Tuesday 23 Jul 2024
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This article first appeared in Wealth, The Edge Malaysia Weekly on February 28, 2022 - March 6, 2022

Throughout history’s major computing paradigms — from the electromechanical calculators of 1890 to today’s semiconductor chips — the computational power that US$1,000 can buy has doubled every two years.

Plotted on a standard linear graph, this is a flat, straight line that — towards the end — suddenly explodes upwards in a J-shaped curve. Known as exponential growth, this mathematical abstraction is what futurist Ray Kurzweil uses to predict technological developments years ahead of time, with a stunning 86% accuracy rate.

Because technology is designed to save people time and money, it is constantly moving down the cost curve, while racing up the power curve.

Over the long run, this means many valuable technologies will eventually become free, or nearly free. Or so says Jeff Booth, a serial entrepreneur and technologist.

As Booth recounts in his bestselling book, The Price of Tomorrow, a cell phone had cost about US$2,000 in 1988 while calls cost US$1.50 a minute. Today, calls are free and phones are not just phones — they are cameras, maps, calendars, gaming devices and many other things.

Look closely and you will find technology deflation everywhere. The price of lithium-ion batteries, for instance, is down 97% since 1991. In the year 2000, hard drives cost US$10 per gigabyte; today, cloud storage costs between fractions of a cent per gigabyte.

As technology advances exponentially, it will expand its reach into every aspect of our world. And since technology is deflationary, we should expect nearly everything to get cheaper and cheaper. But why, then, is life seemingly getting more expensive? Why are many of us on a hamster wheel, trying to earn more and outrun rising living costs?

In The Price of Tomorrow, Booth attempts to unravel this paradox. Between 2000 and 2018, global gross domestic product rose from US$33.5 trillion to US$80 trillion, giving the impression of economic growth. Over the same period, however, global debt grew even faster, rising from US$62 trillion to US$247 trillion. In other words, it took the world four dollars of debt to achieve every dollar of growth.

Booth believes economies are increasingly leveraging themselves, seemingly to drive growth but actually to fight off powerful forces of deflation. Unproductive debt makes growth harder to achieve because borrowings need to be repaid. As growth slows and obligations rise, the risk of defaults increases.

Governments then turn to money printing, which — as Ray Dalio of Bridgewater says — is simply the default choice to deal with spiralling debt. After all, spending less drags growth while restructuring obliterates vast amounts of wealth.

However, inflation reduces the value of currency while driving up the value of assets. Wealth concentrates in the hands of asset owners while making it harder for everyone else to keep up with rising prices. This, Booth contends, is driving the wave of populism and discord we see across the world today. Taken to the extremes, the fight to stop deflation will culminate in revolutions and wars that will “burn the existing system to the ground”.

As it turns out, Booth is far from alone in making this assessment. Inflation is “the way democracies die”, the billionaire investor Charlie Munger said recently. 

To illustrate this, Munger brought up the Roman Republic, which debased its currency for hundreds of years to finance government expenses. As the historian Bruce Bartlett relates in The Cato Journal, inflation initially helped Rome shore up its finances. But the move eventually led to skyrocketing prices, falling wages, asset seizures and rising taxes.

Ultimately, “the whole damn Roman Empire collapsed. So [inflation is] the biggest long-range danger we have probably, apart from nuclear war”, Munger said.

The good news is that technologists may have found a solution: Bitcoin, which was designed to resist inflation. With its supply fixed forever, Bitcoin lends itself to a deflationary world. In this alternate reality, Booth says, we will stop chasing higher salaries so that we can pay higher and higher prices. As living costs drop, we might finally get to work less and play more.

Because we have always lived in a growth-addicted world, it is hard to imagine what anything else will look like. What we do know, though, is that 80% of the world’s debt was created over the last two decades. We also know that because technology is advancing at an exponential pace, the next two decades will make today look prehistoric.

By 2029, for instance, Kurzweil predicts machines will be as smart as humans. Humans are scarce; robots are not. What would that mean for deflation? How will economies respond?

Despite Munger’s warnings of societal collapse, we can expect many will continue brushing aside the long-term risk inflation creates. But in the exponential age, the question is not about what will happen in the next 20 years. The question is whether we can afford to wait and see.

Andrew Vong is chief future officer of EquitiesTracker Holdings Bhd

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