Great Inflation Part Deux

By Larry Schweikart

Great Inflation Part Deux. In my last column dealing with federal debt and deficits, I argued that we “might” be seeing signs of an inflationary surge. This, according to the traditional interpretations, would be due to the whale-sized spending bills coming out of Washington, D.C., and the astronomical national debt. But I also noted that both on the debit side and on the production side, those indicators might be premature—that our national debt “may” not be where most think it is, and on the production/growth side, we may be way undervaluing our output.

Why would the latter, especially, be important? Because as every 1960s schoolchild would know (but probably few since then), inflation is . . . let’s say it all together!. . “too many dollars chasing too few goods.”

Certainly, in the last month, gas has gone up by 30 to 40 cents a gallon at the pump. Brent crude, which hit a low in late April of 2020 of about $24.00, has recovered to (for oilmen) a healthy $68.35. Much more than that, and it will be profitable again to be in the oil business. Remember, the higher oil prices climb, the more lucrative it is to go into shale.

The oil price collapse was due to a number of factors, not all of them entirely political and certainly many not entirely domestic. Probably the biggest shock to the oil markets was the sudden collapse in demand due to the China Virus grounding a significant number of domestic and international flights and virtually all of the cruise industry. Lock-downs also cut into normal auto travel around the U.S. and even restricted some trucking with the and rest areas being shut down.

Shorter Voyages, Multiple China Virus Tests

Most of that has now abated, and cruise lines even entertain the fantasy of running cruises again. To do so, they have to have shorter voyages, multiple China Virus tests, and no buffets. Oh, and wear your little mask at the pool. No. Thank. You. Most people seem to agree with me that this would be the least recreational thing a person could do. Major cruise lines continue to cancel 2021 sailings. But slowly, states are opening up (Texas and Mississippi entirely last week, Arizona in a faux 100% reopening, as Governor Doug Ducey has no state lock-down, but cities and counties are still enforcing “social distancing” that means, in reality, no restaurants can truly be 100%). Conventions are now being held.

Besides oil, this past week has shown there are other indicators that we may be on the verge of inflation. Spot silver is just over $25 an ounce, well down from its late January high of $29 an ounce and below the September 2020 level of $27. Copper prices, which had leaped to over $.27, have fallen back to just above $.25—still an increase over late February of two cents but trending back to a very slow and steady growth trend line of about 30% since April of 2020. Does this indicate inflation? Possibly. It can also indicate renewed demand for products that use copper.

A provision in the National Defense Authorization Act last December included direct support for chip manufacturing. Subsidy-driven expansion in the chip industry, however, has been disappointing for those who favor government involvement. Although American companies design 65% of the world’s fabless chip volume, they have only 10% of the actual foundry capacity to make those units. And only five firms worldwide make chips at the top end of the performance scale, down from 30 in 2001.

World’s Chip Manufacturing

Taiwan Semiconductor now makes 50% of the world’s share, while South Korea’s Samsung stands close to 20%. That’s 80% of the world’s chip manufacturing in three countries—but 70% in Asia, where China could swallow them up. With TSMC (Taiwan) making overtures to open a fabrication plant in Arizona and, for now, the Biden Administration not getting in the way, some of the manufacturing could return to the U.S. This would bode well for the blood of the tech universe, chips and bring prices there down still further.

Oh, and what about my argument that we have been in a meteor-sized productivity-driven deflation since 1990? I argued that none of our pricing or valuation indices have come anywhere close to capturing this mass deflation; hence QE1, QE2, and all the deficit spending have been like dumping a few wheelbarrows of cash into a gigantic sinkhole.

Brett Swanson, at Entropy Economics, lends further evidence to my theory. He asked, “How much would it have cost to build an iPhone in 1991?”. He answered that when accounting for data storage, computation, and bandwidth, an iPhone 12 in 2020 dollars would have cost $51 million. Per phone. Even an iPhone 5 would have cost $3.56 million.

The Big Tech Companies

My point is, where has that value gone? Inflation? How many apps do you have on your phone or iPad or smart TV or computer that is free? Yet, we know nothing is truly free. Amar Bhide has argued in The Venturesome Economy that tech companies have offloaded some of their research and development costs onto us!  Instead of researching what they should sell to consumers, they merely let the consumers tell them what apps they want and make them (or solicit them). A vast R&D cost has thus been shifted off of corporations.

“Well, Schweikart, we all have to pay the piper sometime. We have to pay for these deficits.” What if, in fact, we already have been paying? You say, “How in the world could we have been paying if we are getting a $50 million iPhone for under $1,000?” (And scream that it is too expensive at that!?) My answer is that the consumers haven’t been paying: the investors and stockholders have.

If, in fact, these products—everything from our cars to our homes—that are so infused with chip technology is undervalued by a factor of hundreds, that means someone hasn’t been collecting profits. (We assume that while no one would pay $50 million for a phone, they may well pay far more than $1,000.) It means all those apps that are “given away” could have been monetized in other ways, possibly for far more.

Somewhere in all that, the value was not compensated for, and someone has to pay. Someone did. It may well be possible that retirement funds, investors, banks, and venture capitalists have all missed titanic gains over the last 30 years by not properly valuing and monetizing the tech revolution. While I have no idea where the equilibrium point is, the recent evidence that none of the commodities are escalating in price; that wages remain stable; and that economic historians have consistently undervalued previous eras of productivity gains by a substantial amount suggests that we are still quite a ways from a Great Inflation.

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