Client Portals

Is Inflation Worry Justified?6 min read

Technology and Population Are Big Factors

Aug 12, 2020 - John Osbon ( 9 mins to read)

John Osbon

Investors today may be worried about inflation. There is little to no official CPI inflation now, and there has not been any for some time. Around the world, the story is similar because major central banks are coordinating with the Fed. Debt growth and money printing has been explosive this year, causing obvious concern. Let’s look at the unstoppable trends that will likely keep inflation quiet for several generations.

Tracking Inflation
There are several ways to keep track of inflation. We use the Federal Reserve indicators since they are responsible for maintaining a stable currency. The Cleveland Fed inflation nowcasting site is the best place to find inflation data in this country.

Outside of the US, the Organization for Economic Development has an excellent database on global inflation trends. Traditional inflation models don’t take into account globalization. Globalization increases the interdependence of international businesses. Globalization also lowers the overall cost of doing business mainly via cheaper labor. As we look at the OECD numbers, we think that their numbers lag due to the difficulty of tracking all international inflation metrics.

Central banks around the world are currently targeting a 2% annual inflation rate, but none have succeeded in hitting that target in at least ten years. At the same time, central banks have expanded their balance sheets exponentially with the purchase of government and corporate debt. Countries and companies have followed suit and increased the debt on their balance sheets.

Traditionally, significant increases in debt have led to significant inflation, but not this time. Economists, policymakers and central bankers have argued for and against the use of debt, yet the pace of debt issuance has not slowed in the least. Investors may be worried that their gains will be devastated by inflation. However, there is no sign inflation will return in a sustained way.

Population growth is decelerating.
Adding to inflationary pressure until 2000 has been the global growth in population. One hundred years ago, there were approximately 2 billion people on the planet. Soon there will be 8 billion. Now, however, population growth has slowed considerably. Experts have been debating what the peak number of people on Earth will be. I use 11 billion because it is the midpoint of the projections. Where the population growth will come from is changing significantly.

Population growth around the world is:

  • Zero or less in Japan and Russia
  • Below the replacement rate in the US, Europe
  • Slowing and can’t be reversed in China
  • Continuing in India
  • Highest in the African continent by a large margin

The world’s population may hit 10 billion in 2050 (+25%) and 11 billion in 2100 (+37%). We feel that is a reasonable estimate. High rates of joblessness and under-employment indicate labor oversupply and hence low wages.

Population growth, consumption growth and debt growth were undeniable drivers of growth over the last 100 years. Consider that the world population grew by nearly 300% over the past 100 years. If we somehow repeated that population growth rate over the next 100 years, we would be at 20 billion by 2100 – an improbably high figure. Consider the impact on economic growth and GDP expansion over the next 100 years when the population growth rate falls from 300%/century to 37%/century.

Technology is deflationary
Disruption by technology causes prices to fall. Technology also eliminates jobs. Job replacement by robots can boost the overall growth of an economy dramatically, but it accelerates wealth inequality.

By itself, the explosive growth of technology is not enough to squash inflation permanently. After all, we had high inflation rates in the last century during the space program, the spread of computers, the upending of communications and the democratization of productivity devices at ever lower costs. It’s my opinion that the turning point occurred around 2000 when modern population growth in the US started to peak as technology growth accelerated.

Technology has an impact on competition and market structure. It reduces the barriers for new company creation in many areas, increases market competition, and, thus, affects product price. For example, the rapid growth of e-commerce is another way by which digitalization has increased competitiveness and suppressed inflation. New technologies have changed the way that consumers search for and compare product prices, and these customers benefit from increased price transparency and comparability.

The role of debt
There is one last mountain to climb before we declare inflation dead for this century. It is the mountain of debt. Never before in the history of the financial world has a large economy been able to issue excessive debt without causing inflation. So far, the world economies have escaped the cost of their issuance by keeping rates near 0%. The reason I believe we can avoid inflation for quite some time, and possibly even the 21st century, has everything to do with slowing population growth and explosive technology growth.

Counterexamples and stubborn exceptions
Even if inflation is absent for the next few decades, there will be occasional outbreaks, some global and some local. The possible global inflation outbreaks will occur in ways and in places they have happened before. The likely areas are oil, war, and currency breakdown.

Although oil has swung wildly in price and access has been limited at times, the impact of oil on daily life has fallen and may decline further. Renewable energy sources and greater energy efficiency are the main reasons. Right now, there appears to be a glut of just about everything, from oil to cotton to iron ore.

War is an ever-present threat, but we have not had a world war in 70 years for the simple reason that global war costs too much. We are too connected worldwide to destroy what we have built as a species. One hundred years ago, you could take over land and profit from the resources buried in that very ground. Today, you can’t profit from seizing another country’s data center.

Currency breakdown is another threat. There could be a new entrant, like bitcoin, but it’s too early to tell. The standard currencies – the dollar, the pound, the euro and the yen – will continue to battle for market share.

Healthcare, college education, and home prices have been stubborn exceptions to deflation. Healthcare inflation is rooted in a giant battle between consumers, insurance companies and employers. Technology is eager to help and has made great strides, but not quickly enough. It’s reasonable to expect healthcare increases to level out. Imagine a year when healthcare costs start going down.

College education is under enormous pressure to reduce costs and prices. The pandemic is helping reduce costs and increase the use of technology in learning. Except for the top one hundred colleges, there is significant price pressure downward.

Real estate prices have been rising outside of major cities, creating inflationary pressures. I do not see that trend ending until well after the pandemic is over.

Investing with no inflation
Every client has different investment needs. At Osbon Capital, we invest with a family’s total liabilities and expenses in mind. To ensure wealth protection, we must build a protective reserve strategy for essential family expenses. Once family expenses are covered, the focus shifts to income, growth and tax management. Inflation may affect families differently, depending on their cost structure. A TIPS ladder (treasury inflation-protected securities) can be a helpful tool in combating inflation over long periods. Each family is different, and proper investment strategy must align with the unique needs and circumstances of each investor.

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