This commentary is more a flight of fancy than a practical analysis (edit: maybe not. Read Here), but since it’s really intended to inspire thought, I’m going to throw it out there and see what sticks…
I’ve been thinking a lot lately about the 1998-2000 Parabolic blow off that ended the last big bull market in tech stocks. I’ve been trying to rationalize and gain some insight into how/why the performance of the NASDAQ composite index has subsequently “followed” the performance of the S&P5000, when it is improvements in efficiency (enabled by technology) that serves to depreciate the real economic cost of labor over time, resulting in improved margins across a broader swath of publically owned companies. In this context, it stands to reason that the tech-heavy NASDAQ should lead rather than follow.
I mean, computers are continuously making just about everything cheaper to do, and computers themselves continue to get cheaper as they simultaneously get MORE powerful (the beneficial consequence of Moore’s law); so how does the disconnect between rising commodity (input) costs versus lower output prices on the final products resolve itself rationally?
It stands to reason that if input costs are rising (whether due to currency debasement, or due to the legitimately increasing scarcity of resources), yet final output prices on finished goods are under consistent price pressure due to economically driven demand pressures, then the price of the second capital element (labor) must be falling in order to facilitate the lower output prices. These reductions in labor costs may be manifest as falling wages, or improved efficiency (fewer human jobs) via automation, or both.
Hmmm… Am I describing deflation? Prices trending lower as the real cost of labor, and therefore real incomes, decrease over time? Bah- I’ve never been a fan of “flations”; and I’m not about to start now- But I am convinced that labor is the key to this analysis, and that when this premise is taken to its logical conclusion, it implies that humanity will soon require a new and revolutionary look at how we value the product of time and effort that we commonly refer to as labor.
Under the current orthodox labor paradigm, people are compensated (paid), not for their willingness to work, but for their actual work output (units of work over time). But what will happen if/when our technological inventions reduce the final “price” of labor to zero?
The Further Impacts of Monetary Policy
The Fed’s officially stated position is that “a little bit of inflation” is the best way to run a currency centric economy, and I will not argue this premise in the context of the post industrial revolution, manual labor intensive economy where people supplied 100% of the labor- Which was the exact economic environment in place when the Fed was founded.
However- in the modern, increasingly automated economy, if people are required to work for wages in order to pay for the things that machines are building for next to nothing, then HOW, pray tell, can a "little bit of inflation" be a good thing over the long term?
Basic supply and demand theory tells us that if I can build one birdhouse for $10, but the next guy can build 2 birdhouses for $5 each, then he will get the business while I will starve, yes?
So, what happens when someone invents the technology to build an infinite number of birdhouses for exactly the cost of the input energy and raw materials?
The Fed's premise that mild inflation is the best guarantor of long term economic growth must fail entirely when technology and automation reduces the real cost of labor to zero.
We can not have "healthy" inflation in electronics while the underlying technology becomes cheaper and more powerful over time. Likewise, as the technology gets cheaper and more powerful, so too must the economic output of that technology get less expensive.
For a realist’s view of this perspective, just talk to any former Wall Street desk trader who has been “downsized” by the “new guy” who hit the exchange with some fancy new high frequency trading algorithm in the past 5 years.
When it comes to doing economic work- The machines are gaining, and the people are retreating- and the machines work for free- they make no demand for compensation, they do not organize into unions, and they do not lobby for preferential legal treatment.
Taken to its final logical endpoint, one can only conclude that this is the point of catastrophic deconstruction of the current global financial system:
When the work is being done for free by machines, the earning power of people becomes zero, and economic growth/GDP becomes a "division by zero" impossibility.
On that day, the "wealthy" people will not be those who work the hardest; it will be those who hold domain over the energy sources and input materials, and intellectual property that the machines will require in order to do their work.
Those who choose to compete with the machines for labor will all, sadly, lose that fight in a most spectacular fashion. The final line between the haves and the have-nots will be drawn, and it will become nearly un-crossable.
So ask yourself- “Why are commodities (input resources and fuels) rising in price, while the market prices of finished products are under increasing price pressure?”
Are we hearing the first drumbeats of the eventual death of compensated labor?
I know, I know- someone will always be needed to program the computers, and to keep the automated machines plugged into the power grid, etc… right? Well, as someone who currently earns his keep in this professional domain, I personally think that self replicating nanotechnology will answer the question for us within the next 30 years, and I’m pessimistic that there will be a consistent long term role for people once our technology becomes self-enabling and self-maintaining.
On the theoretical day that this scenario comes to pass, my theory is that money (in all forms) will finally succumb to worthlessness; and, to the delight of many anti- Goldbugs out there, I’m happy to report that even Gold should finally become worthless as a medium of exchange, since Gold only really represents the intrinsic value of the effort required to extract, refine, and fabricate it- A value proposition that currently still makes it superior to printed currency coupons, but I digress....
The finality of this tech-driven “new reality” also pains me because it represents the moment in time that people will lose their right to choose whether or not they wish to exchange labor for their livelihood.
Where will we find the personal reward of accomplishment (or the incentive to excel and succeed) when we are no longer compelled to expend the time and energy, since any such efforts against the machines will be futile?
I recently wrote a blog entry stating that fiat currencies can only serve as money as long as there is faith in the currency, while Gold will serve as money only so long as there is faith in money itself- In other words, as currencies are fiat money, money itself is fiat capital- it serves as a safe, stored value proxy for work over time. But what would happen when the value of labor drops to zero? Shouldn’t the value of its capital proxy (money) simultaneously fall to zero as well?
When labor becomes a zero-value proposition, humans that wish to work in exchange for livelihood will constantly have to worry about how to feed themselves, while the humans who control the energy, technology and the raw materials will only have to worry about how to control their burgeoning obesity rates...
Even after falling back to Earth after such Flights of Fancy, I still maintain that the only safe long term capital appears to be real assets, but I also must concede that even this is a shaky proposition in the face of accelerating technology that aims to eliminate the time-value nature of capital itself.
At any rate- we’re on the threshold of a new paradigm, because “a little bit of inflation” just isn’t going to work for that much longer.