The Federal Reserve Continues to Ignore Technological Deflation

The recent FOMC meetings continue to feature a range of debate only around the rate at which the Fed Funds rate can be increased up to about 4% (which has not coincided with a robust economy since the late 1990s).  They actually describe this as a 'normal' rate, and the process of raising the rate as 'normalization'.  The 'Dot Plot' pictured here indicates the paradigm that the Federal Reserve still believes.  Even the most 'dovish' members still think that the Fed Funds rate will be above 2% by 2019.  

This is dangerously inaccurate.  At the start of 2016, the Federal Reserve expected that they will do four rate likes this year itself.  Now they are down to an expectation of just two (one more than the one early in this year), and may just halt with one.  How can a collection of supposedly the best and wisest economic forecasters be so consistently wrong?  A 20% stock market correction will lead to a swift rate reversal and a 25%+ correction will lead to a resumption of QE in excess of $100B/month.  

As we can see in the ATOM e-book, technological deflation is endless and exponentially increasing, and hence the Wu-Xia shadow rate indicates the natural Fed Funds rate for the US to be around the equivalent -2%.  Yes, minus two percent, achieved through the various rounds of QE that have been done to date in order to simulate a negative interest rate.  The US stopped its QE in 2014, but continues to be held afloat by a portion of the $220B/month of worldwide central bank easing that flows into the US. This is barely enough to keep US Nominal GDP (NGDP) growth at 3%, which is far below the level at which innovation can proceed at its trendline rate.  The connection between technological progress, technological deflation, and worldwide central bank action is still not being discovered by decision-makers.  

The -2% indicated by the Wu-Xia shadow rate might be as deep as -4% by 2025, under current trends of technological diffusion.  The worldwide central bank easing required to halt deflation by that time will be several times higher than today.  As per the ATOM policy reform recommendations, this can be an exceptionally favorable thing if the fundamentals are recognized.  

For the full analysis and thesis, read the ATOM e-book.  

 

Related ATOM Chapters :

4.  The Overlooked Economics of Technology

6. Current Government Policy Will Soon Be Ineffective

7. Government Policies Must Adapt, and Quickly

10. Implementation of the ATOM Age for Nations

 

Comments

[bloblob]

I'll confess that I have no read your ATOM book just yet, so perhaps my comments are misdirected.

1 - One of my personal concerns is employment (I'm a software developer.) My biggest threats are either cheap labor from overseas, outsourcing and some automation. How will I be able to make money in the future?

2 - What will happen to human relations when things such as nano-tech and sexbots (yes, I said it) come online? Will everyone just turn into a society soup of detached and indifferent -- no pun intended -- atoms?

3 - A maliciously program (a virus, trojan, etc.) will take out your data and be a huge hearburn. But what about a maliciously programmed nano-bot? How the hell do you defend against that?

I live in the US for reference.

Feel free to provide whatever input you wish, I look forward to your input.

[fatcat]

I think that you are too optimistic on the rate and the strength of the tech deflation. The money supply has to efficiently cover or rather supplant the wealth. To make the thing more complicated the speed of the money and derivative instruments could greatly affect the liquidity. On top of that the emitter of fiat money faces two great challenges: keeping people's trust in your IOU and supplying sufficient but not excessive liquidity. On the other hand the government owns the printing press. And the temptation to run the press and get free money is extremely high. After all, who doesn’t want free money? The economy can grow only so much, while the government spending just keeps growing. And sometimes even for good reasons. The irony is that you can have at the very same time inflation and insufficient liquidity supply.

[fatcat]

One needs people to trust the fiat money. That trust is converted to real goods, services, and other financial instruments during each transaction. Gold and bitcoin are good example of trust. The trust is predicated on the money scarcity. The government / a country state can get away with some printing because some money is needed soaked by the economy to run the day to day business activity. Another part of the money is sequestered as value store. The moment the money supply is increased (or the money speed is accelerating) you have more money competing for the same goods and services. The only way to offset this is to either sequester more money or grow the economy. And projecting the future growth is not a simple matter. On top of that you have to persuade all the participants that you are not flooding the economy with devalued money, otherwise they will switch to other currencies or instruments.

[fatcat]

For now the CPI is showing measurable levels of inflation. And FED cannot afford talking about another QE, even though another round of QE might be beneficial for the economic growth. And there will be some rhetoric musing about raising the interest rates. They might even go 0.25 up a couple of times. And then immediately some bad news will prompt a reduction. So, it is too early to talk about mainstream deflation.

[Kartik Gada]

fatcat,

I think that you are too optimistic on the rate and the strength of the tech deflation.

Worldwide money creation is $220B/month right now, yet world inflation is very low. Total world metrics are the only ones that are accurate as both monetary creation and inflation can flow across borders.

Deflating technological products are 2% of world GDP right now.

The CPI is still under 2%, which is moderate but certainly not high. The optimal NGDP is 6-7%, with inflation of 2-3%..

But yes, rate increases by the Fed are not just wrong (even while the rest of the world is doing QE), but will be reversed in great haste relatively quickly thereafter.

[Hemlock]

KG -

"Apres moi le deluge."

King Louis XV of France, 18th Century
also...
President Barack Obama of the USA, January 20, 2017
------------------------------------------------------

I've come to this blog and someone who is interested in technology and the transforming power it is bringing to both individuals as well
as society at large.
I've read and heartily enjoyed your ATOM e-book. It belongs on the shelf next to Kurzweil, Nick Bostrom, et al. In putting tech in an historical context it makes me think of NONZERO, a book by Robert Wright which I strongly recommend and would be curious as to your thoughts/opinions on his ideas.
On page 152 Wright gives us a quote by historian Joseph Strayer...
"...an interesting problem in the history of civilization. If there is steady progress anywhere, it is the field of technology, and yet this kind of progress seems to have little connection with the stability of society..."
With that quote in mind, else where in the book he talks of a "Pareto optimum" moment. A moment where it is no longer possible to make someone better off in society without making someone else worse off. This necessitates a change in the social compact. Needless to say this is not without pain and confusion for that society.
I believe your predicted 2017 recession will be such an event. What at first blush will seem to be your typical capitalist system cyclical recession will instead be modern societies' reckoning with the growing (exponential!) power of tech in every aspect of modern life. Simply put this renegotiation of the social contract will be traumatic and disorienting and fiscally painful. (Many people I work with live paycheck to paycheck, have significant debt and have most of their net worth invested in their homes... the hit on them will be grim.)
This is all to say I agree with your thesis and would be interested in any more thoughts you might share on 2017. Your longer range predictions are rosy with the DUES both helping those who need it most as well as creating a new economic model. However getting from A to Z will necessitate some grim times. 2025 will be fun, but 2017 is around the corner.... How long might the downturn last (I know, it depends on a lot of factors), how might this downturn affect other nations, how suddenly might the crash happen, etc.?
Finally, have you reached out to anyone with a soapbox to promote your ideas? Such as Kurzweil,Krugman or even the Freakonomics team?
When you read enough about tech, accelerating change and so forth your theories become obvious, most policy makers and economists however, cannot see the forest for the trees.
I look forward to continuing this conversation.

Hemlock

[fatcat]

>However getting from A to Z will necessitate some grim times. 2025 will be fun, but 2017 is around the corner.

>

i see 2017 as dull and grim. Kind of replaying 2008-2012. And 2025 as exciting and turbulent. For some it will be fun, for others really painful.

[Kartik Gada]

Hemlock,

I've read and heartily enjoyed your ATOM e-book. It belongs on the shelf next to Kurzweil, Nick Bostrom, et al.

Thanks! That is the highest praise I can receive.

If you can send a few emails to key people who will read it based on your recommendation, I will be very grateful.

This is all to say I agree with your thesis and would be interested in any more thoughts you might share on 2017.

I believe the process is already starting as seen in the stock market. The EU is talking about tapering even as the US is raising rates. Exactly the opposite is needed. QE will have to be much higher in 2017 just to offset a recession, but they are doing the opposite.

Real Estate in the US is propped up by so many forces that cannot continue that it will be the core of the decline. The median baby boomer is 62 in 2017, and most will end up losing a lot of the home equity they think they are locked into.

Finally, have you reached out to anyone with a soapbox to promote your ideas? Such as Kurzweil,Krugman or even the Freakonomics team?

I emailed Kurzweil, and he responded, but with a very basic question. I am trying to establish an ongoing dialog with him. I have also sent it to a number of other people, but outside of a few key people, it is hard to get traction..

It will be a long, hard road to get exposure, but we will get there. I will run a video contest (i.e. who can make the best video to explain the ATOM concepts, for a prize of $10K to $20K), which will help.

[Kartik Gada]

fatcat,

i see 2017 as dull and grim. Kind of replaying 2008-2012. And 2025 as exciting and turbulent. For some it will be fun, for others really painful.

2017 will be grim, but not dull. It will be brutal for many.

Yes, by 2025, things will be exciting. If a DUES is implemented by then, it will be $25,000/year and rising, on top of zero income taxes. That would be fantastic.

[Hemlock]

KG -

Listening to the news recently.....

A Russian central bank official slams western governments for QE.
OPEC is working to shore up/boost its oil price.
Two-thirds of leading economists predict a 4th quarter US rate hike.
All the while a BBC news anchor notes that there is little sign of inflation in advanced western economies.

However this AM on News Hour Extra on BBC radio there was a discussion about the stagnant state of the world economy. One of the commentators posited a "QE for the people." This is obviously UBI or DUES by another name. So the idea is out there and growing, but I don't believe it will be implemented widely before the recession that you predict. To most economists and lay people this is seen as "helicopter money" which is inflationary and irresponsible fiscal policy. And 'x' amount of years ago it would have been - before the rise tech as you describe it.

People think tech is gadgets - light sabers and jet packs and magical hover boards - and it is, but it is the maturing of AI that I think has become an unappreciated factor in this economy. That is why most can't see it coming.

I know a college economics professor and intend to get his take on the ideas we are talking about here. Keep up the good work.

Hemlock

[Kartik Gada]

Hemlock,

Thanks. Yes, if you can send it to a professor, that is great.

I do find that most economists are quite orthodox, and believe that no real econ ideas can come from someone who is not an economics professor. This, despite the fact that the Federal Reserve (the best economists, supposedly) continue to have their forecasts proved wrong again and again... They did one QE, thinking it was the only one. Then they did a second, and a third. They still think this is the final one. On top of that, they thought there would be 4 rate hikes this year. They did one, and that may be it. Their forecasts continue to be wrong, because they are not accounting for technological deflation.

Yes, people don't think of tech the correct way. If they actually *observe* the smartphone that they use all the time, they will see how many tech trends are manifest within that device, and how much deflationary disruption it creates. Instead, they think 'where is my jetpack' and use that as an excuse to claim there is no technological progress.

Yes, no government will act *before* the avoidable crisis. Rather, they will act under duress, only after millions of lives have been ruined..

[fatcat]

> Federal Reserve (the best economists, supposedly) continue
>to have their forecasts proved wrong again and again... They
>did one QE, thinking it was the only one. Then they did a
>second, and a third. They still think this is the final one.
>On top of that, they thought there would be 4 rate hikes this
>year. They did one, and that may be it.

Let’s not forget that what FED says and what they actually think are not exactly the same. They always have to project optimism. If they have said that there will be x rounds of QE initially there would be an immense political pressure to reverse the policies. That’s why there always talks about raising the interest rate. Greenspan was perfect in talking without actually conveying any message. Then we had “helicopter” Ben. Didn’t stay for too long… Long story short, the rhetoric will hint at interest rate raises. Might even have a token increase like raising rates by +0.25%, and immediately offsetting it by some other mechanism like some disguised QE.

Besides it is not obvious and provable beyond doubt that there is a sustainable and accelerating technological deflation. Not to any mainstream economist.

[Kartik Gada]

fatcat,

Besides it is not obvious and provable beyond doubt that there is a sustainable and accelerating technological deflation. Not to any mainstream economist.

We shall see. There is a decent chance that central bankers in Japan and China will get on board with this concept, even if the US Fed remains in denial.

[fatcat]

We shall see. There is a decent chance that central bankers in Japan and China will get on board with this concept, even if the US Fed remains in denial.

The central bank in China could do it as their 5y plans project 5-7% growth of the Chinese GDP. However, the rimimbi has a few barriers to be used as a world currency, hence limited liquidity on world-wide scale. Still might be beneficial within chinese borders.

Japan on the other hand, has a proven history of deflationary policies with 2 lost decades of growth.

In fact, all the governments and central banks are constrained by inflationary fears and the need to keep confidence and trust in their respective fiat currencies. The US did the bold move with QE, which in a way is brilliant. Printing money without really printing it. And having the ability to reduce the monetary mass in the future. However, QE on such scales can be done only by the largest economies like US, EU and China. Everybody else will just quickly devalue their currency. UK can do something on a limited scale. And even US cannot do more than 3-5% nominal inflation or risk losing people's trust.

[Kartik Gada]

fatcat,

And even US cannot do more than 3-5% nominal inflation or risk losing people's trust.

Yes. But 3-4% is extremely far from where we are now. Do you know how much QE is needed to keep inflation above 3%? It will be higher still if income taxes start getting phased out too.

[agimarc]

Howdy KG - Started following the older combined blog with the Misandry postings. From those, expanded to your other writings.

Finished the ATOM last week and think I (kind of) understand it enough to start passing it around to friends and readers.

Have a dumb question for your consideration: Why is deflation a bad thing? Because it destroys capital? I know deflation was at the heart of the damage of the Great Depression. An explanation from your perspective would be valuable. My economics background is mostly as a Milton Friedman fan / reader. I understand inflation. Deflation not so much.

Thanks for your consideration. Cheers -

[Kartik Gada]

agimarc,

Deflation would not be bad if the entire economy were not built around debt and valuations of equities as a multiple of earnings.

But if one has debt (i.e. fixed payments on mortgages, etc.), then deflation makes each payment larger, while inflation makes it smaller, as long as one's income keeps up with inflation.

The GD as well as Japanese stagnation are all the byproducts of deflation. The low Nominal GDP (see Chapter 4 of the ATOM) also results in weak valuations for new businesses.

Hypothetically, deflation would not be bad if the whole world oriented around employee salaries gradually reducing, no debt, etc. But that is too radical of a change..

If you can pass it around, that would be great! All exposure is good exposure..

[fatcat]

Hypothetically, deflation would not be bad if the whole world oriented around employee salaries gradually reducing, no debt, etc. But that is too radical of a change..
I have heard, but cannot provide links that Stalin was running an anti-inflationary policy with mandated increase in productivity and price annual (or every 5 years) price reductions of many staple goods… At the end didn’t work that well…

[fatcat]

But regardless of the inflation direction you will always have winners and losers; either debtors or the loaners. Inflation is a tax on cash/and fixed income flows. Equally so is the deflation: a tax, albeit a negative one. The only difference is the macroeconomic effect. A moderate inflation tends to increase the economic activity due to more available liquidity, and by consequence is pro growth.

[Kartik Gada]

fatcat,

But regardless of the inflation direction you will always have winners and losers;

Of course, as it should be.

A moderate inflation tends to increase the economic activity due to more available liquidity, and by consequence is pro growth.

Which is why ATOM DUES is necessary, to ensure inflation remains 2-3% in a world of accelerating technological deflation.

[fatcat]

Btw,
there are some articles expecting FED to raise rates soon. The general sentiment can be summed by this comment:
"Fed may raise rates" - weekly WSJ headline since 2008.

[agimarc]

Howdy KG - Shopping your suggestions to others in the financial community. A friend of mine pointed me to the following link that claims that deflation is accelerating. He promised to review ATOM. Cheers -

http://seekingalpha.com/article/4016383-deflation-still-accelerating?app=1&auth_param=1e7l:1c16vf3:38a600c6f14c4b602116fe68f77abc8c&uprof=44

[Kartik Gada]

agimarc,

Yes! Deflation is accelerating, which is why amount of world QE is accelerating, just to offset it..

$220B/month ongoing as we speak. Soon, even that will not be enough. If your friend found that article of his own accord, he might really like the ATOM.

[fatcat]

And the DU[D]ES/UBI concept is getting mainstream attention With Musk talking favorably about ubi.

http://gizmodo.com/elon-musk-we-need-universal-income-because-robots-will-1788644631

[Sunny]

Hey Kartik
How are you. Long time reader (since 2009) first time commenter.
Does the election of Donald Trump, change your hypothesis of the financial crisis in 2017 or do you think that still happens. I don't see how the financial team, of same old same old Goldman Sachs cronies changes or adapts the policy recommendations that you are proposing. SO I guess the question, is with a two hundred plus points spike in the market today. I am beginning to wonder if the 2017 financial crisis still happens or gets delayed by years, considering Trump's plan is going to have a massive infrastructure spending component in it.

[Kartik Gada]

Hi Sunny,

Thanks for commenting.

The election does not change the timeline, as we don't quite know what he would do before it is too late. Remember, the only way to avoid the crisis is for world QE to become higher, and for the US Fed to stop increasing rates (and reverse the rate increase they have already done).

[Sunny]

Hi Kartik
How are you.

Thanks for your explanation. Oh by the way. I think someone at Business Insider seemed to have read the ATOM :). Your idea of Basic Universal Income is catching on. Now if they only eliminated Personal Income tax, this may just work out. But I think people are either borrowing your ideas or just reading up on the ATOM :).
Check this out :
http://www.businessinsider.com/basic-income-experts-trump-america-2016-11

[Sunny]

Hi Kartik
How are you. Happy Holidays to you.

A quick follow up question, to my previous question.
And frankly this is the only thing that is holding me off on endorsing your very well thought out proposal of Universal basic income. So, your proposal of universal basic income, won't it facilitate the welfare class that already exists and is acknowledged nationally as essentially a parasite to the tax payer class to become even more entitled and therefore even more parasitic to the overall GDP. Resulting in, not an increase but a massive decrease in overall revenue and a massive increase in overall taxation ?. I think what is not being factored in your proposal/thesis is the resentment that this will create in the middle to upper middle class (essentially households with 75,000 to 150,000 annual incomes), who already have significant job insecurities and see the welfare class as entitled "takers" . I would argue that this resentment and its resulting rightful frustration is the reason that Trump won (full disclosure:I voted for him) and frankly this will cause a tear in the already fragile social fabric that exists in our current society, if it hasn't already. As a result of this, I would also argue, any attempts to implement the universal basic income model would become challenging if not impossible. I would love to hear your thoughts on this.
Thanks
Best Regards
Sunny

[Kartik Gada]

Sunny,

Have you read the whole ATOM publication? In there, you will see that an essential component of the entire program is that income taxes eventually be transitioned to 0%, with the QE covering all government spending, especially the exponentially-rising safety net.

See the FAQs for info about incentives : http://atom.singularity2050.com/faqs.html

Incentives increase due to offsetting factors like :
a) Income taxes eventually becoming 0%
b) Better climate for entrepreneurship.

When income taxes go to 0%, higher income people win too. See Chapters 8, 9, and 10 as well.

[Sunny]

Hey Kartik
Thanks.
So did miss the income tax part on the last read.

Have passed the ATOM on to colleagues and friends, so not sure if you are seeing any additional traffic on your blog.

Have another follow up question after this time's read. And apologies in advance if I missed something again.

So The Atom is based on the dollar surviving as the reserve currency correct ?. How does geo-politics play into this ?. Meaning, when the crash occurs in 2017 as you theorize, what would prevent the IMF from pursuing and enforcing the SDR (special drawing rights)?. Wouldn't that end the dollars role as the global reserve currency and therefore hinder all attempts to print ?.

[Sunny]

Hey Kartik
I think I am going to answer my own question from above. I think the IMF gets sidelined because the deflation will be global and therefore all central banks will have to work in unison. I think you alluded to this in the ATOM. I just didn't see the connection from the Geo-Political perspective and I think that is ideal solution. The thing I am struggling to understand is how does that happen without some kind of a global conflict. I mean what is stopping China or Russia to say, ok we will just print our money and not buy dollars with it and not trade with you. In which case all those dollars come rushing back home, through some kind of an asset buy. Now you have answered this too, in that the Fed buys all kinds of debt. But I think this is where it gets tricky, where does the deflation end and the Fed inspired Hyperinflation take off -- peacefully. Because if History is an indicator then this leads to war and therefore the concept of the ATOM and its solutions may not take off. I buy your argument about the deflation part Kartik and I admire your stamina for laying all this out for us. I am just struggling to understand how and if the solution you mentioned, (which would be as you well put them, elegant and simple) actually happen. Because every scenario I game on this, ends up in war, starting first with a trade war leading to a hot war. I would love to hear your thoughts on this.
Best Regards
Sunny

[Kartik Gada]

Sunny,

First of all, a hot war between the major countries in the world is out of the question, because there is too much aggregate prosperity to lose. Only countries that are either poor or steeped in some absurd ideology (to the extent of no trade with other countries) will still be at war :

http://www.singularity2050.com/2009/11/the-winds-of-war-the-sands-of-time-v20.html

Central Bank coordination occasionally happens, but it has to become far more formal and real-time. That said, the US can start a DUES without any other country - it just has to index payments to the level of worldwide QE, itself indexed to the level of technological deflation.

http://atom.singularity2050.com/4-the-overlooked-economics-of-technology.html

[fatcat]

Hi Kartik,
your ideas are slowly percolating and reaching mainstream media: https://www.lombardiletter.com/the-janet-yellen-rate-hike-could-unleash-u-s-financial-collapse-2017/8374/

let's see how it will really tun out.