September 5, 2019


What Recession? Low Interest Rates Could Mean Tech-Fueled Growth (Zachary Karabell, September 2019, Wired)

[W]hat if rates are falling because technology is systematically depressing prices? If a wide swath of goods and services is getting cheaper and cheaper, then people and businesses and government don't have to spend as much for the same things. Yes, fighter jets and prescription drugs are more expensive than ever, but that's more because of government and market distortions than because the products are more expensive to make. In many sectors of our economy, things are becoming less expensive, not more. The result: less inflation, and slower nominal economic growth (some of which is attributable to inflation), but not actual contraction of economic activity. If you buy 100 of X at $100 a pop one year, and then you buy 100 of the new version of X two years later at $90, you've gotten what you need for less. That's good for you, but the country's GDP will decrease because you spent less.

The role of deflation and technology has not been ignored, but it has hardly been front and center. A recent analysis by Ark Investments suggested that in times of profound technological innovation, such as the late 19th and early 20th century, deflation can be common. This can confuse investors and lead to wild gyrations of long- and short-term interest rates.

The Industrial Revolution unleashed mechanization, leading to a proliferation of goods at cheap prices. Today, waves of software and communications technology are having a similar effect. Add to that the early stages of artificial intelligence and robotics, which allow more output at less cost (including the challenging issue of less labor). The AI revolution is significant, but our productivity statistics, grounded in 20th-century notions of manufacturing workers making things, have a hard time capturing these changes. Then consider that increasing portions of economic activity are digital and often free to users (think Google or Facebook), further confounding our ability to gauge what's happening and what's likely to happen in the future.

These technologies are unleashing more affordable goods and services around the globe, but deflation poses threats to financial markets; almost all investment is predicated on the assumption that a dollar invested today will yield more tomorrow. The venture capitalists of Sand Hill Road look for 10, 20, and even 100 times the return on their initial investment. Indeed, this is where the conventional wisdom around inverted yield curves seems most potent: If investors underperform and savers can't get anything for their savings, that can create turmoil in the global financial system.

The larger point, however, should not be lost: An inverted curve auguring a deflationary world is not necessarily predicting a recession, as in the 20th century, nor does it augur the kind of pain experienced in 2008-09. There may yet be a substantial economic crisis, but the flattening of interest rates globally need not be a harbinger. Quite the opposite; a world where capital is cheaper, connectivity greater, and goods inherently digital could be one of widespread affluence, defined not by levels of GDP growth or income but by more access to goods and services by more people. That could mean statistically low to nonexistent GDP growth, very low interest rates, and close to zero inflation. It will not look like economies of the past or behave like them.

Posted by at September 5, 2019 1:54 PM