The Price of Tomorrow: Why Deflation is the Key to an Abundant Future

by Jeff Booth

We cannot afford to cling to systems and pretend they are working because they did in an era before technology.

Those choices compound and sometimes we don’t realize, or we forget, that we control our own thoughts, and we control our time. We all have choices on how and with whom to spend our time; it is one of the most important choices you can make.

Each of them is distinctive in their approach and market, but they have in common an unwavering drive to help people, and the companies are successful because they do.

“The ideas of economists and political philosophers, both when they are right and when they are wrong, are more powerful than is commonly understood. Indeed the world is ruled by little else. Practical men, who believe themselves to be quite exempt from any intellectual influence, are usually the slaves of some defunct economist.” John Maynard Keynes The General Theory of Employment, Interest and Money (1936)

Our economic systems were not built for a world driven by technology where prices keep falling. They were built for a pre-technology era when labour and capital were inextricably linked, an era that counted on growth and inflation, an era where we made money from scarcity and inefficiency. That era is over. But we keep on pretending that those economic systems still work.

The only thing driving growth in the world today is easy credit, which is being created at a pace that is hard to comprehend. The rise of that credit and corresponding debt is keeping us locked into a system where we are the proverbial frogs in a pot with the heat of the water slowly rising and we do not notice.

The seemingly random events of Brexit, Trump, and a rise in populism and hate in our world are not haphazard or isolated at all. They are all connected to a loss in hope for a better future for large portions of the population. Underlying this loss of hope is a new economic reality where it’s not just the poor who are missing out on economic gains. Much of the middle class is also feeling squeezed. Instead of technology allowing for a fifteen-hour work week, as Keynes predicted when he penned his 1930s essay “Economic Possibilities for Our Grandchildren,” vast numbers of people are working longer, in jobs they rightly fear will soon be gone.

Trapped—wondering how they will provide for their families and basic needs when the other shoe drops. At the same time, we are seeing a massive rise in inequality: in the United States, the top 5 percent of the population now holds more than two-thirds of the wealth, while the remaining 95 percent of the population fights for their share of the other third.1 Just three people—Jeff Bezos, Bill Gates, and Warren Buffett—account for more wealth than 50 percent of the population.

It’s hard not to look back to a similar loss of hope and rise in populism and ideologues around the world in the early 1930s, which escalated into World War II.

All of our lives, we have lived in a world where hope for a better future was a motivating force in economics—a world where growth reigns. Our parents grew up in that same world, and so did their parents. It is what we know.

If we leverage those assets by adding debt, our return is even greater because the asset increases in value while the dollars that we pay back in debt are priced in today’s dollars—and with inflation, and growth in our incomes due to the inflation, we pay back the debt tomorrow in dollars that are worth less.

Housing is the classic example of this leverage. My parents bought their first house in suburban Vancouver, Canada, in 1977 for $69,000. At the time, it was a large sum of money for them. But with a down payment of $10,000 and a mortgage of $59,000, they were on their way to seeing the benefits of buying assets in an inflationary environment. Their incomes rose over the course of their careers, and with that rise in incomes, the mortgage of $59,000 became easier to pay. All the while, inflation also increased the value of their home: today it’s worth about $1.5 million.

Today, we are in that scenario. The continual growth and inflation we expect—the system we’ve built our nations’ economies around—is ceasing to exist. Technology is a deflationary force so great that, in the end, nothing we do will stop it.

Deflation, put simply, is when you get more for your money—just as inflation is when you get less for your money.

Deflation is not intrinsically good or bad. It just matters where you put your money. On each side of the equation, there are winners and losers. With inflation, holders of assets win, since the dollars in the future are worth less and it would therefore take more dollars to buy assets at a later date—like my parents and their first house. With deflation, holders of currency are the winners, since their dollars can buy more goods and services in the future than they could today.

The problem is that we still think that deflation is restricted to parts of our economy—that we will keep getting more with less in our electronic devices while getting the benefits of inflation in the rest of our lives. And we still look at technology through a narrow lens, as if it’s only something that powers our phones.

If everything—not just phones or Internet companies but everything—is giving far more performance and at the same time falling in price, a family that makes $75,000 this year and struggles to make ends meet could make $70,000 next year and the dollars would go further. And then $60,000 a few years after that and it would go further still, continuing to gain more for less with the natural deflationary trend in technology. That would allow us to step off the existing treadmill of chasing higher and higher prices, requiring ever-higher-paying jobs to keep up. That may sound radical, but if technology is deflationary, and we expect technology to continue its advance into more and more industries, it may not be radical at all. It may be the only sane thing to do. There’s just one problem: if technology should be driving everything cheaper, why is life getting more expensive?

But this rise in prices is artificial—driven by an enormous rise in credit and debt.

Governments and central banks will do almost anything to stop deflation. Inflation targets, set at typically 2 percent, are public elements of their mandates, with a blend of ever-increasing, wild ideas to keep inflation going. Any real growth that the world has seen is only because of an unprecedented spending spree fuelled by easy credit and debt that masks what is really happening underneath. The problem comes from believing we can outrun deflation and the natural order of things by creating more and more debt. It’s a bit like trying to flap your arms to fight gravity: gravity will win. Even a plane using massive energy to stay in the air must eventually land.

For example, a government brings its debt under control by no longer funding a program, but that stop in funding forces debt to accumulate faster in consumers who need the program; only through total debt will you see the real impact on GDP.

In 2000, the total debt in the world was approximately US$62 trillion. At the same time, the world economy in 2000 was about US$33.5 trillion. Since 2000, the world economy has grown from US$33.5 trillion to about US$80 trillion, but to achieve that growth, the total debt has grown to over US$247 trillion as of the third quarter of 2018, according to the Institute of International Finance. In other words, it has taken approximately $185 trillion of global debt to achieve $46 trillion of global growth.

If we stopped adding to that debt and started to pay it back at a rate of $1,000 per second, it would take nearly 8,000 years. Instead, we keep adding to it. And it gets even worse—if it took creating $185 trillion of debt to get only $46 trillion of growth, I’ll show you in chapter 4 why it will take at least double that amount of debt to get another $46 trillion of growth.

I can’t imagine going to the bank for a loan and pitching this great idea where I would add $4.00 of debt for every $1.00 of growth. Even if I taxed the entire $1.00 gain at 100 percent, the $1.00 would never allow me to pay back my original loan. The mirag...

“Policy makers always print. That is because austerity causes more pain than benefit, big restructurings wipe out too much wealth too fast, and transfers of wealth from haves to have nots don’t happen in sufficient size without revolution.”3

Passion, risks, ingenuity, hard work, and smarts should be rewarded. The monumental challenges for any society are when an economic game is rigged in favour of a few while others are disadvantaged. When the disadvantaged realize that they are playing a game that cannot be won.

It wasn’t housing itself that caused the 2008 bubble. If it hadn’t been housing, it would have been somewhere else that easy credit was flowing to. The continuing rise of debt that cannot be paid back was at the heart of the housing crises and will be at the heart of the next crisis. A bubble pops when people wake up and realize that the debt can never be paid off. At that point, credit is removed—and because easy credit was the main thing causing the run-up, assets collapse. It is what led to the bubble in technology stocks in early 2000s. It is what led to the crisis in Greece and to the crisis in Venezuela today.

Here is how the balance between the two countries actually works out. Almost 70 percent of the United States’ GDP is made up of consumer spending; in China, consumer spending makes up only about 30 percent of GDP. In China, incentivizing production requires keeping lower wages (relative to the world), tax incentives for production and distribution, and investments in automation to achieve production that allows their exports to win on a world market. Conversely, to support consumer spending at 70 percent of the economy, the United States requires relatively higher wages, high credit creation with low interest rates (debt to finance that increased spending), and lower taxes.

This is also happening between China and the US, and not in the way you might think. China has been buying US government debt as a consequence of trade. It now has more than $1.1 trillion of US reserves and tops the global list of US Treasury bond holders. As with Germany lending money to Greece, this can be looked at as vendor financing, such as you might get from a car dealer: I provide you cheap capital so that you purchase my goods, and I make more in the long run. It also helps to ensure a US market for China’s exports by keeping interest rates low, so that consumers spend more. But China cannot reasonably stop buying government bonds without collapsing its own economy, because then interest rates would move much higher in the US and cripple consumer spending, which would then collapse China’s economy. It’s a feedback loop in interconnected economies.

And without continued debt-fuelled spending, it would be like sticking a pin in a balloon, because growth would collapse and we would suddenly see what has been there all along. The natural trend of technology deflation.

If it takes ever-increasing credit growth to achieve economic growth, how are our economies any different from a Ponzi scheme? A Ponzi scheme creates an illusion of profits because it pays early investors with investments from later investors. Even though the scheme is a fraud, it can look like a good business in that early investors talk about how great their returns are. Because it requires more and more capital to pay out investors, it continues until new investors at the bottom of the pyramid slow down enough to stop paying out earlier investors, which brings the entire system down. At what point does debt slow enough to bring the entire system down? When does the future stop paying off the past?

To keep the system running, monetary policy all around the world has target inflation rates. From a debt perspective, this makes sense: inflation makes debt easier to pay back because you’re paying yesterday, when dollars cost more, with money from tomorrow, when dollars are worth less. In the United States in 1970, a $3.25 per hour wage had the same purchasing power as a $25.00 per hour job today. A movie ticket that cost $1.55 in 1970 is more than $9.00 today. A gallon of gasoline in 1970 was 36 cents; it’s $2.98 today. A debt that you took on then that cost you 100 hours of work—$325—could be paid off with 13 hours of work today. Even with interest, you can come out ahead. For

That said, they made a choice that changed capitalism by gifting many of the engineers of the chaos with risk-free returns at the taxpayers’ expense.

By nature, though, quantitative easing also causes currency devaluation, even if that’s not what it’s specifically intended to do. The government doesn’t actually have more assets; it’s just representing its assets with more units of currency, which means each unit of currency is worth less—like cutting a pizza into twelve slices instead of eight, or dividing an estate between ten heirs rather than nine.

A market where government reaches in to decide who wins or loses is nothing more than crony capitalism, where wealth is not created by the value you create and the risks you take to get there but by a political system that rewards its insiders.

Because of this tension and fear, people are losing empathy and following xenophobic ideologues, and we are collectively missing the most important point: it is our inflationary system, which requires ever more jobs, that needs to be changed.

In the end, I realized that the things in life I valued most—family, friends, integrity—weren’t contingent on business outcomes and couldn’t be taken away from me no matter what.

Strong network effects are at the core of every platform business today. In fact, in a recent three-year study by NFX, network effects accounted for 70 percent of the value in technology companies over the last twenty-three years.12

Being early on a platform can yield terrific results for supply. A hack I used on Twitter gives a good example. Realizing the pattern—that supply was needed for the platform owners and being early mattered—I decided to write a blog post in early 2008 titled “Why Every CEO Needs to Be on Twitter.” In this case, I was a supplier (a CEO) that validated the platform for other CEOs. Two days later, something extraordinary happened: after using the service for months before that with limited interactions, my Twitter account exploded—gaining over 1,000 followers a day. It took some time to figure out what had happened. Then a friend sent me a screenshot of his Twitter onboarding process: there was a list of ten CEOs that every new Twitter member should follow. There I was—the only one of the ten that didn’t belong on the list. Right between Richard Branson and Bill Gates. As I gained more followers, the rate increased as my number of followers itself convinced others I was worth following. That one blog post and the subsequent actions by Twitter drove my followers to more than 185,000 almost overnight.

Minsky, an American economist, theorized that long periods of financial stability naturally lead to instability because of the rise of debt. The “Minsky moment” is the tipping point where the debt-fuelled asset bubble collapses, assets become difficult to sell at any price, and a market collapse ensues.

This is where I believe Minsky and Schumpeter converge. It is not the debt itself that acts to undermine capitalism. It is the act of stabilizing an economy through socializing the losses when faced with a collapse that undermines capitalism’s own institutional framework.

As Nassim Nicholas Taleb cleverly points out in his book Antifragile, “Small forest fires periodically cleanse the system of the most flammable material, so this does not have the opportunity to accumulate. Systematically preventing forest fires from taking place ‘to be safe’ makes the big one much worse.”16 By continuing to add debt and kick the can down the road, governments and central banks have prevented some of the small fires—in this case, the pain of restructuring. I realize that calling the 2008 crisis and the monetary easing that allowed the economies of the world to escape restructuring a “small fire” is akin to calling the Great Depression a “recession.” The problem, though, is that in choosing that option, the size of the fire on the horizon is unimaginable.

And so, as we go on with our lives, filtering a massive amount of information, we can easily become blind to important information, caught in our own bubbles, disregarding some information or alternative views, even when it might be helpful to us. Our decisions are shaped by what we regard as the facts, and if new information emerges that belies what we believe, it often hardens us to our original view.

Another way of error correcting for these natural biases and stories, according to my friend Bob Sutton, is to argue as if you were right, but listen as if you were wrong. Bob is a Stanford professor and bestselling author of The No Asshole Rule, and for decades he has studied what makes great leaders. The best leaders are constantly learning, curious about where they made mistakes and actively looking for areas where they might have it wrong. Arguing as if you’re right and listening like you’re wrong allows leaders to confidently go forward with a direction, while also being able to course correct when new information arises that suggests a better path. Bob’s research suggests that not only does it allow for faster learning, but by using similar frameworks, leaders inspire confidence in teams to contribute new ideas and challenge the status quo. Instead of leadership having their heads in the sand, the best ideas win.

The institute teaches “strong opinions, weakly held.” Strong opinions allow leaders to move forward quickly, which is important because it avoids information and choice overload. “Weakly held” adds the humility to constantly be learning and ready to course correct. It allows leadership to move past confirmation biases.

Those aren’t the only second- and third-order effects of self-driving cars. As much as riders have benefitted from great new services, it is difficult to see how the ride-sharing companies, such as Uber or Lyft are going to make money in the future.

When manufacturers can give a choice of 1) a rides-on-demand service for a monthly fee or 2) an ability, when I purchase, to make extra dollars on my car when I’m not using it by adding my vehicle back to the network, what advantage do Uber and Lyft provide?

For example, is it that difficult to imagine a world where people spend more of their time in mixed reality and less time travelling? Many other industries have been toppled as the digital experience and convenience becomes better than the analogue version.

If there is no net job creation globally (more global jobs created than destroyed), the inflationary system that we have relied on for commerce throughout history cannot continue.

Unless global jobs and our economies expand at a rate that exceeds debt creation (which even at backwards-looking rates of progress seems impossible), the age of inflation is already over. We just don’t know it yet.

It took $185 trillion of debt to produce about $46 trillion of GDP growth over the last twenty years.