The Deflationary Era Is Upon Us
This is an odd topic not long after a CPI print in the United States that is at a 40 years high. Nevertheless, we will do what we always do, look at things from the long-term perspective to understand what it taking place.
One of the advantages to macro-analysis is that one is able to circumvent the emotional nonsense people spew. There is little doubt that inflation is an emotional subject and we can understand why. When the prices at the gas pump go up each time someone fills up, that is something that hits them in their pocketbook. Nevertheless, we need to overcome that tendency to truly grasp what is taking place.
When looking at things from a long time period, we get a better grasp of what is going on.
For example, let us look at oil.
This is pretty horrific looking. It is no wonder many are convinced that hyperinflation is on the way. Here is the number #1 commodity in the world and look at the price jump. All the money printing is leading to the consumption of oil to go through the roof (sounds odd when put that way but that is what the inflationists believe).
Of course, let us take a step back.
Notice something different?
We are at the same price as we were in July of 2009. That means we have effectively moved zero in the last 12 years in the price of oil. Of course, this is the number #1 commodity in the world. How many of you would have guessed we were at the same price after the massive run up over the last year?
The levels we are at now are also where they were in August 2018. Isn't it interesting that was the last time the Fed decided to unload their balance sheet. Coincidence? Either way, after a massive run up in oil prices, we now have Brent crude flickering in and out of bearish contango. This means that demand is weakening since there is no appreciable increase in output.
The point of all this is to emphasize how short-term viewpoints can be fatal when looking at economic conditions.
When it comes to the oncoming deflationary era, it can only be seen when stepping back.
There are two reasons for this.
Exponential Technological Era
We are in a technological era. Is there any way to deny this? When we look at all that is happening, it is mind-boggling. It is impossible to look at some of the things people are working upon and not get blown away.
For most, it is evident that technology is advancing at a rate faster than every before. In fact, it is accelerating. This is due to many factors, much of it tied to the fact that computation and communication systems are speeding up. All the while, they get less expensive.
What this means is we are not only in an exponential era when it comes to technology but also a deflationary one. After all, technology by its definition is deflationary. New technology makes older systems obsolete.
The result is that, when industries get disrupted, the costs go to either zero or near-zero.
Remember when information was very costly. If someone wanted it, first it had to be created. Then it was reproduced. Next it was mailed out. Of course, copies were kept in-house, requiring filing and storing.
Consider what happens today. This article cost nothing to create. At the same time, the distribution (uploading) is basically free. For people to read it, there is no cost. The number who "receive" it could be a dozen, or 50 million. There is no additional cost as the numbers increase.
People like to point out different expenditures that have not gone down. To start, they overlook much of what took place. People are now complaining about the price of gas, omitting the fact that, in the United States, it was 25% higher a decade ago.
Nevertheless, there are certain areas where we did see a straight line heading up. In the past I did videos on this which detailed the three areas that stick out most: construction, upper level education, and healthcare. The bottom line is all three of these areas still operate like they did 100 years ago. For the most post, the core has not advanced due to technology.
That is about to change over the next 10-15 years. All three of these are about to be upended in a major way. Technology is going to come in and obliterate much of what is there. This is what it does. Disruption destroys and cleans out. The longer it takes for this to happen, the more powerful the breakthrough once it begins.
As more of our daily lives are digitized, we will see costs plummet. This is extremely deflationary.
We Are Dying Off
With the exception of a few zealots who hold onto the false narrative of the last 50 years (or are closet eugenicists), the scare of global overpopulation is done. Most are aware that this is no longer a concern. In fact, some are starting to speak out about an impending population collapse over the ensuing decades.
The simple facts are the fertility rates across the developed world is well under replacement level. This was recently verified by the last census out of China. Some take exception to that report, instead believing the CCP "manufactured" 10 million kids. If that is the case, demographers are saying that China's population peaked 15 years ago.
Here is a list of countries that are either at peak population or very near it:
- Japan
- Russia
- South Korea
- Canada
- Italy
- Spain
- Germany
- Britain
- Australia
As we can see, this is much of the developed world.
Why are demographics so important? Anyone who had kids understands the reason: they are expensive creatures. Populations that are younger have a larger section that is of child-rearing age. This means they tend to have kids. That leads to consumption.
What happens when populations get older? They do the reverse. Instead of consuming, they start to cut back their expenditures. They do things such as downsizing the house. Eventually they leave the workforce putting them on a fixed income. Naturally, they require more social services which places the government in the middle of a larger part of the economy. All of this is deflationary.
Of course, the next step is people start dying off. A contracting population does not to lead to economic expansion. In fact, before they die, the situation gets very ugly as social spending skyrockets yet the number of workers to support this through taxation are diminished. Hence, we can expect some class warfare to take place in many countries, this one based upon age.
In the United States, the Baby Boomer generation was the largest we ever saw. There was 85 million of them born. It is safe to say this group is starting to drift away. There are more than 10,000 of them retiring each day, on average. However, that is not the only thing they are doing.
They are also dying off.
More than 28% of the Baby Boomers already passed away. This means they are now smaller, in number, than Generation X. Fortunately for the US, the Millennials are a sizeable group so they can offset this.
It is not a luxury the countries on the list above have.
All of this means economic output is likely to slow down as consumption in these countries wanes. This is a major problem for a nation like Germany that is a major exporter. It is hard to grow the economy when the countries you sell to are facing aging populations and reduced consumption.
Add technological advancement to an aging population in the developed world and you have a recipe for massive deflation over the next 15 years. It is impossible to ignore these long-term trends, especially the demographics. That is something that does not change quickly even if there is a reversal which, up to this point, no country has figured out how to do.
This is the path in front of us regardless of what espoused online.
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