The title of this article “Hyper-deflation” is pure BS designed only to get your attention? No it is not. There have been periods of actual documented Hyper-deflation in history. Hyperinflation is better understood sometimes. Lots of people see the possibility of hyper inflation arriving anytime because of excess indebtedness of government and the mad printing of paper currency. True Hyper inflation is a relatively rare event. One of the best examples of course is the German hyper inflation prior to world war II that destabilized that country. Often forgotten is the problem Germany had paying post war reparations extracted from them in a treaty following the war. Other recent hyperinflation were Zimbabwe and the One in Yugoslavia as the country broke up after hardliner Tito died. Hyper inflation is genuinely an out of control government paper money printing press every time. There have been other types of inflation including gold inflation when too much gold is on the market at at one time the commodity price cannot sustain it self and if gold is at that time the medium of exchange then it is subject to it’s own inflation. If suddenly a gold mountain was discovered somewhere on earth with twice as many ounces of the metal than are already being hoarded and it is quickly mined then we would have a precipitous decline in gold price. If gold is the money then it would be the exact same thing as paper currency inflation.
Hyper-deflation is a very type of event without too many examples in recent history. Hyper deflation occurs in unsettling times mostly due not to economic collapse because of the installation of socialist policies but because of mass population declines. Deflationary pressures by themselves are not very rare at all. If gold is a currency and goes up in value against other world currencies in circulation than it may actually be in a deflationary period . That has everything to do with relative scarcity and escalating demand. In a paper money deflation the paper money should also have augmented value which translates to better purchasing power. A dollar can buy more or much much more in a hyper deflationary period.
The best documented case of a hyper deflationary period comes from not the collapse of ancient Rome after the city was sacked because then you could argue that the economy or the Latin economy disappeared with the treasure of the city that was left being carried off by vandals. That would suggest an inflationary period verses a deflationary one. It would be depending on types of goods and services and the level of the dislocation of markets to allow for commerce. The best example of hyper-deflation come from the black death period of time in Europe when roughly 40% of the population or more disappeared from plague.
Hyper-deflation was of course only a temporary phenomenon. Some parts of Europe and Asia experience a mortality rate as high as the plagues responsible for the post Colombian new world die off. Europe during the time of the black death had a relatively finite supply of money because at the time gold was the primary medium of exchange. Prior to the plague population growth was robust which translates into more gold being found and put into circulation just because there were so many people having to work with a larger percentage that would be mining or looking to find gold where ever it could naturally be found. Pre plague higher populations meant more demand for land to grow crops and produce food , larger domestic animal populations to feed a larger working growing population and high costs for shelter because of the high cost of shelter and the general scarcity. Most people were employed in agriculture than would have been in any building trades during those times. Fuel to heat homes would have come mostly from wood to burn fires with and in winter that would have been a significant part of the economy considering that in Europe the wood would have to be gathered, harvests and then transported to areas where needed. Energy for heating and cooking had some of the same types of costs that energy has in today’s economy. Horse power was exactly that back then and depended on the number of horses , donkeys and cattle that could do that sort of work. When the black death mass die off of humans started to happen the work of larger populations and years of greater productivity left a landscape of excessively lower prices. There were empty houses, unworked farms, livestock without masters running wild.
All the gold silver and other metals in circulation as money was more money than could be used to justify higher prices or any sort of inflationary pressure. Hoards of gold would have been easy to find in a finders keepers world with no need for much security because of all the excess. People who survived the epidemic found easy pickings of everything of value that was left. Hyper-deflation set in. Stocks of food that might be preserved like salted fish would be less expensive at least until the supplies started to run down from lack of future. The period of time for a total collapse in prices would have been an enduring phenomenon that could last generations. A lot of basic necessities were suddenly available in greater supply with a much reduced population. Less people and more wealth of the years of previous wealth creation left a temporary bonanza of supply all except for labor which would eventually be the undoing of the state of economic hyper-deflation. Before the black death a small piece of gold would have had a lot of value. After the epidemic a lot of gold would have had meaningless purchasing power. It would have been consolidated and hoarded as would have been empty estates and houses. The black death survivors were in an enviable economic situation by any means of looking at it. Experiencing hyper -deflation would seem to be a bit like hyper inflation because gold the grand old currency would not be in the same state of scarcity as it has been before the plague without a considerable higher level of hoarding.. Horse power available per person would also be significantly up. Feed stocks to feed horses might not necessarily be down since there is natural forage. Meat and milk consumption probably increased per capita with lower costs and less demand. Plenty of gold lying around to lead to lower prices if gold was even initially accepted at all. It would not become completely irrelevant rather just an other over stocked already produced commodity. There is no indication from historic records that the plague resulted in fatter people. A lot of the population remained sick or weakened , disabled, lack of adequate numbers of people resulted in crop failures and fields not being able to be harvested. Hyperinflations was uneven among the various commodities, A surplus of dead bodies was good for nothing. There was even a hyper deflation of religion at the time with many empty churches of little use without populations to come to mass. Hyper deflation was pretty much the consequence of natural history with the epidemic sweeping though and culling the population to the extreme.. Images of the black death were recorded by artists as the apocalypse having passed over Europe with big dose of faith being questioned. Images of the rich being spared no more than the poor were another common theme. The theme was mass death and a barren landscape that would have initially been unlikely in the hyper deflation that occurred.
How does this kind of destruction by natural causes relate to Moore’s law and excess computing power? Computers don’t kill people except in 2001 clone films. What computers are doing is expanding productivity especially in services that expresses itself in a geometric progression. Services that used to cost a lot of money can now be duplicated with remote custom entry order parameters at no cost on the Internet. The cost is less than buying the cheapest computer that can connect to the network. An example of services that cost a lot less than they used to are found in everything from online banking, brokerage, auctions, communications including the ability to make free telephone calls online and tax preparation without an accountant or CPA. Expansion of free and near free services online is a tremendous transformation of the economy which mimics the effects of a deadly epidemic in making in making for hyper deflationary conditions. Computers are one thing that can cause deflation as we have never seen it before and it is not just in services but in also being able to conserve resources by not wasting them. We see sites online like Craigslist and other free classified ad boards more efficiently than ever recycling goods so that instead of being trashed they get reused either given away for free or sold at a more reasonable price than having to produce it new. That may not necessarily stop factories from producing more new items although computers do help control inventory by immediate point of sales reporting programs. Like the horse power analogy increasing in the time of the black death epidemic or fire wood becoming more available, computers are helping to prevent waste and send supplies to areas in the economy where the they fetch the highest prices. Less waste can mean the conservation of a larger supply of goods than can be consumed just due to lack of waste. When hyper deflation sets in production does become a form of waste since the deflation shows down consumption. No lack of supply of goods and services is not good for higher prices even if there is an excess of money being saved in the economy. Computers maybe making everything too efficient and too productive. One even notices that people don’t have to use as much fuel in machines to transport themselves because they can sit at home and visit shops, libraries and museums without ever having to get get out of a chair. That leads to more commodities being at least temporarily over produced. Demand does not have to collapse for supply to become at least temporarily a sort of free lunch while it lasts. Blaming deflationary pressures on computers may sound silly until you see the strange new phenomenon of the etf market with commodity hoarding exchange traded hoarded commodities. Hoarded commodities held for financial security purposes are savings not being consumed which only make massive multi billion dollar reserve funds of gold or silver etc indication of pent up supply that will at some point be unloaded with deflationary effects. Some people see 80 plus billion dollars in gold sitting in a gold etf as proof of inflation where as others worry it harbinger of deflation that will come. If a million of investors are sitting on a multi billion dollar reserve of gold for their retirement spending and they reach retirement at about the same age then a lot of gold hoarded will need to be spent at the same time others will have to be unloading as cash. High commodity prices due to hoarding is a bad sign if you are counting on inflation to prevent an economic melt down.
The raging debate over the prospects of the economy going into a deflationary spiral verses those voting for an super inflationary cycle by buying gold is unavoidable in the financial media including odd ball theories including that in personal blogs and from the Austrian School of Economics.
Universally accessible computer power is changing the world faster than most of us can consider the possible longer term consequences. It is creating a deflationary environment for a variety of reasons including better information on how, when , what and where to produce to satisfy demand as instantaneously as possible. When competitors have the same access to that information they all may find themselves misallocating resources by over producing. The computers can all be tweaked to consider factoring in what the competition may be doing with a prisoners dilemma algorithm but that would be considered anti competitive , perhaps against anti trust laws and maybe just as counter productive for the economy as big stupid government interference and over regulation. If the results are the same as government price controls there would not be too much sense in limiting production. An entire economy running with super efficiency in all aspects and types of production would be ever more prone to over production. over production is a sort of wealth that cannot be dismissed. Imagine the people actually having their way and destroying new homes built in the housing bubble just to reduce supply so builders could hire more employees again to build new homes. That would be stupid as stupid gets yet there were actual economists making the argument that destroying housing stock was the solution . What would be wrong with society over producing homes and the price going down so the affordability went up for a lot more people who previously could not afford to buy homes in the housing bubble folly years?
Ubiquitous computer power is preventing people from making the old sorts of mistakes in business they used to under estimating the competition. Universally improving productivity may lead to a higher productive net yield. which can mean lower and lower prices. Computers have opened a real globalism in direct international communication which brings in the lowest cost competition where ever it exists and pits it against the competition with any added transportation costs. That can add to an ethos of deflation that feeds on itself because there may always be a cheaper source for goods and services as communications expand international contact. Computer power is making many services much cheaper with no direct human contact required in many fields.
This has the effect of over production of those goods. All of this as it now seems to be happening may ultimately reverse itself once limits of computing power are reached or at the point when excess freedom from having to work because automated machines can do it all for us backfires and has us all working for the machines.
Computers are becoming the markets and the market place and that is possibly increasing investor efficiency in allocating capital to viable business ventures which somehow leads to over production. Could computers really cause a hyper-deflation in an economy. Maybe. will take longer to find out…..it will take a lot more computer experience.
Did you like this post? I will be giving away three personalised diaries from Toad for my readers in my next blog post so please be in the loop!