Deflation eats credit-dependent, mass-consumption economies alive from the inside.
While AI (artificial intelligence) garners the headlines, the next wave of disruptive technologies extend far beyond AI: as the chart of technologies rapidly being adopted shows, this wave includes new materials and processes as well as the “usual suspects” of machine learning, natural language processing, data mining and so on.
While many voices seek to assure us these technologies won’t displace human workers, the reality is cutting labor inputs is the core driver. What few pundits seem to understand (perhaps because they’ve never experienced a truly competitive market?) is that the rush to incorporate these technologies into existing enterprises is deflationary not just to prices but to profits. Reducing labor inputs and improving productivity of capital and the remaining labor force is not going to generate profits if competitors can access the same tools and processes. The race isn’t to maximize profits, it’s to survive the inevitable deflationary spiral in prices as competitors are forced to pass along cost savings to customers to retain market share.
Pundits glorying in tech profits only consider monopolies or quasi-monopolies like Apple, Facebook Google enforced by government regulations and policies. Markets open to competition do not enable pricing power beyond a temporary advantage for one or two product cycles. (Please see Two Intertwined Dynamics Are Transforming the Economy: Technology and Financialization) As the race to improve technologies speeds up, “good enough” open and cheap previous-generation hardware good enough for . (We can surmise that the Pareto Distribution is active: technology that is 20% of the cost of the newest product can do 80% the new product can do, and tech that costs a mere 4% of the can do 64% of what the latest product can do.) on trillions in tech profits is overlooking the of the S-Curve for cheap credit, cheap energy –the three drivers of global expansion. Once credit dries becomes more expensive, once cheap energy is only a memory (or ) and once employment sags under the pressure to reduce , the ranks of those with the earnings or credit to buy, buy, be thinned.
can only be supplemented with borrowed money until the costs the debt (interest) the borrower’s budget. At , lenders will have to face the unpalatable truth that loan will end in default, a process that will also entire unsustainable mountain of debt the household is struggling . As many others have pointed out, energy can be abundant but it only drives expansion if it’s affordable to low-wage workers. If it’s only affordable to the top 20%, every economy based on mass consumption implodes.
the factors in the U.S.-China trade dispute that few seem to labor costs are spiraling higher in China, reducing at a critical juncture as global trade, demographics, energy costs and the risk of credit bubbles bursting a self-reinforcing confluence of negative dynamics. China still needs the jobs while its customers (including but to the U.S.) are seeking lower-cost alternatives to Made in China. Even Chinese companies are looking to establish lower-labor hubs overseas. Strip away the happy talk about technology creating jobs and we’re left with real-world enterprises desperate to lower cost inputs in any way they can: and the go-to “solution” to reducing cost inputs is reducing labor inputs by reducing wages via global wage arbitrage (a.k.a. offshoring jobs) and/or replacing human labor with software and robotics. Sure, there will be jobs for those installing and maintaining the software and robots, but remember: enterprises don’t have profits, they only have costs, and the pressure to eliminate entire layers of managerial costs as well as production costs will only increase.
Who will be willing and able to pay a premium for any technology, product or service if cheaper alternatives are available? service costs rise and wages continue to stagnate, the “solution” of borrowing more reaches an endgame of credit contraction and . government-enforced monopolies as the only dependably , and the citizenry will soon tire of enriching who bought political cover and regulatory moats. Deflation eats credit-dependent, mass-consumption economies alive from the inside. Adapt or die boils down to strip out costs or die.
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