Well, I think there is one thing all of us should admit about both the world and the US economy: no one knows what the heck is happening.
We who grew up with classical/Friedman/market economics have to admit that nothing is looking like it should-—much like the Keynesians in the lat 70s had to admit that the Phillips Curve was wrong.
Traditional economics says that high debt/deficits/large money printing means high inflation. That, in fact, is the classic market “correction” for a superheated economy to slow it down and force prices back down.
But we have no inflation really, anywhere: energy is still as cheap as 10 years ago. (If you take taxes out of gas/oil, it’s as cheap as in the early 1990s). Gold, silver, commodities that used to be the bellwethers of inflation show no signs at all. There is a little inflation in food prices, none in wages-—which is really the final measurement of inflation.
So if there are no symptoms associated with the disease of debt/inflation, is the diagnosis really accurate?
My hypothesis-—and it is only that, because I’m not an economist and I haven’t run tests-—is that there was a massive (and I mean globally stupendous) explosion in productivity in the 1990s because of computers. I always use this example: typically “productivity” is measured in a device by comparing its performance to the previous iteration. The classical study was Fishlow and Fogel’s studies of the railroads in the 1800s and how much value they added over steam-powered water transportation or stagecoaches. While somewhat flawed, it pretty much measured apples to apples, namely transportation.
But take the cell phone. It is not just a “better” rotary dial phone. It’s a completely different device-—a calculator, a GPS, a gaming system, a camera, a writing tablet/email and on and on. To properly value a cell phone, you can’t just measure it against a previous phone, you have to measure it against a phone + a calculator + a GPS + a Nintendo + a Nikkon . . .. well, you get the picture.
If I’m right-—and these computer functions acted like this in every industry, not just changing and improving ONE job function but several-—we haven’t begun to properly valuate what has happened. I think that is why QE 1, 2, and the rest are a drop in the bucket and why we still haven’t seen any real inflation.
If there has not been any inflation why has concrete gone from $50 to $150 a yard? A sheet of steel I bought for $38 in 2001 is now $158. These are just two examples off the top of my head. We eat less but spend a lot more on groceries. Not long ago I bought oil for 80 cents a quart.