Does Technology & the Internet Make Inflation Impossible?

Before we can assess inflation and the effect of technology we need to understand some of the biggest costs of daily life

  1. Accommodation – Houses, buying/renting
  2. Sustenance – Food/White goods (cooker, fridge, microwave etc)
  3. Transport – Vehicle & Fuel
  4. Entertainment
  5. Education

Accommodation

As a wise man once said, god aint making anymore real estate so we can assume real estate prices (buying/renting) will continue to increase.

Although the rate of increase can be tightly controlled by government policy. Housing costs can be reduced by the relaxation of planning regulations and the adoption of higher rise buildings with a smaller footprint but the same or more floor space.

Sustenance

Whether we talk about actual food itself or the tools we use to prepare the food, the trend will be downward. Improved technology will reduce the price of getting the food to the door, growing/raising the food and the storage and preparation of the food.

Transport

Fuel in terms of Gold/Silver are about as cheap as it ever has been despite the growing demand for fuel due to growing populations.

Technology which makes products cheaper to operate will continue to improve and the internet will massively improve the proliferation of the best technologies.

The need for individuals to move for work related reasons will continue to decline with the spread of home working.

The increasing popularity of home delivery will further reduce the distance people will have to travel.

Improved technology and co operation will reduce costs in the transport industry by increasing vehicle utilization.

Entertainment

The expansion of video services whether they be paid per view methods such as Netflix and YouTube will put downward pressure on cinema prices due to the reduced demand.

The advent of virtual reality and the immense technological developments that will inevitably come will also reduce the desire to travel to experience things in “real life”

Combine these points with the ease with which we will be able to carry out these activities with people from around the world will further reduce the cost of entertainment.

Education

The technology highlighted in the entertainment section is equally applicable to education. The cost of education could go close to zero despite the quality of the education increasing immeasurably.

Conclusion

In short, the price of life’s biggest expenses will reduce and it is quite conceivable the rate of reduction could increase exponentially.

What does this mean?

The demand for money will plummet which will inevitably cause deflation

How will governments control this deflation?

Fundamentally governments & central banks need to do 2 things.

  1. Increase the demand for money ie cancel out the effects of deflation
  2. Increase the money supply

For point 1 increasing taxes will be by far the most effective and easiest measure to implement.

A higher tax burden maintains or increases the demand for money

Point 2 is a lot more difficult to solve

For the money supply to increase, loans need to be made to governments and to the private sector.

The massive problem here is how can loans to the private sector increase when the money from the loans will only be doing 1 thing ie paying increased taxes.

There is only 1 reason for a loan, to increase productivity. If the loan will not achieve this most basic goal then it makes no sense to take out a loan as there is no way to pay it back.

The only way loans can be effective in an environment of lowering costs, increasing efficiency and increasing tax burden is for firms to keep a larger portion of their profits, in other words, share buybacks.

There is simply no other productive purpose for the loan.

Where does this lead? – There are two possible approaches.

1. Fight Inflation

 

Government revenues will increase as a percentage of GDP.  The extra revenue will used to increase government spending.

And the knock on effect?

As the cost of employing people increases due to tax increases, unemployment will increase.

So we have a situation of increasing unemployment, increasing taxes, increasing social security payments.

Taking this to its hypothetical conclusion

You have a fully automated economy which is completely funded by government social security payments and whereby products and services are taxed at close to 100%.

2. Embrace Deflation

Falling prices will mean the work you do today is worth more in the future.

The cost of products and services will decrease and so will wages and so will the amount of hours we need to work to achieve the same/higher standard of living as today

Everyone benefits from % but there is only one type of entity that suffers from deflation, an entity who borrows money but who does not increase its productivity with the loan and who can therefore not repay the loan. This entity can only function in an inflationary environment, without inflation this entity will rapidly and constantly run into financial difficulties

 

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