The Unstoppable Force vs. Economic Liftoff
Why hasn't technology made us all rich yet?
As a species we're incredibly gifted at so much.
Complex problem solving, check.
Adapting to new environments, check.
Art, comedy, creativity, check.
But, one thing humans are terrible at?
Understanding exponential growth. I know, left turn, but I have a point here.
How thick would a standard sheet of office paper (which is usually 0.1mm thick) get if you could fold it in half 42 times?
Don't read anymore and think about it for a second. One tenth of a millimeter thick sheet of paper folded 42 times.
Ok, have your answer? What'd you guess… a couple inches, couple feet, hundreds of feet?
Well, the actual answer… All the way to the moon!
That's a simple way to imagine what exponential growth looks like. The reason I'm sharing this is because we're experiencing and watching exponential growth in technology occur all around us right now. It's a fascinating time in history to be alive.
But, as exponential the curve of technology shoots to the moon, what's happening in the rest of the economy?
Well, it doesn't look so great.
We're seeing civil unrest of a magnitude not seen in the last 50 years in America.
Financial inequality is at levels not seen since the 1920s.
Real wage growth has stagnated since the 1970s (meaning the wages paid to workers may have gone up in dollar terms but those dollars can’t buy what they used to).
Housing prices have skyrocketed and blocked millions of younger Americans from being able to own a home.
So, what's the deal Jared? Why does exponential growth in technology not lead to exponential growth in everyone's wealth?
We're watching two forces of economic nature battle for supremacy.
Our current monetary system is built around inflation. Our economy needs inflation to work. What is inflation? Simply put, inflation is growth in price. Wages inflate, you get paid more. Housing prices inflate, your house goes up in price.
And, pre-digital technology most all economic activity created inflation.
Want to produce more cars? Well, you'll need more people, more energy, more this and more that. So demand goes up for scarce resources = inflation.
All of the economy's pre-digital technology was competing over scarce resources. And so our economic and monetary policies were built for that world.
However, that inflationary world is crumbling around us. Technology creates abundance. Abundance creates deflation.
Why does technology create deflation?
Compare Netflix adding 10 million new subscribers to their platform to a print newspaper adding 10 million new subscribers to their physical subscription.
For Netflix adding 10 million subscribers is almost no different than adding 10,000 subscribers. Maybe they need some more server space to handle the streaming, but because of advances in cloud computing that's cheap.
The newspaper, to add 10 million subscribers, needs more paper, more ink, more energy, more employees, and so forth. It needs more scarce resources.
One of my investing mentors and someone I follow close refers to certain kinds of digital technologies as a "Supermassive Blackhole". These digital networks (Facebook, Google, Amazon, Microsoft, Square, Paypal, and more) have a reflexive feedback loop of lowering costs as their networks grow.
Where most old businesses have the opposite. As their businesses grow and scale their costs still rise (yes, they get some economies of scale but it's linear) where digital businesses have their costs exponentially lowered until the point where one-day they might even be functionally free.
We are witnessing the battle of outdated economics (inflation) vs the unstoppable force of technological deflation.
And, it's creating a world of hurt for so many people. See, governments across the world are fully bought into the inflationary economy. Deflation is the enemy but they only have four tools to fight it.
Austerity - spending less (LOL!)
Debt defaults/restructuring
Central bank fiscal stimulus (money printer go BRRRRRR!)
Transfer of money from wealthy citizens to citizens that have less (Tax the rich!)
And out of the four choices, they really only have two: print money and raise taxes. So, as technological deflation pulls down the "growth rate" of our economy over the next 10 years (less jobs as automation takes over, lower wages, and winners taking more) our governments are forced to react to stimulate growth.
So, what do they do? First they're going to (and already have) taken on an extraordinary amount of debt to finance growth.
In the year 2000, the world's total debt was $62 trillion and the world economy was valued at $33.5 trillion, roughly a two-to-one debt to value ratio.
But, as of 2018, world debt has ballooned to $247 trillion while the economy has grown to $80 trillion. That ratio now jumped to just over a three-to-one relationship.
In short, governments and corporations (mostly governments) have financed $46 trillion of global growth with a mountain of $185 trillion in debt.
And, we're only getting this party started. The figures above don't include the debt orgy governments partook in to stimulate the economy after Covid lockdowns.
The money printer is going to print, our government is going to do what they know how to do. They’re going to increase the debt load to goose growth and raise taxes to attempt to curb income inequality.
And with that increased debt load they’ll either do direct fiscal stimulus to the population (checks) or they will do some kind of guaranteed financing like the PPP loans.
Debt is good when there’s inflation. The dollars you borrow today are worth less in the future. Your debt burden decreases over time as you pay back the nominal amount that’s worth less in the future.
But debt is deadly if there’s deflation. The dollars you borrowed today are worth less in the future so the nominal debt load is harder to pay back with your future dollars.
Inflation = asset holders win
Deflation = currency holders win
But what happens when the government is creating inflation in their currency while technology is creating deflation everywhere else?
It's hard to know, but I am confident we're going to find out. And, I'm also confident that this show can go on a lot longer than we all imagine.
There is one thing I am sure of. All the money printing and fiscal stimulus all leads down the same road... Bitcoin and digital assets.
That supermassive blackhole sucking up all of the monetary inflation from central banks?
The winner is going to be Bitcoin.
This newsletter is setting up the stage for why Bitcoin and other digital assets are the big winners from our deflationary future. They’re one of the few ways for the younger generation to get involved in assets that are not wildly expensive. And, they’re going to and already have built generational wealth for retail investors (institutions are only just getting into Bitcoin in the last six months).
Look out for my newsletter coming out next Friday.
Thanks for reading,
-Jared
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