Overall Thoughts:
Jeff Booth’s “The Price of Tomorrow: Why Deflation is the Key to an Abundant Future” digs into the deflationary nature of technology and questions the current economic paradigm of inflation-based monetary policy.
I flew through this book and took a lot from it. The topic of embracing deflation is so against the grain today that few are willing to look at it. I’m glad Jeff wrote this book to explore it. The Price of Tomorrow is recommended for anyone interested in economics, monetary policy, technology, and re-imagining what the future might look like. 10/10.
Summary:
Our current system of economics takes consistent inflation as a given: small increases in prices of goods and services happen more or less every year. The Federal Reserve aims for a certain rate of inflation as it tries to steer the economy. The theory goes that inflation helps ensure money continues circulating in the economy. When there is less incentive to save because your dollars will be worth less later, it makes sense to spend them now, or to invest them.
Jeff argues that although we take inflation as a given, the exponential rate of technological progress has been leading us down an inevitable path of deflation: things becoming more and more affordable.
The inflation we have seen has been manufactured. A combination of fiscal and monetary policy measures enacted after the Great Financial Crisis led to growth that’s been financed by ever-increasing amounts of debt:
“In 2000, the total debt in the world was approximately US $ 62 trillion. At the same time, the world economy in 2000 was about US $ 33.5 trillion. Since 2000, the world economy has grown from US $ 33.5 trillion to about US $ 80 trillion, but to achieve that growth, the total debt has grown to over US $ 247 trillion as of the third quarter of 2018, according to the Institute of International Finance. In other words, it has taken approximately $ 185 trillion of global debt to achieve $ 46 trillion of global growth…. The mirage of growth today is nothing more than a debt-fuelled spending binge.”
This manufactured growth is not benefiting everyone in our society equally. As a result of low interest rate policies and money printing we’ve seen dramatic increases in asset prices. This overwhelmingly benefits the wealthy that own those assets, creating ever increasing amounts of wealth concentration. We are now at a point where wealth concentration is as high as it’s been since the 1920’s, and we’re seeing populism rising in conjunction.
Until we confront the reality of technology-driven deflation and choose to imagine another system, we will see continued printing of money and debt fueled growth in order to keep the existing paradigm intact. As we’ll see later, this will have to end sooner or later.
Let’s look at a couple of the ways Jeff illustrates that technology is deflationary:
-Network effects of modern internet companies
Most modern internet giants benefit from network effects, leading them to eventually deliver deflationary pricing to their users. “A network effect exists when the value of a product or service gives more value to each user as the number of users increases.” The value of the network increases exponentially as users are added. Each new user has access to exchange of information/goods/services with all other users, so growth becomes exponential.
These platforms aggregate supply, and let the supply compete for an audience, without actually carrying the supply. As a result they can scale more or less indefinitely as their cost to carry additional supply is next to nothing. Jeff uses the example of the supply being you on Facebook, songs and musicians on Spotify, and products and suppliers on Amazon.
Because of this, most internet platforms are monopoly businesses. Formerly these were broken up as they were considered detrimental to consumers due to their ability to constrain markets and increase prices. These tech monopolies are constructed a bit differently. They have created a system where the consumers win in the form of better prices and services – a deflationary phenomenon.
–AI and Automation
Technology growth is exponential, but humans don’t typically instinctively understand exponential growth. Jeff argues we will continue to see these exponential changes take place in solar energy, self driving cars, AI and other fields. As they begin to happen faster and faster, we’ll see them impact other areas of our economy in surprising ways and see prices continue to drop.
A major topic covered is AI. Human intelligence is essentially correcting errors and knowing what to do in a given situation. Across the globe information is growing exponentially. That information flows through computers that can correct errors faster than humans. Many of us will see our jobs automated by computers that can work 24/7 at a much lower cost. This will reduce costs across the board – and with it remove many existing jobs.
So where are we heading?
The current and future exponential growth of platform companies with network effects, automation, AI, self driving cars, advances in manufacturing and renewable energy production all suggest that without intervention, costs will come down on many things we purchase. Eventually we will come to realize that the only thing offsetting this phenomenon and causing inflation is the continued unsustainable increase in debt. There are a few ways this can play out moving forward.
- Continued rise in inequality leading to conflict – Bond holders decide the government does not have the ability to pay off its debts, sell their bonds and interest rates rise. This leads to higher inequality, people losing hope in the current system, increased polarization and the rise of divisive populist leaders. Eventually this path leads to revolution and war.
- The socialist/universal basic income path – This path involves different strategies to create wealth transfers to those that have less. This could look like increased taxes on the wealthy, potentially combined with guaranteed basic income. The government could pay all citizens a base income from taxes from the wealthy.
Neither of these paths deal with the root cause of the issue: technology driven deflation. This deflation is exponential. The increases in debt required to maintain inflation will also be exponential. Eventually a system reset is necessary if we continue down the path of exponential debt growth.
An example of such a reset happened in 1944 with Bretton Woods. Global powers came together and agreed to tie exchange rates to the price of gold and the US dollar. The US dollar became the global reserve currency, tied to gold at a fixed rate. This established trust internationally and allowed global trade to expand as countries could not easily manipulate their currencies.
Eventually this system changed when the US removed the ability to convert US dollars to gold. The currency became a fiat currency with a supply that could again be manipulated to suit US interests. As a result we find ourselves in another debt spiral.
In the end, Jeff suggests we imagine a world where we stop fighting deflation, let it happen and learn to live with the potential of abundance.
“What if the natural order of things was permitted? What if, instead of trying to stop deflation at all costs, we embrace it? As technology spreads, deflation happens at the rate it should. Deflation becomes something celebrated because it means that we are getting more for less. We allow ourselves to accept abundance.
Along that continuum, as technology removes jobs and fewer overall jobs are needed, prices will keep falling, allowing those who lose jobs a way to share in the benefit of technology abundance without massive transfers of wealth. If technology-driven price declines continue to the point of something becoming free, we let that happen, too. People will no longer have to be on an endless treadmill to pay for things that are constantly rising in price. As hard as that might be for us to accept, because it is such a radical change to the way things are today, it seems to me that it is the only real choice we have.”
The author questions if governments would actually allow this to happen, suggesting that it’s unlikely central banks would be willing to give up the power they have over the money supply. As trust is eroded in the dominant global currencies as stores of value, Jeff suggests that we may see the population begin to shift to an alternative currency that people can trust not to be manipulated. He throws out Bitcoin as a possible alternative, and one that is provably scarce.
Parting Thoughts
I was blown away by Jeff’s compelling narrative around technology as a deflationary force that is essentially unstoppable. The book illuminated many of the big forces at play in today’s economy and helped me think about what may come next. I still have a lot of work to do in understanding more about what a deflationary economy would look like. I’m left wondering if Jeff’s vision of an abundant deflationary economy is possible or a big, unfeasible techno-utopian dream. I’d love to find out.
The Price of Tomorrow is a fascinating read, one worth going through start to finish.