Politicians and bankers still seem to think that low inflation is a temporary problem. It is not. We are quickly moving towards a complete deflation of the economy.
Central banks have inflation targets. We want inflation, because with inflation, money is more expensive in the future, thus better spent today. Inflation means growth, deflation means debt spiral. That is the lesson from 100 years of modern economics. It is completely wrong.
I have long argued that we will never return to inflation again. We may already be living in a deflationary world. The reasons are not financial or political, they are purely technological.
Ultimately, where does inflation come from? From wage growth. Wage growth means traditional career paths, and over time more money to buy more things. That is what inflation is: the human factor in the economic puzzle. Higher productivity = more work = more money = buy more = more demand = inflation. Sounds convincing, but that is no longer the world we live in.
In May 2016 Foxconn, Taiwan's world-class maker of electronic gadgets removed 60000 workers and replaced them with smart robots. In the next 5 years not thousands, but millions of workers will be replaced by intelligent machines. The machines aren't paid wages. The things they make will get cheaper and cheaper.
No work = no wages = products cheaper. That's deflation.
Enter AI. Increasingly intelligent machines will mine massive amounts of data and make almost all processes cheaper and more efficient. The price of everything from manufacturing to health care will collapse. The cost of knowledge services now provided by white-collar workers will approach zero as machines do a much better job. Think of IBM Watson. It analyses, compares, and diagnoses thousands upon thousands of medical images within seconds. That's a lot of doctors' hours you previously had to shell out for.
Solar and wind energy are basically free. This year, several countries around the world have had entire days where they ran completely on renewable energies. Blockchain & Co. will make energy distribution more efficient. Smart materials in everything from the walls of buildings to your clothes will further accelerate the energy revolution. In the long run, the price of energy will approach zero.
Technology is the main source of deflation.
As we remove human factors of production, we are removing inflationary pressure. Some countries may be affected sooner and faster than others. If Foxconn replaces workers in China with smart machines, the question arises, why keep production in China in the first place? Intelligent machines will reduce and then eliminate the advantages of economies of scale. If a big chunk of the products' target market is in the US and Europe, why not build the next smart factory there? That saves shipping the robots to China, and the iPhones to America. That in turn lowers transportation and energy costs.
The augmented reality offered by Hololens is another great example. It shows you how we can interact as human beings without being glued to a computer screen typing emails. Computers and social networks don't enhance our humanity, they make us less human. Widespread adoption of AR will also greatly reduce the need for travel, thus further lowering our carbon footprint and energy needs, i.e. more deflation. I wouldn't start a new shipping line right now.
The impact of what has been dubbed Industry 4.0 cannot be understated. Networked smart robots will learn from each other. Their software will become self-improving. And if you think scarcity of raw materials could still be a source for inflation, look at Industry 5.0 or so-called molecular manufacturing, which will break traditional supply chains completely.
Which leaves us with a dilemma: how can we make permanently deflationary economics work in favor of humans?
At the end of the line, we will live not in a deflationary world, but in a world without money at all.
My speculative answer will surprise you: I don't think we'll have to. I think the problem will solve itself. Smart machines will reduce the incremental cost of manufacturing rapidly and massively. That means the next generation will simply not need that much money to buy the same amount of goods. Once we can 3D-print food from recycled molecules, the basic cost of living will approach zero. At the end of the line, we will live not in a deflationary world, but in a world without money at all.
I believe we are in an exiting transition phase where we need to embrace those technologies which ultimately guarantee our freedom from economic serfdom. That doesn't mean saving jobs better done by machines. It means quickly deploying the machines so costs can fall even faster. It means fully automated industrial-scale hydroponics and molecular food grown in labs, not better fertilizers and bigger combine harvesters. Once food thus produced is so cheap they'll give it away for free, those who want can keep tinkering with their organic veggies in their own backyards.
Jobs are for machines. Once they do everything, we can focus on living again. This will happen in the next 2 decades.
Once we have armies of smart machines and molecular replicators, big data and AI which prevent problems before we need to solve them, automated hydroponic farms and electricity delivered by intelligent materials, and nuclear fission as Bill Gates is betting on, most of us won't need jobs. Food and goods will be free. Utopian? Definitely. Achievable? Certainly. Unavoidable? I think so.
We need to work towards these technologies that allow us to be truly human again. We need to create a world without economic needs and only human needs instead. A world where molecular replicators produce all we need for free and robots take care of all the work. A world where we can do what we like without having to worry about "making a living". A world where we can focus on exploring the universe, writing novels, building cabins in the wood by hand, and doing some creative gardening.
In short, a world where being is more important than having.