Inflation/Rates Discussion

I think faceslappingcompilation is conflating a few things. He's combining some cursory knowledge of economic history with a couple anecdotes about today's markets to guess what may happen in the medium to long-term without a lot of supporting facts. That's not a great way to make an argument, but I genuinely appreciate the effort.

"Printing money" isn't a phenomenon we've seen in a major economy in quite some time. That doesn't mean it can't happen, but it's not likely. As a rule, I don't like comparing markets spread across too many decades. There are too many variables that differ the further you move temporally from one scenario to the next to make intelligent comparisons. This is why you can write a PhD dissertation in economic history without ever saying much. If you run enough regressions flexing on different variables, you can eventually find something interesting to say, but you run the risk of interpolating data rather than extrapolating information from it.

In any case, proposals for higher taxes from the likes of AOC or Elizabeth Warren are not casually linked to inflation. The arguments around the links between taxation and inflation are not clearly defined. But on balance, I'd say that moving the top tax rate or instituting a wealth tax on the super rich will not impact CPI, PPI or any other measure of inflation in the US one iota. The ECON102 (intro macro) response might lead you to believe there is a clearer link than there really is, but a more nuanced understanding of economics would lead you to believe otherwise.

Perhaps I'm being overly harsh, and that's not what Slappy was talking about since I'd hope he'd know that the US ran higher marginal tax rates on individuals for decades without experiencing hyperinflation. I'd argue there's a much better case to be made for a low inflation, low growth trajectory. The x-factors in my mind don't center on debt cycles, though he's right to say China is over-levered and has been for years. It's unclear to me how China will handle a material slowdown to its largely export-led growth path. And it's even more unclear to me how other developing economies will follow China's footsteps since I think that path is being brushed away behind them.

On a 10-20 year horizon, everything comes into play. It's not just financial variables--our economies are changing. And the growth paths that once worked for the US and China aren't likely to be open to, say, Nigeria and India. There are economic efficiencies to centering working populations in cities, and while that may still be the case for the next decade, it's not a certainty. It's a hope that automation doesn't displace workers at a faster rate than innovation can replace them.

It seems clear that more people will be born into the world and that more people will move to cities. It also seems clear that a great number of jobs will be automated out of existence. What's more, the growth path for many emerging economies has been export-driven, predicated on cheap labor and relatively easy access to credit. That path will not persist into perpetuity. And while it has long been argued that the process of 'creative destruction' eventually leads to the creation of more jobs than were lost in previous upheavals, there are reasons to believe this time will be different. It's worth noting that people always say 'this time will be different'. Still, it's unwise to imagine that just because history repeats itself two or three times in-a-row doesn't mean it will do so a fourth time.

To be clear, even if history repeats itself, the best case scenario is that a huge number of jobs and tasks within jobs will be automated, and that will result in some major dislocations in markets around the world. Emerging economies could get crushed if they attempt to leverage cheap labor to compete with zero-cost labor. It's a long-run losing gambit. For more developed economies, they can either fully embrace the coming technological change and automate as many jobs as possible, become more protectionist and decouple their supply chains from the global trade systems we currently have in place, or find some middling path that protracts the disruption cycle and gives more time for workers to retrain and move.

In any of these scenarios, society is woefully unprepared for dealing with these giant structural challenges. When you couple these issues with the population explosion of places like sub-Saharan Africa, there is a non-zero potential for catastrophe. While everywhere else in the world saw a decrease in birth rates as populations became wealthier and more educated, that has not happened in the vast majority of Africa. In 10-20 years, that could be a humongous problem. If technological change occurs as rapidly as I foresee, I predict famine and riots on scales not seen in my lifetime. It will also force the mass migration of people. And since there is nowhere else for a billion additional starving Africans to go, they'll be moving north into Europe.

Europe may try to slow the tide, but they can't stop it without war or genocide. But Europe may have other problems by that point. It's not like France and Italy are humming along like a dream at the moment. They have unsustainable debt-to-GDP ratios, their populations retire too early, and they live too long on pensions which are too generous and under-funded. Even if they wanted to, I sincerely doubt the developed countries of Europe could take an extra 10 million people each without collapsing their social systems, so mass migration is going to have to be met with force, and the history of force in Europe isn't a happy one.

In Latin and South America, I'd bet both my nuts that corruption is still the order of the day in virtually every country. I'd imagine there are at least 3-4 currency crises over the next 20 years spread across the usual suspects (Argentina, por ejemplo). I suppose there is an outside chance they start working together in a more cohesive way. They have a lot of natural resources which could prop up their economies, but they probably need their own cartels to regulate prices and production, and I just don't see them organizing in that way.

In Asia, my biggest fear isn't China, though that's a huge fear. I think India has been making up their numbers for years. China's economy is run fundamentally differently than India's. India doesn't have as many levers to pull to control the system as China. They also have far too many people, and they don't create enough jobs for them. I know several of the CEOs of India's largest IT companies, and they're not talking about incremental changes to their workforce anymore. They're talking about wholesale automation of most of their workforce. The BPO movement has largely run its course, and India is going to feel the brunt of that change since they were one of the principal job gainers due to outsourcing over the last 20-30 years.

Once again, I have to wonder--what do all these people do when there are no jobs for them anymore? I think this is the primary driving force of our times. You have to go back to the first industrial revolution to see such massive change. And it took 6 decades back then to get to the same level of employment as before the start of the revolution. That's 3 generations of people. 30 years ago, the half-life of a useful job skill was 26 years. Today, it's 4.5 years and falling, but we don't have any system in place to retrain all the people who will be losing their jobs.

This is a monumental fuck up in strategic planning that will ripple through all economies slightly differently. The US is comparatively well off. Most of the emerging world will suffer immensely. But even if you just think through the implications within the US and couple this driving force with demographic changes associated with an older, longer-lived retired population, the giant debt load we already have in current liabilities and the even larger amount of unfunded liabilities, our system from a macro perspective has some real problems. In my lifetime, though, that debt super cycle isn't likely to correct itself through printing money. While that would be inflationary, I think it's likelier that we'll see less money in the hands of fewer people. With less disposable income, there isn't a clear mechanism for the sorts of price increases that drive inflation. Even if there were more disposable income per person in the US, if people don't buy more shit, you won't see any real inflation.

But before any of that happens, I think the system will buckle. It may seem like I'm being dire, but this is far from the worst case scenario since we haven't discussed the effects of climate change or a number of one-off events that could wreak havok (NK nuclear missles, a major international war, etc.). Maybe there really is a God and we get lucky again and thread the needle one more time. Maybe governments around the world come together to slow the rate of automation, to put more money into lifelong learning and retraining programs, and to creatively solve the problems associated with the export-led path to growth disappearing for many emerging economies. Unfortunately, this requires more coordination and cooperation in a world that feels scared to me and seems to be going in the exact opposite direction.