids for oil wells. Software turns the work of people into cheap, even free services. The impact is accelerating over time, because while 1+1=2, 1 trillion + 1 trillion = 2 trillion, and the doubling hasn’t slowed. Gordon Moore still lives, and so does his law.

Deflation Growing Worse

As bad as inflation may be, deflation is worse. We saw this during the Great Depression of the 1930s. (Well, our grandparents did.) Prices declined, but wages declined faster, and unemployment rose.

The Center for Economic and Policy Research writes today that inflation is trending down, even when housing prices are factored in, but this really means that deflation is winning again.

I have been pounding the table against deflation for years, but its impact is only growing. Private markets are running out of things to buy. Asset prices are peaking, with stocks trading at scary earnings multiples and homes are becoming unaffordable.

Value is leaking out of the economy, and nothing we try seems to work against it. We’re still at war, Bill Gates is playing a game of Brewster’s Billions (and losing). Private demand for private goods cannot keep up with the effects of deflation.

Clouds and devices represent Moore’s Law (first enunciated in 1965 by Gordon Moore, later CEO of Intel Corporation (NASDAQ:INTC) ). All of the so-called FANG stocks — Facebook Inc (NASDAQ:FB), Amazon.com, Inc. (NASDAQ:AMZN), Netflix, Inc. (NASDAQ:NFLX) and the Alphabet Inc (NASDAQ:GOOG, NASDAQ:GOOGL) formerly known as Google — are based on the deflationary impacts of cloud, which are accelerating.

Cloud economics are making it possible to create cars that drive themselves and to turn DNA itself into a programming language. The deflationary economics of Moore’s Law are leaving billions of us vulnerable to losing our jobs, from bankers being replaced by blockchain to truck drivers replaced by autonomous trucks. Abundance is leading us toward a recession, or at least a little depression.

New Business Models

If the stock market, and economy, crash later this year (as some predict) it’s because our business models, and imaginations, have not kept up with the deflationary reality of Moore’s Law.

It’s not that there aren’t things worth doing. We’re all getting older, our climate is changing and there are still hungry kids out there. What’s lacking are the business models needed to create what are essentially social goods.

No private individual profits from cleaning the great oceanic garbage patches, or reversing the trend of climate change that is treating mankind like a virus by catching fever. These are social goods. Just as education, infrastructure and health are social goods.

But the ideology under which our markets, and our politics, runs today forbids considering such social goods as real, because it would require government, or governments, to build the business models required to take them on. The objectivism of Ayn Rand has become, in its way, as stultifying as Karl Marx ever was, and as resistant to needed economic change.

A generation ago, when inflation was the problem, President Gerald Ford tried to fight it with a button, reading “Whip Inflation Now.”

The market needs a new button, and economic policy a new attitude.

Dana Blankenhorn is a financial and technology journalist. He is the author of the historical mystery romance The Reluctant Detective Travels in Time, available now at the Amazon Kindle store. Write him at danablankenhorn@gmail.com or follow him on Twitter at @danablankenhorn. As of this writing, he owned shares in FB and AMZN.

Dana Blankenhorn has been a financial and technology journalist since 1978. He is the author of Technology’s Big Bang: Yesterday, Today and Tomorrow with Moore’s Law, available at the Amazon Kindle store. Tweet him at @danablankenhorn, connect with him on Mastodon or subscribe to his Substack.


Article printed from InvestorPlace Media, https://investorplace.com/2017/06/deflation-economys-greatest-threat/.

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