Fed and ECB: Print Money Now
http://www.forbes.com/sites/kevinomarah/2016/01/25/fed-and-ecb-print-money-now/2/#7c714ada367a
Opinions expressed by Forbes Contributors are their own.
A week before the Fed raised interest rates last month I posted an article with four reasons not to do so. With US stocks down more than 10% since Christmas despite months of expectations setting, it looks like I was right.
The root issue is simple: there is no basis for inflation in the global economy, but plenty of need for stimulus.
Why no inflation?
Long term productivity growth rates in the manufacturing backbone of the world economy are higher than they have ever been in world history. This reason alone could be enough to dampen any but the most outrageously loose monetary policy’s ability to spark inflation. Official US government data sends confusing signals about productivity growth because it is measured monthly and is hugely volatile, but the underlying revolution in automation is always and everywhere replacing human labour with dramatically more efficient, effective and ultimately deflationary capital.
One US medical device plant I toured recently had dozens of workstations which had increased output volumes and quality while cutting headcount by 80-90%. This is typical and universal. Research we have done at SCM World shows that this automation wave is not only massive in terms of worker displacement, but nearly universal geographically with China doing more than any other country, including the US, northern Europe and Japan.
The inflation impact is direct. Goods producers are driving down costs and ramping up volumes faster than people can consume the output. Raising prices simply won’t fly when competitors are ready to discount to hang on to the sale.
Add in three other elements that are intertwined and its clear we won’t see traditional inflationary pressures with any time soon:
The root issue is simple: there is no basis for inflation in the global economy, but plenty of need for stimulus.
Why no inflation?
Long term productivity growth rates in the manufacturing backbone of the world economy are higher than they have ever been in world history. This reason alone could be enough to dampen any but the most outrageously loose monetary policy’s ability to spark inflation. Official US government data sends confusing signals about productivity growth because it is measured monthly and is hugely volatile, but the underlying revolution in automation is always and everywhere replacing human labour with dramatically more efficient, effective and ultimately deflationary capital.
One US medical device plant I toured recently had dozens of workstations which had increased output volumes and quality while cutting headcount by 80-90%. This is typical and universal. Research we have done at SCM World shows that this automation wave is not only massive in terms of worker displacement, but nearly universal geographically with China doing more than any other country, including the US, northern Europe and Japan.
The inflation impact is direct. Goods producers are driving down costs and ramping up volumes faster than people can consume the output. Raising prices simply won’t fly when competitors are ready to discount to hang on to the sale.
Add in three other elements that are intertwined and its clear we won’t see traditional inflationary pressures with any time soon:
- Digitization – Marginal costs are essentially zero for digital products (apps, entertainment, software, etc.). This means that microeconomic theory crashes and marginal cost never intersects with marginal revenue for a market clearing price. Both curves in fact are asymptotic along the x axis. Prices tend toward free. How does inflation take root here? There is no way for “too much money chasing too few goods” to happen. Economists mostly still ignore this problem since historically it’s a small part of the whole, but it getting bigger fast and will eventually outshine physical products as a component of GDP.
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- Commodities are abundant – True physical product, most notably oil, is anything but scarce. We did an analysis of the supply chain implications of resource economics for energy, water, minerals and land last year and found essentially no underlying inflationary pressure anywhere in the world. Even water, which is the new hot button issue, turns out to be so amenable to intelligent use tactics that true crises are readily avoidable, at least at a macro level. In addition, climate considerations dampen demand for mega-commodities like oil while businesses constantly work to lean out the resource requirements of their global supply chains. We are quickly learning to do more with less, even as it gets cheaper and easier to extract more. Abundance most definitely undercuts inflationary pressure.
- Work is being Uberized – Jobs are being created slowly everywhere, and yet people are working. Many like Uber drivers, Amazon Mechanical Turk crowdworkers and AirBnB hosts are beavering away often making good money without adding traditional wage pressure to the economy. These workers are small business people selling unitary work into a market that responds incredibly quickly to price changes. Inflation in the late stages of the industrial economy was all about passing along costs to consumers. Nowadays most can simply click away to a better deal.
Interest rates are at or close to zero worldwide and idle cash is everywhere – corporate balance sheets, private equity and venture funds and central banks. New technologies do need investment, but as the troubles of many high tech unicorns show, this is not the best place for more money to go to work. Traditional monetary expansion tools look pretty limp just now.
I know it sounds crazy and the Germans in particular can’t accept this notion, but simple cash giveaways to consumers would work. The artificial spur to demand created by such a tactic would absolutely show up in sales of consumer products. This would ripple back up into business investment, much of which is acutely focused on digitization and therefore inherently anti-inflationary. The end game might be just what Europe, the US and especially Japan needs which is activity. Developing economies would get a boost in exports and a window of opportunity to continue shifting toward consumer led growth. Stock markets would turn around and recession might just be avoided.
Cash is king. Let’s see what it could do for us.
Post written by
Kevin O'Marah
I am the Chief Content Officer at SCM World, and I direct SCM World’s practitioner driven supply chain content and research.
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