The Deflationary Era Is Upon Us

in LeoFinance11 months ago

This is an odd topic not long after a CPI print in the United States that is at a 40 years high. Nevertheless, we will do what we always do, look at things from the long-term perspective to understand what it taking place.

One of the advantages to macro-analysis is that one is able to circumvent the emotional nonsense people spew. There is little doubt that inflation is an emotional subject and we can understand why. When the prices at the gas pump go up each time someone fills up, that is something that hits them in their pocketbook. Nevertheless, we need to overcome that tendency to truly grasp what is taking place.

When looking at things from a long time period, we get a better grasp of what is going on.

For example, let us look at oil.

oil.png

This is pretty horrific looking. It is no wonder many are convinced that hyperinflation is on the way. Here is the number #1 commodity in the world and look at the price jump. All the money printing is leading to the consumption of oil to go through the roof (sounds odd when put that way but that is what the inflationists believe).

Of course, let us take a step back.

oil.png

Notice something different?

We are at the same price as we were in July of 2009. That means we have effectively moved zero in the last 12 years in the price of oil. Of course, this is the number #1 commodity in the world. How many of you would have guessed we were at the same price after the massive run up over the last year?

The levels we are at now are also where they were in August 2018. Isn't it interesting that was the last time the Fed decided to unload their balance sheet. Coincidence? Either way, after a massive run up in oil prices, we now have Brent crude flickering in and out of bearish contango. This means that demand is weakening since there is no appreciable increase in output.

The point of all this is to emphasize how short-term viewpoints can be fatal when looking at economic conditions.

When it comes to the oncoming deflationary era, it can only be seen when stepping back.

There are two reasons for this.

Exponential Technological Era

We are in a technological era. Is there any way to deny this? When we look at all that is happening, it is mind-boggling. It is impossible to look at some of the things people are working upon and not get blown away.

For most, it is evident that technology is advancing at a rate faster than every before. In fact, it is accelerating. This is due to many factors, much of it tied to the fact that computation and communication systems are speeding up. All the while, they get less expensive.

What this means is we are not only in an exponential era when it comes to technology but also a deflationary one. After all, technology by its definition is deflationary. New technology makes older systems obsolete.

The result is that, when industries get disrupted, the costs go to either zero or near-zero.

Remember when information was very costly. If someone wanted it, first it had to be created. Then it was reproduced. Next it was mailed out. Of course, copies were kept in-house, requiring filing and storing.

Consider what happens today. This article cost nothing to create. At the same time, the distribution (uploading) is basically free. For people to read it, there is no cost. The number who "receive" it could be a dozen, or 50 million. There is no additional cost as the numbers increase.

People like to point out different expenditures that have not gone down. To start, they overlook much of what took place. People are now complaining about the price of gas, omitting the fact that, in the United States, it was 25% higher a decade ago.

Nevertheless, there are certain areas where we did see a straight line heading up. In the past I did videos on this which detailed the three areas that stick out most: construction, upper level education, and healthcare. The bottom line is all three of these areas still operate like they did 100 years ago. For the most post, the core has not advanced due to technology.

That is about to change over the next 10-15 years. All three of these are about to be upended in a major way. Technology is going to come in and obliterate much of what is there. This is what it does. Disruption destroys and cleans out. The longer it takes for this to happen, the more powerful the breakthrough once it begins.

As more of our daily lives are digitized, we will see costs plummet. This is extremely deflationary.

We Are Dying Off

With the exception of a few zealots who hold onto the false narrative of the last 50 years (or are closet eugenicists), the scare of global overpopulation is done. Most are aware that this is no longer a concern. In fact, some are starting to speak out about an impending population collapse over the ensuing decades.

The simple facts are the fertility rates across the developed world is well under replacement level. This was recently verified by the last census out of China. Some take exception to that report, instead believing the CCP "manufactured" 10 million kids. If that is the case, demographers are saying that China's population peaked 15 years ago.

Here is a list of countries that are either at peak population or very near it:

  • Japan
  • Russia
  • South Korea
  • Canada
  • Italy
  • Spain
  • Germany
  • Britain
  • Australia

As we can see, this is much of the developed world.

Why are demographics so important? Anyone who had kids understands the reason: they are expensive creatures. Populations that are younger have a larger section that is of child-rearing age. This means they tend to have kids. That leads to consumption.

What happens when populations get older? They do the reverse. Instead of consuming, they start to cut back their expenditures. They do things such as downsizing the house. Eventually they leave the workforce putting them on a fixed income. Naturally, they require more social services which places the government in the middle of a larger part of the economy. All of this is deflationary.

Of course, the next step is people start dying off. A contracting population does not to lead to economic expansion. In fact, before they die, the situation gets very ugly as social spending skyrockets yet the number of workers to support this through taxation are diminished. Hence, we can expect some class warfare to take place in many countries, this one based upon age.

In the United States, the Baby Boomer generation was the largest we ever saw. There was 85 million of them born. It is safe to say this group is starting to drift away. There are more than 10,000 of them retiring each day, on average. However, that is not the only thing they are doing.

They are also dying off.

boomers.png
Source

More than 28% of the Baby Boomers already passed away. This means they are now smaller, in number, than Generation X. Fortunately for the US, the Millennials are a sizeable group so they can offset this.

It is not a luxury the countries on the list above have.

All of this means economic output is likely to slow down as consumption in these countries wanes. This is a major problem for a nation like Germany that is a major exporter. It is hard to grow the economy when the countries you sell to are facing aging populations and reduced consumption.

Add technological advancement to an aging population in the developed world and you have a recipe for massive deflation over the next 15 years. It is impossible to ignore these long-term trends, especially the demographics. That is something that does not change quickly even if there is a reversal which, up to this point, no country has figured out how to do.

This is the path in front of us regardless of what espoused online.


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 11 months ago 

In various Discord servers, I've come across the deflationary theory of macroeconomics.

Most of them focused on the Feds manipulating certain elements. Some of them talked about technological advancements as well as "increasing demands" via USDC as CBDC. I haven't found too many people focusing on the reality that population is drifting off.

This is actually truly fascinating.

Actually from a macro perspective, the blocks that change little is the starting point. Demographic trend are decades long thus, even reversals takes 25 years to truly make an impact.

Japan has a 25 year track record with this. There is a real world model to look at. No longer does anyone have to theorize about what happens to property values or their stock markets. Just look at Tokyo and the Nikkei.

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https://bitcoinmagazine.com/culture/the-case-against-bitcoins-inflation-narrative

Have you read this one?

It's pretty dense but I'm trying to get through it because it seems super legit.

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No I didnt see it. Thanks for the link. Bitcoinmagazine seems to be one to avoid since it is a total maxi site. There are articles there how Bitcoin is the answer for everything.

I will check it out and see what I can pull out of it.

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With the world populace in decline and consumption in a decline, could this be the start of a massive global economic depression?

There is an offsetting factor to consider: technology. That could provide a solid boost.

However, something that was not in this article is the debt levels. The only way out of them is austerity. Historically, that was very painful. The US went through, if memory serves me correctly, 5 of them. One problem with the GFC of 15 years ago is that it did not clear out enough debt. All the stepping in only enhanced the problem.

So we will get different areas experiencing different things. I think the EU is in a lot of trouble since they fact demographic issues, have a huge debt problem, and lack the technology of the US or Japan.

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Debt is a huge problem. I find it worrisome how much credit card debt the average American carries. It is hard to imagine Nations carrying debt, especially with all of the taxes they collect.

Elon likes population growth.

With such deflationary moves what will hold value.. cash?

Certainly you would think the opposite of what everyone is touting. I wrote in the past how I think real estate is in its last bull market. The reasoning was more technology and remote work allowing for migration more than monetary policy though.

I have a feeling that Cryptocurrency will do fine. After all, bitcoin did advance during a secular deflationary cycle. It also is not doing very well in this period of high inflation. So we could see crypto, especially that with development doing well.

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The population decline is definitely an interesting topic and to an extent, I think there is a class warfare to an extent. After all the taxes from richer area isn't evenly distributed but more concentrated on the rich areas. I know it's their right to do things but when they promote everyone getting fair distribution but don't complain about their own areas.

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The class warfare over the next 20 years is likely to shift from the rich-poor dynamic to one of generation. The Millennials were already screwed over by the Boomers and, now, the Boomers are going to want to suck more out of the pie to take care of them in their old age. The Millennials are going to have a problem with that.

We already see the rebellion in China with the "lay down" movement.

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It really serious how everything is changing at every given point in time. The positive part is access to information, at least readers retain a 60% chance of surviving these occurrences.

It is hard to grow the economy when the countries you sell to are facing aging populations and reduced consumption.

Yes it is, and it is difficult to say it would stop.

We don't face this problem in Nigeria but we face a greater challenge in the development of the younger generation.

!PIZZA

Nigeria is a bright spot when it comes to the population question. You are in one areas that is projected to grow in population throughout this century. If the country can get itself in order, Nigeria could become a major player by the end of the century.

It has to do a lot of housecleaning first.

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Thanks for this.. I wrote an article two days ago relating to how we don't even want to earn in Naira, we strive to earn in dollar. Thanks for your support on that post. Most youths here are into scamming and fraud because of the extreme rate of poverty. How can one explain inflation in a country where oil is our major source of revenue!. Thank God for crypto, because this saves us, Here on hive, most Nigerians here are youths and they are all trying to secure their future! Me included. I'm glad you see that it is an inward problem. I hope someday all this happens. !PIZZA

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Just keep taking the high road and not succumbing to the temptation of shortcuts. Scammers do not seem to get very far.

Put in the effort on Hive and I believe you will be richly rewarded.

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For sure the population is something to talk about

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Awesome article, on deflation its actually concerning the japsnese call the 90s and 2000s the lost decades, because output didnt really improve and they were stuck in a cycle of deflation. This got me wondering why we are so excited about deflationary coins?

On the population point the one issue likely to impact the world massively is chinas one child policy, although it has since removed the damage is done and there will increasingly be a burden on the younger çhinese to look after the older generation and that can only mean production suffers