During the oil era, the most powerful economic force was inflation. The way to fight it was to hike interest rates, cut the money supply, and push costs out of the economy.
In the tech era, the most powerful economic force is deflation. The way to fight it is to cut interest rates, hike the money supply, and push demand into other sectors of the economy.
Deflation has been an economic force since Gordon Moore wrote his 1965 Electronics article. I’ve spent my career detailing how the forces unleashed by Moore’s Law spin ever outward from pure silicon, causing deflation everywhere.
The force of deflation has been accelerating since 1965. It overcame inflation by the 1990s. It helped cause the 2008 market crash. Trump fought it by throwing trillions of dollars to his friends in the investing class, creating dollars through the Fed and cutting taxes for his friends. That money went into assets, where it could easily be lost, as it was a decade earlier, while deflation rages on.
From 2017-2019, deflation was in the background of the economic mind. With the pandemic, it has come on like a California forest fire.
You no longer go to the office. You do your work with your own tools, in your own home. Productivity has jumped, and offices have been emptied. You don’t have to go to the store, either, to stay safe and get what you need. Again, productivity has jumped, and more real estate lies empty. When you can’t go out to dinner you order it from “ghost kitchens.” Downtown is a ghost town.
No more waiters. No more cleaning or security jobs in offices or shopping malls. No more shopping malls. Fewer drivers. No more newspapers, no more printing. Deflation means there’s less demand for energy, so efficiency and harvesting it from the Sun and wind starts draining the oil patch. Fracking is dead.
Remember. The only way to beat deflation is to create new demand. Things conservatives decry as “socialism” are, in fact, new types of demand for business to invest in, and profit from. Infrastructure can be used by every business. Educated workers are needed by every business. Healthy employees benefit every business. These are “social goods” where public investment can get a private return. These investments create employment and demand.
Give a poor man a dollar and it will be in a rich man’s hand by nightfall. But it will at least have passed through the poor guy’s hand. A dollar in a spender’s hand is a dollar the rich man can go about earning, through his investments in what the spender wants.
It thus makes business sense to invest in social goods in a time of deflation. No one person, no one company, can meet this challenge alone. It takes all of us. That’s demand that can be harnessed and turned into profit, which is what business is supposed to be about.
Here’s one example. Health care.
Medicare for All isn’t socialism. It’s universal demand for care, with a big pot of money to whoever can give it, and lots of jobs. Managed care companies like Centene already make a profit on Medicare and Medicaid contracts, serving risks among old people and poor people private insurers don’t want. Add better risks to the pool, add younger people, and Centene’s profit grows. So does Centene’s market. This creates competition from CVS Health, United Healthcare, and others. In the process, we start to deal effectively with chronic conditions such as heart disease and diabetes, because managed care makes dealing with them profitable. Growth creates demand for efficiency and more deflation, which in turn creates a requirement for more demand.
This means we need action against climate change. Biden talks about solar panel installers, but there are lots of other opportunities once solar panels become cheap enough to self-install. We need plastic solar collectors for windows, we still need insulation, LED light bulbs and management software in low-income apartments. We need new, smaller wind turbines, we need batteries. We’re going to create new markets in watches and phones that collect their own energy and don’t need to be plugged in. There are going to be new jobs in climate mitigation, and in wildlife management, even in cities. There’s growth to be had, a lot of it. All you need do is create a financial demand.
The point is that, because of the power of deflation, we have the chance to make big things happen. Social goods can be bought through taxes and borrowing, not just private investment. Inflation isn’t the threat. Deflation is. Even if climate change were not such a threat, we’d need new demand to prevent a deflationary spiral.
The last deflationary spiral to go out of control was under another failed Republican President, Herbert Hoover. Manufacturing and farming costs were declining throughout the 20s, more was being produced, but the idiotic idea that “gold is money” kept Hoover from creating the demand necessary to clear supply.
In a deflationary spiral, prices decline. But wages decline faster, and jobs disappear. That’s what the Great Depression was. Crops that could have fed people were destroyed because no one had the money to buy them.
The Great Recession represented the last triumph against deflation. Remember what happened. Money was thrown from helicopters into the banking system and then into the hands of borrowers. Growth followed.
Monetary policy can’t do that anymore. Banks and other asset holders are stuffed to the gills with cash. Assets of all kinds are overvalued. They’re going to be sold, the money used on them will disappear, unless we create new demand to Whip Deflation Now.
