With so much doom and gloom about, we’d like to take you on a trip through the looking glass to a world where the future is bright, not bleak. Optimistic, not pessimistic. Hopeful, not dismal.
And we mean that in the context of today’s data. Not in some parallel-universe that doesn’t exist.
At FT Alphaville we’ve spent a fair bit of time discussing the problems posed by a “shortage of safe assets” in the system. How this shortage is leading to a scramble for safe stores of value alongside a recollateralisation of credit outstanding a la a giant game of musical chairs, all the while pushing yields into negative territory as people forsake capital (principal) for the opportunity to protect wealth.
We’ve also described how a very similar thing happened in the original Great Depression.
We’ve called the phenomenon “the time depreciation of money“. But one could also easily call it “money decay” or the end of the compound interest environment, in which capital is naturally presumed to appreciate.
It’s an environment that we have argued requires a new paradigm for the world. A transition towards a steady-state where money has no choice but to depreciate because its role as a store of value has been made redundant due to the general abundance of goods in society, brought about by technological innovation and efficiency. In a post-scarcity environment there is no need to delay or hurry purchases, or to even have a store of value. You use only what you need.
It’s almost as good as having one of these:
Consider our analogy of water. If water is scarce and finite, and you have to travel miles to the nearest water source, and the man who has the greatest number of receptacles to store that water is richest. Those without receptacles — stores of water — go without.
But in an environment where springs flow unconstrained for everyone — anywhere, anytime — no-one needs a store of water at all. Water is freely available.
Yet in the transition from water scarcity to water abundance, a funny thing happens. As water becomes more and more abundant disproportionately across the population, the man who is nearest to the water source and has the most receptacles becomes the richest.
He thus has an incentive to store and hoard as many receptacles as possible, to prevent the water being distributed evenly — a situation in which he would lose all of his advantage.
Of course, if the water is so abundant that people don’t need access to receptacles at all (it becomes free flowing everywhere), then only the fear of future scarcity can make his receptacles retain value.
Even if the much-discussed scarcity never arrives, the man with all of the receptacles suddenly has an interest in inducing artificial scarcity, or at the very least the fear of scarcity.
This is arguably the point at which we now find ourselves.
As Sober Look observed on Wednesday, the US TIPs curve is inverting, implying renewed risk of deflation. As goods become more and more plentiful, these deflationary forces set about by technology and accessibility (freight rates are, after all, now negative) become too difficult to overpower, even by those who have the capacity to create artificial scarcity.
In fact, it becomes harder and more costly to induce artificial scarcity.
Thus, if today’s ails are being caused by a shortage of safe stores of value for money — credit claims outstanding and collected by society– then this phenomenon is only meaningful in the context of what those claims can one day hope to redeem.
Thus a shortage of assets is really a shortage of assets/money relative to the amount of goods that are readily available for redemption at any particular time.
In other words: when you have a shortage of assets you may really be looking at an abundance of goods problem.
Given that scarcity and abundance ultimately determine supply and demand, which in themselves set the clearing price for the goods in question, it’s thus time to consider what happens in that relationship if and when one of the variables (the price) is constantly manipulated into a constant state via the central bank “price stability” mechanism.
Let’s presume two fundamental truths. 1) Technology and innovation lead to ever greater efficiencies. 2) Efficiencies give us the means to create ever more goods with the resources at hand.
Thus the number of goods in society is growing all the time.
As the number of goods available to the population rises, it is fair to say that the supply of money must rise if “price stability” is to be maintained. If credit/money fails to rise, or is constrained, while the number of goods continues to rise then deflation must be the consequence — because goods begin to surpass the amount of credit that’s available to purchase them.
This is economics 101.
So what is deflation really? According to the above logic it is a situation where the lucky few who do have access to safe stores of value see their purchasing power increase — as more goods become available for the monetary units they hold — while the unlucky majority without access to safe stores of value are frozen out of the system entirely, since there aren’t enough units to go round. Wealth essentially becomes concentrated in the hands of the few, unless government intervenes to supply more credit/money into the system (usually by going into spending mode itself).
Even with government intervention, however, the surplus of products itself does not go away, nor the means to produce the surplus products. However, rather than give goods away for free or have people work for nothing — a situation which would restore equilibrium at a cost to the wealthy few — artificial scarcity is introduced to the system instead. The least efficient factories are closed down, while producers destroy or retain product from the market. Goods go to waste and people go without.
A period of concentrated “destocking” ensues, as manufacturers attempt to induce scarcity.
This is what is arguably still happening now. Just think of all that unused housing inventory, all those commodity stockpiles, all that spare capacity, all those bankruptcies forcing capacity to go unused.
This is why wars can help. The surplus product that the system cannot pay for because of a lack of credit is redirected to the war effort and/or a collective national purpose. Goods stop going to waste. Genuine scarcity is reintroduced to the economy, matching the number of credits. Balance is restored as scarcity is re-introduced.
Without something like a war — or an extra-terrestrial pursuit — the system can only be rebalanced by a boom in credit supply and/or artificial scarcity enforced by manufacturers themselves. Only the most profitable survive, whilst those that are inefficient shut down — leading to a temporary shortage of goods.
Refining in the US today is an excellent example of this phenomenon. Faced with the prospect of diminishing margins — as more and more cheap US crude became available — it made sense for the least efficient refineries to shut down to restore scarcity in the end product market (especially in the most profitable and important markets which set prices). This has now been achieved. Capacity is insufficient to meet demand in specific bottle-necked areas, despite barrels of crude inventory piling up all over the country.
Yet even these moves have not been enough to restore equilibrium. The disparity between those markets which are being made artificially scarce and those which can’t be managed is becoming ever more evident.
What’s more, with shipping rates now negative, it’s become ever easier to restore supply to those areas where supply is being restricted artificially. The scarcity manipulators are finding it harder and harder to convince the world there is a shortage of goods.
It’s worth pointing out that every industry has its own manipulation technique in this regard:
- Too many commodities = stockpile surplus in dark inventory.
- Too many garments, clothes and retail goods = create fashion to make old product seem outdated.
- Too many pharmaceuticals = create patents to reward inventors.
- Too much free music = create copyright laws to restrict free access.
- Too much free media = enforce paywalls and subscriptions.
- Too much food = convince society to constrain itself by making thin beautiful. Destroy food rather than give it away for free.
- Too much free energy = stop subsidising it, let inventory go to waste, bankrupt it.
Yet it is logical that eventually the dam will bust. All these goods will flow onto the market for free. Once they do, only those offering “quality” will be able to justify any charges at all. And even these will gradually become deflated as the system becomes ever more efficient at making quality product. And when that happens money itself will die, because who needs to save for their old age, if over the time the system is going to provide ever more “stuff” you need for free or almost for free.
We’d argue the signs that this is happening are already appearing.
In Greece, Peer2Peer networks have moved in to help the cash constrained meet their daily needs via direct barter mechanisms. Meanwhile, over in Spain some villages are working for free, as they find that their direct living needs are provided for in other ways and that the system is looking after them despite the debt crisis. A couple of choice examples, we know. But there will be more.
On the extreme end, an entire sub-culture known as freeganism has developed around the premise that society wastes too many goods, and that if you outwit the system (legally) you can meet most of your basic needs for free.
Platforms like freecycle, meanwhile, have even ensured that the philosophy can be adhered to without the need to scourge through society’s bins. All the while, society’s moral conscience gets increasingly concerned about how much the system wastes day-to-day.
We’ll bring you our thoughts on what it means to work in a post-scarcity environment in a follow-up post. We’ll also explain why defaulting on debt might not even matter anymore — since your needs will likely be met regardless.