This time central banks have responded to the Coronavirus by injecting trillions of dollars into their economies, which could generate Demand-Pull Inflation because “too many dollars will be chasing too few goods.”
This is my concern too – the problem right now is that goods are not being manufactured and services are not being delivered as much of the economy is shut down by government mandate.
Throwing more money into this encourages people to purchase goods that are now in scarce or limited supply, thereby driving up their prices.
Plus, where is the cash coming from? I have not looked into that. But if we are just printing money (or the electronic equivalent of printing money), we are devaluing the dollar – which is the same thing as inflation.
If this is the case, then you want to own real things as cash will go down in value. A $100 thingie now will sell for $110 after 10% inflation. But $100 of cash now will be worth the equivalent of about $90 after 10% inflation.
This is a though provoking video: Economics theory is based on the idea that wants (demand) exceeds supply. Stated another way, we tend to want more than we can afford – we do not have the resources to acquire everything we may desire. But today we are, for a great many, and for many of life’s necessities, living in a post scarcity world. Once we have fulfilled our basic “wants” we have the luxury of being tricked by marketing into wanting even more (basically, a fake want designed to increase demand).
Maslov’s Hierarchy of Needs tries to explain human motivation in terms of fulfilling the basics, like food and water, first, at the bottom of his pyramid. Above that we seek shelter and safety, then peer support, self esteem and finally self actualization.
The reality of life today is that life is actually quite good – compared to the past. (Poverty is at a global low point, for example. Literacy is at a historical high point, and so on, in spite of the daily dose of fear mongering news media.) In effect, for most people, the goods and services of daily life are not scarce. We enter a world of post-scarcity economics for much of our daily needs.
Most people (yes, there are definitely exceptions) in modern economies have fulfilled the bottom 3 tiers of the Hierarchy of Needs. At this point, our wants become warped. Few people need digital watches (to quote Douglas Adam’s comments about the 1970s) – or for that matter smart phones or any number of other goods and services.
Since we do not really need a lot of “stuff”, marketing tricks us in to wanting things we don’t need. So we acquire more.[1] Because many of our basic wants are satisfied, we create new “wants”. Some “wants” are not goods or services – we have the luxury of time so we build ourselves up (top of the pyramid) by running marathons and ultramarathons or spending time at the gym or the hair salon to look good.
At some point, many people are persuaded to want things they cannot afford today – so lenders step into loan money to acquire stuff (you probably don’t really need). This can be loans for cars, homes, or consumer loans for vacations and home improvement, or accumulation of credit card debt to acquire “stuff” we believe improves our self-esteem (catching up or exceeding those in our peer group). As satirist JP Sears says, “Tesla – pretend to save the environment while looking rich” 🙂
Eventually, our loan payments cause us to cut back on spending on other things. As collective debt loads become too high, economic activity slows down and we enter a recession.
Post scarcity economics means we have the means to be persuaded (by marketing) to acquire stuff we probably don’t need and a ready supply of lenders to enable us to buy it today (versus saving our money).
A small observation: When we choose to purchase an item X, it is not so much a decision to buy X as it is a decision that we are not going to buy Y (and A, B and C too!) Few people think of purchase decisions this way though. But we should be asking ourselves, if I buy X, what product Y am I choosing not to buy? If we did this, we’d balance our spending – and wants – a lot better.
We see this effect at work in government spending. Legislators are constantly asked to spend more money on government programs (let’s call them X). But seldom is anyone simultaneously suggesting what projects (call them Y) we should not be funding in order to fund X. The solution is to buy X – and Y – and just borrow more money.
Keep this in mind the next time you “want” something (X) and ask yourself, what will I give up (Y) to buy X? Most people never ask this question and buy stuff they probably cannot afford. Spending decisions are about choosing between things X and Y, but most people view spending decisions as deciding whether to buy X1, X2 and X3.
[1] Getting tricked in to wanting and buying more is made possible by intense surveillance of our lives both on and offline. As Walmart says
“[W]e have a lot of data and we can gather even more data. [I]f you win their most frequently purchased items, you get the opportunity to serve impulse items online and in-store, and our focus is in driving that sweet spot,” he said.
While working out the gym this week, I heard several ads on the local radio station urging consumers to take on more debt. One was for an airline promoting that you can now get a loan to pay for your vacation trip – this is not a wise idea.
This was followed by an ad for a local car dealer encouraging you to trade in your car, even if you owe more on a car loan than the car is worth. In the hyper rapid voice over at the end of the ad they mention this means taking on negative equity. In other words, going further into debt!
You take out a loan to buy a car for $25,000. Three years later the car is worth $15,000 but you still owe $20,000 on the car. You trade it in to buy a newer $30,000 car and roll over the $15,000 value of the used car to pay off $15,000 of the $20,000 remaining. Since you come up $5,000 short on the old car loan, you roll this over to the new car loan. Congratulations, you now owe $35,000 on your $30,000 car. That’s called negative equity.
When I heard the ad, I could not believe consumers could be this naive.
Borrowers are responsible for paying their remaining debt even after they get rid of the vehicle tied to it. When subsequently buying another car, they can roll this old debt into a new loan. The lender that originates the new loan typically pays off the old lender, and the consumer then owes the balance from both cars to the new lender. The transactions are often encouraged by dealerships, which now make more money on arranging financing than on selling cars.
The lead anecdote in this story replaced his car 4 times in two years, each time taking out a larger loan (saying he had to do this due such things as a divorce, mechanical problems, and then wanting a larger vehicle). The article says 1/3d of those trading in a car took on negative equity loans.
As a general rule, its better to borrow money for items that deliver long term value. For example, home prices appreciate over time because multiple industries have persuaded government for police that make this happen. Taking out a loan for a high level education and degree may make sense for jobs that generate future high incomes, particularly professional degrees in health care, engineering, business and potentially law. It does not make sense to take out a loan so that you get a minimum wage job without benefits at Great Clips.
How can you buy “stuff” if you do not take out a loan? You work hard, avoid spending like crazy including buying less than you can afford at the time, and save your money.
Wealth = Assets – Debt
Many people prefer to look wealthy and do so by spending and borrowing, under the misconception that
Wealth = Assets + Debt
During The Great Recession, the local paper ran a story about the business of automotive repossessions (when debts were not paid). All of those interviewed had similar stories – the typical auto repossession was at a large, new house, with two newer SUVs, a $35,000 boat and an RV (trailer or mobile home) – all paid for using debt. These people all looked wealthy to the outside world but only because they confused the definition of wealth.
“Other nations have responded with smart, well-funded innovation policies like better R&D tax incentives, more government funding for research, more funding for technology commercialization initiatives.”
There are downsides to blockchain technologies and processes (blockchain algorithms power Bitcoin and other cryptocurrencies):
Each purported use case — from payments to legal documents, from escrow to voting systems — amounts to a set of contortions to add a distributed, encrypted, anonymous ledger where none was needed. What if there isn’t actually any use for a distributed ledger at all? What if, 10 years after it was invented, the reason nobody has adopted a distributed ledger at scale is because nobody wants it?
I suspect there are good uses for blockchain, however, the point is well taken. In the 1980s, I worked at a company that built a spreadsheet product that was so simplified that people who did not know algebra could use it. This seemed like a great break through. What was the problem? People who did not know basic algebra concepts did not have problems in life requiring a spreadsheet!
In other words, the technology was great but completely missed the target audience.
The linked article identifies many disconnects between proposed blockchain use cases – and the real world. A very interesting read.
The largest union representing grocery-store workers has come out strongly against Amazon.com’s launch of a store sans cashiers, a sign of how a recent generation of futuristic technology comes with a dose of angst for big parts of the workforce.
When workers cost $20/hour ($15 minimum wage + $4 to $5 for benefits), while technology costs are falling, numerous businesses are moving from variable cost labor to fixed cost automation.
The feature photo I attached to this post is a photo of a self order kiosk I took inside a McDonald’s in St. George, Utah. Starbucks has a mobile app that let’s customers place their own order ahead of time. Another coffee shop I visit has, at times, flipped their order entry app (its just an iPod on a stand) around and let customers place their own orders and pay with a credit card, when they are short staffed.
The market (meaning the public) will determine if this is what people want or not.
Now the 5G, or fifth generation, wireless revolution is near, promising data speeds 50 to 100 times faster than 4G LTE networks. Sure it’ll improve smartphones, but that’s not the point. Analysts say 5G’s biggest impact will be to drive the proliferation of the Internet of Things — billions of connected devices.
The business case for 5G is all about IoT, an evolution, or maybe revolution, that will take the internet era into new territories.
From a business perspective, #IoT applications will drive demand for 5G high capacity data networks, which in turn, drives demand for more antenna sites (smaller cells), fiber optic networking to link more, smaller cells, new RF chip devices (article mentions Qorvo, which is funny, since I am sitting in a building next to Qorvo as I write this:) ), more revenue to cellular service providers, and more data centers.
In this context, #IoT may drive a cycle of enormous investments and economic growth.
$15 per hour minimum wage, $4 to 5$ hour in benefits adds up while the costs of automation fall dramatically. The former is a variable cost while automation is mostly a one time fixed cost. Labor intensive service businesses have advanced beyond experiments with automation and are now rolling out various solutions. The “featured image” attached to this article is a pair of self order kiosks in a McDonald’s in St George, Utah (photo by me). Starbucks offers a mobile app that let’s patrons order products in advance for pickup when the customer enters the store. If widely adopted, this could reduce the labor needed to take orders. To the extent these steps free up labor that may then be applied to higher value services, this will be good for all. But in some situations, this may simply free up labor – reducing the number of jobs. Plus, some of the people whose jobs become automated may lack the ability to learn new higher-value skills.
“You will see completely lights out factories for manufacturing,” said Rowan Trollope, senior vice president and general manager of Cisco Systems’ IoT and Collaboration Technology Group. “You’re going to see manufacturing technologies that are even easier to automate … that are really going to transform manufacturing.”
This is also somewhat true for the service industry. A combination of automation and self service will reduce labor requirements. Long ago, the ATM machine did indeed reduce the need for bank tellers. Service service check outs at stores (grocery, hardware, department stores) has reduced staff needs. Some restaurants are using apps for self order/data entry by customers, and others are using a combination of self order kiosks and customer self service (Think of filling your own soft drink cup at a fast food restaurant.)
Minimum wage laws, the new requirement in some locales to pre-schedule workers two weeks in advance, and the expense of health insurance will cause a rush to replacing labor with automation. These changes were going to happen eventually but new costs associated with labor will accelerate this change.
To the extent this frees up labor to purse other, higher valued added functions, this can be a net positive with improved economic efficiency. However many will not be in a position to migrate upwards to provide higher value – this will cause disruption and hardship that will lead to government legislation that requires economic inefficiency.
A good example of the latter is Oregon’s law that prohibits individuals from pumping their own gas into their own car. Oregon is the only state in the U.S. that outlaws self service fueling of your own vehicle. This is a “make work” law – and consumers pay for it in the form of higher prices and longer waits for service and refueiling. Yet that is how government responds to this sort of problem. Next: A ban on using apps to self order at restaurants? Who knows.
Business, Tech, Energy, Transporation, Thinking
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