Last week my friend Tom Evslin left this comment here at AVC:

Trial investment thesis: deflation is here to stay, get used to it. Of course we’re used to that in high tech and communication because of Moore’s Law. we don’t model price increases in our business plans. But the rest of the modern economy and the goals of various central banks assume inflation is normal and desirable.

I’ll leave aside whether it’s desirable because I’m positing that deflation is going to happen (except in terms of certain debased currencies).

Energy prices are going relentlessly down. They drive costs, of course, through the economy. Moore’s law has had an effect on these prices both in the more efficient use of energy and more effective ways to extract or even generate it it and manage it in grids. But historically, if you measure by manhours required to generate a BTU, energy costs HAVE gone way down since the first fire was intentionally lit in dry sticks.

Moore’s law will eventually even drive the price of health care down (see Andy Kessler).

Food costs are arguable but energy has much effect here as does genetic engineering and computerized farming.

Currency devaluation as an instrument of national financing becomes more difficult with globalization and perhaps nation-independent currencies.

Obvious losers from deflation are the current banking system (built for inflation), debtors with non-productive assets, and governments both because they are debtors and because they lose the taxes on inflationary portion of interest is there is not interest.

The winners are? That’s the investment question I’m thinking about.

I did not reply to Tom’s comment but I’ve been thinking about it ever since. I had a long conversation last night at dinner with another friend about it. What if we have seen peak energy prices on our lifetime? What if we won’t see long term rates in the US of 10% again in our lifetime? What if deflation is what we are managing instead of inflation?

We’ve been in a low rate and deflationary cycle since the financial crisis of 2008, but the assumption has always been that we will someday come out of that and we will return to economic conditions that existed prior to that event. What if that is not the case and we are in the new normal and it is here to stay?

I am writing this post because I’m still trying to wrap my head around what this means. If the global economy is going to have a deflationary bias for the foreseeable future, what should we all be doing and what should we not be doing? That’s the question and I’m looking for a discussion and some answers. Which I hope we will all find in the comments.


Comments (Archived):

  1. Guest

    1. fredwilson

      i believe those subsidies are all about fighting deflation. i think when they are stopped we will see more, not less deflation

      1. Guest


        1. Avi Deitcher

          Other way around, I think. QE stops, rates increase, fewer dollars in the market, the value of each dollar increases. So if a can of tomatoes used to cost $0.50, that $0.50 is worth more and can buy more than 1 can of tomatoes.One of the things our macro prof at Duke hammered into our heads is that inflation/deflation is nothing more or less than the ratio supply of dollars to demand for dollars. Same economy, more dollars (QE) = more inflation; same economy, fewer dollars = less inflation.Specific commodities are subject to relative values of individual items and specific supply-demand (e.g. Moore’s Law), but overall inflation is controlled by dollar supply.

          1. Guest

          2. Avi Deitcher

            Charlie you are a lot smarter than most of us in many ways. The smart ones put it out there with confidence and learn; the not-so-smart never do.And I am waiting for someone to correct some of my economics here, because a- I must have gotten something wrong and b- then I get to learn!

        2. fredwilson

          Economic theory says higher rates drive economic activity down and are used to control prices and put downward pressure on them

          1. Tom Evslin

            Of course it’s higher REAL rates which drive down economic activity. With deflation its hard for a central bank to get the real rate down because that would require negative nominal rates. Government as a whole can make the cost of capital negative by layering in grants as supplements to borrowed capital. I think that’s happening even though the congresspeople aren’t studying the economics, just the politics and campaign fund flow.The result now, I think, is that the slow growth of dinosaur enterprises is being subsidized while real interest rates for capital-intense innovative businesses are high to infinite (not bankable).But all of this favors the equity model for growth. Good thing for VCs in the tech sector. In the industrial sector (reflecting my recent experience) raising capital is very tough. We were fortunate to get a good chunk of equity; the offers we had from PE firms might have killed us and certainly wouldn’t have let us thrive. Still not getting bank loans even though EBITDA-positive since almost the beginning.

  2. Avi Deitcher

    I am skeptical that central banks will allow deflation over any long term. Since they control interest rates – and can flood fiat currency into the economy, thus devaluing the currency, causing inflation – it is relatively easy for them to prevent deflation. Whether or not that will help an economy is a different matter (ZIP is heavily-debated, my view is that it causes more damage than it helps).When was the last major US deflationary period? I think the only one since the Federal Reserve Act of 1913 was during the Great Depression, they weren’t too happy about it, much has been written about how it had a lot more to do with fiscal policy than monetary policy, and the Fed was fairly weak back then.Interestingly, since you mention energy prices, they actually have been fairly stable for the last 7 years… once you account for USD fluctuations. I graphed USD vs oil, it was fascinating. Read it here:

    1. William Mougayar

      Of course the price of oil is related to the strength of the USD, but why? It seems like an artificial game, where prices are lowered, by the strength of the USD compensates for that. So what have we done?

      1. Avi Deitcher

        I think it was an unintentional game. What that chart really shows is that the relative value of oil to the global economy was fairly stable. But with much oil shipped in from overseas, an the price of oil denominated in USD, a much weaker USD means more expensive oil as denominated in USD (but not in other currencies).

      2. James Ferguson @kWIQly

        It gets really interesting when the USD loses its reserve currency status to China !Was this really the key powerhouse for US success after Bretton Woods – or is there something more ???

        1. Avi Deitcher

          When do you think that will happen? Low interest rates = low investment return, hence the weaker dollar, which reduces reserve currency value. Add to it really bad fiscal policies – lots of currency traders and central banks do not believe the US will ever be able to pay down its debt…

          1. James Ferguson @kWIQly

            I believe it is already happening (quite slowly) China is playing a long game and winning.

          2. JLM

            .The definition of a Chinese win is quite a small thing — they are still struggling to connect their country by road and to feed their people.They are ambitious and they are making huge inroads in S America and Africa. We better get on our toes on those two continents where America is almost non-existent.JLMwww.themusingsofthebigredca…

        2. pointsnfigures

          No chance. China is in deep shit.

        3. Girish Mehta

          …hence Giscard d’Estiang’s famous coining of the phrase “Exorbitant Privilege” (attributed to DeGaulle sometimes). The ultimate Seigniorage.May not lose its reserve status very soon, although the present global monetary system is certainly heading toward a day of reckoning. Which wouldn’t be the first time it has happened. Thanks.

        4. JLM

          .The low hanging fruit is that oil trades in dollars. No alternative currency has a strong enough reputation and enough float to support — literally float — the oil business.If you want a good example of a successful attack on the US financial position in the world check out the Chinese Development Bank.Our European allies — over American objections to the governance of the CDB — are joining like crazy as they see it as the only way to get a ticket to the Chinese infrastructure and tech play.It is a very solid example of the loss of American financial prestige in the world.The Chinese own 50% of the bank and are in it for the profit.JLMwww.themusingsofthebigredca…

          1. James Ferguson @kWIQly

            Hi JLM – Have to agree with you on this 100%.I am sure that this “loss of American financial prestige” is in your world view a dreadful thing.I am not sure – I am sure it is significant.We in Europe have been pretty xenophobic towards the Far East (a lot of people privately admit to fearing what used to be called “the yellow peril”) – however whether you like it or not US foreign policy is also not “du jour” and the message “better the devil you know” is wearing thin in our back yard. (The middle east).However extremism thrives when people want change – people are already looking inwards – Our looney right wing (facist) politicians are heralding the start of goose-stepping hatred. And sadly they are not alone.

          2. JLM

            .I do not see it with alarm other than it is a concrete example of our allies not trusting/respecting us — which we have earned with full tuition BTW — and our enemies not fearing us.The big beneficiaries of the chaos in the Middle East have been the Chinese. They have seized a few oil rich islands. They have generally cowed their neighbors and they have refused to reign in the N Koreans.I would not be surprised if they make a move on Taiwan.They are building silent submarines. They are trying to build a blue water navy.We, are slow to pivot toward the far Pacific. We should be dating Australia and the Phillipines and Japan. The importance of S Korea is that is the largest aircraft carrier the US owns.JLMwww.themusingsofthebigredca…

      3. Ryan Bogardus

        As you know Canada’s economy is highly dependent on oil as an export. The US is highly dependent on oil as an import. Fracking technology has contributed the decrease in extraction costs, thus the US can extract more native oil and is less dependent on importing from Canada. USD goes up, CDN goes down. It’s the same diversification concept as any investment portfolio. The more diverse your country’s export portfolio, the less elastic the currency will be to demand of a single export.Enter global cryptocurrencies that aren’t connected to the economy of a single nation. My vision of the future is cryptocurrency will be the equilibrium for the global economy that will keep central banks in check. People in those nations have a backup currency if their country doesn’t diversify exports or if their central bank implements bad policy. A truly global, government agnostic currency will be a true measuring stick for the national economies of the world. If they aren’t responsible they will be slapped by that measuring stick.

        1. William Mougayar

          Believe me, I know about cryptocurrencies. But it will be a long road before they can tip a balance. (but I’m counting on that day)

          1. Ryan Bogardus

            I’m fortunate enough to have read all of your wonderful work on cryptocurrencies. Just trying to throw some optimism into the conversation… even if it’s the light at the end of a long tunnel 🙂

          2. William Mougayar

            thanks 🙂

        2. JamesHRH

          Most industry players feel the USA is <10 years away from being an energy exporter.

          1. JLM

            .If the US had a coherent energy policy, it would be energy independent in three years. We will be energy independent in N America in the same time period if we just get out of our own way.The big significance of being N Am energy independent is global policy. The Middle East will not see us hanging around as soon as oil production is NOT a consideration.JLMwww.themusingsofthebigredca…

        3. Beautyon

          Wow, someone who actually understands what money is and what is happening!In the future, money will be like the speed of light; a natural constant that no one can interfere with. What you believe should be the money supply, or who should own it, or anything else about it will be completely out of your control, just like the speed of light is. This will have many beneficial effects.Everyone will be able to store money, knowing that its value will not go down simply because the State wants to invade a country, or pay off debts. Banks will not be able to create money out of nothing to loan at interest. The Bitcoin world will impose discipline on all market actors, and everyone will reject all other monies because they do not have that discipline.Peculiar ideas like Keynesianism, will die disproven, as prosperity blossoms without a government fiat currency that is inflating wildly. Never again will anyone anywhere trust government fiat currency. The chapter of history where that money was circulating will close, and be subjected to rigorous analysis, further nailing the coffin shut.With a fixed standard money any doubt about that side of economic calculation will be removed. This will make business easier, on top of the fact that it can be transferred anywhere instantly.The implications and transformative effects of this true money on every aspect of life will reach every corner of human activity. The light it shines will make everything more rational. Everything will be subjected to the same calculation, and the first to feel this will be the State.They will not be able to print money to finance policies. The only way they will be able to continue is by increasing taxes, and everyone is already at breaking point as far as that is concerned. Couple this with with super transparency, and you have a toxic mix that will cause the State to retreat; they cannot tolerate scrutiny or fiscal discipline.Every assumption about how society works is going to be turned upside down. From the money, the way services are provided, the idea of “public goods” and every other thing that has even the slightest whiff of socialism will be shrunk down to nothing. This is the future that many cannot see, and those that can reflexively turn their heads away from. It is coming whether you like it or not, and there is nothing you can do about it if you don’t.The Statists had their chance to control the world, and they blew it. They blew the money, the trust, the chance to carry on indefinitely. Bitcoin is a direct result of their failure, theft, insanity and immorality, and it will clean up the mess and make it impossible for them to re-emerge as any sort of significant force.

      4. JimHirshfield

        All oil sales globally are conducted in US dollars. Even, for instance, a sale of CDN oil to a firm in Mexico is conducted in USD.

        1. Avi Deitcher

          Yep. So if oil is “expensive” in USD, but the CDN is strong vis-a-vis the USD, and the Mexican peso is equally strong, they just don’t care. Only people spending in USD care…

        2. William Mougayar

          I know, but that rigs a whole lot of interdependencies that affect local currencies and economies. It’s disturbing. Fuck oil.

          1. JimHirshfield

            “Fuck oil” – That’s what Elon Musk says…Elon Musk: Burning Fossil Fuels Is the ‘Dumbest Experiment in History, By Far’…

          2. Girish Mehta

            …I was listening to that Degrasse Tyson-Musk interview on my Stitcher app while working out earlier today, and this comment about oil struck in my mind for the manner in which he phrased it. Now I see it here…funny how that happens :-)Some other good stuff in that interview (his concern about Super-AI)….it was a good listen. Below is the audio link of just the Tyson-Musk portion, and the complete show. Thanks.

          3. JimHirshfield

            Will have to check it out, thanks.

          4. LE

            Love the narcissistic renaissance man thing he has going on. I guess he doesn’t have his hands full with enough things to occupy his time.You know you are in an intellectual bubble when people think all of your ideas are just going to happen. And radio hosts fawn on you like you are jesus fucking Steve Jobs.Fuel usage [1] in small airplanes (even if obviously improved) would have to take a huge leap. Not to mention that short takeoffs and landing would totally screw up any efficiency (defy gravity). And you aren’t going to put heavy batteries in something that flies and has utility. (I’d watch the video but why bother..)But sure, it could happen. One thing is certain though. A guy “that smart” has a hard time thinking like an average person. This is part of being a tech guy. Like the people on HN who said “who would need dropbox you can just roll your own with rsync”.[1]

          5. JimHirshfield

            It would appear that you’re ragging on him for considering flying cars? However, the title of that YouTube video is that he’s “bearish on flying cars”…IOW, he’s pessimistic about flying cars. Either I’m reading your comment wrong, or you read something wrong…Sorry. :-/

          6. LE

            You are right. That was a total Rorschach on my part.After spending so much time learning Chinese my brain saw “bullish” where the word “bearish” was.However most of my thoughts on Musk and or techies essentially stands. Not that I am one to stereotype or anything. I guess my issue is when someone has such a halo [1]that people no longer question most of the things that they say (or the people that do get drowned out by the lemmings).[1] Same reason anything Seinfeld says seems funny because it came out of his mouth.

          7. William Mougayar

            I rest my case 🙂

          8. William Mougayar

            So if you just link to a URL image, Disqus displays it now?

          9. JimHirshfield

            Yes. For about a year now.

        3. Girish Mehta

          Thats starting to change though Jim…Moving away from the Petrodollar. The Dollar is still dominant, but not all sales…

    2. pointsnfigures

      Great Depression was exacerbated by the Gold Standard, tariffs and the rise in interest rates. FDR’s policies of price controls didn’t help either. (and before anyone says it, WW2 didn’t “bring us out of the Great Depression”-that’s the broken window theory of economics!)

      1. Avi Deitcher

        Exactly. Rise in interest rates = reduced money supply = deflation, which is exactly what happened. And, yes, terrible fiscal policies. That great story of SecTreas Morgenthau meeting heads of top industrial firms in NYC (they used to be based there, hard to believe now) begging them to hire while he makes it impossible, and their literally laughing in his face.And I love it when someone quotes Fredric Bastiat well!

      2. David Kimball

        WWII and the Great Depression: absolutely. Living standards remained about the same during the war as they had been in the late Great Depression, and there was widespread fear that the country would revert to the Depression once the war was over.But by 1950, the Great Depression was dead and buried. Why? Probably — although this literally just occurred to me — because everyone was protectionist before the war (the Nazis literally conducted international trade on the barter system, and even the sane industrial economies were trying to discourage imports and encourage exports), but everyone outside the Communist world was a free-trade zone afterwards.Autarky has its merits, at least for arms production in a world which is obviously going to go to war in a couple of years, but it leaves you poorer than free trade…

    3. Kevin Hill

      Exactly, inflation/deflation has just as much or more to do with M1 as it does the quality of goods available.

  3. James Ferguson @kWIQly

    Distinguish peak energy cost (for recovery) and peak energy price (for use).As soon as you factor in Climate Change and the impact of releasing Carbon (surely AVC will not deny it) vast recoverable resources become untenable. This implies taxes, and more expensive alternatives. There may come a technological fix to store, or abate or recover carbon from the air (but it will not be cheap) – Meanwhile renewable energy supplies are a) more expensive, b) less controllable, c) inherently volatile.The market price for delivered energy has not peaked, and anyone who forecasts a future (say 25 year horizon) based on that assumption is likely wrong. Whether they are foolish, disingenuous or know something I don’t is to be proven.I would love to hear a reasoned argument that says we can dig the black stuff up and burn it without factoring in non-recovery costs ad inifitum.PS if you can achieve this you can become very very successful

  4. William Mougayar

    You make compelling arguments about deflation as a trend, but I’m having a tough time stomaching it when in Canada, the Cdn dollar has lost 30% of is value in the past 5 months, exactly as energy prices started to come down.This is related, to make Cdn crude oil affordable for export (to the US mostly), but it’s crazy hard on prices of everything else, as anything coming from the outside is going up, and the Cdn dollar purchasing power is going down. Now foreigners are coming and buying real estate at a 30% discount and that will push prices up again (good if you’re selling of course).This whole currency drop seems unreal to me, and it’s predicted to continue in 2015. It has made the CDn dollar one of the worst performing currency, after Venezuela and Sudan.

    1. James Ferguson @kWIQly

      Interesting that energy prices fall with economic demand. This means that lowering energy prices are more significant to many operations (as a nearly fixed overhead of operation eg in a hotel) in terms of bottom line impact. Energy efficiency is becoming a “no brainer” whether prices are going up or down.

      1. William Mougayar

        The direct relationship to currency is frightening & we’re paying the price of the high costs of Canadian oil production, which we knew were high and only sustainable at high oil prices. I wonder what the role of government was in setting this up.

        1. James Ferguson @kWIQly

          I believe OPEC (mainly the Saudis) now buy the idea that most oil / coal will never be extracted. (At least until we find a way of using it without screwing the whole planet). This means that there is a race to the bottom on price ( only the cheapest recoverable / cleanest will ever be used). OPEC thus keep sweet oil production high to kill off renewables and shale as much as possible. (Building large capital plant is tough so long as you can only predict downward prices). So they are choking off the supply infrastructure before it is born.TL:DR; From an entrepreneurial perspective the cheap commodity becomes a competitive moat to exclude new players. only once the moat is drained do other players get a look in.The role of government – myopic !

      2. Avi Deitcher

        Almost a no-brainer. Most people still prefer not to buy energy star fridges or CFL lightbulbs, even though they save electricity costs… because they cost so much upfront. I will pay $5 upfront to save $2 per year on the four-year life of a product. Not everyone has that $5 (and what if it is $5MM vs $2MM/year?), and if it is $10 upfront to save $2/yr on a 4-yr lifespan? More efficient, but at what price?

        1. James Ferguson @kWIQly

          Fair point – but I am more interested in the very big picture4 Trillion USD of Global domestic product is used heating and cooling air for comfort.Of this around 1.6 Trillion is avoidable operational waste.Most of this is achievable through being smarter (switching stuff off optimally)Figures derivable from IEA, IPCC, WCSBD (2011)

          1. Avi Deitcher

            What is “avoidable operational waste”? Is that people being in a room for 1 hr and leaving the lights on for 2 hrs? Is it loss in transmission lines? Inefficient fridges?

          2. James Ferguson @kWIQly

            We define waste as avoidable operational loss without capital investment.Switching lights off when unoccupied ROI close to infinity (no capital, negligible revenue cost, instant inpact) – this is operational waste.Inefficient fridges / Transmission lines – requires capital investment – it is infrastructure loss (current operations require it continues until investment takes place)So yes whole market is around $1.4 Tn (value at point of consumption not production)

          3. Avi Deitcher

            Understood. Thanks for clarifying.So if 50% of the time someone leaves their living room lights there is no one in the room, then if their $100/yr costs for living room lights, $50 is operational waste? I.e. point of consumption cost without any return value on that additional ($50) investment?

          4. James Ferguson @kWIQly

            Exactly – Try finding another asset class that gives you that return – And even if you can it is still worth getting up and switching the light off if you don’t need it, because of the near zero opportunity cost !

          5. Avi Deitcher

            I don’t disagree in principle. Practically speaking, though, it doesn’t have a zero opportunity cost. With the exception of cases where people do not pay the bills (fixed utilities for renters, guests at hotels, employees at offices), they already have a price signal. They know they are paying that extra $50 (or something like it). They are actively choosing to incur that cost.In other words, they are spending $50/year to *not* have to get up and turn it off. Is that really operational loss?Now, if you could make it so they could “earn” that $50 but still not have to get up, but not invest capital in some expensive system….

          6. James Ferguson @kWIQly

            Read a bit about Consumer engagement and you soon find the key problem – Energy is ridiculously cheap.200 years ago the 1% could afford a coach and four horses. (stabling , hay, coachwork etc etc)A normal family today has 100 Horse Power under the hood of each of their 2 cars and driving it 50 miles costs less than a bail of hay (the horses would have needed many bales of hay).The hay in use today is the solar energy that grew plants millions of years ago. We use it faster than we store it and so Carbon is being unearthed – we have not factored in the land cost of production of oil – only the cost of recovery and distribution.

          7. Avi Deitcher

            Doesn’t that just agree? $50/year when GDP per capita is $53k (i.e. 0.1%) is a small price to pay not to have to go back downstairs and turn off the light over and over again.

        2. LE

          Agree. The other phenomena with that (along the lines of factors that people wouldn’t typically think of when making a prediction) is that people tend to run their lights longer when they are energy efficient. So a part (don’t know how much) of the energy efficiency is actually lost to waste.

          1. Avi Deitcher

            Ties into the other discussion on operational waste. The more efficient a product is, the less it costs more to leave it running unnecessarily, the more likely I am to do so. Nice.

    2. PeterisP

      Currency fluctuations have a big local impact, but they don’t change the global picture. A fall of one currency looks exactly the same as a rise of all the other currencies; but no matter what is happening with your local currency, the total economic situation and appropriate reaction to it should chenge if you expect a long-term global deflation versus a long-term global inflation.

      1. William Mougayar

        We’re learning and adjusting.

  5. gdibner

    Massive caveat: I struggle with this question as well – and given my limited macro-economic training, I’m pretty sure I’m not equipped to answer it. But as VCs, I think we need to think about it – so here goes:I tend to think that this broad deflation goes hand-in-hand with the erosion of traditional notions of labor/work. If goods are cheaper, people theoretically need to work less in order to afford them. But with technology, there is (arguably) less “work” to go around, so wages decline. I’m not a macro-economist, but intuitively, it would seem to me that deflation of goods and services is somehow related to deflation in the value of labor.I tend to see Walmart as an example of this. Walmart arrives in a town. Suddenly goods get cheaper, so everyone gets richer. But wages also get pressured and unemployment goes up as indie stores can’t compete. So everyone gets “poorer” on paper, but they can still consumer the same quantity of stuff. Some will argue everyone is better off due to lower prices. Others (including I think me) will argue that freedom, choice, job satisfaction and overall quality of life go down – because those things can’t be measured in terms of “dollars” or “quantity of stuff.”But either way, I’m pretty sure that is what’s happening with Walmart, Amazon, and maybe Uber to some extent as well. Machine learning is only going to extend this trend… I guess we have to hope that the price of “stuff” goes down faster than the price of “labor?”If this is the broad secular trend, as investors we need to find those companies that (1) are in line with the trend and are, in fact, driving it (such as Uber) and also those that (2) represent some sort of sustainable reaction to that trend. I struggle to think of companies in the second category. Perhaps Codecademy or Taskrabbit are examples of the second category.

    1. James Ferguson @kWIQly

      So long as Walmart cannot create land, soil , sunshine and water there is hope for those who are satisfied with the basics.Those that want the trappings of a sophisticated economy and who are prepared to see capitalism as a dominant mechanism to allocate resource face one more problem.They must participate by bringing scarce IP, labour or capital. If labour and capital become less scarce concentrated IP becomes the remaining bastion for hope.Since we cannot all write apps and be happy – some must revert to farming or producing items of subjective appreciation (art music entertainment) !Are we creating a whip for our own backs ?

  6. Mark Cancellieri

    You might be interested in this book by George Selgin (an economist specializing in monetary economics and banking):Less than Zero: The Case for a Falling Price Level in a Growing Economy…

  7. Ronan Perceval

    I think there is another powerful trend which is driving deflation. And one that won’t go away. As populations in the west age, people need to consume less. Older people tend to own most of what they need. This leads to deflation and is particularly prevalent in Europe, but will also be a problem in China over the next few decades because of the one child policy. There is a guy called Paul Hodges that has written a lot about this –

    1. Avi Deitcher

      If this happens, central banks easily counter it by printing more dollars. Inflation is not due to more or less consumption (demand); it is due to the relationship between that demand and the amount of currency in circulation, which the central bank controls.

      1. Matt Kruza

        Printing is meaningless. What matters is getting money flowing to lead to inflation (not saying inflation should even be the goal.. but just saying for your theory to work). Govt. can directly spend, they can directly give money to people. these two options actually are difficult to make work in large scale because they are massively transparent and while people like free stuff, they are obvious, so people are hesitant to endorse crazy spending plans. The “printing money” issue really just means making money available cheaper for banks to lend. That worked for the last 30 years because when you took interest rates from 8% – 6% etc. everyone wanted to borrow more because it was profitable. Now that interest rates are at the zero bound, monetary policy is much less powerful. Hence QE, negative interest rates in the Euro one etc.. and bernake’s “helicopter drop” of money as one of his seminal works on this topic before becoming fed chairman. TLDR: “printing money” is not easy or effective in most major economies today

  8. Tom Labus

    Ben Bernanke’s first post at Brookings posted yesterday is “Why are interest rates so low”.…Predicting the cycle is a dangerous game since I’ve found that once I’m certain where we are, the cycle has already changed. Having lived through the high inflation of the early 80’s I can say that both are equally dangerous.There are factors with defaltion other than currency wars. Tarrifs, embargoes and taxes are also used to make things worse. There is also war which usually comes along once someone can’t get access to enough resources, deflated or not

  9. William Mougayar

    I hope one day that this world will not depend on oil anymore. Oil production, consumption, trade, prices, and geopolitical interdependence are the biggest global drug today, and we are hostage to it. Can we get off that? Please, faster Elon Musk and all the other misfits out there working on the energy revolution.

    1. Avi Deitcher

      Is the better solution not to depend on oil, or to diversify the sources of oil? The big exposures (environmental and financial) are due to trade. If America produced all of its energy needs, and Canada its, and Australia its, etc., it would be far less of an issue. Producing it in human-rights-deprived and terror-producing and supporting states, like Saudi Arabia, Iran, Venezuela, etc. and shipping it across the world in big boats is the larger issue.Of course, I would love to see an energy from air machine, too. After all, who is John Galt?

      1. William Mougayar

        Well, airplanes might be the exception, but maybe not … But if oil production costs are high, consuming it locally still doesn’t help, does it? You still have to drill, distill and transport.

        1. Avi Deitcher

          I thought you were wishing oil were passé because of those issues. You meant from a cost point of view? Or a stability point of view? So far the alternatives aren’t stable or cost-effective enough, unfortunately.

      2. James Ferguson @kWIQly

        @deitcher:disqus -Consumption is the issue – long term it doesnt matter where it happens

        1. Avi Deitcher

          But we always will consume?

          1. James Ferguson @kWIQly

            Yes – but not necessarily based on Oil.

    2. TrustEnabler

      Let’s step back for a moment and consider the source of economic growth. What is the source of value creation? You might say productivity, but what is the source of productivity? I have often wondered, even after taking economics courses at university, where does global economic value creation come from? Although it is easy to see how one country’s economy grows relative to another, and how there is an iterative dynamic between economies that appears to propel all participating economies forward (essentially through arbitrage of production costs), it had not been clear to me where or how new value is actually created.Let’s use the laws of physics as an analogy. Where does matter (proxy for economic value) come from? I think most would agree that matter is created from energy. In fact, energy is required to create any order from disorder. The absence of energy leads to entropy. So where does energy come from? Is it created or imported exogenously? I think physicists would say that the source of energy is always exogenous, coming from stars, some of which is stored in matter, such as organic material that can be converted back to energy through combustion.If this analogy applies equally to the economy (and I believe it does), it would suggest that economic value is nothing more than a transformation of energy. The source of that energy is ultimately the Sun. Our economy depends on transforming energy primarily stored in coal and oil into energy that is used for economic value creation. If we deplete these stored sources of value creation, we will need to find other exogenous sources, such as direct solar energy.Now, how does this relate to deflation (stagnant economic growth)? Well, if there were a lack of economically viable sources of energy, it would be impossible to create value, and hence grow the economy, leading to deflation. Hence, productive use of oil is currently the primary driver of economic value creation. Once that becomes economically unviable, we have two choices: a) deflation; or b) finding ways to productively tap into alternative sources of energy, such as the sun (solar energy).In a transition period, as oil becomes increasingly economically unviable and solar energy (or other sustainable alternative) is yet to become viable, we stand the risk of slowing down value creation, and hence economic growth.To prevent systemic deflation, we must uncover innovative new ways of tapping into existing sources of energy. I believe, technology innovation is the only systemic, long term solution. We must find ways of efficiently tapping into energy streams (ultimately, solar energy), rather than energy stores. The danger is that as long as it is more more expensive to tap into energy streams than extracting stored energy, we will continue to, in essence, live beyond our means, namely by borrowing from energy stores, the cost of which must be borne by future generations.The sooner we can develop efficient new sources of sustainable energy, the sooner we will stop borrowing, and begin living within our means. That standard of living, or rate of economic growth, is entirely dependent on the effectiveness of our technology innovation investments in solar energy and even atomic fusion. The efficiency and stability of these energy sources will directly affect our rate of economic growth and prosperity. If the efficiency of converting new sources of energy is lower than that of conventional methods, economic growth and our standard of living will decline and we will live in deflationary times.Fred, please invest in energy technologies.

      1. William Mougayar

        So what should Canada do about its oil production dependency? We’re strapping the dollar because our cost of oil production is high, and that has the risk of tanking the economy. I call bullshit on that.

        1. TrustEnabler

          I think we are approaching this from different levels of abstraction. I am looking at the topic of deflation as a global closed ecosystem. You are looking at it from the perspective of national jurisdictions and individual economies relative to reach other. They are different things. I addressing and essentially agreeing with your original point, which had nothing to do with Canada’s economy.Canada must diversify it’s economy and invest in developing future energy sources. It must also invest in future financial technologies, as current financial institution structures are economically too costly. In the mean time, it’s economy will continue to tumble at the whim of geoeconomic and geopolitical winds.

          1. William Mougayar

            ok. i thought we were diversified…apparently not, because a small part (oil) can cause a lot of havoc.

  10. David Semeria

    I can’t see any economic basis for secular deflation.In other words, I can see why it has been happening, I can also see why it should go on happening, but I can’t see why it should go on for decades.

  11. Liban Mahamed

    Fred, declining population growth and very soon declining global population is another factor driving towards deflation.The stage is set for slow growth, and shrinking customer base in the world.Once you have less and less new workers and customers all kinds of demand declines cars, gas consumption, consumer goods, you name it.I was in Japan this past summer, they close hundreds of schools every year, the Japanese economy has been in funk for 20 years, and there is no solution in sight. No one is buying anything, no workers, no growth to speak of, etc. They call it the lost decade era.My sense is there is not going to be inflation from here on.I am afraid we will miss it though.

  12. Richard Carlow

    Having spent 2 and a half decades in Japan where deflation is the norm I should have a sense of where things are going. I really do not. Moore’s law is now outdated. New technologies will accelerate performance and prices will erode at increasing rates. Price points and margins will have to be protected with ever more the demands for value. While technology races forward I see the the non-technical parts of a business becoming increasingly important.

    1. James Ferguson @kWIQly

      Agree – but I would restate ” non-technical parts of a business ” as ” non-scalable parts of a business” (Distribution, Staff, Energy, Raw Materials) all of which see major dis-economies of scale beyond a certain point (unlike IT infrastructure).

      1. Richard Carlow

        I agree with your wording. Branding, user experience, community all will continue to grow in importance.

    2. Liban Mahamed

      Excellent point, Japan maybe what the world will look like in few decades.It is likely Abenomics will fail unless they allow immigration or Japanese women decide to have more chIldren.Deflation will stay with the Japanese econony unless they find new customers. I doubt pumping new money will do the job

      1. Avi Deitcher

        Bingo. But how do you convince Japanese women to have more children?

        1. Richard Carlow

          The question no one has an answer for, but suffice is to say nothing being done as of now is going to lead to an increased birthrate.

          1. Avi Deitcher

            Well, you could always slash the welfare state, so people *have* to have lots of kids to support them in their old age. But that always leaves some (many?) falling through the cracks and is pretty cruel. It would work, though.Or get them all to convert to active Catholicism, Judaism or Islam, which culturally encourage numerous children?So much for the cruel or impractical solutions. 🙂

          2. Richard Carlow

            Please don’t let Abe read this….

      2. Richard Carlow

        It will stay. With limited daycare options and extended family living further away “more children” seems unlikely. Immigration? Just not going to happen.

      3. James Ferguson @kWIQly

        Population growth to increase demand merely kicks structural problems of failed economics (low employment) further down the street – In the meantime the underlying issues get larger

  13. awaldstein

    Read and learn day for me.

    1. Avi Deitcher

      Ditto. Finding the Japan comments interesting.

      1. Richard Carlow

        40 something well educated “salaried” workers tend to borrow money from asset wealthy parents with full pensions…the price of education and health care are going up. Pensions are now known to be a deep well that will never pay. Abe has actually introduced an exit tax.

        1. Avi Deitcher

          Exit tax = tax to fly out of the country? Or tax to move out permanently? Or tax to move assets out? Or death tax?

          1. Richard Carlow

            Tax to move out. Still trying to get my head around it. But plenty of entrepreneurs looking to set up outside of Japan and the government knows they cannot have the assets move quite so freely.

          2. Avi Deitcher

            Feh. Short term solutions. It keeps current capital in, but strongly discourages foreign direct investment. Soon enough existing capital says, “I would rather pay the exit tax and have control over the growth.” Israel used to have that. Look at the explosive economic growth there since liberalization.

      2. awaldstein

        No formal training in economics or even business.Self taught from the ground up. After years of this I do well but I find discussions really useful to fill me in from the top down.

    2. fredwilson

      me too! this community shines on days like today

  14. seankelly

    I wear 2 hats. Technologist and Macro economic enthusiast. My take is that the deflation being witnessed is a consequence of product substitution brought on by technological advances. Case in point – the iPhone. No longer do I need to buy an alarm clock or CD’s or weather vane or visit a travel agent or go to a bank branch etc. You get the drift. Technological advances are driving or deleveraging the need for a range of products which formally were based on the industrial model. Make a product, drive it into a market, gain dominance, iterate and up your price.It ain’t about the price of oil.

    1. SubstrateUndertow

      Yup !Integrative disruption at work.

  15. seankelly

    I was in Tokyo last week. They are doing fine. 3.5% unemployment. To a westerner it appears Japanese firms take a serious sense of pride in their endeavours and value their workforce like family. In the US they fire them at will. Different outcomes…

    1. Richard Carlow

      Tokyo is Tokyo. Visit Japan as well 😉

      1. seankelly

        Agreed. Only so much you do in a week.

  16. John Frankel

    We do live in a deflationary world. Driven by two interconnected things: (1) artificially low interest rates (since March 2000) and (2) the acceleration in deployment of technology.These are linked as low rates have led to an investment boom in tech. Low rates are self sustaining when debt build up excessively in the economy and, simply put, can’t be repaid. The growth we now see in the economy is, well, artificial due to the mal-investment that artificially low rates create. I.e. spare capacity is created that cannot fund the repayment of debt.Technology development is deflationary as it is is all about increased efficiency. Better efficiency or utilization will lead to lower prices. For example if Uber leads to better car utilization then less cars are purchased. At some point this will lead to less demand for new cars which will force car prices down and job losses throughout the car manufacturing complex. This will lead to excess capacity and reduce the chance that the debt used to build the cars will be repaid.

    1. William Mougayar

      But Tech as an industry is only about 5% of total GDP. With all its might, how can it affect the whole economy?We should be careful not to take a US-centric view. In the US, Apple thinks – what’s the highest price I can sell the super sized iPhone Plus, hey why not $800. In China, they start by optimizing for the $100 device instead. Different starting points and objectives. Different end-points and situation.

      1. John Frankel

        That was true 15 years ago. Now every company is a tech company or will be disrupted by one. Just look at our portfolio.

    2. Richard

      The greatest brands in the world since 2000 just don’t fit into the deflationary hypotheses.

  17. Jorge M. Torres

    I’m not qualified to say whether or not long term deflation is real, but if it is, it seems to me that it’s a trend that would bode well for tech entrepreneurs and venture investors. It would remain relatively cheap to create new tech companies. And capital markets would continue to chase yield by allocating to alternatives, including venture. Perhaps long term deflation answers all the bubble talk, or at least cushions the next correction.

  18. Elliott Hauser

    Something overlooked about Deflation: it’s not just that asset owners lose, its that those with reliable income streams win. So a focus on cash flow in startups, especially ones that don’t own assets, makes tons of sense. A new lens to check out AirBnB, Uber, RelayRides, Getable, et al.

    1. Richard Carlow

      I am not sure asset owners lose in your example. Investment loses if return is not immediate. A homeowner converts a room into an Airbnb space and boom they have revenue. Who builds hotels?

      1. Elliott Hauser

        The point is that if my asset is losing value, a service like AirBnB that helps me turn it into income is most important in a deflationary environment. In an inflationary environment I would be looking to buy and sell assets, not generate income which is diminishing in value.The asset value / income value lever is the main mechanism of inflation. In inflationary periods I want stocks as assets. In deflationary periods I want bonds as income. Businesses have a similar split.

    2. Tom Evslin

      asset owners only lose in nominal terms; just as they only gain in nominal terms with inflation. governments lose because they don’t get to tax inflationary gains and may have to credit deflationary losses.However, holders of leveraged assets will lose unless the assets are more productive than the rate of deflation plus interest. The debt will become harder and harder to repay in current dollars. Interesting secondary question is what does this do to the PE model, which Andy Kessler says is already threatened?…Note that the VC model of equity does better than the PE model of extreme leverage in this scenario. And, in a deflationary environment, cost-cutting by itself probably won’t produce the continuous improvement needed to preserve nominal value. But innovation will. We know this story from the high-tech/communication world where we lived with declining prices seems like forever.

      1. Elliott Hauser

        You’re right about nominal loss/gain, of course . But when players are exposed to these forces in different amounts that turns into real relative strength or weakness. VC vs PE is a great example of that.I think that cash flow and lack of exposure to assets becomes key for investors going forward in a perma-deflation scenario. Those turn into huge relative strengths.

  19. Mario Cantin

    If predictions by Harry Dent Jr. in his book “The Next Great Bubble Boom” continue to be correct, the economy will come closest to what it was pre-2008 in 2022.

    1. William Mougayar

      can you elaborate on that, Mario?

      1. Mario Cantin

        Nice to see you in person last week Williiam. Did you find the link you had asked me to send you?I bought this book circa 2006 –not exactly sure what it came out now — but around that time.The guy had look ed at society’s macro trends going back decades and even centuries ago and predicted a boom followed by a collapse to take place at the latest by 2010, with the bottom hitting in 2014, and then gradually up until 2022 until the next full rebound.It has panned out almost exactly like that so far in my own business in Toronto, as we run a little behind the US in Canada.

        1. William Mougayar

          I just replied 😉

  20. Justin Baker

    Here is a crazy idea: continue to do things that are clearly productive and you will be fine.Instead of trying to park your money in instruments that will rise because of government monetary policy investors should put it in new technologies, and new companies that make the world a better place.

    1. fredwilson

      now that is fantastic advice and one of the many reasons we have so much of our net worth invested in backing entrepreneurs

  21. James Ferguson @kWIQly

    MV = PT – A truismM= Money SupplyV = Velocity of circultion of M (how many accounts does the average dollar hit per period)P= Mean PricesT= No of Transactions in periodSimplistic thoughts …QE increases M at a point where demand for investment is low (banks just bank it to deleverage at time of high risk). V Falls – and stimulation effect is lowHelicopter drop – Give money to poor peopleM increases but is immediately spent. T rises and P need not. – Can workArguably QE released to indebted banks reduces velocity of circulation for a fixed level of economic activity and it thus non-stimulative and price-deflationary.(It also bails out idiots from the pockets of the poor)

    1. Tom Evslin

      Good explanation of why welfare to banks is counterproductive to increasing the money supply. And perhaps why Japan seems to be stuck. But perhaps reigniting inflation is not the right answer to restarting an economy.TARP (bank bailouts) was also a mechanism for protecting wealth inequality for the healthy if harsh redistributionist effects of bankruptcy. But that’s a thought for another thread.

      1. pointsnfigures

        TARP, TALF etc, were fails. The US has a process called bankruptcy. It works.

        1. James Ferguson @kWIQly

          It works if allowed to !!!Looking around the EU system at the moment you can also say Bankrupcy is obvious in its absence (excluding moral bankruptcy which is alive and well and until recently banking with HSBC in Switzerland)

          1. Cam MacRae

            It cannot work while private sector is deleveraging.

    2. pointsnfigures

      QE 2, 3, 4, etc was a fail. QE1 necessary.

  22. bfeld

    Human beings are extremely bad at dealing with geometric curves. We extrapolate everything to a straight line. And then we believe the straight line is going to continue for the foreseeable future.Tom’s comment feels like he’s struggling with that. I have huge respect for Tom and his brain, but how do we really know that energy prices are going relentlessly down? What happens when Russia, Iran, and Argentina’s economies collapse enough so that Saudi Arabia and the US collude on an Saudi cutback on oil production, which results in increasing energy prices, at least for petroleum based energy. That has nothing to do with a trend-line and is an exogenous factor that has nothing to do with fundamental structural factors (well – ones that are not manipulative.)I remember in mid-2008 when working on a massive new house project hearing from my architect that I should “lock in the price of construction with a fixed priced bid immediately since commodity prices were going to go up forever.” We freaked out (for a variety of reasons, mostly because of the overwhelming amount of work) and decided not to build the house. Six months later we felt like we dodged a massive bullet. Twelve months later we bought a wonderful piece of real estate at the absolute bottom of the market.I remember in mid-2000 sitting in a cab in New York having the driver ask me which stocks he should buy since “technology stocks will always go up.” We all know how that played out.I have zero idea of deflation is here to stay or not. I’m also confident that no one else knows this with certainty. You can use it as an input into your thought process around how the world, at least the US, will work. You can also use it as an input into an investment thesis, or in how to operate a business.But I think it’s a dangerous input.

    1. Avi Deitcher

      Great story! I lived in Riverdale, NY, in 2006, watching all of the new construction, and everyone telling me that, “around here, prices always go up!”Except for the little old men who had been there for decades. They said, “when there is this much construction, you know it is all about to come tumbling down.”They were the smart ones. I should have sold my home then. I didn’t try until 2008-2009, and boy, did it hurt!

      1. LE

        Except for the little old men who had been there for decades. They said, “when there is this much construction, you know it is all about to come tumbling down.”I’m like that “little old man” on AVC. I’ve been around long enough and seen so many things and that’s why I am typically cynical and critical.That said I have to say that it’s a bit unsettling (and hard to stay the course) when you see people taking stupid chances (gambling) and actually making out pretty well because of what they don’t know as opposed to what they know. That’s it’s actually quite an advantage to be young and naive (or just naive) and take chances which many times by sheer luck work out.

        1. Avi Deitcher

          Or maybe they are young enough to be able to handle the risk? A lot harder to take risks when you have a mortgage and 3 kids in school and a minivan than single living in a shared room and can live off Ramen noodles…

          1. LE

            With Oil prices occam’s razor [1] doesn’t apply. With this occam’s razor does apply to a greater extent.I say “don’t look for the zebras” [2] here.It is true that “when you have a mortgage and 3 kids in school and a minivan” you are less likely to take a chance. But to me at least the overriding factor [3] is that you take chances by evaluating the upside and not the downside and that when you are young you are less likely to even know the downside to counter the upside that you see.(But you do have a point…)[1]…[2]…[3] Another factor of course is who you hang with. A guy who would eat ramen and live in a shared room is brainwashed by that group as opposed to the man living in the suburbs with a minivan.

          2. Avi Deitcher

            So we could summarize it as, “when we are young, we are too dumb and inexperienced to know better about the downside, and that sometimes works in our favour”? 🙂

          3. LE

            Exactly. Especially when the people that you read about (that ones that have things work in their favor) are the individuals that succeed. Not the ones that gambled wrong and didn’t make out. Little statistics at all on that.Along these lines I’ve mentioned before how I get worked up when people talk about opportunities that big companies have passed on and how stupid those big companies were in doing that. “It was right under your nose you idiot!”The problem is you don’t hear about the 1000 other ideas that never worked that they also passed on. (The one that comes to mind is Woz and Hewlett Packard passing on his PC idea or something like that..)

          4. Avi Deitcher

            So need to look at stats of success and stats of failure in everything; false positives and false negatives. Reminds of the Carter Racing case study by Duke prof Sim Sitkin. I loved that one.

          5. Dane S.

            Agree. I find my continued pursuits for growth (financial or otherwise) coupled with obligation contribute to a greater degree of risk analysis.

          6. Daniel Taibleson

            Can I just say thank you for educating me about Occam’s Razor. It’s like, the ultimate response to 99% of people’s tweets.

        2. PhilipSugar

          Here is the thing, you can always get upset at a “stupid” person making money.But it is like gambling.You see me beef about it when Tech Crunch says “look at these geniuses!!!”But just like gamblers, you only hear about the winning. And guess what??? Most of those stories are not true. Ever hear the person that goes to the Casino and wins $thousands every single time??? I can look up the records. Its every single time you remember or somebody writes about it, or you tell the story.What is forgotten, not written about, or told is the five other times you came in, got the shirt ripped from your back, your underwear pulled over your head, and hit with a stun gun and started flopping like a fish on the ground, you took a beating from the house so bad.

      2. Dan Epstein

        When prices fell, did rent go down as well? My (limited) experience as a landlord and tenant has been flat or increasing rent, but never decreasing.

        1. Avi Deitcher

          I think they did a bit, but not sure. I owned at the time, so I wasn’t following the rental market as closely. It must have, since ownership and rental are substitutions for each other, but I didn’t check.

        2. Sean Hull

          I used to go to University in Buffalo NY. There apartment hunting was very different than new york. Many houses had signs. You could just walk around on a Sunday and sign a lease that day. No problem.Believe me with that sort of vacancy, landlords were willing to negotiate. And that surely pushes prices downward. I imagine you see the same phenomenon in places like Detroit.

    2. William Mougayar

      This world is definitely more erratic, including the weather which is now going from one extreme to another, in every part of the world.And since you’ve just come back from Dubai, I’m sure you’ve heard a share of conspiracy theories that people over there take as input to explain everything.I think the only trend I see is no trends, but rather a series of ups and down, from one extreme to another. We are testing highs and lows in just about everything. The world is getting re-configured accordingly. Some things will stick. Others won’t.

      1. James Ferguson @kWIQly

        Miller and Modigliani explain the “trends = no trends” well.If the market can see a trend it will buy/sell to it. (Arbitrage) this pre-empts the trend. It follows in a well defined and informed market that new information is absorbed as rapid step inputs (of random up/down orientation).To the extent that technical rather than fundamental trading is of value it is only exploiting weaknesses of market inefficiency. IE you can only really beat a market if you have information that it does not.(Correction spelling of name error Mogdiliano – who would have thought)Debt/Equity ratios do not matter in a perfect market.

        1. pointsnfigures

          I think Robert Lucas does a great job with expectation theory and how it affects current behavior as well.

        2. SubstrateUndertow

          “It follows in a well defined and informed market”That sound like some mythical “Market” that is now being further eroded by organically accelerated interdependencies all begging for a whole new modelling paradigm accessible only to computational elites ?

          1. James Ferguson @kWIQly

            Ahha – Did I mention that well informed markets do not exist they are a model.They start badly informed, and then as information is added they change creating a newly misinformed market – and because trading is continual (effectively, the market evolves) the model never anticipates reality (just what slower models should do) – and so who processes fastest wins (usually)

    3. Elliott Hauser

      I agree there’s danger in overgeneralizing. But in an industry that talks about the accelerating pace of innovation and value creation it seems very possible that economists don’t fully understand the deflationary effects of technology. So we could be in the midst of a massive deflationary period that was forestalled for a while by fiat floating currencies. Worth considering, and I think it’s more insightful than a linear extrapolation.

      1. bfeld

        “Worth considering” – definitely, but your more important point is “economists don’t fully understand the deflationary effects of technology.” I strongly agree with that and it’s one of the things that is going to be confusing to folks on a macro level over the next few years.One of the very few people who has a clue is Erik Brynjolfsson at MIT Sloan.

        1. Elliott Hauser

          Awesome- thanks for the link. Will read up.

          1. JD Carluccio

            I think is not only economists that can’t understand technology, but also technology that doesn’t understand the changes in human demographics and international commerce. We have never been here. When I say “here”, I’m talking about an interconnected planet on which no country can decide their macroeconomic policies without considering the rest of the world. We also haven’t experiencied Moore Law for long enough to know how it will affect energy production. And I agree that energy is the common metric in all the system. (As a professor of Purdue told me: this world in one big energy system, inefficient transformation rules it)On inflation and deflation what I believe it’s important to understand is that they were usually tools or effects caused by microeconomic decisions (sometimes in response to macroeconomic circumstances) that are not necessary extrapolated to where we are now.

          1. Timothy Post

            I was just listening to Neil Howe be interviewed on my commute home this evening on the podcast “Peak Prosperity.” Here’s the link to the interview: Quite thought provoking. First time I’d heard of his framework for better understanding history and current events.

          2. Chris J Snook

            Thanks for sharing. This was a show I produced 8 episodes for in 2011 with Neil as a guest on Rebecca’s new media show that has a cool convergence of their ideas

        2. Trey Strawn

          I would say that all economists understand the deflationary benefits of technology. The problem is that most macroeconomist’s mistakenly believe they can control market economy outcomes with a push of a lever with few unintended and deleterious effects.As for deflation, it is natural and beneficial in small increments. But since our economy, the banking system, and the government demands inflation to cover its debts, they will not allow significant deflation. This is why central banks have taken over the controls of interest rates and excessive monetary creation/devaluation.Beneficial deflation from technology will continue in all sectors as labor and capital becomes more productive. However, the initial question of the overall economy entering a deflationary phase is unknowable. It should happen. But will it be allowed?

    4. Tom Evslin

      Brad, thanks, I have huge respect for your brain, too.I think you are a contributor to deflation because of all the innovation you’re funded and encouraged.It’s not short-term extrapolation which makes me think energy prices are going down; it’s the the fact that Moore’s law is having a greater and greater percentage effect on both our ability to extract more value from each BTU and to generate/extract more BTUs per dollar spent.None of this should be a basis, of course, for commodity speculation. And lower energy costs are just one of the inputs to what I think is a developing economy of abundance (for which deflation is just one more name).

      1. LE

        It’s not short-term extrapolation which makes me think energy prices are going down; it’s the the fact that Moore’s law is having a greater and greater percentage effect on both our ability to extract more value from each BTU and to generate/extract more BTUs per dollar spent.You have given one example of a reason why energy prices are going down. But as others have pointed out there are 100 other inputs that can cause a change including ones that nobody has ever heard of. (The unknown unknows).That’s at least one of the reasons that I don’t buy gamble on stocks. As much as I think that a particular company should do well, and the stock should increase, there are just to many bits of information that I don’t have access to that could possibly change the outcome the other way.

        1. phollows

          I can’t find the link now, but a recent Economist article made this remark, which made me stop and think. It was along the lines of: Oil is a fuel. Renewables are technologies. Oil prices will be controlled by the markets and geopolitical intrigue, but demand will lessen as efficiency, environmental drivers and renewable usage increases. Renewables will create their own version of Moore’s Law, and that’s what will make the difference.

          1. JLM

            .When energy and tech are both measured in the cost per BTU, they are married in their competitive outcomes.The point is — they are not always just devolving to BTUs. When they do, they are related intimately.JLMwww.themusingsofthebigredca…

        2. Art Matsak

          Great books on the subject: Thinking, Fast and Slow; Fooled by Randomness; Black Swan.

      2. JamesHRH

        Short term energy costs are almost solely based on distribution issues.Long term costs are almost solely based on demand. The world is taking a break, but demand will skyrocket again (India, China middle class).There is no technical innovation in the near future that curbs demand.

    5. Richard

      And Macroeconomic inflation /gdp numbers seem have less and less relevance with each passing year.

      1. SubstrateUndertow

        Could you unpack that just a little ?

    6. SubstrateUndertow

      “an exogenous factor that has nothing to do with fundamental structural factors (well – ones that are not manipulative.”In a world of 7 billion+ volitional-agents isn’t “manipulation” the mother of all fundamental inputs ?

    7. fredwilson

      i disagree with you Brad because i’m not saying this will happen. I’m saying what if this happens, and if it does, what will change in terms of how we should behave as rational economic animals? i don’t want to go out and make bets based on this thesis, but i do want to understand what exposures we have both personally and professionally to this scenario

      1. bfeld

        I’m not sure we are disagreeing. I think the hypothetical understanding and / or the Gedankenexperiment is healthy. That sounds like what you are doing.It also sounds like what Tom was doing – I was disagreeing with his statement “energy prices are going relentlessly down.” I think the moment you build an argument on the inevitability of something like that, you are in trouble. If this was hypothetical in Tom’s case, then I missed that (I thought it was an assertion.)My punch line, “I’d be very cautious about using it as a real input.” Which it sounds like you are doing based on your statement, “I don’t want to go out and make bets based on this thesis”I suppose my use of the word “input” is sloppy here. I was meaning “input” in the context of economic theory, rather than through process to understand context in a scenario.Just trying to clarify and see if we are actually disagreeing. I don’t think you believe that “things will always go up”, or “things will always go down”, or “things are inevitable.” But I could be wrong!

        1. LE

          Most of this boils down to human psychology (as I am always trying to say).Investors, like people trying to cure a disease (or depression maybe a better example), are always looking for “the answer”. The thing that will lead them to the promised land and/or explain something enough that they can get set in the right direction. [1]To me none of this high level thinking ever matters, unless you are spreading bets like a VC or an angel investor is doing.If what you are putting on the line is all your money (not a part of it or not OPM) you’d really be foolish to make any life decision based on any of this.[1] Throw in “weight loss” as another thing in this category.

      2. Tom Hughes

        To answer your question — which I think can be phrased as “how do I hedge against the risk that we’re in a prolonged period of low or negative price change?” — it’s helpful to think about the main cause of this deflation, which is a post-2008 structural reduction in the ability of the economy to create credit. This is why the rich world central banks are keeping rates low: because they want to restart the virtuous circle of credit expansion.The short- to medium-term hedge for deflation is to hold monetary assets (bonds and notes) with fixed payment schedules; and secondarily, to hold assets that are leased out for long periods at fixed rents. In the first case you have to grit your teeth and ignore the comparison of 1% yields to the 10+% we remember from the 1980s. The second category can be desirable but there is event risk (lessee defaults), and smart lessees (the ones likely to survive) write protections into their leases; so, opportunities are scarce and risks are non-trivial.(The reason governments can borrow cheaply is that they control their currency — so they aren’t squeezed by deflation the way other borrowers are. Of course, in the U.S. the Tea Party tried to change that by instigating a bond default in the name of holding down the Treasury debt ceiling.)There’s a lot of debate about whether stocks are good or bad to hold in deflationary circumstances. They’re for sure bad in the “Japan lost decade” case, where stock prices collapsed; but that collapse was more a cause of deflation than an effect (the root cause of that deflation was the credit crunch resulting from all those stocks clobbering the balance sheets of the banks that held them — one reason why in most countries banks aren’t allowed to hold assets like that).If you want to be aggressive about investing to exploit a deflation scenario, you might think of investments that improve the credit-extension process, the thing that’s currently broken. There are some very long-lived companies, like the bond rating agencies, that got their start during deflationary episodes.My view is that deflation is a risk, but one that most central banks (especially the Fed, the ECB and the Bank of England) are well equipped to fend off; much better equipped than they were in the 1930s. I think the bigger risk is that they over-correct and damage the economy by entrenching inflationary expectations that can then only be resolved with a prolonged spell of high rates: which is what Paul Volcker had to do in the late 1970s to remove the expectation that “oil can only go up in price and therefore consumer prices will always go up.”

        1. fredwilson

          this is a great commenti’ve been acquiring a lot of rent producing real estate which i prefer to fixed income securities for a variety of mostly personal reasons and i think that’s a decent hedgedo you agree?

          1. Tom Hughes

            Broadly, yes, but with a major caveat: most rent-producing properties are in fact fairly risky, compared to conventional high-grade bonds. You can lose “coupon” cash flow (the renter disappears) and “principal” (without the cash flow to cover your fixed costs you are forced to sell at a loss). I see a lot of people (I’m not suggesting you’re one of them!) investing in real estate but they would shy away from, say, single-B corporates; but the risk they take may be greater than those single-B bonds. Of course, knowing your tenant and/or agent, if you trust them, should reduce this risk.One advantage of real estate in deflation: you can deduct the depreciation of your asset against the income it generates, and the depreciation calculation doesn’t reset if deflation lowers the value of that asset (caveat: I am not a tax guy! but this is my understanding of how it works). If you had an asset with a cash flow you trusted, but that depreciates under deflation, you can think of those deductions as being a kind of durable shelter for your income, a shelter that keeps its value even if the cash flows and asset values decline.Still, I think many non-institutional investors under-estimate the risk of real estate investment.

          2. fredwilson


          3. LE

            The parent analysis doesn’t consider that when investing in real estate you have a much much much greater ability to understand and avoid risks simply because you are in control of more variables. [1] With any other type of investing (the market, bonds, whatever) it’s a black box of things that aren’t under your control.[1] What you buy. Where you buy. Who you rent to. And so on.

          4. LE

            Broadly, yes, but with a major caveat: most rent-producing properties are in fact fairly risky, compared to conventional high-grade bonds.Specifically can you give examples of “most rent producing properties are in fact fairly risky?”.For example if you buy a 10 unit or 100 unit apartment building or a multi tenant medical office building your risk (not taking into account the particular tenant mix) is mitigated by the fact that all of your eggs aren’t in one basket. Unlikely that 20 doctors offices are going to close at the same time obviously.

          5. LE

            As I pointed out the other day on GothamGal’s blog you need to be acquiring property in Philly. It’s close by and it’s not run up yet or even close.

          6. panterosa,

            If you have the stomach for tenants, repairs and lawsuits, then it’s fine 🙂

        2. JLM

          .The comparison between real estate and monetary assets is a huge miss. Having been a real estate developer longer than most people reading this blog have been alive, I can assure you that real estate does not act evenly remotely like monetary assets — that is why you own them or develop them in the first place.Real estate is an active and appreciating asset when done correctly while monetary assets are “dead money” paying the same returns whether the weather is cold or hot.Catch a cap rate wave in a hot market — like most of Texas these days or NYC — and it is a thing of beauty, anything but dead money.Let me first say I am talking about institutional quality, commercial real estate — CBD and suburban and tech offices, multi-family, industrial, warehouses and storage (one of the best investments available today).Any commercial property is a conduit through which an owner is able to access the underlying credit of his tenants. Make a spreadsheet and evaluate/score the credit of the tenants, zero out the vacancy and then calculate the resulting credit strength and thereby the rating.Enter into long term leases (15-25 years) with 5 years bumps — triple net leases in which the property taxes, operating expenses, insurance and maintenance are paid for by the tenants, a NNN lease — tied to either a fixed percentage or a multiple of CPI.This lease becomes your financing security. The financial institutions are not really financing the improvements, they are financing the leases.Put a reasonable amount of leverage on the transaction to be able to create meaningful ROE returns. With a structure of 75% debt and 25% equity you should be able to generate very nice double digit returns on equity. In my lifetime I have placed more than a billion dollars of such financing back when a billion was a lot of money.Just for specificity, such a financing structure results in a high DCR (1.5-1.75) and a 70% LTV which is at the AAA to AA rating level. It is much better than B corporates and it has a big upside when done correctly.Real estate is not just an appreciating asset — the physical cost to rebuild continues to go up — but also a market driven-demand driven price increase asset.Location, location, location, anyone?I developed the buildings on opposite corners of Sixth and Congress in Austin, Texas and rents went from about $10 to $35 in less than 15 years — market, location driven. Much of this is just skill in decision making. The skill takes a few years to acquire but it is not more difficult than long division.Investors cannot deduct depreciation since 1986 unless they are an “active” owner or partner. Before 1986, no developer ever paid taxes. Losses offset everything including the rising sun.The risks you describe are not really the risks of real estate. The big risk is the initial leasing risk but even this can be mitigated by knowing what you are doing.My people leased up millions of square feet of space and tens of thousands of apartments by knowing the raw market data, the absorption rates, the competition and the rates.At one time I had a DB of every tenant in every square foot of Austin (B quality buildings and above), the size of the lease, the expiration of the lease, the lease rate, the decision maker and her secretary.It is a very business intelligence driven business when done professionally. It is really very easy.When I was operating high rise office buildings, I would provide services — oil changes, tire rotations, car washes/detailing, golf club cleaning, shoe shining — which would provide business intel constantly.I had carpal tunnel massage guys go through the receptionists and secretaries — trying to find out if anyone was unhappy or thinking about leaving my buildings.Guys like Fred can do exactly the same thing by investing in high quality properties, professionally managed with great leases and long terms.The best long term opportunity is the renovation of older properties. I have some pics on those attached. I used to make 14-18% cash on total cost returns but it is a very acquired skill. It takes a lot of experience to be able to crack open a lobby wall and be surprised it was built on fragile red clay tile rather than masonry.If you don’t have the stomach for it, consider REITs in the right part of the cycle which may be right now.We are currently in the first decade of our own “lost decade” while the Japanese are at the end of the second decade of theirs. Real estate — well located, well leased, well managed — will continue to perform well cause in some places they aren’t making any more.The little building, the Sampson Building, is a perfect example of a little deal anyone could do. Sorry, somehow two pics got set and I can’t figure out how to get rid of them.BTW, the Sampson Bldg used to house Karl Rove’s office when he was just getting started with George W Bush and the Littlefield Building used to be LBJ’s HQ in Austin when he was a Senator.JLMwww.themusingsofthebigredca…

          1. panterosa,

            JLM,I was lured by my family, who loved real estate, to be their NNN minion. Your comment brings back all the information I learned to make my own property sing. So I could sell it and do something I really wanted. Like be a startup grind :)I wished I had succeeded in drinking away with champagne and red wine all the tactics you list above which were plied into me ( I sadly still remember). Too bad I was so good at RE, but found it deeply boring. Everyone hoped I’d weigh in and make them a mint because I have a golden instinct which you can’t train.I try to keep this knowledge hidden so I don’t get taken prisoner and plied for advice.

          2. JLM

            .Yes, when the waterboarding starts, they always want the lease forms.Well?JLMwww.themusingsofthebigredca…

          3. panterosa,

            You must have some good saying about having talent for something you abhor.Having written my own divorce in an hour I saved a lot of money. Law is career #2 that I didn’t want.

          4. Tom Hughes

            There is a strong case for institutional real estate as an asset class — for institutions, because they (or their agents/managers) can do the process you describe, matching the leverage against the credit strength of the tenants. So, I think we agree there. And, someone like Fred may be able to access that asset class at a reasonable price. What scares me — which is what I was describing — is when retail investors dive into small-scale real estate and lever up (their first step being, of course, their own home). Their sense of appropriate risk gets distorted by their closeness to their property and tenants. In the context of this discussion about hedging against deflation, my worry was only that retail investors would see deflation risk as yet another reason to raise their bets.

          5. JLM

            .Absent the recent debacle on home mortgages, underwriting criteria on single family primary homestead mortgages are sound.A “conforming” mortgage is a very well structured piece of debt.Homes are the most overlooked retirement account that most people have.As to small time real estate investors, much of it gets down to what do they actually know. I have helped small investors by giving them a good lease exemplar which sets up a NNN rent arrangement.As I noted earlier, I don’t really see any deflation out there so I am not drawn into the conversation as to what folks should do or not do in the near term.I am much more worried about being struck by a meteor.Real estate is a great asset to own because it reports to work when you are sleeping or on vacation.Like anything, one should have a bit of knowledge but most of the risks can be underwritten or insured against.JLMwww.themusingsofthebigredca…

    8. Gregory Magarshak

      Well, I guess deflation is always occurring in various sectors, in that prices are going down. But when it comes to the money supply, I think it has more to do with wages going down, and how much money is actually paid to the US population vs expatriated overseas. Banks issue money based on reserves, and if the banks are in the US then the money supply is created for US based businesses, consumers etc. Also US consumer purchasing power, including consumer credit, drives the prices here, and is coupled with job creation in a self reinforcing loop.Basically we are probably seeing a skyrocketing change of allocation to automation instead of labor. When companies have money, they spend it on R&D (especially with tech companies and their economies of scale) and worker productivity multipliers instead of actual workers. They spend it on acquiring startups with 30 employees instead of hiring 1000 workers with unions and pensions.I think what’s been happening can be accurately described as the disruption of the Second Economic Sector – manufacturing, etc. just as the Primary Economic Sector – agriculture – was disrupted during the great depression. This is independent of fluctuations in the markets (housing, jobs, whatever). It’s not really cyclical. Once disrupted, we have to move on to something else. Meanwhile, all those law and phd grads have to go move in with their parents and find a way to pay off their loans.We have to look out for a huge demand shock coming for US local labor. There will be a big adjustment in wages to be more in line with the rest of the world. After all, you can’t sustain wage inequality forever if the technology removes borders.

      1. werpor

        In many ways the so called ‘western world’ was walled off from the ‘rest of the world’ by events, which flowed from a few people — deeply recognizing the connection between knowledge and effective application — after the Enlightenment.This led to people washing their hands. A population explosion cause out migration from what was a relatively small small piece of geography.The means of making war amplified the differential between the ‘west and the rest’ especially in favour of the U.S. in the years following WW ll.But the means of projecting power and influence by making war has waned. Of course the U.S. is well armed in the conventional (and expensive) sense but the war going on today is economic. It’s means is technological diffusion and it’s consequences deflation and global wage recalibration.Recalibration of wage rates to a global mean is an imperative and cannot be prevented either intentionally or by geopolitical means. Can wage rates in the U.S. for the majority of jobs continue to be five, ten, or fifty times those of wage rates in the rest of the world?Can government extract the amount of taxes and continue to spend, and pay wage rates, as though global recalibration did not exist, while the economy which supports the State is deflating?Events in Europe are signalling the disconnect between reality, and the ideologies, presumptions and beliefs of a world gone past. The Enlightenment began there…what next?

    9. PhilipSugar

      This is a great comment. The human brain is wired to look at the past and extrapolate to the future. This is a great survival trait.However, it breaks down completely when random (or non thought of) circumstances happen.Two examples:Slot machines. People are sure that if they have been putting money into one and have not won it will pay off soon. You see literal fights over this. I assure you the random number generator in each machine, randomly determines the outcome of each turn not based on past events. As a matter of fact many people are shocked to realize that the drop (what the machine wins) and the fill (what the machine pays out) are separate boxes at the bottom and top of the machine (for mechanical and auditing purposes)Prices: Housing, Stocks, Programming Salaries, given there are 10 things available: If 11 people want to buy prices go way, way up, somebody will not get to buy. If there are 9 people buying prices go way down, somebody will not get to sell.

  23. Matt A. Myers

    Wow. This is the kind of conversation I need to avoid today so I get work done but will be excited to return to at the end of the day to read up on what everyone has to share!A sidenote: energy is free, the whole universe including yourself is made up of it – go hug someone to feel how free it is. 🙂

  24. Matt A. Myers

    Deflation comes in line with reaching the optimal output where the next unit of production is $0.

  25. lisa

    If you are the US government, and perceive deflation as a threat, then one response is we need more demand for energy, food, healthcare, and increased currency flow (I think? That is from a layman in this field).So does the US government, most other governments and many large corporations proactively push for accelerated development of third world countries, even more so than today?If so, investments in the companies and technologies that will build third-world infrastructure and economies?Lot of Ifs above, just trying wrap my head around subject. Macro-perspective however I feel the proactive actions by US government and other huge players need to be predicted and understood in order to answer Tom’s original question.Also seems war becomes more likely as players like the US government and the oil-rich countries perhaps get too proactive and/or make series of moves that lead to unintended consequences?

    1. Richard

      We need more demand for energy, food and healthcare. We need increased currency flow.Huh?

      1. lisa

        @samedaydr:disqus thanks, my comment wasn’t clear, I added the “ifs” in there to hopefully make more sense?

  26. Matt Kruza

    Best arguments for deflation: 1. It can happen (japan has had it since 1990.. DESPITE MASSIVE govt. stimulus) 2. The three biggest expenses of the American consumer are going down long-term (this is a controversial view.. but true). Housing, transportation, health care. a) We are 2-3x higher in health care costs than the developed world.. this will eventual correct (whether 5 years or 30.. they will fall. MANY different ways to bring this about, but will happen). b) Transportation will be revolutionized by self-driving cars and uber / lyft style platforms for better utilization of existing assets (combined with the fact that driving demand will be reduced with fewer work hours and/or more telecommuting .. which still hasn’t hit main stream really .. which is surprising). c.)And the big difference is housing. Average home size above has increased 100% in last 70 years and 50% in last 30 years. While family size has gone down. Something doesn’t compute.. The reason is simple. Average person has thought of the home as an investment, but after the first 100k-150k a home is a lifestyle choice or a speculative investment. This reality will change long-term. Also, AI technology will eventually be able to build houses for say building material cost +15-30 per square foot. Material costs are between $15-$50 per square foot. So homes built between $30-$80 per square foot, for 1,500 square feet are $45k – $120k. Of course some of the details will change, but overall that is the blue print and forces of undeniably deflationary forces. So what to do about it / who wins: 1) Avoid debt at all reasonable costs. Heavily evaluate if education debt makes sense, minimize expensive car purchases, and make sure your home is a 10 or 15 year mortgage 2) Focus on businesses that generate solid cash flow (may seem obvious, but what it means is speculative future growth may be much less attractive vs. a business with dividends and/or solid private company cash flows) 3) Avoid commercial real estate like the plague. Already have a bet with JLM that commercial real estate prices 15 years from now will be lower than now, and potentially as much as 50% lower 4) The real winners will be the lower 90% (aka the common man), because deflation will crush the power of financial players who have been able to skim the top off of economic growth for 40 years and who are essentially “leveraged long” and need assets to rise perpetually. Hope some read and like this… or maybe I just wasted 20 minutes of my life.. but this is an issue I think about all the time, have a pretty detailed view on.. so hope to stimulate some good debate!

    1. pointsnfigures

      Blackstone just raised a $145B commercial real estate fund. Is that the top?

      1. Matt Kruza

        Yep. I did not even know that, but I will have to look at that. Great example! I am an Ohio State grad here and the other top I saw was when on campus in the fall for a football game they are building EVERYWHERE. They are building way more real estate, for education which can no way look the same (or cost the same) 10-20 years in the future. It is surreal to watch the top taking place. Important to remain rationale and committed to your theses as existing players hype the bubble bigger

        1. pointsnfigures

          Interesting. At the, we switched our strategic mission a couple of years ago when it came to education. We have a 6 acre campus, but abandoned the idea of an education campus-only going virtual for education, and partnering with brick and mortar institutions when we need it.

          1. Matt Kruza

            Awesome Idea. And btw, I LOVED the national ww2 museum. Saw it when in New Orleans last year for a financial conference. Was my favorite museum I have ever been in. May sound corny / hokey, but left almost in tears. The museum was well done, and really made the visitor (at least me) appreciate all the sacrifice that was made to give us a chance to be around in the current form as a nation. Its not something I think the average 20-something understands or thinks about, but definitely think they should

          2. pointsnfigures

            Thanks very much. If it helps, I cry every time I see the movie in the Solomon Victory Theatre Tom Hanks narrates (and helped produce). It’s a can’t miss place in the United States now; and it helps that the music and food in New Orleans are so good.

          3. Matt Kruza

            That’s awesome. So how did you get connected with the museum, as you are a Chicagoan right?

          4. pointsnfigures

            The museum’s board is national. We have people from LA, NYC etc. I had a friend on the board and I always had an interest in WW2. My grandfather was a welder in the New Orleans shipyard during the war.BTW, if you take a vet to the museum with your family, it’s amazing what happens. Memories flood back. They connect with their children, grandchildren, and great grandchildren in a unique way.In 2007, I brought Medal of Honor recipient Walter Ehlers to the floor of the Chicago Mercantile Exchange. He was the last surviving MOH recipient from DDay (and we became good friends after that). I had a badge cut for him, and we walked on the floor unannounced. People ran up to Walt and hugged him, shook his hand, kissed him. I took him to the edge of the Eurodollar Option pit and spontaneously everyone on the entire floor stopped trading for two or three minutes and gave him an extremely loud applause and ovation.Since that time, I have met lots and lots of WW2 vets. They are all passing away now. When I started on the board, 1000 per day, now down to 600. A young one is around 88. Got to get the museum finished before they all go.

          5. Matt Kruza

            Really cool. Appreciate the insight.

          6. Matt Kruza

            Maybe a blog post sometime from you on this and any other non-profit boards you are on? Both on how you got recruited (or recruited yourself), the experiences it has caused for you, the sense of purpose, interesting people you have met etc. I know Fred has shared some of the causes he is involved with, (and you may have as well.. have read some but not all your blogs), but in general I think many investor bloggers don’t share enough of these stories.

    2. Eric

      I call shenanigans on your housing claim. The driver of a housing costs isn’t the cost of construction, rather it’s the value of the land it’s sitting on. The value of the land is mostly related to its commute-time to high paying jobs. Just look at the prices in SF, NYC and other coastal cities. People aren’t paying a fortune to live there because their houses are so much bigger; quite the opposite.Whether or not this holds true in the future is dependent on a couple of things. If automation destroys jobs as many technologists are predicting, that’ll put even more pressure on the housing markets around whatever jobs remain. Alternatively NYC and SF might change their policies and dramatically increase the supply, lowering prices across the board. If self driving cars completely automate our transportation infrastructure and make it incredibly efficient, then that’ll lower the commute time to far flung exurbs, creating a de facto increase in housing supply.But I can’t imagine is a scenario where construction costs will change the dynamic one way or another. Even if it becomes practically free to raise new cities from the ground on empty land, attracting employers and employees to it is a vexing challenge. Network effects are too powerful to overcome easily.

      1. Matt Kruza

        So we are more in agreement than you calling shenanigans states :). Its a combination of housing costs and transportation as you state that will drive the future. Both matter. And no doubt self-driving cars will be the key to far-flung exurbs, as well as increased telecommuting. Lastly, 50 years from now do you really think San Fran and New York will be our major economic hubs? I live in Cleveland and 75 years ago Cleveland was almost San fran, and 50 years ago Detroit was san fran. That is the other argument against high home prices. But I do agree that high prices has a ton to do with “good jobs”.. but those will be less tied to close proximity in future. Also, in the non-mega cities the big driver of home prices is a good school district. This too will eventually change as some form of charter schools, online learning, and home schooling changes the landscape, and allows more than just those who can buy expensive real estate to have good schools (again, this is non NYC and San Fran downtown where wealthy send kids to private schools). Thoughts? I think we are in agreement, just I only stated some of the argument for housing, not the transportation or job side of it.

  27. pointsnfigures

    Your partner Albert worries about this too. I think there are two truths: Moore’s Law, and also the dropping cost of DNA research.It also pays to look at the different marketplaces to see what’s really going on. For example, in Russia there was the official price of goods and services and the black market price. In world financial markets, there is an underlying shadow banking market that might diverge from the official central bank market showing the true cost of capital.Since economists like to look at extremes, 2008 is a good example. The publicly quoted short term interest rate market (Eurodollars) showed one price, but the shadow banking market had a far different price. Turns out, the banks were “fixing” the price.Since Dodd-Frank really limits who banks can lend to and how much, what’s the real cost of capital? When companies like Lending Tree get large enough, they could show what the street cost of capital is better than the official markets.I traded commodities for 25 years. I saw a few boom/bust cycles. Sometimes, supply and demand doesn’t work to set the real price. I think that we are in one of those cycles right now when it comes to energy. Strong dollar always leads to lower oil prices because the world’s oil market trades in dollars. Central banks in Japan, EU etc have been artificially pushing down their currencies relative to the dollar and that accounts for some of oil’s decline.Today, the official hog market price posted by the CME everyday probably isn’t close to the real market since the retail trade has left and open interest is down by 50%. Our financial markets in the US are not structured to optimize electronic trading the way it’s currently being done, and that screws with prices in thinner markets.In 2008, all commodities declined in price not because of decrease in demand necessarily, but because of a rush for liquidity. Everyone was scared and wanted to be in cash. Margins were pushed, and so everyone sold.I also think that a lot of capital is locked up artificially due to poor regulation-or too much government spending/taxes. That’s a different blogpost, but more likely a book.

  28. andyswan

    I’ll just leave this here…

    1. JamesHRH

      Note that he uses the word forecast.I don’t think he was against situation assessment.Marc Andreessen recently tweet stormed a situational assessment that said:- money does not like the West, too regulated- money does not like Emerging Markets, too Wild West risky- tech innovation clearly reduces employmentStagnation was how he described where the world is at. Not a forecast, just a description.Money needs to move for people to make money and it currently is not keen on doing so.

    2. fredwilson

      i disagree with that, obviously

      1. LE

        But you have to agree that lemmings love quips and aphorisms.Which is why I hate quips and aphorisms. They don’t account for nuance and the particulars where the devil is always in the details and the facts which typically matter.

  29. Kevin Hill

    Sounds to me like he’s conflating changes in purchasing power of an individual with inflation/deflation which deals with the purchasing power of a unit of currency. The world he is describing has existed for a long time and what he’s envisioning more or less fits inside the status quo. What it doesn’t fit is the fact that none of the underlying factors he mentions have stopped inflation from dominating historical trends for the last 2000+ years.The question for inflation and deflation is not if, over time, it has become easier or harder to produce a BTU or a Calorie of food, but rather if that same unit of goods has cost more or less money.

    1. Tom Evslin

      Of course that you are right that person-hours required to make/buy something are different from the number of units of currency needed to buy a market basket.And also right that historically currencies have inflated.Two things may be different this time:1. if the supply of goods increases fast enough (age of abundance) it can outpace the money supply;2. the power of governments/central banks to inflate their currencies may be waning because of globalization and nation-independent currencies. Neither the Japanese central bank nor the Fed have been able to cause currency inflation and it isn’t from lack of trying.

      1. Kevin Hill

        Now I think we are getting to something good =)While # 1 might be temporarily true, you should try and be at least almost as bullish on central bank technological developments as you are on those of the private sector.Because deflation is just so bad for everyone except those who have already accumulated large stores of wealth, if deflation really does come to roost, there will be immense pressure to try something new, such as NGDP targeting or even guaranteed income from just printing money.Japan is actually not a great example for you, as while they did have some deflation, the world bank estimate of the inflation rate for 2010-2014 is +0.4 %, so even in the face of large structural problems, it has managed to prevent a deflationary spiral.EDIT: World Bank link:

  30. christopolis

    if you define deflation or inflation as a general decrease or increase in prices you will get very confused. If you understand that inflation and deflation are a specific type of price increase/decrease CAUSED by increasing or decreasing the money supply it will help.Prices go up and down for all kinds of reasons how is it helpful to average a bunch of prices some of which went down from productivity some of which went up from an increase in the money supply some of which went up because of draught some of which went down because of political reasons?The overly broad definition of inflation and deflation used by most people will never help them understand what is going on.

  31. Rob Leclerc

    On food and agriculture: we’re adding a population the size of Germany to the planet every year and the global middle class is expected to nearly triple from 2010-2030. Moreover, yields increases on all major crops are decreasing on a ten year curve. The (massive) growth and efficiency in agriculture over the last half century was driven by land expansion, irrigation, hybrid seeds, and fertilizer, and to a lesser degree GMO. If we’re going to keep pace, we’ll need massive innovation and investment throughout the value chain. I’m optimistic, but it’s not a given.

    1. JLM

      .The Chinese are buying African and S American farm land like crazy.There is still a world of farm land not be used in the world.JLMwww.themusingsofthebigredca…

  32. christopolis

    the key to his post is that banks will suffer. Does he forget they are too big to fail? That did not go away and it is more true now than ever.

  33. anthonybrown

    With the monetary base increasing the way that it has, betting against inflation (at some point in our future) is not a wise move.

  34. Matt Zagaja

    We already experienced the heaviest deflation possible in some places as the price of content became free and the price of software hit free. General havoc has and is being wrecked on local newspapers. Distribution becomes cheap, consumption cheaper, and we get some power law dynamics. Taylor Swift and the Wall Street Journal are doing more than ok. My friend has a YouTube channel and is making money with an audience he never would have had with the old system and gatekeepers. I don’t know if that’s better or worse than when he would have been on the local TV station.The weird thing about this dynamic is that you’d expect producers to drop out more. In a world where people are paying less for music singers would decide to spend their time becoming college professors. Eventually all the Taylor Swifts of the world would not be in music and consumers would be frustrated at the lack of quality product and demand would be re-introduced as people’s whose need and desire for more Taylor find a way to get her paid so that she stops teaching college students calculus and goes back to singing.This is of course the story of the New York Times, which while still going through a rough patch is reconfiguring its revenue streams. They were giving things away for free and bleeding money as the price of ads they sold got shredded. Reporters have been laid off and departments closed. But then they asked their most loyal readers to start paying something for the product and that revenue stream is becoming a bigger and bigger part of their business and as we all know Tom Friedman still has his column.Another thing about deflation that’s weird is that we have this natural instinct that everything is on an upward vector. Governments have employment contracts that include cost of living increases. What would happen if we assumed a cost of living decrease? That you signed up to work somewhere and they wrote in your contract that your salary would go down 3% every year? It just feels wrong, doesn’t it? Fundamentally we know a few things, like a floor has to be somewhere because the cost of food cannot be free. Making food will always require labor, and people will always want to exchange their labor so that they are doing things in life they prefer to be doing over things that they don’t prefer to be doing. In theory if you have indestructible solar panels that you have built that last forever we can end up in a situation with free marginal energy creation because the sun will cause them to generate all the power we need and we won’t ever need to build more or have workers that repair them, but we also know that is not the case. You’ll have storms, components wear out, and we need to pay people to maintain these systems.So suddenly we reconfigure our understanding of what we’re paying for when we buy something. Whereas before we’d assume that if we pay $10.00 for a hamburger a portion is going towards the electric bill, heating for the building, etc. we change our assumption to be that nearly all the money is going towards the labor that went into its creation. Money goes more and more into services and labor and that’s what we see.Then people argue the robots are eating the jobs, and we see that as well. Tesla makes cars with robots and as a result needs less workers. But can a Tesla ever be free? I don’t think so, but what if Tesla’s cost a penny? Anyone could buy a Tesla that wants one, but the only way for Tesla to be profitable would be if the whole world were buying multiples. Raw material availability along with the desire of stockholders to make money and the natural time requirements for making Teslas create an absolute price floor somewhere. Someone will want their Tesla today instead of a week from now and be willing to pay $0.02 to skip the line. Then once Tesla has supplied a Tesla to everyone that wants one, the factory becomes useless, it shuts down and everyone moves on. They have to creatively figure out how to meet the needs and wants of people in a different way and then this requires both creativity and capital that certainly isn’t free.Sorry this is so long.TL;DR: There is a natural floor for prices of goods and the value of time and labor becomes a larger component of costs. Also agree with Andreessen that human wants and needs are unlimited.

    1. ShanaC

      I don’t think needs are unlimited – wants might be, but at some point we all know we can’t have it all, and we have a baseline of happy where getting more of our wants does do very much

      1. Matt Zagaja

        Thinking about this a bit more, I think you’re probably right about that.

  35. kidmercury

    US treasury bonds have been generally rising for hte past 34 years.if it has a beginning, it will have an end.the idea that we are in global deflation can be easily disproven. look at all the other currencies. ask russia, belarus, the entire eurozone, any oil-exporting economy (venezuela, iran, nigeria) if they are experiencing deflation in terms of prices.the whole world is running to dollars because of central bank mismanagement around the world, but the stage is being set for the world to run out of dollars too for the exact same reason. look at what happened to their currencies. the dollar will get its turn in due time. while myself and many other kooks have been saying this for a while (since at least 2008), we are getting closer with each day. the trajectory remains.even domestically, you have a rising stock market, rising real estate in most areas (some rising faster than others), and rising wages. energy has collapsed largely because saudi arabia is flooding the market as an act of economic warfare. we may have reached peak demand, but we’ve reached peak resource also. monetary policy is the key fulcrum and it is destined to be seized by platforms……this is perhaps the most glorious aspect of the internet!!!! it is our destiny!!!!9/11 was an inside job,kid mercury

    1. ShanaC

      they are inflating sky high, but they also are under echos of politics

    2. JLM

      .As often happens, I agree more with you than you do with yourself.Well except for the 9-11 quip. It was George W Bush’s fault, no?JLMwww.themusingsofthebigredca…

  36. jochend

    Technology is driving down energy and consumable prices, but what about asset prices like stocks and real estate in main metropolitan areas around the world increasing fueled by the cheap money supply and lack of alternatives … will this not force central banks to increase interest rates at one point, even so if in day to day consumption we might see deflationary tendencies?

  37. Matt Kruza

    One of the best blogs (and really overall view points on deflation – is Mike Shedlock – “mish”). here is a link to his blog post today http://globaleconomicanalys… Good stuff for the most part

  38. charlesbonello

    If you have high conviction in an ongoing, deflationary environment, the answer is pretty simple: lever up to buy real estate, stocks with high debt loads/beta, and if you’re a position to be an acquirer, competitors/”up and comers.”Valuations are largely driven by two key things: supply/demand and the underlying performance of the asset. I’d argue that both are pretty equal drivers.Leaving aside the “performance” question, if we continue to see a deflationary environment, that necessarily punishes “savers” writ large by “deflating” the value of their cash reserves. There’s only so many places that capital can flow when yields are low — out of fixed income and into higher-yielding or differentiated asset classes. That money is cheap in this environment only makes borrowing even more attractive.I’d argue that this, combined with precipitously falling costs around starting and scaling a business, and new capital flows into the startup world (from crowdfunding, non-US investors, corp VC, etc) are as responsible for people running around with their hair on fire around high valuations as the really positive and uplifting indicators like robust traction, and great talent into the ecosystem.Theoretically, that means being able to buy lots of assets in a capital-light way. In reality, who knows what the hell that means if rates turn around and go up. As Brad and a few others pointed out, we saw what happened the last few times around. The winners will keep on winning, but the end will probably come sooner and uglier for under performers in this ecosystem.

  39. Stephen Kalil

    Re energy prices: Do the Saudi’s have the reserves and production capacity they claim? They keep that info pretty close to the vest. If so, I guess that helps make the case for lower energy costs moving ahead. If not, what are implications?

  40. Jim Greco

    I get the gist of what he’s saying, but the comment is a little too fast and loose with the definition of deflation. Moore’s Law helps drive down unit costs of processing. The uses of that processing power doesn’t stand still though. New applications that harness additional processing power are possible that weren’t even just a few years ago.

  41. petec

    I think your premise that the global economy has a deflationary bias is unfounded. Just because oil prices are down and tech is inherently deflationary does not mean the entire global economy is facing deflation.This article just out today states that the US economy has surprisingly not experienced deflation as a whole. It states “First of all, the Fed wasn’t alone in being surprised by the failure of actual deflation to emerge”http://krugman.blogs.nytime…If you or anyone else has any evidence otherwise please share.

  42. LE

    Moore’s law will eventually even drive the price of health care down (see Andy Kessler).It’s actually the opposite.First, labor in health care delivery costs is huge. Machines are not going to take over a doctor’s judgement and in fact they have added to costs.One of the reasons that health care costs are so high is because of technology. All those tests that can and do get done (MRI’s Cat Scans) not to mention high tech life saving robotic surgery. Further, as people live longer (because of technology advancements) there is more health care to pay for. In the past someone who died in their 50’s or 60’s wouldn’t live long enough to be a burden in the 90’s on the system. Also the advent of “end of life” measures (tremendously expensive and I’ve seen it first hand as has my wife (every day)).Back in the 80’s when I had a health plan at my first company the “gold card” “all you can eat go to any doctor no questions asked” Blue Cross plan cost about $65 per person per month. An entire family was $125 or so iirc. This wasn’t the shit plans you have today. This was the best plan, the one that I used myself. The one that I covered all my employees on. I don’t even remember batting an eye at the cost at the time.What changed to make costs higher? Technology and tests as well as risk of lawsuits and obviously other factors. But technology played a large role in driving up costs.

    1. Richard

      Compare CPI of healthcare and education to electronics. It is 300x.

  43. Tyler

    Fred, “We’ve been in a low rate and deflationary cycle since the financial crisis of 2008,”re: deflationary cycle: We’ve been in a deflationary cycle since 1980. The trend line extends far longer and implications could be massive.Japan is an interesting case study as their early 90s real estate crash gives us a 25 year view into what could happen.

    1. fredwilson

      thanks for this comment and i love the chart you added. as JLM likes to say around here, “well played”

  44. Chris J Snook

    This is an awesome question and discussion guys:The good news is that there are lot’s of levers to pull, so the real question is which ones can we ‘eliminate’ as obsolete so that we can narrow down the first principle levers that may provide some utility in stabilizing and solving this issue for humanity in the coming decade.Here are some more noodles to chew on this question:-With real wage growth stagnant the last 20+years relative to price of fundamental goods and services (housing, personal transportation, food and higher education etc) it is hard not to bias towards a much more pronounced deflationary cycle in years to come but there are macro forces in automation that will destroy 50% of the current jobs employing people today in repetitive tasks while simultaneously creating a vacuum and need for jobs that machines and AI cannot yet do for at least the next 100 years.So…What is the intersect of these two dynamics and the timing gap before scale is met?Also…What are the required disruptions in education/efficiency and skill development, emotional intelligence development at scale to prepare the masses of humanity to fill this void, survive it’s initial fall out, and not become a cash drain to society and federal spending?-At a gut level (without real clarity as to how it all shakes out) I definitely bias to a belief that the institutions of the last 100 years face massive obsolescence (i.e. central bank #4-The Fed is now in it’s 102 year and will face massive modification or replacement) as we are heading towards this saeculum’s pinnacle storm/crisis event by 2020ish based upon (MUST READ BOOKS) thought leadership on cycles and generational archetpying studies from Neil Howe (The Fourth Turning Book); and the collapse-drivers of manufactured complexity speed vs evolutionary biological constraints (slow) Rebecca Costa (The Watchman’s Rattle book) and that it’s manufactured product of inflation/deflation will not resolve itself with the normal short term debt cycles that have been predictable in the past century. T-This could mean an extended deflationary cycle of 10-20 years for all consumer goods and products demand as the deleveraging is not able to be contained beautifully (as Ray Dalio says) and consumers retreat backwards piled into non-producing debt burdens.-This could also mean a tremendous reflationary trend for investors and owners in certain business to business markets as software eats the repetitive task employee in previously unharmed high employment industries like accounting.-The Fed will also play a major impact for at least the next 5 years-10 years as the Creature from Jekyll Island fights tooth and nail to invent the next ‘asset bubble’ for all the credit and capital to flow into. Can they re-prop up housing with 60 year mortgage products that allow for continued madness in suburbia and urban dwellings? I dunno but if you own property you don’t intend to live in for 20 years that is between $300k-$2.5m (mortgaged house buyer personas) in any town with decent restaurants and culture the time to cash out and move to liquidity is yesterday in my humble opinion. Sure money will be left on the table for a little while longer but the suckers are starting to buy back in to the American Dream (nightmare) again in mass based on a linear growth mindset that always goes up and to the right.-In 2001 with perfect credit my mortgage on a $196k note cost me almost $1700 per month with PITI, because rates were at 7%. The Fed isn’t going back there any time soon, but can’t stay at 0 any longer as it cripples the growth engines and lending sources to job creating companies because there is no spread to justify it. Consumers get tightened and hurt with more normalized rates, but small and growing businesses actually get access to capital lines for growth in that environment which actually drives real productivity growth (but this takes too long for a crack addicted world of consumers and investors alike), so real pain lies ahead either way.-The only way the now “normal” single family house “From the low $400ks” can be bought and held by average Joe and Jane is with low interest rates and low downpayment, and the hope of appreciation in a 5-10 year window. If and when one or more of those variables is no longer certain then stagnation at best and deflation at worst is imminent unless a magic trick like a 50 or 60 year mortgage can be packaged and sold to the masses as something intelligent to do :(-Millenials and Gen Z aren’t buying at the clip the X’s and Boomers did and are being more frugal with their debt load. Yet in every town I live and travel that has energy and innovation in it’s current mantra, homes are being built again left and right for whom??? The developers that push these out with $3500 deposits to hold in the next 12-18 months will make rich and look smart but beyond then? It’s a secondary market nightmare for resellers or unfinished projects.-Real costs at the same time for essentials like water (in California) are facing the opposite drivers though and are at risk of being hyper-inflationary, which would put even more deflationary pressure on disposable income goods, services, or non-essentials.-Uber will save many families in the short run with supplemental incomes as people stop buying new or second cars or start putting those liabilities into asset producing use as part time drivers, which buys us all 5-10 years at least before UBER uses only self driving cars and all those people are again out of work (hopefully they will listen to books and university on CD/MP3 while driving to create skills for the creative/intuitive economy jobs that will be abundant as software/AI automates all the boring shit we need to do.-It’s a long rant I know and not all necessarily valuable, but I know that as it relates to deflation being permanent I can say I definitely think we must be heading into a deflationary cycle of length, but am smart enough to also say I have no idea if that will actual happen in reality with all the levers to pull.

  45. JLM

    .One of the benefits of being a little older when looking at the US economy is the frame of reference that experience provides. I (not by myself, part of a damn good team) was building a high rise in Austin — One American Center at the corner of Sixth and Congress — when the Prime Rate peaked. We were borrowing $72MM at P + 1. Ouch!We survived only because we had a ready source of funding.Look up and see what the Prime Rate peaked at in Dec 1980 — 21.5%. The world was about to get an enema and it was going in at Sixth and Congress, so I thought.But, it didn’t and the project was a great success. The world did not end and today the Prime is 3.25%. It was a nasty business cycle and the boat came keel up even though it looked like it was going to founder.There is almost no evidence that the US is facing deflation — which in my view is not a catastrophic event anyway — when one looks at the actual graphs of inflation. The components provide an even more definitive granular view.What we are facing is a “market cycle” wherein certain asset classes and commodities (oil) are fluctuating because of “normal” — bit extraordinary but normal nonetheless — market driven factors.I was overseas during both of the 1970 oil shocks but I did work for an oil company thereafter. It was a supply and distribution problem.The issue today with oil prices may not be one of declining prices but a return to a more “ordinary” and normal pricing algorithm driven by the advent of shale oil, fracking, exploration/production, the return to the market of “fallen producers” and the reduction of demand having weathered the huge increase in Chinese demand. American fleet even more efficient.Can you imagine what would happen to the price of gas if we had a coherent national energy policy which allowed nuclear power into the mix and which allowed Federal lands to be used for production?Gas would be $0.75/gal and we would have the biggest structural tax decrease in US history. It is actually possible if only we had a rational energy policy.It is difficult to characterize any of these developments as anything other than market forces let loose on a now much more finely attuned marketplace. As the information flow has become more democratic, we react faster.I have attached a couple of graphs which may support these comments. I started out looking for the evidence of deflation but I found none. What I did find looks to me like a business cycle.We need about 2% annual inflation to be able to build wealth with commodities and assets, like real estate. I think we are right there.The low interest rates? Driven by a huge pool of money looking for work (figuratively).I conclude that anyone wandering the darkness looking for widespread deflation is going to need a lot of lamp oil.No generation invented sex or the business cycle though we all know a little more about . . . business cycles than we did as teenagers.One last word, when looking for trends — rather than the flavor of the month — it is useful to look at moving averages over some reasonable period of time. Every time I think I have found an inflection point, I get a good scolding by the two-five year MVG AVE.JLMwww.themusingsofthebigredca…

    1. Richard

      We need about 2% annual inflation to be able to build wealth with commodities and assets, like real estate. I think we are right there.This seems like a tax. Why do u feel it is necessary ?

      1. JLM

        .To create wealth by paying off residential debt and building equity. A home is the biggest investment that most individuals will ever make and it will have an incredible yield if held for 30-40 years.Home ownership has been the greatest creator of wealth for 60% of the US.JLMwww.themusingsofthebigredca…

        1. CynicalPragmatist

          You sure about that? Factor in all the interest paid to the bank over the life of the mortgage (yes yes, discount the tax-deductible portion of that), factor in the devaluation of the dollar over that 30-40 years, factor in the repairs and maintenance of the decaying structure itself over those years, factor in property taxes over that time (even when you own, you still really just rent), then add in the realtor and title and other fees every time the house changes hands.At the end of the day, you can sell a house for 5 times its nominal purchase price 40 years later, but you haven’t “created wealth” at all. It has just been, in effect, a complicated piggy bank (you could have saved the money into other vehicles over that time) that you happen to live in.IMO, the great american dream of housing is largely a scam. (And I’m not even getting into the aspect of home mortgages being a huge driver of fiat money creation by the banking system).Enjoy your debt bondage masquerading as a well-marketed asset class. Sorry to be cynical, but do the full math.

          1. JLM

            .Aren’t you failing to value the utility of the shelter itself?Shelter is not otherwise free. It has a cost whether owned or rented.All that you say is correct, there are a number of costs but they are not a zero sum game — if you rent a house you pay all those things but on behalf of the owner.When you have paid off a mortgage, you then have no cost in many of the things you mention but if you rent, they never go away.You are right it is a “complicated piggy bank” but it is an essential element of the American Dream.I don’t find your comment to be the least bit cynical. Just do all the math.JLMwww.themusingsofthebigredca…

          2. CynicalPragmatist

            Yes, there is definitely value in the utility of the shelter….and you pay for it, whether via rent or whether via all the costs of “ownership” I mentioned. My point was more that the “wealth creation” from price appreciation is not all it is often cracked up to be and therefore likely does not actually cover that cost, as many think it does. i.e. “ownership” is just a complicated way to pay a rent.When you have paid off the mortgage, the interest expense does indeed go away. However, the property tax does not go away, the maintenance and repairs and devaluing of the structure do not go away, and the US dollar does not stop losing its purchasing power.When I said complicated piggy bank, perhaps I should have said “complicated yet not particularly efficient.” You can continue to buy into the american dream all you want, I still say the housing piece of it is largely a well-marketed financial scam that doesn’t make most long-term home-“owners” any wealth in real terms.

          3. JLM

            .There is no need to speculate, this is a real world phenomenon.My personal experience is quite contrary to what you suggest. Like any investment there will be vagaries of any market. For me personally, it has worked out spectacularly well twice.Savings is part of the creation of wealth under any analysis. If you buy a $100,000 house and pay it off, the equity that you have created by the reduction of debt is savings.Paying off an old mortgage with inflated dollars is the way to make inflation work for you.Again, I think you are disregarding the utility of shelter. You have to pay for shelter whether you rent or buy. The cost of shelter declines dramatically when you have paid off your mortgage.JLMwww.themusingsofthebigredca…

          4. CynicalPragmatist

            Um, when did I speculate? The ones speculating are most American homebuyers, actually. (see what I did there?)Look, with fortunate timing you can make money in *any* asset class (stocks, bonds, pork bellies, derivatives, real estate, silver, whatever). And with good timing multiplied by leverage, you can make a killing.If you yourself have made money on your house twice, I salute you. But unless you’re like 80 years old, those were most likely shorter plays than the 30-40 year time period that we began this thread discussing. I will absolutely concede that some people clearly can and do make money on their house. If you bought in the Bay Area after the lows of the financial crisis, if you bought in Austin TX 8 years ago, if you bought in Vancouver before all the hot Asian money poured in, then yes, life is good. With fortunate timing on a levered asset (small % down on a house), you can flip it after say 3-5 years of a hot market and absolutely come out ahead. No doubt.Another interesting case where folks did well on housing was in the late 70s in the US when inflation got bad, since that actually reduced the real value of the mortgage debt they had to pay off. You alluded to this point above, but my take is that net net inflation hurts most people more than it helps them (if you’re a pure debtor with your mortgage and nothing else in life then yay your debt gets reduced in nominal terms, but if you have any other savings or investment gains you get taxed on, inflation is just an extra tax on all that, on top of all the other ones you already explicitly pay). Don’t let the perverse incentive of inflation helping a debtor make you think that inflation is good for most people. In general it hurts the 99%.My main contention, though, is that the typical American (i.e. averaging out those periods of fortunate housing market timing) taking out a mortgage and paying off a house over that 30 year time horizon, really doesn’t do so well in terms of generating a great yield or great wealth, despite common thinking on this. I get that you “create savings” when you pay off debt, but I can also stick 10% of every paycheck in the bank for 30 years, create a lot of savings from that, and not have to pay hundreds of thousands in interest plus property taxes over that period.And I will grant you that your cost of shelter indeed goes down after you pay off a mortgage, but man, it is an expensive debt-treadmill for 30 years that you have to run on just to get to that point.

          5. CynicalPragmatist

            er: in 4th paragraph above I meant to say reduced in real terms, not in nominal terms

    2. LE

      I was borrowing $72MM at P + 1Old-er men, driving in cabs, telling stories from back in the day. To wit:I had a mortgage in the 80’s that was at something like 16% (iirc). Somehow at the time that didn’t seem like a big deal. Taxes were low (was in PA at the time) and the price of the house was obviously pre run-up. [1] [2]Likewise when I bought machinery and got bank loans the loan rates were in the mid teens. Didn’t matter, still made money. Never forget the day that I bought one of the cars that I always wanted as a kid growing up, a Mercedes. [3] Loved the car but the thrill wore off about 2 weeks later (I still love to buy cars though).[1] That house, which I obviously moved out of a long time ago is now for sale for 4x what I paid in the 80’s.[2] My Wharton tuition was approx 6k per year which in today’s dollars is about $16k.[3] I remember in the 70’s when a neighbor who ran a labor union drove up in a big fancy 450SL which was the flagship in a time when Cadillacs were king.

      1. JLM

        .Several interesting things in your comment.Real experience creates perspective, the only thing the young do not have.Historic interest rates were very high.That MB — I had a 1984 450SEL which was as big as an aircraft carrier. The car was the best road trip car ever. I wish I had it back.The price of your house is the exemplar for why real estate is such a good investment over time.JLMwww.themusingsofthebigredca…

        1. LE

          Key “over time”.I’ve told the story of the building that I bought in CC Philly back in 1991. At the time my dad told me “you can’t go wrong with this and if you ever want to sell it I will buy it from you”.So about 7 or 8 years later I wanted to buy a different building somewhere else. I hadn’t spent time in the neighborhood that the building was in (Old City, Philly) but my dad was there several times per week. So he had the heartbeat of the area (and I didn’t). It was changing and like a floor trader he sensed the opportunity and “got one over on me”. [1]So as he had said he would do, he buys the building for what I paid for it back in ’91. Didn’t seem (to me) that prices had moved in the 90’s and it was a quick transaction.So what happens? A few years later (2004 or so?) he ends up selling it for roughly 3.5x what he paid me! My own dad!. Not to mention he jacks up the rent for the tenant after the lease expired (and they paid).The lesson? You gotta have your feet on the street to get the feel for things. He had it, I didn’t. That said I spent my time on other things which ended out playing out pretty well. (See how you can spin a story anyway you want?). You can’t be in two places at one time.[1] No hard feelings at all. Was sport and fair game. He was always telling me to “keep on top of things” and I didn’t.

        2. LE

          I had a 1984 450SELWhich no doubt had real leather not “MBTEX”. [1] I lovethe “just as good as leather” in the link I provided. Like saying a cubic Z is “just as good as a diamond”.[1]

  46. LPaddy

    As an active reader of AVC, I am not surprised that most of the comments have extolled the important role that technology innovation – and in particular software – might have in improving productivity and putting a downward pressure on prices in the last few years.While this might sound logical, most productivity data for advanced economies have shown little improvement for quite some time.I think that we possibly need to broaden the picture and look at ‘deflation’ a symptom of a broader economic and social issue, dubbed by some economists like Larry Sumners ‘Secular Stagnation’.…If you do not have the appetite to go through Larry’s speech, I can try to summarize what Secular Stagnation means by reposting a comment from a fellow reader on the'”Secular stagnation” is not a supply side story – rather, it is really a narrative of enduring demand deficiency (in which massive legacy debt and lousy demographics both contribute do deficient demand).With rapidly advancing automation and falling capital costs, the impact is to discourage investment. As capital equipment becomes obsolete more rapidly, and as capital equipment must be depreciated more rapidly, and as capital equipment is falling in price more rapidly over time (making it lucrative to postpone an investment, even by 12 months), so the investment share of GDP is likely to be depressed. The faster our capacity for automation advances, the lower the volumes of potential investment (while we are trapped against the zero lower bound). And with investment depressed, with investment incomes depressed and with labour demand depressed, demand will be depressed more broadly (including consumer spending, including GDP).Against the Zero Lower Bound, faster technological advance counter-intuitively condemns us to a lower rate of GDP growth. If we want to escape secular stagnation we must consider very unorthodox options like negative interest rates and basic income schemes.

  47. idrake

    Forgive me, but I don’t believe innovation and other newly acquired efficiency is the basis for deflation. Inflation and deflation are (as I understand it) a function of the money supply and demand.If a new computer costs $2k today and the same computer costs $1k next year, we cannot say deflation caused the change, nor can we say they change caused deflation.It seems like that is what’s being suggested here.My understanding is that the money supply has grown tremendously, but the demand isn’t there. When demand returns, the supply will be plentiful and inflation will take over.

  48. Lewis Katz

    I am not sure I agree or not that an extended deflationary environment is coming. But here are the reason why deflation usually occurs: Change in Structure of Capital Markets, Increased Productivity, Decrease in Currency Supply, Deflationary Spiral and Austerity Measures. All of these simply impact supply and demand and therefore price. But to Fred’s question of – what we should be doing or not doing, if it does, here are a few thoughts:In a deflationary environment, people slow down purchasing as they wait for prices to fall. So those prices then fall even further and companies lay off workers. Forcing prices yet lower. In a deflationary environment it makes sense to stay in cash, fixed rate vehicles and stress driven commodities like gold – as general portfolio approaches. For example, in the U.S. there have been three recorded deflationary periods – and gold increased its purchasing power in each of them – by between 44 percent (1929-1933) and 100 percent (1814-1830).In terms of actual companies, product and technology – it would seem you want to invest in companies that provide access to goods, rather then those that provide the ability to own those goods. Rent vs Buy, Lease vs Own. Products with standard life cycles begin to extend. Cars are kept longer, computers are upgraded rather then thrown out. So the service providers of these type of goods are beneficiaries. Sharing economy and peer to peer benefits. Companies with long contracts and licensing fees will benefit. Companies that focus on smaller communities benefit. Companies that hold inventory suffer. Broadly, fin-tech may suffer and revenue begins to outweigh engagement.Some Venture Capital, arguably could suffer. Banks will reduce the hurdles to access loans as they search for any yield, and entrepreneurs will be able to access much cheaper capital, depending on their stage. Zero cost debt, placed in growing businesses may begin to win out. See Japan last 25+ years for example. Public equity markets become much more short term trading based. People look for the small caps with upside and the big boys who can borrow at zero rates and hoard cash. As the cycle bottoms, distressed becomes in vogue, recaps happen, then M&A starts and the cycle begins all over again.There is lots more to dig into around this and lots of ideas. Interesting topic. How do you think it effects crypto -currencies?

  49. J franta

    energy and health care are growing markets. falling ASPs is not deflation on its own. if the market is growing, who cares about the ASP?

    1. JLM

      .I agree more with you than you do with yourself.JLMwww.themusingsofthebigredca…

  50. afat

    I just kicked off a kickstarter to try to builds some experiments to deal with a lot of these issues. So far I’m not hopeful that there is enough interest in looking at these things differently to get it funded, but I’m going to build it anyway.…More at:

  51. Gregory Magarshak

    Deflation would mean that the money supply has steadily been going down. The prospect of that is indeed what the central bank battles when they print more money. They learned their lessons from the Great Depression, when they sat by and let a third of the country’s banks fail. Even Milton Friedman criticized them for that.Stiglitz has an interesting piece on it (… ) where he talks about how we went from 20% of Americans being employed in farm-related jobs to just 2% today. If we look at it from the point of view of economic sectors (… , the primary sector (agriculture, raw materials) was disrupted by automation & the dust bowl, and it took people a decade to migrate to the cities, and for enough factories to be built and the economy restructured to thrive again. Grapes of Wrath and other period literature captures the plight of regular people of the time.After we transitioned to a manufacturing economy, we were lucky that after WW2 our competition had mostly been bombed out. In fact we helped them out with the Marshall Plan, but in the meantime, the USA saw the rise of Detroit and American manufacturing. Steve Blank has a great presentation on the history of Silicon Valley I remember seeing.But after that, advances in technology and the rising power of labor unions prompted corporations to begin increasing automation and outsourcing, that continues apace today. Logistics have improved tremendously, to the point where even Apple, once proudly Made in the USA (TM) is now Designed in Cupertino, Assembled around the World. Steve Jobs famously said to Obama that the manufacturing jobs aren’t coming back. Well, they are, but to robots.I think what we are seeing is mostly local to the US, that the demand for local labor is dropping even as things are getting cheaper. It’ll become easier and easier to deploy a safety net for the growing unemployed class. The narrative of taxing the “productive people” to subsidize “moochers” will eventually give way to the narrative of taxing robots to subsidize basic human existence for millions of unemployed people who, whether by moving in with their parents who are now elderly and receiving public assistance, or through other means, benefit from public assistance themselves. And the puritanical moral stance that “he who does not work, does not eat” will be replaced with an acknowledgment that all of us, in every generation, are heirs to the wealth knowledge and infrastructure that came before us, built by people who need no recompense other than recognition and memory. When things (besides rent and food) become so cheap that everyone can afford them, our societies may as well give a basic income to everyone, like Alaska does.As it is now, I think you are finding a mean reversion, with the American worker in a race to the bottom with the rest of the world. If you divide today’s GDP by the number of people employed, and adjust for inflation, you’ll find that average worker productivity went up 4x since the 1950s, while wages stayed stagnant or went down.…Companies aren’t hiring like they used to. There is no need. Automation and outsourcing have reduced the demand for local labor. It goes a little bit like this: Local Humans -> Outsourced Humans or Wage Slaves -> Robots. A lot of the wage slavery can be fixed not with minimum wage laws, but with a basic income, allowing people to choose how to spend their time, and have real opportunities to learn on the job instead of getting paid. The alternative — widespread poverty and stagnation — is far worse for societies. That is, in fact, how you get deflationary spirals and hoarding.…Countries have to break their dependence on the old style pyramid of more young people paying for old people’s social security. It encourages exponential population growth, which just leads people into trouble later on and kicks the can down the road. This is a good thing. Overpopulation is behind some of the biggest dangers that face the entire human race, including climate change, overfishing, ecosystem collapse (bees and others disappearing due to stresses introduced by changes in agriculture), factory farms (ethical issues) etc.

  52. Josh Morgan

    I think it is wrong to assume innovation results in deflation as when Mr. Breslin relates Moore’s law to healthcare.Developing top notch medical devices and pharmaceuticals is not getting cheaper because of increased regulation, taxation, and other external factors. Given that many of these advances are necessary and backed with huge demand, prices tend to creep up. This is just one example.If we are speaking in terms of commodities like oil, if we lived in a vacuum where all of the state actors around the world acted peacefully and encouraged a market economy approach–prices would surely go down as new discoveries are made and efficiency in the use of the commodity increases. Unfortunately, we don’t live in a vacuum.If we are making predictions, once the oil storage situation works itself out and production is scaled back due to cost of extraction, I would expect oil prices to increase.

  53. 2face

    Typo Fred. “I’ve did not reply to Tom’s comment “

    1. fredwilson


  54. Semil Shah

    Other potentially deflationary force: 3D Printing

  55. Manuel Zafra

    Wouldn’t this sustained in time deflation take us to a scenario with a chain bankruptcy of central banks?

  56. wiseguy

    1. Government or other relatively few economic participants lend tons of money into existance.2. It move around in the economy through the supply networks, until it ends up in the pockets of a few other economic participants who already have more than they can ever spend even if they would try to.So what we call an “economic cycle” is not a cycle, so if (1.) does not spend more money faster, then at some point, all money would pile up in few pockets, leaving the rest with little money, forcing prices down.Hint:If (2.) just “lend” the money, it’s not spent, because balance sheet wise, it’s nothing else than an “asset switch”, so instead they need to spend it for products and services that cannot be “activated” in a balance sheet and are basically consumed…..doesnt happen, so situation stays as is, so deflation becomes normal and debts around the world grow.

  57. sc

    Certainly an interesting hypothesis, but I can’t get my thoughts past some basic macroeconomic tenets (which maybe the commenter is saying no longer exist?)1) We are operating within a constrained set of resources (energy, beef, water, etc)2) The human population is (on the whole) expanding as is their energy demand per capita.3) New forms of transportation, communication, computing, etc will require greater and greater energy to become successful (even if the things producing the compute power are smaller)If we assume these things, can we really make a rational assumption that energy prices will be deflationary in the long term (say, 50-70 years?) I can see a play to things that aren’t dependent on inflation as other commenters have stated, but not sure I can buy wholesale deflation.Either way – an interesting discussion and topic of thought!

  58. afat

    Fred, I think you are doing a pretty good job preparing for this. In an environment where our core capital stock is deflating, every invention that lets us make more diverse things creates new opportunities for us to build niche monopolies. Kickstarter, etsy, companies like this that let us optimize what we make and connect it to who we make it for will keep a number of prices high. The challenge is that it is really hard to get your investment dollars in when it is a guy in in his living room who only needs $10k to create a couple million dollars in value.

  59. Steve

    If we are looking at a deflationary future, how much of that is due to stagnant wages (in large part due to workers not sharing proportionately in the increased productivity in recent years)? After all, if wages were increasing proportionately with productivity, more dollars would be chasing the goods, leading to some inflation of prices, right?

    1. JLM

      .Wages are not stagnant — they are declining.Average household income in the middle class is down by about $5K in the last 6 years.Household expenses for healthcare are up by a similar amount with increased premiums and real deductibles.The injection of 5-20MM illegal, low skilled, low wage immigrants ensures that employers are not going to have to boost wages. Dishonest employers are having a field day.Unions are totally ineffective in training labor from apprentices to journeymen to master craftsmen.This all at a time that the entire wage curve has been reset to a lower family of curves by the recession, outsourcing of jobs and the advent of technology.Increase the minimum wage in this environment? More job loss as experienced in places like Seattle.The good news is this — the 2014 election was people voting their pocketbooks.It would take so little to re-ignite the US economy. So little.JLMwww.themusingsofthebigredca…

  60. Dan

    I originally had this same line of thinking. That we were definitely in a deflationary environment and I still believe we are. Tech is making things cheaper, unbundling things such as cable will make them cheaper, energy is getting cheaper, etc. What I found interesting though was other things that seemed more expensive. I’ve definitely noticed that things like craft beer and ‘trendy’ (original/small) restaurants are quite expensive. So where we are definitely saving money on cable / energy and the like, we are using that money on things to raise our experience. It’s tough because its a “physical” market so its hard to invest and scale, but that is my view.

    1. Tom Evslin

      Your observation is right on: we have a barbell market where value goods and luxury goods do well and there is little room for the middle. Brands like Macy’s, Buick, Kraft are in a world of hurt while house brands, Walmart, craft beers and Tiffany are doing just fine.Probably only the low end should be in the cost of living. The high end is us indulging ourselves with our extra wealth.But the high end, which is usually labor intensive, helps to absorb the labor freed by technology.

  61. Druce

    If you really believe in deflation, Bitcoin isn’t such a great investment. And the whole infrastructure of finance, and quite probably our human brains, are pretty hard-wired for inflation. So we’re going to be in a world of pain. But we’ll need some new financial infrastructure that is deflation-friendly. Payments systems that run on physical cash to sidestep negative interest rates, some replacements for the things that will go bust, like defined payment insurance plans and pension plans, etc. Dog food for all the people who are stuck with fixed mortgage payments and underwater houses.But why would those green pieces of paper go up in value, when everything in our financial infrastructure assumes it won’t happen? The Fed is trying pretty hard to make sure greenbacks keep going down in value, and the first rule of investing is, don’t fight the Fed.I dunno, I’m a pretty simple guy and came of age in an inflationary era, I don’t believe in deflation. You have a short term balance sheet problem and a liquidity trap. Once inflation gets going, it solve the balance sheet problem by inflating away the debt, so it’s a problem that solves itself. The Fed is stomping on the gas, but the clutch isn’t engaged. Once it catches, look out.To have a world where you don’t have inflation, you have to have a world where the power elites don’t want it to happen. Which is pretty nuts. Or you have to have a world where the Fed can’t make it happen for some reason. Which is also pretty nuts, you’d have to believe in a Piketty world where supply keeps growing as robots build more and more robots, but demand never filters down to the masses. Which again could be easily fixed by policy, if people wanted to fix it.I think if you look at all the demand from emerging middle classes in Asia, everywhere else, it goes against pretty much everything I learned to see how you get a generational deflation problem. Unless you really believe in Piketty, or policymakers and power elites really screw the pooch.Bernanke doesn’t believe in secular stagnation –…See alsoSolow:…Krugman: http://krugman.blogs.nytime…Summers:…Rognlie:

    1. Tom Evslin

      Just for the record, I’m not a Piketty fan.The emerging middle class is emerging because it is productive. Sure, the newly un-impoverished consume more.. but they also produce much more.The new consumers in India and China are workers, hard workers.

      1. Druce

        If I was going to bet on productive people getting integrated into the global economy at a higher rate, the same, or lower next 30 years vs. the last 30, would probably bet on lower. Most of the opening up has happened, and the places with productive people have demographic headwinds.

      2. Druce

        Deflation is anathema to central banks when everyone is up to their eyeballs in debt.The question of our time is whether QE/easing -> inflated asset values -> more debt -> inflation -> solves debt and overinflated asset problem.Or QE/easing -> more debt -> deflation/no inflation -> even more precarious balance sheets -> financial crises and economic chaos.If you believe in deflation in spite of policy, you need a mechanism whereby printing lots of dollar bills doesn’t decrease their value because they don’t get to people who spend them. The whole robots/secular stagnation/wealth distribution thesis is most credible one I’ve heard. I’ve also heard weird confidence fairy explanations, but I think they depend on second and third order thinking that most people don’t do. Or maybe QE is totally ineffective, everybody just hoards cash forever, or maybe power elites are nuts and excessively fearful of inflation and screw the pooch.But if the value of everybody’s debt starts rising persistently we’re gonna have a bad time.

  62. csantiago702

    A persistently deflationary economy would be horrible:When everyone expects prices to fall in the future, everyone becomes less willing to spend today. Sitting on cash becomes an investment with a positive yield. The less everyone wants to spend on goods and services, the less businesses sell of everything, and the more they have to compete by lowering prices further, making everyone less willing to spend… a vicious circle of economic contraction.Businesses normally find it very, very difficult to cut employee compensation in line with declining prices, so they end up cutting costs by firing people instead, making everyone less willing to spend, so businesses sell less of everything, forcing them to cut costs futher… contributing to the vicious circle of economic contraction.A deflationary economy is a negative-sum game in which everyone loses.Also posted on HN thread:

    1. Tom Evslin

      We know that the phone, tablet, or computer we’re going to buy today is going to be cheaper tomorrow. But we buy it anyway because the value we get by having it more than makes up for the money we might save by waiting. Somehow the tech industry is not in a zero-sum declineWe can’t really put off buying food or energy or medicine.Inflation makes us buy hard assets without much utilitarian value either as a leveraged investment or to protect against monetary inflation.So, I’d argue, that deflation pushes us towards more productive purchases and inflation to less productive ones.

      1. csantiago702

        How about assets that are neither phones, tablets, or computers nor food, energy, or medicine — assets such as shipping containers, cargo ships, airplanes, trailer trucks, delivery vehicles, engines of all kinds, manufacturing equipment of all types, HVAC systems, laundry machines, piping…? Don’t you think people would delay purchase/replacement of these and many other assets if they expect prices to come down?

        1. Tom Evslin

          I think people will make rational decisions on those assets. Do I incur more maintenance and downtime cost by not replacing this engine than I save be deferring the purchase? Do I miss more opportunity $ by not having another shipping container than I save by holding off on the purchase.It is good for productivity as a whole that we don’t throw things out before their useful life is done.The decision to buy before the price goes up, which is forced by inflation, may actually be the wrong decision from an equipment productivity PoV.

  63. marcus

    I think about a deflationary (or what the Fed has taken to calling “counter-inflationary”) macro-economic scenario constantly. Even though I have relatively little personal wealth to protect. In an advanced deflationary environment, the Fed’s further adjustment of interest rates and / or the money supply might not be able to turn the boat around. For those of us with 5 and 6 figure net assets, USD becomes an attractive investment vehicle. Prices may deflate but debt is debt and cash is the only real cure.

  64. William Minshew

    Tom’s on point.Here’s the trick: for a long time, deflationary tech forces were contained to the technology space (computers doubled in value every year instead of falling by half in price). Now that computers are increasingly supplanting workers and processes in other fields, the same price mechanics must follow. You have two options in a competitive space once tech enters: find a way to double the value of your product every year, or suffer horrific price deflation. If the value of your product is stagnant (oil), good luck. Don’t laugh so hard big pharma.. your days are numbered as well.If you’re actually curious about what’s happening right now in the world, read Kurzweil’s law of accelerating returns. Benefactors are prime RE (SF, NYC – the ‘supercities’ of tomorrow; constructions costs are going to zero barring regulation, prime land is going to infinity) and innovation (you have to create something new, something better, to justify a higher, or even steady!, price.Luxury brands also get a boost since they don’t compete on price per se. Any company that can produce growth will be valued at crazy multiples (is biotech a bubble right now? not until they innovate themselves out of profit.. I mean really though how much money is generated by insulin sales today? How much does it actually cost to produce insulin via recombinant yeast production? How much money is generated by cancer therapies & treatments? Cancer therapies sell for $$$ today but change is afoot. There are at least 5 different promising technologies for curing cancer within 5 years that I can name off the top of my head. There is a cure for lupus (!) in the works as well – look up spherical nucleic acids. Mark my words, every serious disease will be cured in the next 10 years, and it would happen even faster if not for regulation. Academics are already moving on to aging….. check out elysium and NAD+ studies. It is weird to think but anyone under 50 today will probably not die from natural causes)Oil may come back above $50 again, but only temporarily. In certain areas solar is already (/ still.. after the crash) competitive. [As an aside, the only reason oil was > $100 during the fracking boom, which btw was 100% the result of technology, was because of china’s credit bubble]. This is why thinking in BTUs makes more sense – the same amount of oil will always produce the same about of BTUs. This is not true of solar cells. Therefore, if oil is to compete at all on a $ -> BTU basis (which in the LONG TERM is all that matters), it’s price must drop precipitously since solar cells follow its own moore’s law paradigm.Deflation CAN be avoided.. kind of.. but only if you print exponentially. You’ll still get steep relatively movements between asset classes & industries.There are some very interesting implications for labor, but I think I’ve written enough.

  65. sraynovich

    Agree with Brad that its incredibly difficult to predict given that the allegedly smartest people in the (computer) room — hedge fund managers and bankers at the Fed — regularly miss big economic dislocations. But I’ve written about this on my blog, the biggest long-term trends are deflationary: Namely, people and demographics. Europe has been deflationary for years because birth rates have fallen below replacement rates and they have an aging population. The younger generation is forced to pay for skyrocketing pension and benefits costs of an aging population. Japan is massively deflationary because they have this problem in the extreme. The U.S. has fared relatively well because it’s still an attractive place to emigrate to, but we have our own generational bubble to deal with — aging baby boomers that spend less, and a worsening picture for Social Security. Even projections in Asia and particularly China show the population starting to age. Warren Buffet said one of the biggest economic factors is population and demographics. All of this is being manifested in falling long-term bond yields because of unease about long-term investment and growth. How do you work around it? There are always areas of growth, for example mobile devices reproduced like cockroaches over the last decade, but that is now starting to run its course. Healthcare continues to be the largest driver of growth because of the aging populations. To get more information we need to study the habits of young people, which is interesting in itself: They want to own less, rent more, hence the “rental” economy. AirBnB. Meanwhile technology is deplacing many jobs, while at the same time yielding benefits such as energy efficiency and increased productivity. The youth population seems to understand this, they are less likely to buy homes. Fast forward 10-20 years and it’s hard to predict where this all leads. Moore’s Law for everything, including money? If the ultimate arbiter of prices is supply and demand I would guess there are some solid bets: Investments in clean water technology, designer drugs, gene therapy, and retirement planning, as there seems to be steady growing demand in these areas.

    1. JLM

      .The aging of the population is not the whole issue — people are living longer (healthier) and thus the cost to maintain the aging population is not only healthcare related, it is also simply more years after retirement.Social Security was designed at a time (1930) when the life expectancy of a white male was 59.7 years and a white female was 63.5 years. Think about that for a second when pondering a benefit that kicks in at 62-67 years old.The odds were clearly stacked in the favor of the house (government). It was a plan that the average guy was never going to tap. He was going to pay in but he really wasn’t expected to get paid. It was a scheme.Black male life expectancy was 47.3 years for males and 49.2 for females.This compares to current life expectancy of almost 84 years in 2015 (estimated).The time alive after hitting SS age is now a huge factor and the biggest cost to the system. Now, the system really has to pay out.As to other pension implications, defined contribution has replaced defined benefit on all but the most stubborn pensions. One could argue that the union pensions wrecked the American car manufacturers ten years ago.I am a bit skeptical about the notion of a “rental” economy. Single family home ownership rates have only dipped from 69% to 65% in a time of extraordinary economic contraction. I suspect that most of that difference is simply persons who “owned” a home, now “renting” a home.One last very odd demographic fact — we have had 55,000,000 abortions in the US since Roe v Wade. Not a diatribe about abortion but a comment on how that could have impacted the population of the US. With a little multiplier effect, we might have a population increase of about 75,000,000 added to a base of 320,000,000 Americans.This is not an insignificant demographic trend.JLMwww.themusingsofthebigredca…

  66. Kenny Fraser

    Very thought provoking. I agree with the comments below that energy prices are not guaranteed to be fixed forever. Despite the hype they are also not enough to lock in deflation on their own. Two other factors play in. One is obvious. Two of the big three engines of the rich world – Japan and Europe – are locked Ina stagnant cycle and this has a depressing effect everywhere. The other is much larger. Spreading prosperity is pulling low cost workers into productive work IE away from pure subsistence. This is a great thing but it will be deflationary for the foreseeable future. There is one easy answer but remember that the inflationary spiral of the last hundred years is an exceptional one. Prices at the outbreak of the industrial revolution in the UK in 1750 and in 1919 were roughly the same with lots of up and down swings in between. In the same period great innovators prospered mightily. The tech sector will surely be a winner this time as well.

  67. cavupls

    Inflation has a “GO” button and it’s a printing press. Until the Treasury can’t print money there’s little danger that inflation is dead. Governments can avoid pain by hitting that button and rational behavior (and all of history) says that they will do exactly that. If Greece could print Euros there would be no pain in Greece.

  68. TrustEnabler

    It looks like deflation might not be such a bad thing after all:”DeflationBecause the monetary base of bitcoins cannot be expanded, the currency would be subject to severe deflation if it becomes widely used. Keynesian economists argue that deflation is bad for an economy because it incentivises individuals and businesses to save money rather than invest in businesses and create jobs. The Austrian school of thought counters this criticism, claiming that as deflation occurs in all stages of production, entrepreneurs who invest benefit from it. As a result, profit ratios tend to stay the same and only their magnitudes change. In other words, in a deflationary environment, goods and services decrease in price, but at the same time the cost for the production of these goods and services tend to decrease proportionally, effectively not affecting profits. Price deflation encourages an increase in hoarding — hence savings — which in turn tends to lower interest rates and increase the incentive for entrepreneurs to invest in projects of longer term.” -…

  69. iamronen

    could it be that the global economic machine that serves debt is slowing down? could it be that economic growth itself is peaking? could it be that deflation is a symptom of a deeper trend – namely an end of growth and transition to steady-state or de-growth?in the physical world debt-driven growth requires conversion of … well everything into money … so that debts can be serviced … however it seems we are nearing a point where there isn’t much more in the world that can be converted into money … everything from forests to relationships have been monetized.maybe from a technology (especiall hi-tech) perspective these effects will come with a delay because there are still plenty of opportunities to do more with less .. to profit from more efficient solutions … and that may present short term trends that may shift between inflation/deflation … however that can take place within an overall trend of a slow-down if not reversal of economic growth … can it not?

  70. Neil

    The issue of deflation is hiding/distracting attention from the emergence of the Third Industrial Revolution.Just yesterday I watched several lectures on Youtube by Jeremy Rifken. What follows is my interpretation of his thesis from my notes.It is that we have just seen the first indicators of the beginning of the Third Industrial Revolution. It is horizontal, peer to peer, distributed, and collaborative. It is the internet of energy; the internet of distribution; and the internet of logistics operating from a common platform.It is estimated that by 2030 there will be 100Trillion sensors throughout every aspect of the environmental, social, and commercial realms that will be feeding data to this internet of things platform.His organization is leading Germany’s conversion to a non-oil/non-nuclear energy base. They have just passed 25% and are estimated to hit 35% by 2020. By the time they passed 10% they had created 350,000 new jobs – more than the rest of the energy jobs combined.Germany presently has over a million buildings – public, commercial, and residential – that have been converted successfully to generate alternative energy.He was recently invited to meet with China’s leaders (they read his book) and as a result China has committed $80Billion over the next four years to make this transition in China.Essentially the internet has broken the firewall and entered the physical world – the world of things, as a natural progression of Moore’s Law. Capitalism’s drive to lower marginal costs will lead to the demise/transformation of capitalism as we know it.What happened to the music industry and the publishing industry is now spreading to the energy (Germany & China), manufacturing (3-D printing), hospitality (AirBnB), and transportation (Uber) industries. No matter how mightily the music and newspaper industries tried to resist – the trend and forces at work could not be turned back.Interesting times.Jeremy Rifkin at the #CGC15: “The Zero Marginal Cost Society”

  71. DiligentDave

    “Deflation is here to stay” as long as humans self-reproduce at a sub-replacement rate. By far and away, most people don’t have a clue that among ALL nations with advanced economies, only ONE (that’s right, just ONE) nation does NOT have sub-replacement birthrates. And that one nation is teeny, tiny Israel. And the only reason why they don’t have a sub-replacement birth rate overall is this. Ultra-Orthodox Jews in Israel (and probably elsewhere in the world), on average, have a birth rate of about 8-1/2 babies per couple (per lifetime).Or, an average of about 17 children per every two married couples. And, it is good for Israel that they do. With an overall birthrate of about 2.6 babies born per woman (per lifetime), Israel’s overall birth rate, otherwise, would surely be at a sub-replacement number without them!Two main factors here are driving deflation (and economic ruin). One is sub-replacment birth rates (in fact, even many developing nations now are having babies at sub-replacement levels). The other cause is “socialism”. Old age pensions and ‘socialized’ health programs, like the U.S.’s MediCare and MedicAid programs, as well as the national healthcare systems throughout Europe, and in most nations with ‘advanced economies’, are what an early 19th century French politician and pamphleteer, named (Claude) Frederic Bastiat in his brochure (cum book) called “The Law” defined as “the plundering of everybody by everybody”.Examined with both eyes wide open and one’s brain turned on fully, socialism turns out to be nothing more (or less) than a “legal” pyramid or Ponzi scheme (it is “legal”, because the state or government operates it, and the government determines what is legal or illegal, though it does not determine what is ‘moral’ or ‘immoral’). Such schemes run privately, like Bernie Madoff’s infamous scheme, which, after around 50 years of operation, was unable to keep the thing going when worldwide, economies were faltering, was unable to pay the 8% return (with principal) to “investors” (i.e., ‘suckers’) who participated in his scam.When Bernie Madoff’s scam was revealed, I remember reading in more than one ‘Comment’ section (like this) of a commenter or two saying, “They better consider what they do to Madoff, because what governments are doing is no less unsustainable in the long run than what old Bernie did!” And, so correct this/these commenter/s were!Consider, with one exception (Chile’s), every nation with socialized pensions and/or healthcare only count, if they count anything at all, as “inputs” that might affect what one receives in return from their socialized systems. And that one thing is money. In the U.S., at least, the amount of Social Security payments received in retirement is based on what one puts in, according to the size/s of their paychecks.But, since all such programs are done largely on a “pay as you go” basis (money put into today from people in the work force, is paid out ‘today’ to those receiving the benefits), therefore, what SHOULD be considered is how many children one brings into the world, and raises to responsible, contributing adulthood.To my knowledge, this never has been done. And, since we are so far along into this ‘game’, it is doubtful that such a prerequisite would ever be required.Therefore, it is lack of demand, more than ‘over supply’ that causes deflation. And, with nation after nation after nation not just entering, but many having been at sub-replacement levels for some many years (Japan is the poster child for this), turning things around, while, not absolutely forcibly are undo-able, are, practically so. For the financial (and even care) burden put on those of working (and earning) age is too great for them to pay for the retirement benefits of those who are retired, pay for themselves, and pay for enough children to overcome the sub-replacment level at which those in their child-bearing years are having children at any given time!Demographers have a theory called “too low fertility rate” that suggests that once birth rates reach and stay below a certain sub-replacement number, that it is nigh unto impossible to get and keep them at a replacement level again! And the reason why is thought to be that overburden of those of working age is at a level that is unsustainable for those of working ages.

  72. george

    Great set of questions under new economics…I agree with your global viewpoint and how that central logic changes our operating framework. There are still huge transformations occurring across most major markets; slower growth will continue until maturing platforms consolidate and the redefining builds momentum. I’m still bullish on tech, as software innovation continues to transform lead industries through market transitions. I suspect, investors with lower costs of capital will continue to chase higher growth industries.

  73. TeddyBeingTeddy

    Buy companies that export expensive things that need to get made in the US. Deflation->cheap $ ->foreign buying power goes up ->Euro buys more stuff from US.

  74. Lynn Kasel

    My first post here… :)My hunch is asset inflation and expense deflation (reasons below).1. The Fed’s monetary policy is such that the supply of money will expand faster than the the supply of goods and services. This will cause asset inflation. 2. Increases in efficiency will drive down the cost of services, at an even faster rate than the net increase in money supply. 3. Products that are being rapidly improved by technology will fall in price. 4. The cost of interest on our federal debt will make rate increases very unpleasant. So I think the Fed will keep rates low for an extended period. If rates go up too far, the fed may have lost control.”What should we all be doing and what should we not be doing?” All of the foregoing implies more money seeking yield. I like Benioff’s comments implying that computing can be thought to have evolved in three stages. Systems of Record, then Systems of Engagement, now Systems of Intelligence which will drive the next generation of Enterprise Software.It might be added that Systems of Intelligence play into falling prices and are already creating opportunity, like Waze, voice recognition, investment analysis, cyber security, etc. Combining systems of intelligence with large communities = big opportunity.

  75. Duncan Davidson

    There is good deflation of cost efficiency and innovation – prices drop relative to money. There is bad deflation – money value rises as an economy deleverages (because banks create money via lending, and write-down of loans decrease money).The tech industry has largely been the cause of good deflation. Financial repression and the parking of reserves drives rates down leading to malinvestment, which eventually has to be written down. Take a look at China – more concrete in the last few years than the US in the last century. Hence we are facing the specter of bad deflation not inflation. The fear that all those parked reserves will come tumbling back is a misunderstanding – banks lend out of opportunity and find reserves, they don’t lend out of reserves.Where to invest? Debt-fueled investments may have run out of room. Tech creates real alpha and delivers outsized returns. I would expect that as bad deflation & deleveraging arrives, hot money will flow like a heat-seeking missiles to alpha, and hence to tech. Seems to already be happening, as there is now a paradoxical private illiquidity premium in later stage deals to public stocks.

  76. fwhyte

    I think this struck me, because I see it at a superficial level. I’m not versed enough in economics and business to really understnd it with the depth that your blog post has.I see companies like Starbucks and Walmart — who have their near financial future pinned on perpetual growth,and I’m stunned. How does this work? How can it be sustainable?What about when there’s a bad year? A down decade?What about when they simple reach market saturation? If the business is designed to only be successful with infinite growth, then how do they adapt for these eventualities?Will be reading with interest.

  77. Guy

    To call a top in traditional (i.e. fossil) energy prices in our lifetime Fred is probably not valid, but not necessarily false either. Will that drive deflation? Inflation was broken in the early 90s with high interest rates and has been low-to-zero since. We didn’t see it pick up when crude went from $15 to $150 and I doubt we’ll see deflation now crude is back to current levels. That doesn’t mean Moore’s law won’t continue to drive higher productivity, lower costs and better priced products but that won’t cause deflation. If anything the bigger risk is Uncle Sam’s increasing M2 by 50% since 2008 which should in theory be highly inflationary.As to property I’m always wary of evangelists – sure some of them have seen 50-80 years of property history but like everything there’s no sure bet. Developers in Germany got cleaned out in the early 1940s, and if climate change produces the predicted ocean level rises developers in Manhattan (and elsewhere) will get cleaned out in the next 30-50 years. Who really knows whether California farmers will be sitting on desert in 20 years time? Property has been good to me but market timing, price, location all a factor.Your best bet is to stay diversified and keep investing in technology companies.

  78. Luis G de la Fuente

    Could be a mixture of reasons; dollar keeps going up because of US recovery and coming interest rates, there´s huge installed capacity everywhere and no perception of big growth coming, the internet is bringing down many human-related costs, etc. On the other hand central banks keep printing money to prevent huge bubbles to burst (eg the public debts) and this will impact sooner or later. I don´t know for low long will we have deflation, but I´m sure of one thing: nothing lasts forever…

  79. Thomas T Meredith

    Deflation is here to stay due to demographics. As we age, we consume less and save more. Combine this with cheaper energy, content, computing cycles, etc. and you get deflation. Look to Japan for our future. They simply grew older a decade before us.

  80. Steve

    I met an old man who looked like a slim Santa clause…white beard and hair etc. I thought he was a crazy sitting on the bench looking at the ocean. As it turned out he was a retired Investor/accountant. Long story short…”Steve, when they start giving money away it’s time to liquidate. Sell everything you have because in a short time “cash will become king, I’ve seen the cycle a few times, I bought an apartment building at 22% interest – but in 3 yrs I renegotiated that down to 8% then lower…and I got that building for $268K @ 22% interest….3 yrs later it would have cost me…well, I couldn’t have afforded it then.”

  81. stefano zorzi

    Belated comment.I don’t know what the future implications could be but I have feeling about what the implications in the last few years have been.Either willingly or by luck, the U.S. Have understood that deflation (mostly tech driven) allows to defy the physics of money and basically print cash with no inflationary implications. They have done that while Europe has decided to enforce austerity and practically gained possibly a 20+ years of advantage which I doubt Europe will ever catch up to. This is so clear in vc where practically every sector has been washed with capital (think of the many companies that almost get started with a 10+ m “seed”). Yes, Money alene is probably not enough to created winners, but can get you quite far.

  82. pointsnfigures

    I think that the central banks are doing this incorrectly. They have created liquidity traps. Inflation is not only the supply/demand for dollars, but also the velocity of money—how quickly those dollars change hands. Right now the way economic/tax incentives are structured money is sitting. For evidence, look at cash on corporate balance sheets and the amount of lending activity to small business. In a perverse way, when the Fed moves rates up, it might get fence sitters off the fence. But, these are economic times like we have never seen before.