Deflation can be an economic good. When efficiency cuts costs and you can lower prices, you make money and your stock goes up.
Technology is the great deflator. Moore’s Law means we’re creating more deflation than ever before, even more than in the 1920s.
Back then, deflation gave us the Great Depression. There was too much production for too few dollars. A spiral resulted in which prices went down, but jobs also disappeared. The solution was to create new demand. Franklin Roosevelt did it. So did Adolph Hitler.
In this century we’ve twice fought deflation by throwing money at rich people. The Great Recession ended when bankers were given back the $1 trillion lost on fake mortgage insurance. The economy has kept growing thanks to another trillion thrown at rich people by the Trump tax cuts.
But if that money just sits, and demand continues to trail supply, asset values can disappear quickly, as in 2008. Stocks are easy to trade, but not if there are no buyers.
Funding the Wrong People
The damage of tossing money at the wrong people is hidden by rising asset prices. Economic activity grew by 5% for 2017-2018 and is up 2% this year. But the Dow Jones Average is up 40% and the NASDAQ nearly 60% in that time. The New York Mets are now selling for $2.6 billion. Asset prices are rising 10 times faster than economic activity because the economy’s gains are going to so few people.
In the end, failing to fight deflation courts disaster. Our great-grandparents learned this in the 1920s. It can happen again. Signs of trouble are growing.
Already, many areas of the U.S. economy have rolled over. If you own an Iowa farm, a South Carolina steel mill, or a North Dakota oil lease, you’re seeing that right now. We’re flaring more natural gas than ever because we can’t sell it. It’s not just coal barons seeking a handout.
Commodity deflation, driven by efficiency and cleaner greener alternatives, is bad enough. Wage deflation is worse. That’s because wealth buys assets while wages are spent. In this decade the cloud has gone from making workers more efficient to costing them jobs and benefits. First, middle managers were replaced by databases. Then retail workers were replaced by eCommerce. Now bankers and brokers are being made redundant by fintech apps.
The wealth effect can be good news if we seize the opportunity to create new demand. We’re not doing that. Uber (NASDAQ:UBER), Lyft (NASDAQ:LYFT) and the rest of the gig economy is just replacing worker benefits and consumer protection with equity for founders and venture capitalists.
I’m lucky. I’m white. My wife is a computer programmer. I have her health insurance, but I’m part of this economy, too. Without her job, we would have gone broke ages ago. I’m making no more today than I did in 1979, and not just adjusted for inflation.
There’s a whole generation like me. They’re called Millennials. If you’re not creating leading-edge technology today, you’re being crushed. You can’t afford health insurance, and no “employer” is offering any. Not only can you not save for retirement, but you also can’t even pay off your student loans.
Meanwhile, there are a host of jobs that aren’t being done because they don’t pay, starting with saving this planet. This hidden demand, however, lies outside current economic models. Choosing whether to meet it is a political choice.
In the 1930s the New Deal created new demand by building dams and parks. There was no demand in Hoover’s economy for dams and parks. But long-term investment has enormous value, even if it shows up on a balance sheet rather than an income statement.
I hesitate to bring this up, but they didn’t do politics at the court of Louis XVI; they just let the French economy deliver all its assets to Versailles until the victims of the system got fed up.
The 18th century’s victims didn’t stop with the royals and courtiers. They went after anyone accused of wealth and guilty of education. They would have killed Lafayette had he not escaped. They nearly got Thomas Paine.
This is also the story of China in the 20th century. Mobs kill intellectuals and financial journalists, not just Kings.
So 2020 offers a choice. Either we create new demand and whip deflation now, or it’s going to whip us. There’s too much deflation in commodity and labor markets for things to continue as they are. I would propose seizing opportunities and recycling wealth in the form of new jobs and long-term investment.
Dana Blankenhorn http://www.danablankenhorn.com is a financial and technology journalist. His latest book is Technology’s Big Bang: Yesterday, Today and Tomorrow with Moore’s Law, essays on technology available at the Amazon Kindle store. Write him at firstname.lastname@example.org or follow him on Twitter at @danablankenhorn. As of this writing he owned no shares in companies mentioned in this story.