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wonderpup

Technology Is Deflationary- Why Is This Not Obvious?

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When ever a politician is asked for their view as to how almost any problem is to be solved most will reach for the technological fix- and this is especially true when it comes to problems of the economy like growth and unemployment.

Improvements in technology will- we are told- bring about greater prosperity for all. But ask that same politician about deflation and he will insist that deflation is bad and will be destructive to prosperity- so we must avoid it.

The snag is that technology is clearly a deflationary force- that is, after all, ones of it's supposed virtues in a free market system- technology allows more stuff to be produced more cheaply making us better off- but isn't 'more stuff produced more cheaply' a blueprint for deflation?

From Charles Hugh Smith;

Technology is enormously deflationary on a number of fronts.
1. Perhaps most importantly, technology eliminates costly human labor. In the late 19th century, roughly 50% of the labor force worked on farms. Today, the number is 2% of the workforce.

At the turn of the 19th century, the largest category of employment was domestic help. The rise of electrical appliances and machines of convenience eliminated much of the need for domestic labor.

The next sector to undergo large-scale destruction of jobs was manufacturing. The process of replacing human labor with robots and software automation in factories is still underway.

Advances in software are now eliminating white-collar office jobs and retail employment. People like me (self-employed information workers) can now produce output and manage services that required three to five people a mere 25 years ago.

Although many believe new technologies create more jobs than they eliminate, there is precious little evidence of that today. Anyone who thinks biotech is going to create millions of new jobs needs to survey the job market for PhDs and those with Masters degrees in biotech fields–biochemistry, etc. The job market is tight, not expansive; these high-tech sectors can only absorb so many graduates, regardless of their level of training.

Just issuing diplomas does not create jobs for graduates.

As technology eliminates millions of jobs by replacing human labor, wages decline and the percentage of national income that goes to labor also declines. This means there is less money for consumption, pressuring prices of consumer goods. This is broadly deflationary.

Interestingly even the rentiers are impacted by this deflationary force;

2. Technology consolidates rentier services via convergence. A few years ago everyone needed a landline telephone, a separate phone line for a modem, a television, a DVD player, a mobile phone, a stereo system and a laptop computer. Now all anyone under the age of 30 needs is a smart-phone and perhaps a cheap laptop or tablet.

The rentier skims being eliminated by convergence are significant. Now people can get rid of cable or satellite and watch most programming via the web.
3. Technology gets cheaper. The first sequencing of the human genome cost hundreds of millions of dollars. Now it’s down to a few hundred dollars per sequencing. An Android tablet with full functionality can be had for $40 wholesale in China.

As competition drives prices down, profits erode. This is why the ideal set-up for profits has always been monopoly. But technology has a way of disrupting monopolies.
4. Technology enables transparency and thus lower prices. Transparency is anathema to cartels, which is why the actual cost of healthcare is obscured by providers desperate to avoid competition. But the web is introducing transparency and that alone is disrupting and creatively destroying profits based on information asymmetry.
5. Technology improves efficiency and reduces consumption. Volkswagen’s 283-mile-per-gallon car is currently very costly, but how long will it take for those technologies to spread to the mainstream. How much less fuel will a 140-mile-per-gallon vehicle burn than a current generation car?

Reduced consumption means reduced sales and profits.

http://www.oftwominds.com/blog.html

So are our leaders correct to say that ever more and better technology is the path to prosperity for all? On the face of it yes- after all, more and cheaper is good for everyone (unless your job has been eliminated by that technology of course)

So deflation is good? Well apparently not, at least not good for the financial infrastructure that underpins the economy. In a system based on money created by debt, deflation is a poison, it's toxic to the system because it threatens the ability to repay debt in two ways- firstly wages don't rise and secondly profits shrink- so both private and business borrowers find it harder to service debt and take on the new debt that is needed to maintain the supply of money.

So we arrive in the curious position that what should be a good thing- more stuff produced more cheaply- is somehow a bad thing because the system that runs the economy has not been designed to operate in a deflationary environment.

So we have a scenario in which technology is busy terraforming the landscape of the economy and as a result the financial software that runs that economy is becoming increasingly maladapted and dysfunctional, and as those that run that software become more desperate to fix it their 'solutions' become ever more extreme and dangerous- but seem to fail anyway.

Our system seems to be at war with itself- on the one side we have an exponentially advancing technology that represents a huge deflationary force- and on the other hand we have the Central Banks and their private sector counterparts desperately trying to create inflation by injecting billions into the system via QE ect.

To the question 'who wins this war' the answer seems to be nobody- we either have a deflationary bust or an inflationary one- so what's the solution?

Do we need an entirely new money system, one where money is created not by private banks but by the state- debt free money creation? If so who will tell the hordes of parasites whose living entirely depends on the current system?

If money=power then we are screwed since those best placed to fix this mess are the people most invested in not fixing it.

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Yes also with a enlarged precariat in insecure smaller accomodation you have less opportunity to amass stuff. Methinks some of the tat hoarding we see in the boomer generation will be a thing of the past.

Rentiers need to be careful, they may find themselves stuck with properties there is no longer any demand for as people adopt to minimilist micro living, and increasingly engage with a virtual 3D world.

Edited by aSecureTenant

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It is obvious.

Next?

So how do you explain why the same people who insist that deflation is something to be avoided also claim that the way to solve our economic problems is more and better technology?

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In the UK the deflationary angle of technology seems to be reflected in the (relatively low) level of reward for technical people and the inflationary angle of the financial sector seems to be reflected in the (relatively high) level of reward for financial sector people (on average of course) - coincidence?

It's almost as if one sector is being discouraged and the other sector encouraged - in the UK that is.

Edited by billybong

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Doesn't deflation make buying things on credit a really stupid thing to do, and If so, is this why they are so scared of deflation?

If you hold cold hard cash, then that's great, as I save for the fridge it gets cheaper. So my goal moves towards me.

They argue that people won't buy a fridge today if it's cheaper tomorrow, but it's more like people won't buy a fridge on credit if it's cheaper tomorrow.

Boom goes the money supply....So let's lower rates.... erm....

Last time we were about to go into deflation, they printed the difference and trousered it!

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I don't think it is that obvious that it will be deflation. The rules of money can change and technology can put the value of money into reverse.

In Weimar Germany, at the time, I guess their printers were the most advanced in the world.

The value of money can be figured by the amount of goods and services in relation to the money in general circulation. So, we have machines that make a billion Blue Ray players, this keeps the cost low and lower through time. But at some point the people who control the money want inflation to be 2%, so they can use the technology to produce more money to adjust the balance.

money-printing-o.gif

Edited by 200p

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What came first, debt or technology? A thirty year Ponzi has greatly inflated living standards all around the world. Many of the network innovations we now take for granted must also be a product of that Ponzi - without it they surely wouldn't be as advanced as they are; potentially, they might not even have happened.

Debt free money isn't the answer. Banks charge interest on their loans as compensation for the service they provide and the risk it entails. Assuming of course they are allowed to fail. It's unlikely that a non-market solution would be more efficient at managing risk. In addition , everything is traded on margin with borrowed money. Unless prices rise on average in a continuous fashion it becomes impossible for traders to keep their margin accounts in good order without liquidating current positions. In aggregate this phenomenon helps create the business cycle. A depression occurs when this selling trend becomes globally reinforcing and debt service becomes increasingly impossible.

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Out of something good comes something bad, out of something bad comes something good.......you can't all have your cake and eat it.....

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Technology is not normally deflationary since the productivity gains associated with it result in an expansion of the scope of activity - so if factory produced goods get cheaper, we don't make the same quantity as before for less money overall (deflationary), but we make a larger quantity of goods for the same total price as before. The individual consumer thus sees a falling price for that good, but overall the same quantity of money changes hands.

Its called Jevons paradox, and each time you put these luddite threads up I am going to remind you about it.

Note that this dynamic may increase inequality, but this thread is about deflation, not inequality.

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Technology is not normally deflationary since the productivity gains associated with it result in an expansion of the scope of activity - so if factory produced goods get cheaper, we don't make the same quantity as before for less money overall (deflationary), but we make a larger quantity of goods for the same total price as before. The individual consumer thus sees a falling price for that good, but overall the same quantity of money changes hands.

Its called Jevons paradox, and each time you put these luddite threads up I am going to remind you about it.

Note that this dynamic may increase inequality, but this thread is about deflation, not inequality.

in other words, cheaper goods means more wealth for everyone.

Thats why "they" resist it with taxes on the "excess" so they can buy more power with armies, vast public empires and shiny glass cities that produce little in reality other than masses of red tape, rules and antiwealth.

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in other words, cheaper goods means more wealth for everyone.

Thats why "they" resist it with taxes on the "excess" so they can buy more power with armies, vast public empires and shiny glass cities that produce little in reality other than masses of red tape, rules and antiwealth.

Bloo Loo, do you not distinguish between monetary deflation and 'more goods' deflation? If so, why not? (genuinely curious).

Monetary deflation = same amount of goods + less money

Technological deflation = same amount of money + more goods

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Bloo Loo, do you not distinguish between monetary deflation and 'more goods' deflation? If so, why not? (genuinely curious).

Monetary deflation = same amount of goods + less money

Technological deflation = same amount of money + more goods

they are both the same.

inflation = more currency for x amount of wealth.

stability = currency= wealth

deflation = less currency for x amount of wealth.

thus all states can be described....you create more wealth, but no more currency, then each unit of currency buys more.

The issue is that people look at the wrong end of the problem...they look at the money, when they should be looking at buying power.

An increase in buying power is villified as deflation in a fully financialised sector.

An increase in buying power is hailed as perfection in a non financialsed sector.

there is my difference right there....the last two words of the last two sentences

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So how do you explain why the same people who insist that deflation is something to be avoided also claim that the way to solve our economic problems is more and better technology?

Because in both these cases the people doing the insisting, are not actually engaging with the subject, but are putting out propaganda and simplistic ideas to lead the masses to their desired conclusion, i.e. working hard to provide the natural leaders with a comfortable lifestyle?

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they are both the same.

I am of the opinion that monetary deflation implies falling wages, but technology-driven deflation doesn't. If I'm right, that strikes me as an important distinction.

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I am of the opinion that monetary deflation implies falling wages, but technology-driven deflation doesn't. If I'm right, that strikes me as an important distinction.

I would say that both should be the result of increasing buying power.

In todays inflationery environment, Id say it wasnt applicable....just a transfer of buying power to somewhere else.

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The notion that a deflationary environment having less money, or lower velocity of money, or both, not translating into falling wages is a complete fantasy.

If somehow things got cheaper and people had more disposable wages that in aggregate they chose to spend, then there wouldn't be any deflation in the first place!

It does seem to be a persistent HPC fantasy that somehow we can have falling house prices, asset prices and commodity prices across the board and yet somehow, wages remain untouched so you all get richer overnight.

Although I guess a subset of HPCers might position deflation as a 'income of bad bankers, BTLers and [insert detested social group here] go down, incomes of hard working [insert favoured social groups here] remain flat".

Inflation = baddies win, deflation = goodies win.

And then there is the luddite angle, in which more technology= baddies win, and less technology = goodies win.

Do I have it about correct?

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...

A bit harsh... I'd say it all starts from the basic premise that inflation rewards debtors and punishes savers, which is wrong both morally and economically. Therefore, as the opposite of inflation, deflation must be good. "My enemy's enemy" is all very well, but it does rather ignore the uncomfortable possibility that your enemy's enemy might just be a bigger tosser.

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Agreed. However inflation does reward savers if the real rate is still positive. As long as the real rate is positive, then savers are still being favoured over debtors no matter what the rate of inflation is.

And the real rate has been pretty much consistently positive throughout the 20th century (including the 70s and 80s) with the exception of the WW1 and WW2 periods.

In general, it is not morally right to reward savers with a yield in excess of the economic growth rate, which is what savers have been getting for the last 60 years or so. The insistence of central banks in maintaining that positive return to savers is why we are burdened with so much debt now.

As I have said before, the only workable deflationary environment in which the interests of the common working man or woman is protected is one featuring negative nominal rates. That would provide, hopefully, for falling assets prices (due to money supply contraction), but smaller or zero falls in wages as a result of enhanced/protected velocity.

Ultimately most people don't have that much savings, and thus protecting their income over their savings is in their long term interest. For those too old to work, we do have to remember they have enjoyed many decades of rising wages and positive real returns on their savings.

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The notion that a deflationary environment having less money, or lower velocity of money, or both, not translating into falling wages is a complete fantasy.

If somehow things got cheaper and people had more disposable wages that in aggregate they chose to spend, then there wouldn't be any deflation in the first place!

It does seem to be a persistent HPC fantasy that somehow we can have falling house prices, asset prices and commodity prices across the board and yet somehow, wages remain untouched so you all get richer overnight.

Although I guess a subset of HPCers might position deflation as a 'income of bad bankers, BTLers and [insert detested social group here] go down, incomes of hard working [insert favoured social groups here] remain flat".

Inflation = baddies win, deflation = goodies win.

And then there is the luddite angle, in which more technology= baddies win, and less technology = goodies win.

Do I have it about correct?

by definition, having less money must mean falling wages..but actually, again, you are looking at the wrong thing...as are most people...buying power is why we work, it is what we have to spend....the numbers we assign this power are a function of unreality.

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Technology is not normally deflationary since the productivity gains associated with it result in an expansion of the scope of activity - so if factory produced goods get cheaper, we don't make the same quantity as before for less money overall (deflationary), but we make a larger quantity of goods for the same total price as before. The individual consumer thus sees a falling price for that good, but overall the same quantity of money changes hands.

Its called Jevons paradox, and each time you put these luddite threads up I am going to remind you about it.

Note that this dynamic may increase inequality, but this thread is about deflation, not inequality.

Jevons paradox as applied to economics is based on the premise-largely take for granted- that demand is entirely fungible and will shift seamlessly from one product or service to another- but the real world consumer demand does not work that way.

So- for example- just because the margins on tablet computers collapse due to more efficient production does not mean that a new demand for a hitherto unexploited product will magically appear to soak up the redundant capacity- people have to want things before they buy them- and this desire cannot be neatly encapsulated into any 'law' or rule of thumb- you cannot simply map an idea directly from the realm of energy conservation onto millions of irrational consumers- this is exactly what got economics into it's present sorry state- trying to pretend that human behaviors can be derived from quasi physics like reasoning.

And you also ignore the other deflationary impact of technology on jobs, wages and price discovery as noted by Charles Hugh Smith's article.

If the prices of things people want to buy are reduced by technology this is deflationary- even if the spare capacity now exists to create a lot of other things they don't want to buy.

I wish it were true that demand is just an amorphous protoplasm in need of a fix- if that were true then business success would be almost a certainty- just start making something- anything at all will do- and wait for that demand to find you.

But the fact that billions are spent on advertising and promotion suggests that demand is not the whore you imagine- it wants to be courted, and it's quite picky about where it bestows it's favors.

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by definition, having less money must mean falling wages..but actually, again, you are looking at the wrong thing...as are most people...buying power is why we work, it is what we have to spend....the numbers we assign this power are a function of unreality.

Fair enough, but is the shift in power created by deflation 'fare'? Debtors, as well as creditors, have a right to stability as well. A businessman might make a reasonable investment via debt in new machinery - and is then wiped out by deflation.

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Fair enough, but is the shift in power created by deflation 'fare'? Debtors, as well as creditors, have a right to stability as well. A businessman might make a reasonable investment via debt in new machinery - and is then wiped out by deflation.

profits pay off debt...even in a deflationery environment.

But the human brain likes to see more in the surplus department, others are tricking us to believe more numbers is more wealth.

When in fact, more numbers, as Sceppy says, can mean less wealth, but you would never know. Its all hidden and obfuscated in CPI, RPI, wage growth figures, pensions, GDP, and everything else trying to avoid stating your £ wont buy £'s worth next year, when in fact, it probably should buy more than a £'s worth.

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