The deflationary view versus hyperinflation debate continues to rage. Some economists believe that we are entering a period of falling prices due to the efficiency and effectiveness of fourth revolution technologies. But others like myself think the reverse could play out with prices escalating in a type of stagflation.
But first, let’s understand the deflationary view, which highlights the cost-cutting benefit of new technologies that will lead to lower costs as the cost savings are passed to consumers and households.
The deflationary view cites the efficiencies that fourth revolution technologies will bring to the business
Those in the deflationary view camp then believe that the cost savings will be passed onto consumers and households in the form of lower prices.
So, the deflationary view cites the Amazon effect, how online digitalization leads to greater efficiencies and cost savings for consumers.
The proliferation of digital commerce has reduced retailing costs, and the retailer can provide more for less, thereby undercutting rivals.
The Amazon effect has led to the retail brick and molter meltdown. Disruptive technology means that more efficient companies end up taking over their less efficient rivals. So, through the application of efficient technologies, these companies increase their market share, either by driving their competitors out of business or taking them over.
Moreover, as these emerging companies gain traction, the technological tailwind, which facilitates an increase in market share also results in another tailwind, economies of scale. The larger company can exploit economies of scale, which is a proportionate saving in costs gained by an increased level of production. Mergers may lead to economies of scale.
So further cost savings can be made by spreading costs over a larger output. The champion company can continue with its market domination strategy by outcompeting rival companies by offering more for less. So, the above scenario outlines the deflationary view based on the idea that technology will make companies more efficient. Moreover, the cost savings will then be passed on to consumers and households in the form of lower costs of goods and services.
There are several flaws with the deflationary view, which cites technology being the driver of lower prices
Technological champions lead to a few or one company dominating market share, in other words, monopolies.
The monopolist no longer needs to compete since it controls the lion’s share of the market. The king of the jungle, the monopolist, can feast on the technological cost benefits without sharing the cost savings with customers.
The view that technology is deflationary doesn’t hold water, albeit in the long run
But the machine has many moving parts, so to get a macro view of the engine, you need to stand back and watch the other moving parts to gauge the full impact.
The bigger picture view macro impact of fourth revolution technologies leads to structural long-term impact on employment. We believe the lower worker participation rates in advanced economies is a Maco trend as global competition is accelerating the adoption of cost-cutting technologies. The technological genie is out of the bottle. Businesses are faced with a choice of becoming more efficient through fourth revolution technologies, robotics, digitalization, and AI or risk being taken over or driven out of business by a more efficient technological competitor.
Technology is deflationary in the short term because businesses can streamline their operations and reduce their headcount.
So, for example, the automation of Amazon warehouses where bots are doing the work in out-of-town warehouses has led to unemployment on the high street.
The technology is deflationary view fails to factor into the equation that automation and other technological advancements are a headwind on worker participation rates
Lower household demand doesn’t necessarily mean lower prices, bearing in mind that businesses will adjust to lackluster demand by reducing their output to maintain or increase the current price levels.
For example, Maersk, the world’s largest shipping company, and two other players reduced their capacity by the most during 2020. So, in terms of the number of container slots. Maersk delivered the largest fleet reduction and scaled-down its container capacity by 236,000.
The global economy was already slowing down before the pandemic lockdowns.
It is the change in monetary policy, which is the crux of this piece, why we believe the technology deflationary view could be wrong
So, we are more likely to see 70s type stagflation triggered by currency debasement.
Fourth revolution technologies, the advent of artificially intelligent bots, web 3.0, means that humans will struggle to compete with the new technology.
The reserve army of unemployed will grow, which will force policymakers to implement a universal basic income. Public finances will come under increasing stress as an aging population and declining worker participation rates will put governments further into debt. Put another way, the public deficit will continue to grow, and so too will the monetizing of government bonds with the central bank being the largest buyer of debt. But a central bank creating currency to finance an already heavily indebted government so that it can go even further into debt with a UBI policy will lead to a monetary crisis.
If technology is deflationary view is wrong and we are in stagflation or even hyperinflation scenario then what impact is that likely to have on asset prices?
Hyperinflation in the Weimar Republic in 1922 was also triggered by excessive money creation.
The wealth industrial class bought machines and exited out of their local currency to protect their wealth against a collapsing currency.
Currency instability led to hyperinflation in Venezuela in 2016, and in 2018 the Venezuelan stock market melted up over 73,000% in the past year.
When cash is trash, investors flee bonds, cash in deposit accounts, and buy assets. So, dividend-paying stocks, precious metals, particularly gold and blockchain disruptive technologies cryptos could be in hot demand going forward.
The melt up in asset prices is likely to continue.