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May 7, 2018 | The Riddle of Low Inflation – Solved!

Donald B. Swenson: Born January 24, 1943, Roseau, Minnesota. Graduated H.S. 1961, Moorhead High, Minnesota. Graduated College 1968, Moorhead State University, Minnesota. Designated member of Appraisal Institute (MAI), 1974. Employed with Western Life Insurance Company, 1968 – 71; Iowa Securities Company, 1971 – 73; American Appraisal Company, 1974 – 81. Part-time teacher/valuation consultant/bartender, 1979 – 2008 (taught workshops at Waukesha County Technical Institute, Wi. and Madison Area Technical College, Wi.). Retired 2008 (part time teacher/blogger), AZ. Self educated economist/philosopher/theologian:

Currently the Euro-zone has an inflation rate of only 1.3%. This is after some $2.9 trillion of QE stimulus since 2015. Low inflation all over the planet is a riddle to many economists. But what are they missing in their thinking? My sense is that the issue is the IT robotic industry which is replacing people and increasing production everywhere. Our Central Banks have stimulated the money supply for years and yet inflation is low or very low. Let’s explore why this riddle is confusing to discern.


Cow-milking robots now help to do more with less is the title of an article I just read. This article in the Wall Street Journal, May 7, is typical of what is happening everywhere. Robots can now milk a cow, clean the teats, feed the cow, and cool the milk which emerges (all this happens automatically). Production of milk takes less labor and the quality and quantity increases. This reduces consumer purchasing power and simultaneously increases production (the supply of goods). The robot industry is growing exponentially in all areas of commerce. This means that abundance of goods is prevalent and inflation is minimal to none.


Now that our Central Banks are starting to restrict the supply of money digits within the global economy, via higher interest rates and less QE, we could witness even less inflation going forward. Inflation is a result of increasing the money supply relative to the goods supply. Today, the goods supply (globally) is growing continually and overcoming the tremendous stimulus which has resulted from our Central Bank monetary policies. This means less inflation in the overall markets as goods supply grows globally. A primary catalyst for this growth is the robotic industry.


Personally, I have noticed this phenomena in my area of the planet. Tucson and all of Arizona have a growing supply of goods everywhere. Stores are full of inventory. Prices may increase on some goods but the alternative items available…which I can purchase allow me to obtain a basket of goods for less each year. Exceptions are items like energy (gas and oil) where robots are less of an issue. The robotic industry is growing exponentially (globally) and this allows for increased production with less labor.


Less labor means less purchasing power as wages do not need to be paid to all these robots. Europe has had less that 2% wage growth these past 9 years. Yet their supply of goods has grown substantially relative to actual needs (demand). America has also had minimal wage growth and this means that purchasing power (overall) is not pushing up general inflation much. We may have 2% inflation now (excluding food and energy) but this is unlikely to grow given the current policies of our Central Bank. I sense that a deflationary trend is starting to emerge.


The big change these past 10 years has been the growth of IT capex – replacing humans with machines. The dairy industry is just one example of how robots can increase the production of milk products with less and less labor. This trend is happening in all our industries. Abundance of goods is the result of more production via robots. Scarcity is disappearing at the present time. Abundance is growing and this may continue if the economy does not crash completely. We live in interesting times. Inflation is mostly over for now. Low inflation may continue if the economy does not falter.


The danger is now deflation as purchasing power diminishes relative to goods supply. Robots have helped to give us abundance and this is good for the general economy. Deflation, however, is dire for our Central Banks and the debt economy. Debts can not be paid back if inflation does not continue. At some point the crunch will assert itself and general deflation could force Central Banks to change their QE policies. At the moment, however, we may continue with abundance and no meaningful inflation (for most Western nations).


Exceptions to low inflation are countries which are collapsing economically. The prime example is Venezuela. This nation is growing their money supply (digits) much greater than their goods supply. So huge inflation results and people starve. We could also say that the real estate industry and our stock markets have also experienced huge inflationary increases. But if we ignore these exceptions (where robots are not the issue), then we can attribute the current low inflation (overall) mostly to our IT robotic industry and the huge growth in goods supply. Give this some consideration as it may explain this riddle of low inflation in the general economy. I am:

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May 7th, 2018

Posted In: Kingdom Economics

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