Low Inflation and GDP Growth is the New Reality
Note: This column first appeared in the Sarasota Herald Tribune.
There has been a lot of discussion in the media about this economic recovery’s slow percentage growth of gross domestic product. It also has been an ongoing reality for years that the inflation rates in the U.S. and Europe have been, for the most part, less than the 2 percent that central bankers want to see. (Those of us old enough to remember the 1970s are wondering, “What’s so bad about low inflation?”)
Many economists have weighed in, with little consensus. But economists are exactly the wrong people to ask, because they see things through the historical lens of their field. The reasons for low growth rates and low inflation are largely due to globalization and technologically induced trends and realities, making historical economic comparisons less relevant.
Here are the dynamics that, since 2008, have shaped the current and future reality of low GDP growth and low inflation rates in developed countries.
The global economy
In early 2006, when Federal Reserve chairman Alan Greenspan stepped down and Ben Bernanke took his place, I wrote that Bernanke was the first person to take the job after the advent of the global economy. This, of course, was one of the reasons Greenspan got so much wrong. He was still operating under the belief that pulling levers and raising interest rates would work. They used to, but only when the economy was a national economy.
Trillions of dollars flowing around the world at the speed of light, without respect for borders, renders any comparison to the recoveries of the 20th century to be obsolete and largely irrelevant.
Individual countries, mostly in the developing world, will occasionally have growth rates of 5 percent or more, but those rapid rates don’t last. Even China’s growth rate has slowed to 5 to 6 percent. Just imagine what the global growth would be if China was taken out of the average.
In 2011, I forecast that there would be little or no growth or inflation in the Euro sector before 2020 and so far I see no evidence to the contrary.
The Internet is probably the single greatest anti-inflation technology ever created. A lower price can always be found somewhere when consumers are no longer limited to shopping where they live and services and products can be accessed from around the world. People go into car dealerships or big-box stores better informed about prices than ever before. Few businesses have not had their margins squeezed.
Industrial Age GDP measurements
The measurements that comprise the GDP were all set up during the Industrial Age: Physical things produced and consumed. Digital things are not fully measured in the GDP. Burning a gallon of gas in rush-hour traffic adds to the GDP. Sending a file of work over the Internet is not measured.
So the digital age and many of its very valuable attributes never get measured as part of the GDP, and GDP no longer fully measures the economic activity of the country.
Physical versus screen reality
Physical reality is based upon atoms. The new, connected screen reality is based on digitized data, so it evolves much more quickly. And screen reality’s changes to physical reality happen more quickly. Why do malls close every week in the U.S.? Why are big-box stores closing everywhere? Why did Borders go out of business? Amazon.com! Amazon, now the dominant online retailer in the world, has and will continue to reshape the physical retail landscape.
The U.S. is vastly over-retailed in physical reality and the market for physical stores will continue to shrink. Since 70 percent of the U.S. economy is driven by consumers, and consumers are buying more online all the time, not only will physical retail not contribute to any GDP growth but the lower prices online will keep inflation down.
Since 2013, I have been saying that the U.S. and the developed countries of the world are moving from an ownership to a rental economic model. This first happened in residential real estate. The level of home ownership reached in 2007 will never be attained again. Increasingly, for several reasons, renting is the better option for most demographics.
Now everything is moving from ownership to rental. Buy a DVD for $20 or watch unlimited movies on Netflix for $9.99 a month? No need to buy CDs or even mp3 files, just use a streaming service such as Spotify. Live in a city? Why buy a car for $35,000+ when you can use Uber for $20 a day? Become a Prime member on Amazon for $99 a year and have access to unlimited books and music.
Products are being replaced by services and, in most cases, services are cheaper. Ultimately almost every product will become a service. Car? Service. Books? Service. Music? Service. And, of course, a lot of stuff is now free. Storage in the cloud? Free. Access to the world’s knowledge? Free.
There are few instances in which renting is more expensive than owning. A significant part of that reality is that you only rent what you use and when you need it. When you buy you pay for the time you don’t use a product. The average American drives 100 minutes a day. So for 1,340 minutes each day it sits in the garage or parking lot, depreciating. How much did you get when you tried to resell that DVD, book, CD or car?
Welcome to the new Shift Age, 21st century global economy of low inflation and poorly measured growth. The Internet will continue to be a global anti-inflation technology. Renting will lower living costs, and the internet will create great value at lower or no costs than in the analog world. Online value will continue to be under-measured until the physical bias of GDP numbers is changed.
Low inflation is a good thing. Our economy is better than reflected in the GDP.