The Price of Tomorrow
Why we need deflation now
The world is well into the age of inflation — the 50-year experiment in radical fiscal and monetary policies that have guaranteed rising prices and led to an exacerbation in inequality and indebtedness.
The response to the current crises has only led to radically greater debt loads and money printing in order to stave off the specter of deflation.
Ray Dalio argues in his book, Big Debt Crises, there are only four levers that governments have to deal with pending fiscal disaster:
- Money printing
- Higher taxes and monetary transfers
Predictably, the US, EU, and other countries have chosen to print — as they always do — because that’s the easiest thing for them here and now, although it’s the most costly in the long run.
Is the long run finally here?
Jeff Booth takes these problems head-on in his recent book, The Price of Tomorrow: Why Deflation is the Key to an Abundant Future. Governments and central banks continue to do what they’ve always done, albeit at an accelerated pace because we’ve hit the law of diminishing returns. More printing and debt is required to keep growth rates up (or the illusion of growth). This policy is coming undone due to exponential trends in key technologies.
This is where one of the most vivid metaphors from the book comes into play. Imagine you have a piece of paper and you fold it over on itself 50 times, how high would that piece of paper be? 5 cm? 20 cm?
Try 149 million km. That stretches from the earth to the sun.
This, Booth argues, is an apt analogy for the pace of technological development in three key areas:
- Additive manufacturing
- Energy via solar development
- Computing and artificial intelligence
All three of these broad technological areas are on that same exponential curve — we’re on fold 33 of Moore’s Law for example — which is driving prices lower and lower across the economy. Money printing in and of itself won’t be able to maintain its continuous march of inflation and wide-spread price deflation is in the cards from each of these.
3D Printing has Finally Arrived
Booth sees additive manufacturing processes such as 3D printers changing the way we make our goods. Shipping finished products is far more expensive than unfinished products or raw materials, primarily because of the issue of volume. This is a major reason why Ikea — which deals in trucks packed tight with “flat-packed” furniture — is able to undercut costs of traditional furniture makers. Additive manufacturing is just the next step in this evolution.
The first generation of 3D printers were slow, limited in materials, and typically produced poor quality products. I recall working in a university machine shop and having to work with clumsy CAD software to design 3D printed objects, wait a day for small items to be printed, then dissolve the supporting resins with another day in an acid bath before finally getting some plastic part completed. The vision was there in those early days — we could produce parts and geometries that are lighter, stronger, and more efficient, but could not be machined or manufactured by existing techniques, but the ability to execute on this vision was extremely limited.
Those limitations are being removed. While the hype has died down, the technology has continued to progress enabling printing of new materials, much more precisely, much more quickly, and much more cheaply. For Booth, this will usher in an era of distributed manufacturing that will enable people to purchase a printer, the raw materials, the plans (with many being freely available as open source files), and produce their products locally, either in their homes or at some local print shop. The flexibility of additive manufacturing also reduces costs associated with specialized tooling and machines, which may only be rarely used but have to be accounted for in the final cost.
The Solar Wave
I have to admit, when I came to this chapter, I rolled my eyes. I had done research as part of my MSc into making solar energy economic back in 2013, and even at a time with high oil prices, it just wasn’t efficient or cost effective. I haven’t looked at the solar market since then, so I was surprised to see the rapid progress it has made over the intervening years.
Energy is the key input for any industrial economy. Since the industrial revolution, fossil fuels have been the primary source due to their abundance, energy density, and ease of access. Despite their continued dominance, Booth sees solar energy as being the next mega-trend to transform our world and bring energy prices to a rock bottom.
Solar has a number of obvious benefits, namely it’s clean, can continue to produce for little to no cost for the lifetime of the panels (25–30 years), and it should last for another 5 billion years or so. Beyond that, Booth is most impressed by the radical reduction in cost (as am I), which has plummeted 88% in the past 10 years alone. On an Levelized Cost of Electricity (LCOE) basis, it is comparable with fossil fuels.<sup>1</sup>
A limitation of LCOE is that it only focuses on the cost side of the equation. A better estimate is to use the Levelized Avoided Cost of Energy (LACE) divided by the LCOE. This awkward acronym estimates the value the power plant provides to the local grid. If the LACE/LCOE ratio is greater than 1, the energy project is economically viable. Taking this into account on a regional basis, the EIA estimates that solar will largely become more attractive than natural gas by 2025.
There remain difficulties with solar, storage being the biggest and most obvious to account for peaks in demand and low production times, but also transmission losses as power needs to be transferred from sunny regions to non-sunny regions. These issues may delay widespread solar adoption, but, if as Booth predicts, prices continue to drop, these additional costs will be incidental compared to their alternatives pushing costs down across the economy.
Computing, AI, and the Future of Work
Booth’s prognostication for the development of AI is based on the eventual emergence of artificial general intelligence (AGI) and the continuation of Moore’s Law, or whatever will come to replace it. This will enable such technologies such as autonomous vehicles and augmented reality, as well as ushering in widespread job disruption. If we maintain our current, inflation-driven economic system, the increase in unemployment will be catastrophic.
Elsewhere, I have discussed why AI will not lead to large scale unemployment (see here, here, and here) as well as spoken about my skepticism of AGI (here and here). However, these specific criticisms of Booth’s argument are really beside the point, because we will likely see a large reduction in prices through adoption of AI technology even if AGI is never achieved and unemployment does not take hold.
AI is a general purpose technology, a tool that can be applied to nearly every industry in order to make better decisions. As decision making is improved, costs can be lowered which will yield savings that will be passed to the consumer through the competitive process.
We can take manufacturing as an example. We require physical goods and raw materials to be moved around the world, and these are dependent upon long supply chains stretching back multiple steps and involving dozens of industries before they reach the consumer. Managing these supply chains is immensely complex because it requires coordination and timing for all of these players as materials and products are routed around the world. To deal with the uncertainty around these, companies typically carry extra inventory, which comes at a cost. They have to pay for additional storage, transportation and maintenance of that inventory. Moreover, many products have a limited shelf life, they’ll begin to break down if they are not used in time — food products are an obvious example of this. This additional safety stock provides a buffer against uncertainty in demand, shipping times, supplier disruptions, and so forth. AI can be used to drastically reduce that uncertainty which leads to less waste across the entire supply chain thereby putting downward pressure on prices.
Examples such as these can be multiplied and exist across industries, meaning progress in AI is going to provide economy-wide improvements in efficiency, thus lower costs.
Deflation on the Horizon
If Booth is right about these trends and their effects, widespread price deflation is to be expected, regardless of what the Federal Reserve and Treasury try to do. The devaluation of the dollar (i.e. reducing the power of your wages and savings), a reversal of globalization, and other misguided policies will only seek to delay these rapid trends.
Deflation is a frightening term for central bankers, but Booth argues that we ought to embrace the coming tech-driven deflation.<sup>2</sup> A rapid drop in prices will enable the purchasing power of every individual to increase. Less work would be required to maintain one’s standard of living as food, housing, and energy all become cheaper and more attainable.
This is the path forward for those concerned about poverty and inequality. Continuing to resist these forces is futile and likely to have deleterious effects, further fragmenting society and preventing large swaths of people from engaging in the wealthiest civilization in human history.
As Booth argues:
In the end, the trend is already clear and foretells a different way of living…The deflationary aspect of technology is too great a force and it will eventually overwhelm even the greatest efforts to stop it. Those efforts to stop it, and the second-order consequences of that fight to halt deflation, will look insane to future generations because that fight will bring on revolutions and wars that burn the existing system to the ground. Allowing that to happen seems insanely irresponsible, since humanity might also forever lose the opportunity to have the kind of social uplift that is possible with technology.
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