Central Banks around the world embarked upon money printing like we never saw before. Trillions were put into the coffers of member banks in an effort to stimulate global economies around the world. While there was some effect, over the last 5 years, the impact was diminishing. This is the problem with QE programs: they tend to be less of an impact with each round.
Many are arguing this is the new norm. At present, we see 1/3 the global debt market under negative interest rates. The overnight market is frozen requiring hundreds of billions from the Federal Reserve.
Through it all, inflation is weak. The United States Federal Reserve cannot even hit its mandate of 2%. This is something that was absent for over a decade.
It is hard to imagine all the money printing and an economy that took off with record low unemployment, yet inflation is absent. What went wrong?
The truth, while a government to botch an economy so bad that it creates a situation like in Venezuela, is that widespread inflation might be a thing of the past.
How could this be?
At the core of this is understanding the impact of technology, something that few seem to pay attention to. For example, U.S. software sales amount to roughly 2% these days. That is an extremely deflationary part of our economy. The same is true for televisions, computers, music, and most anything else digitized.
Do you remember when a basic laptop cost about $1,800? I do. Today, a much more advanced device is now $300.
One of the components absent from the inflation equation is the run up in the cost of labor. Typically, when unemployment gets low enough in an advancing economy, wages see increase. This often is a push in the prices of goods since the cost to produce goes up.
In this instance, we see technology right in the middle of this. Automation, or the threat of it, have suppressed wages for two decades. When labor costs go up, the ROI on automation improves. We saw this in the manufacturing world where robots replaced more than a million blue collar workers.
Amazon is a prime example of how this all works. The company simply has a lower cost of delivery than a physical store. The entire cost of the retail establishment is replaced by a website. The cost to run this is a lot less than its counterpart.
Thus, each item Amazon sells have a lower cost component to it.
Of course, this is not the end of the story. Amazon is looking to establish an end-to-end automated system where everything, from order to delivery is absent humans.
As technology moves into its next phase, the impact should be far greater. One area where pricing have taken off is healthcare. It is to the point where it is a major burden on many western economies. The demographic shift almost guarantees that breakthroughs are needed. In the end, with the likes of Samsung, Apple, and Google all investing billions into healthcare related projects, it stands to reason that costs will be reeled in. After all, other than the bureaucratic organizations making mint, it is in everyone's best interest to see this happen.
We could see short term situations where things get a bit out of control but I think widespread, long term inflation is a thing of the past. In fact, in the Western countries, once the economy that falls under the laws of IT hit 10%, I think deflation becomes the major issue. Inflation will be almost impossible since it can't offset rates of 16%-50% each year in the opposite direction.
Of course, then the Chicken Littles in the mainstream will be spouting how economies will collapse if deflation takes over. The main idea here is that when prices are falling, purchases are delayed since things will be cheaper down the road.
Unfortunately, for them, this is not the case. Anyone who is reading this is doing so on a computer or mobile phone. Both those are deflationary devices that see prices falling over time years hundreds of millions of each are sold each year. The same is true for servers, chips, sensors, camera, televisions, and software.
In spite of the rapid decline in each of those segments, sales have grown significantly over the past couple decades.
One thing appears certain: the central banks lack the ability to create inflation no matter what they try. A decade of insane monetary policy resulted in missing their mandate by a wide margin.
This will only get tougher as technology expands into more areas.
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