A New Kind of Deflation

The narrative around inflation sure is changing fast. CPI came in at 5% this week, the lowest level in almost 2 years. We’re seeing an amelioration in price pressure almost across the board. Oil is a problem as discussed last week and residential rents are showing signs of persistent strength, even in places like New York. But the inflation situation is looking pretty promising. Some prices are even coming down in absolute terms, like with food.

I learned about this promising dynamic (and many other things) in my fascinating interview with David Rabie, the CEO of Tovala, one of the most successful food tech companies in the world, for my very-soon-to-be-released podcast. By the way, I’m racing behind the scenes to get the Nick Halaris Show launched. I’ve recorded 8 episodes already and have 3 more on deck over the next few days. We have some fascinating guests in the lineup and I cannot wait to share with you all the incredible insights coming out of these conversations.

Back to inflation. Unfortunately for all the employees of the world, wages are coming down too. Behind closed doors, the Fed is probably silently cheering this dynamic as it looks like we might just avoid what they feared the most—i.e. the dreaded wage-price cycle. It’s an absolute tragedy that our system is structurally biased to produce this exact result. Wages are the last prices in the economy to rise and the first to fall. And what we’ve seen over the last few decades is that this lag creates a dynamic where wages, even when they do go up, never quite keep pace with actual inflation. In case you haven’t noticed yet, this is a big problem for our society.

To make things even more complicated, there’s something new afoot in our economy and it could be revolutionary. And yes, like everyone these days, I’m going to talk about AI.

First, let’s switch gears and talk about deflation for a second. It’s common knowledge, at least in finance circles, that there are actually two kinds of deflation. There’s the really bad kind—think Great Depression—where prices fall, for just about everything, as a result of a persistent, unexplainable decline in aggregate demand. Then there’s the good kind, where prices fall as a result of productivity improvements—think technology or labor arbitrage (i.e. outsourcing manufacturing to Asia).

The historical problem is that there’s always been a limit to good deflation. No matter how powerful the innovation, prices never go to zero. Eventually we reach a kind of natural limit, a point of maximum efficiency and the gains wash out of the data. In other words, there’s only so far incremental productivity improvements can take us before the persistent, structural inflationary forces at the core of our system resume their inexorable march.

With AI though, things could be different. This technology, especially if coupled with robots and renewable energy, has a kind of exponential deflationary potential. We might see, for the first time ever, the emergence of a new kind of deflation, one that has no limit. If so, it won’t be long before we have to toss aside all of the historical baggage of economics, a field of thought that’s based ultimately on an assumption of scarcity. Common knowledge maxims like “there is no free lunch” and “everything is worth what the buyer will pay for it” will lose all meaning. In a structurally deflationary world, we’ll be forced to come up with whole new ways to measure and think about things.

Look, this is probably for the best as we’re fast approaching the limits to the logic of our inflation-based system. We’ve just taken on too much debt and made too many promises.

On the current trajectory it’s only a matter of time before we stumble into some financial accident that is either too big or too complex to solve. If the CATO Institute is even half right about these projections, without AI Deflation we are in big trouble. 🤖

Words Can Change Your Life

This will come as no surprise to you all but I believe that words can absolutely change your life.

Whatever you may think about God, you have to admit it’s rather interesting that we see God literally speaking the world into existence in Genesis—“And God said ‘Let there be light,’ and there was light”—and the Gospel of John starting with “In the beginning was the Word, and the Word was with God, and the Word was God.”

Isn’t also incredibly interesting that AI-era is beginning with Large Language Models? I’m no expert here but my understanding is that these LLM models can basically mimic human intelligence simply by surveying tons of pre-existing written language and predicting statistically what word should come next. This just cannot be coincidence. Clearly, there’s something very, very special about the relationship between words and the human condition.

I want share with you today some of the words that have changed my life. In different ways, these have inspired, challenged and pushed me to become a better person. I have returned to them often in life and always walk away with something new and helpful to my journey. I suspect the same might happen for you all as well!

1. An Essay—“Self-Reliance” by Ralph Waldo Emerson

“There is a time in every man's education when he arrives at the conviction that envy is ignorance; that imitation is suicide; that he must take himself for better, for worse, as his portion; that though the wide universe is full of good, no kernel of nourishing corn can come to him but through his toil bestowed on that plot of ground which is given to him to till. The power which resides in him is new in nature, and none but he knows what that is which he can do, nor does he know until he has tried.”

2. A Speech—“Man in the Arena” by Theodore Roosevelt

“With you here, and with us in my own home, in the long run, success or failure will be conditioned upon the way in which the average man, the average woman, does his or her duty, first in the ordinary, every-day affairs of life, and next in those great occasional cries which call for heroic virtues. The average citizen must be a good citizen if our republics are to succeed. The stream will not permanently rise higher than the main source; and the main source of national power and national greatness is found in the average citizenship of the nation. Therefore it behooves us to do our best to see that the standard of the average citizen is kept high; and the average cannot be kept high unless the standard of the leaders is very much higher.”

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