Focus on Deflation
The debate over whether inflation is transitory or not continues to rage on as we move farther into the second half of the year. As has been heavily reported over the past few months, inflation numbers have been running hot for most of 2021.
Some of the rises in prices can be attributed to low base effects from a weak 2020 economy that was limping through the pandemic, while higher labor, supply, and production costs have also played a significant role.
The narrative is split between the investors and government officials who ensure this uptick in inflation is only transitory, and others who predict that inflation is going to stick around for a while.
Most of these discussions focus on the inflation side of the argument. This is probably since the economy has not seriously had to worry about inflation for a few decades and consumers are currently experiencing rising prices across most of their frequent purchases.
While inflation may be the hot topic of the summer, strong deflationary forces aim to disrupt this leading narrative.
Since the end of the 1970s decade of stagflation, the economy has experienced a prolonged trend of deflationary forces. Mainly due to new technology bringing down the costs of production and an aging demographic that spends less and is not as productive in the workforce.
However, these deflationary forces have been hidden largely hidden from plain sight as an increase in government deficit spending has been implemented to offset these effects (remember, the U.S. Government is the largest debtor in history and the only way to pay off their debt and continue to spend more money is to print more of it).
Technological advances have always been, and continue to be, the most powerful deflationary force impacting our economic system. According to Jeff Booth, technological advances bring efficiency and abundance to the economy, which is profoundly deflationary.
Technology brings down the cost of production by increasing efficiency and performance over time. It also evolves to replace human labor, leading to lower wages, lower purchasing power, and lower demand.
As we enter the digital age, technology will continue to evolve and bring with it deflationary pressures on the economy.
Alongside advances in technology, a changing demographic base has also contributed to the deflationary forces of the past few decades and will continue to do so in the future.
The United States and the world are currently experiencing declining birth rates, an increase in the unproductive elderly age group, and a decrease in young and working adults.
This means that we are experiencing a population decline in both the producing demographic as well as the consuming demographic. This is not just a United States problem; it is happening all over the world.
If these trends continue, the world will see a steady decline in the standard of living for most of the demographic segments.
To combat this, governments of the world have utilized debt to prevent their economies from entering a deflationary spiral. Unfortunately, these countries have become addicted to debt and must rely on it for economic growth and to pay off their debts.
Furthering this addiction to debt, politicians in the United States have recently begun discussing the idea of Universal Basic Income to offset the decrease in wages from technological advancements that have replaced jobs.
An implementation of Universal Basic Income, funded by debt monetization, would only cause more issues and volatility in an already uncertain economic environment.
While we do not know which economic force will prevail, the direct deflationary effects of technological advancements and changing demographics will probably prove too powerful to ignore in the debate versus inflation.