We won’t know till the end of this cycle how much mal-investment has occurred under the great monetary inflation which started in 2010.
We may already suspect, though, that much of this will be in “big tech” and related fields. Any final reckoning should also include wider political and socio-economic damage not included in a narrow economic calculus.
Scott Galloway describes skilfully and colourfully the power of the big tech narrative in his just published and highly readable book “The Four: the hidden DNA of Amazon, Apple, Facebook and Google”. The general critic would take issue with his repeated use of a four-letter expletive. The monetary critic can point to a bigger problem with the book – a lack of any analysis linking the amazing spread of the big tech narrative to the prevailing monetary disorder.
If central banks had not created a famine of interest income, the big four would surely not have enthralled investor audiences to anything like the actual extent. Hunger for yield means that investors become willing to take on bad bets (actuarial value highly negative but some possibility of a big pay-off) rather than suffer certain loss on monetary assets. This is an example of “loss aversion” as diagnosed in the pioneering work on mental flaws of investors by Daniel Kahneman and now prominent in behavioural finance theory.
A hypothesis not yet explored in that literature, but which seems to fit the spread of asset price inflation in present and previous episodes, is that investors do not like to admit to themselves that they are taking on bad bets. They turn bad into good by awarding irrationally high probability of truth to speculative stories which accompany the wagers. The positive feedback loops from initial capital gains add to their complacency with the metamorphosis.
Consistent with that hypothesis Galloway identifies the success of the Big Four in being able to attract cheap capital by articulating a bold vision that is easy to understand.
For Amazon the story is Earth’s Biggest Store: the strategy – huge investment in consumer benefits that stand the test of time – lower cost, greater selection and faster delivery. Google’s vision is organizing the world’s information; the strategy – with a compelling reason for investors to buy its stock, Google has more money to invest in engineers than any media company in history. Facebook’s vision: Connecting the world. And as to Apple, who you really are has become what you text on.
As Galloway puts it:
The strength of visionary capital begets competitive strength. Why? Because you can more patiently nurture assets and place more bets on more pockets of innovations. Of course, you ultimately have to show shareholders tangible progress against your big vision. However, if you are able to make the jump to light speed and the market crowns you the innovator, the reward is an inflated valuation – and the self-fulfilling prophecy that comes from cheap capital. The ultimate gift in our digital age is a CEO who has the storytelling talent to capture the imagination of the markets while surrounding themselves with people who can show incremental progress against that vision each day.
All the story-telling cannot hide the fact that this digital revolution — represented by companies like Amazon and Google — has not delivered the general increase in prosperity of previous technological revolutions. The stories have been captivating, told by would-be messianic narrators who find nourishment in monetary disorder. But living standards have been stagnant or falling except at the top (including those working in the Big Four).
Nonetheless digitalization has created a strong downward rhythm in prices for the past two decades. Increased transparency and information absorption potential mean that consumers and businesses can find at much less cost than before the cheapest provider of a given good or service (albeit with distortions due to the monopolistic abuse by the internet search engine). Across a wide range of industrial sectors, the most efficient firm has gained market share and power. The “star firm” has been born. And in general digitalization has led to downward pressure on wages of human capital which lacks any star-like attribute or any special connection to the star firms.
Digitalization, by setting off a wave of “price transparency” and “globalization” has camouflaged the process of monetary inflation in the goods and services markets. Hence central banks have been able to continue a wild experiment with their non-conventional tool box. The big visible effects remain restricted so far to asset markets and these enjoy considerable popularity.
The mechanism essential to the spread of asset inflation — the telling of speculative narratives which entice investors to discard rational skepticism — has gained strength from a coincidental aspect of digitalization. “Big Tech” has had a uniquely captivating narrative matched by a tremendous new power to spin.
But, we have re-learnt in this cycle that the speculative narratives which spread asset price inflation under conditions of overall monetary inflation do not always depend on a surge of prosperity and productivity. Instead they can thrive on a transformative re-organization of lifestyles which provokes much buzz and excitement.
The Big Four have dominated this re-organization — internet search rather than encyclopedias and library visits, instant messaging rather than fax, groceries within a two-hour time slot to one’s door rather than driving to the store, trading firms getting the latest information in fractions of a second rather than several seconds. The unattractive downsides of the reorganization have not dimmed the sparkle, at least in frothy financial markets — whether hacking, the empowerment of Big Brother, the “commoditization” of broad swathes of human capital, or the aggravated capacity of employers to monitor, control, and exploit employees especially in the context of grown monopoly power.
The excitement and the downward rhythm of prices might turn out to be much more transitory than many now imagine in the financial market-places.
A technological revolution which Increases transparency and lowers information costs has a once and for all downward influence on prices and wages albeit spread over some years and this is consistent with increased profits in the star firms. The disinflationary forces as described are self-limiting in time and scope. As they wane, and as monetary disorder grows, the camouflage of inflation in the goods and services markets wears thin. Meanwhile the speculative narratives grow tawdry amidst tales of abusive monopoly and consumer revulsion. Bottom line: we could find that reported goods inflation climbs just as asset price inflation moves on to its final stage.