How much stimulus can technology absorb? July 18, 2010 at 6:06 am
Here’s an interesting conjecture from the Futurist. First he points out that we have had a massive stimulus, yet this has not lead to inflation. Remember, $1T of liquidity and an essentially zero FED funds rate have not lead to any prospect of inflation. Now you all I am sure know the conventional explanations of this, but bear with the Futurist while he gives you a novel one.
A technology company exists under the reality that all inventory depreciates very quickly (at over 10% per quarter in many cases), and that price drops will shrink revenues unless unit sales rise enough to offset it (and assuming that enough unit inventory was even produced). This results in the constant pressure to create new and improved products every few months just to occupy prime price points, without which revenues would plunge within just a year. Yet, high-tech companies have built hugely profitable businesses around these peculiar challenges, and at least 8 such US companies have market capitalizations over $100 Billion. 6 of those 8 are headquartered in Silicon Valley.
Now, here is the point to ponder : We have never had a significant technology sector while also facing the fears (warranted or otherwise) of high inflation. When high inflation vanished in 1982, the technology sector was too tiny to be considered a significant contributor to macroeconomic statistics. In an environment of high inflation combined with a large technology industry, however, major consumer retail pricepoints, such as $99.99 or $199.99, become more affordable. The same also applies to enterprise-class customers. Thus, demand creeps upwards even as cost to produce the products goes down on the same Impact of Computing curve. This allows a technology company the ability to postpone price drops and expand margins, or to sell more volume at the same nominal dollar price. Hence, higher inflation causes the revenues and/or margins of technology companies to rise, which means their earnings-per-share certainly surges.
So what we are seeing is the gigantic amount of liquidity created by the Federal Reserve is instead cycling through technology companies and increasing their earnings. The products they sell, in turn, increase productivity and promptly push inflation back down. Every uptick in inflation merely guarantees its own pushback, and the 1.5% of GDP that mops up all the liquidity and creates this form of ‘good’ deflation can be termed as the ‘Techno-Sponge’. So how much liquidity can the Techno-Sponge absorb before saturation?
Now I have no idea whether this is even half way to true. But it is an interesting idea. Certainly tech spending, unlike magnums of Krug (so déclassé – I prefer Salon), can increase productivity. If that creates more wealth, then you can have growth without inflation, especially if the basket that defines inflation is tech heavy.