"Technology Has Changed The Game": Why The Rise Of Robots Will Be A Permanent Deflationary Force

Tyler Durden's picture

Back in 2015, BofA put together a simple equation trying to explain the pervasive deflationary wave around the globe when it said that "Deflation = Debt plus Disruption plus Demographics."

In his overnight take on recent events, Bloomberg macro commentator Mark Cudmore took another look at this underlying assumption, and specifically the "disruption" part, or the role played by technology, and machines, both of which are reducing the need for labor (and implicitly pressuring the global labor force growth), and concluded that "while those with specialized skills can continue to earn more in a wealthier world, the rise of robots provides a significant disinflationary force on the median wage globally. This effect will be most extreme in developed economies where labor costs are already elevated. (And as an aside, is the reason why increasing inequality and populism isn’t going away any time soon)."

Adding demographics into the mix, Cudmore notes that "the growth rate of the global population continues to slow, further relaxing consumer demand pressures over the long-term. All this means that, excluding isolated and idiosyncratic flare-ups, consumer prices won’t ramp higher in real terms" even and as "a lack of CPI growth doesn’t prevent financial-asset inflation."

However, the implication is that "bond curves should remain flatter than we are used to, equity valuations will look distorted relative to history due to a sustainable paradigm shift in discount rates, and many financial operations will have to adjust their whole business model."

His full Macro View note below:

Macro View:

Rise of the Machines Keeps World Inflation In Check:

 

There’s little risk of global consumer price inflation running away to the topside, even as financial asset inflation persists. While the 30-year bull market in global bonds may have ended, there’s little chance of a severe bear market any time soon, if ever.

 

There won’t be a sustainable large increase in yields for as long as inflation-targeting is the primary goal of monetary policy. Global convergence of risk premiums will also be a long-term, if slow-moving, theme.

 

The acceleration in inflation has been almost parabolic since the global deflation scare of 2015. However, it’s important to consider the move in context of the low starting base and realize the average rate in major economies still isn’t high.

 

Technology provides a powerful disinflationary force on both wages and commodity prices, which are arguably the two key fundamental inputs to long-term consumer inflation levels.

 

The detection, extraction, production and distribution of commodities are becoming cheaper and more efficient all the time. That’s exerting a strong downward pull on prices over the long term, meaning demand-driven spikes will be short- lived.

 

Similarly, technology is reducing the need for labor. While those with specialized skills can continue to earn more in a wealthier world, the rise of robots provides a significant disinflationary force on the median wage globally. This effect will be most extreme in developed economies where labor costs are already elevated. (And as an aside, is the reason why increasing inequality and populism isn’t going away any time soon).

 

It’s also worth noting that the growth rate of the global population continues to slow, further relaxing consumer demand pressures over the long-term.

 

All this means that, excluding isolated and idiosyncratic flare-ups, consumer prices won’t ramp higher in real terms.

 

However, as has been perfectly clear in recent decades, a lack of CPI growth doesn’t prevent financial-asset inflation.

 

And, in fact, it makes sense for this divergence to widen while global wealth increases but interest rates stay contained and liquidity remains abundant.

 

The knock-on effects of this are profound: bond curves should remain flatter than we are used to, equity valuations will look distorted relative to history due to a sustainable paradigm shift in discount rates, and many financial operations will have to adjust their whole business model.

 

Something to think about next time you want to fight current financial valuations purely on the basis that they look historically anomalous. Technology has changed the game.

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Gold Dog's picture

What's the best way to invest in the robotization of labor?

EDIT- Already own some ROK.

King Bruv's picture

Silver and Fintech (Blockchain etc) :-) If they dont give the robots social security numbers and make them taxable as humans, ALOT of wealth will be transferred to you over time.

Take profit on your ROK and be out of your position by autumn. Buy it back in 2-3 years.

Nemontel's picture

Cash out completely and buy real assets instead. The game will soon be over.

http://www.westernpolitics.net/economy/the-coming-breakdown-of-u-s-globa...

malek's picture

False premise.
EROI is a flawed viewpoint for this [the coming collapse]. In the 60s scientists declared "the energy problem is [forever] solved." (That was meant as 'we know the sure WAY to solve the problem' but often misunderstood as 'we already built the systems needed to solve the problem.') It was true back then and is even more true today.

Also read and understand Julian L. Simon's "The Ultimate Resource II" and then get back to me.

Arnold's picture

IOTA.
https://www.iotatoken.com/

Pharmaceuticals.
Distilleries.

Digital Asset Holdings
https://en.wikipedia.org/wiki/Digital_Asset_Holdings

Thanks Blythe.

Déjà view's picture

U.S. has a respite for now...

IFR put South Korea at the top of the list among countries that had the most number of industrial robots per 10,000 people. In South Korea, the number stood at 347. The 2016 report stated that over the next five years, South Korea will pump in approximately $445 million in its robotics industry.

Coming in at the second spot was the Asian nation Japan where there were 339 industrial robots for every 10,000 people employed in manufacturing. The robotics industry is a significant one in Japan and as per estimates, the nation is expecting a revenue of around $70 billion by 2025 for robotics. 

In Germany, which is the most prosperous country in Europe, there were 261 industrial robots for every 10,000 people employed in manufacturing, while in Italy the figure stood at 159. In Italy, Comauis a major producer of industrial robots. Sweden also relied heavily on industrial robots and here, the figure stood at 157 industrial robots for every 10,000 people employed in manufacturing.

Denmark, which invests heavily in industrial robots, reported figures of 145, while in the United States it was 135 industrial robots for every 10,000 people employed in manufacturing. 

http://www.mapsofworld.com/headlinesworld/technology/top-10-countries-ro...

Arnold's picture

Nice.
Manufacturing, necessary but is not where the skim is however.
Capital, on going maintenance and upgrade intensive.

Middle man skim is where the money's at, Operating Officers aside.

new game's picture

not seeing the discussion of added energy cost. the human still exists consuming and now we have an energy intensive component(obviously less of an offseting human cost). not going to peak oil bullshit with this comment, but looking at the energy construct as component of mix...

some form of tax has to be added to offset real cost born to socialist society. gov.org will be getting a slice one way or another. and empowering their position as moar plebs vote to suk a tit...

secretargentman's picture

Is there anything more vulnerable to sabotage than self driving delivery trucks? Not a long term solution, but if anyone thinks truckers are just going to roll over and take it, they're quite mistaken. 

DEMIZEN's picture

well fed people dont steal food delivery trucks, there is no motive. cant sell it, cant go for a police chase and chicks dont dig it. cant buy LNG without being tracked down. there is gazilion ways to disable the car remotely.   how do you steal a remotely driven car? there will be a few percent of the current fleet only. beeping their locations on collision avoidance system?

really how far can you with a stolen police chopper? 

Bigern's picture

Disaffected workers are going to spend their free time discovering ways to get even. These vehicles will be an early target.

Great Deceivah's picture

It has nothing to do with stealing, genius.. learn how to read.. it is called SABOTAGE, where robots and self driving cars are destroyed and the companies that own them will take huge losses replacing them.

Great Deceivah's picture

Yep, i've thought about this a lot.. the war against robots will start as soon as they start replacing us.. think about it.. if humans are violent against other humans.. imagine what they will do to robots that take their livelyhood away... 

tmosley's picture

You can probably get away with just being alive.

Money is a claim on HUMAN labor. Robotic labor is free. You can see this in highly automated services like those on the internet. Damn near everything here is free, yet people continue to invest time, effort, and real money in creating content, and not all of it is ad supported. How can this happen? Zero marginal cost. "Robot" content servers mean that the cost per view is so low that it isn't worth charging for. And that is a system where there is still human labor involved!

Once the robots take over all the jobs, the price of all real goods and services will follow the price of internet content down to zero.

But if you must invest in the hopes of gaining monetary profit, buy Alphabet. They are going to be the first to reach AGI, probably this year. That is, unless their best talent splits off and forms a new company to create it, which seems to be a trend.

Farewellyou's picture

"Once the robots take over all the jobs, the price of all real goods and services will follow the price of internet content down to zero."

I select randomly your comment as an example to deconstruct shortly this widely made conclusion. If the prices of all goods fall they must all be commodities. If gold were a commodity, its price must fall as well in tandem with the rise of labor productivity of mining and energy production. Therefore, in a gold based  (or oil based or any other commodity basket based) money economy prices can only sink to zero if the labor productivity of the the production of the money commodity does not rise or rise much slower compared to the productivities of non-money commodities.
The same holds for fiat money that is backed by debt that is a derivate of real wealth (or of future taxes)

"Money is a claim on HUMAN labor."
Hahaha the self employed and pet "capitalists" on ZH must now realise that what is falling by the rise of labor productivity is first of all its social labor value of all commodities at their individual degrees. That's why monopoly capitalists and their spin doctors ignore commodities, they like goods to complicate matters and hide power relationships.

 

dlfield's picture

We survived the Cotton Gin...we'll get through this, too. Just another step along the way...

Ghordius's picture

you can look at technological change in two ways

the optimist will point out that technological advancement "saved the bacon" several times in history

the pessimist will point out that technological advancement destroyed business several times in history

both are right

for the very efficient makers of whips and buggies and the excellent breeders of horses, the self-propelled internal combustion engine car was the worst thing that could happen, and they had to close down their businesses

robots are nothing else then the return of... slaves

in ancient times, slaves weren't "labour". they were... capital. because you could buy or sell them

a city like ancient Athens had some 100'000 souls, and... 15'000 citizens

because in order to be a citizen, you had to be: 1. free; 2. male; 3. of military age and conscripted in the army or a veteran of the same

a future world full of robots running around and going after what mistress told them to do? ancient Athenians would find that picture very comforting, and feel at home in such a world, way more then people from the 20th Century

Singelguy's picture

It all comes down to the pace of technological change.if the pace is faster than the time it takes for the displaced worker to update his skills and find another job then the effect will be deflationary. Even so, it is doubtful that the deflationary effect will be permanent. We saw that in Britain during the industrial revolution.

BorisTheBlade's picture

And robots are hackable. I suspect if they proliferate to take the most popular jobs, then entire industry of hacking and exploiting them will arise. Not the least by disgruntled former employees. Big capital liked the effect of wealth extraction through labour arbitrage with China: you outsource production and keep only design and innovation domestically and build factory in a place with zero environmental enforcement and labour safety net, you get immediate boost in profits (see AAPL business model, company has more cash than many sovereign governments combined). Though I suspect it will be very difficult to replicate such effect with robots, not least of all because they'll have to be extremely intelligently designed with very good knowledge by the people of the processes that require automation (don't hold your breath for that).

tmosley's picture

These robots won't be hackable. The solution to the control problem (which is driving mass automation of more and more jobs) is in neural nets, which operate differently than logical computers. You can't hack them any more than you can hack a human brain. You will be able to TRICK them, at least for a while, but before long they will be so experienced they will have seen every trick in the book, and so intelligent that they could fill a hundred more books with tricks you might try in the future, and be ready for them.

New_Meat's picture

displaced worker a) update skills or b) die off

Arnold's picture

Slaves that don't revolt.
Interesting concept.

--Skynet

DEMIZEN's picture

I am sure Louiss 16th piss boy loved his job and hated the crazy anarchos talking about some overly complicated toilets.

BrownCoat's picture

@ Ghordium,

You said 15,000 Athenians. Unfortunately, the world has 6 or 7 billion people. Free food means even more exponential growth. The model will break!

nmewn's picture

Well I guess the upside is, they haven't created "a law" making the termination of cyborgs a crime...yet.

So whats Tesla's stawk going for these days? ;-)

FranSix's picture

You mean... communism is being replaced by machines?

Arnold's picture

You'll always have anarchists.

--V

Ghordius's picture

actually it's even funnier then that

when Marx wrote the "Communist Manifesto" and the book called "Das Kapital" (i.e. the Capital) he kind of predicted two things:

- capital would become so concentrated in so few hands that it would kind of make itself irrelevant

- machines would produce enough for everybody, making any class division (read: differences in wealth) irrelevant, too

that was around the year 1848, where people in Germany were divided in five voting/electoral classes (according to wealth) and people travelled in the first train carriages, which were divided in five classes (First, Second, Third, "standing upright" and "with the cattle, on straw")

this always led me to joke that Communists ought to be lazy, and wait for that "worker's paradise", and don't stand in the way of entrepreneurs

Dilluminati's picture

The argument that somehow that there would be enough for everybody never pans out.  Lokk at Venezuela, look at the distribution of wealth from Google, Microsoft, and Amazon.  No you're not getting a robot unless it is there to arrest and jail you.

 

HenryKissingerChurchill's picture

Lokk at Venezuela, look at the distribution of wealth from Google, Microsoft, and Amazon.  No you're not getting a robot unless it is there to arrest and jail you.

coincidentially Google is already developing terminators for DARPA (or for themselves?)

tmosley's picture

That is the correct take. Marx really was a genius, the only problem was that he identified the classes in his class struggle theory incorrectly. If he had identified them correctly, he might have been the greatest capitalist philosopher of the 19th century. FOFOA laid this out beautifully in this article: http://fofoa.blogspot.com/2010/07/debtors-and-savers.html

malek's picture

I would never ever call Marx a genius, but I applaud your pointing to the very prescient article by FOFOA.

hobopants's picture

Irony being that Marx thought of value only in terms of human labor. Now that human labor is becoming obsolete, where does that leave his theory? Can there be a worker's paradise without workers? 

just the tip's picture

ZH is playing chart porn with these articles.  chart 3 of this article is in stark contrast with the FRED chart posted in:

http://www.zerohedge.com/news/2017-05-01/chinese-factory-slave-explains-...

chart 3 implies that the labor force peaked in '82, while the chart in the other article clearly shows the labor force of manufacturing decreasing from the early '60s.

lasvegaspersona's picture

I think he has some misconceptopns about wealth and inflation. A hyperinflationary event is more than increased prices. Wealth is more than money in the bank. I see his main points but he seems to be igmoring what Yellen and Bernacke call tail risk....aka train wreck.

We shall see.

Ghordius's picture

+1 and... it's worse then that, too

then in history, hyperinflationary events are invariably tied to two things:

- a fiat currency and...

- foreigners rejecting that fiat currency and having a kind of "fire sale" of it... nearly every time after having it bought up because it "looked cheap" (i.e. only for speculative purposes)

see "currency controls", which are nothing else then an attempt to stem the second part of that process, by "closing" the economy, particularly in regard to currencies flowing in and/or out

JimmyRainbow's picture

add the "Free Market" meme and "price discovery" and one has to notice that everyone without a degree has no real worth in the new robot times and the question arises who will buy all the stuff?

and with all things moving having a few chips inside the possibility to earn something by doing "low work" to start a buisness elsewhere is also diminished.

Add a few stupid and not so stupid "regulations" to be followed and the class-cage is set at birth. no way to get out of the pond with ones own hands.

SixIsNinE's picture

hence the PTB going along with the vaxx damaged people to serve as a lower class donkey without the mental abilities to even question the way things are.

BBC ran a story back in 2005 or so showing a divergent humanity. The autistic/downs class.

that and the deliberate dumbing down - people simply won't be capable of envisioning anything other than what is presented to them.

Dilluminati's picture

Between a gas tax hike, AI, and robotics my suggestion is to grab certifications in Security + (and keep learning) and redo that old 2003 MCSD with a new MCSE and then market those skills into data paid positions.   Keep in mind that AI and Robotics will erode that additionally.

Is this degflationaty?  Absolutely.  Is this going to create social unrest?  yep.

Funniest part of all of this is that the gas tax hits that part of the economy that is excluded from COLA and is in food and energy, so here is the briefing: you are slated to become poorer and the framework from which discussions are being made or the narrative of it is probably 50 years old.  We keep hearing of the post WWII institutions, Nato, Bretton Woods, IBS, etc.. and guess what?  They are not relevant to the new conditions we face and as instituions go not addressing real challenges.

 

 

CRM114's picture

This article, like so many others, fails to address the future by assuming robotics will only be used to replace workers within the current manufacturing paradigm.

The robotic aspects of CNC machining and 3D printing will change that paradigm. There is no need for robots in a factory in China to produce light switch covers which are shipped by robot ships and delivered by robot drones to your door when that same cover can be printed in back of your local hardware shop. And hand-finished by your neighbor.

you_are_cleared_hot's picture

I agree. If I were China, I would be crapping my pants. What is China going to do with tens of millions of factory workers when the factory orders stop coming in? They will most likely re-tool and go build public works projects like more of those "ghost cities" nobody lives in...somehow - I think China will be an a manufacturing hurt locker in 5-10 years.

CRM114's picture

Indeed.

I used to think (since the end of the Cold War) that this was deliberate US long term policy - to allow Chinese manufacturing to develop at breakneck pace before yanking the market from under it and causing communism to collapse in the subsequent revolution.

Now I realise that the US isn't that disciplined or organized, and it's simply market forces and unintended consequences of crazy social policies that are causing it.

Actually I think China is in the hurt locker now, but they are covering it up with dodgy stats and financing.

Victor999's picture

"Actually I think China is in the hurt locker now, but they are covering it up with dodgy stats and financing."

 

Kinda like everyone else, eh?

CRM114's picture

Just like, not kinda like. ;)

DEMIZEN's picture

china has the edge and talent and is global and is a regional powerhouse. In absense of labor cost variable, they will still play a vital role in the giant region. fool yourself not with declining china. 

DEMIZEN's picture

How much do local currencies matter when labor and RD are not marketable? how do you value perfect information? The only currency that will matter will be eroei. it won't be printed in your backyard. It will depend on inputs and energy and machinery required. I believe products will be designed as very modular for multiple applications. We will need brand new worldwide standards,It will be almost impossible to compete efficiently.

if everything is priced right, the cover will be printed at the minimum of all considered inputs. Ill assume there will be industrial zones designed to share inputs and outputs to minimize transportation and heat losses. It is called a zero loss matrix.  Only a third of cali water is used for agriculture the rest goes for cooling and processing. Consumer and household end-use represent only a few percent. A lot of water could be saved if industries would cluster efficiently, but you have to tax them on a regional level or have end users as investors.

Some byproducts are inputs in other industrial processes or manu, so it makes sense to cluster production when no longer depends on labor commute or housing, and all known CNC procedures are stored in the cloud. There will be a heavier regional primary production center and a couple of spatially optimized semi-finished distribution centers to finalize and assemble the products.

Lets say you have a multicriteria decision analysis with ten layers, considering all input and output costs including cost of transportation/unit with all known externalities, time variables for perishables, etc.

 You could use all the hot water for processing at very low costs if located next to the nuclear reactor cooling system, for example. There is also no energy transportation loss or other unnecessary inefficiencies.  There is virtually unlimited space for improvements in an allocation of resources goods and services if only deregulated and unleashed.

it won't happen without the fucking zirpers taking the cream, even if it takes a WW3

Farewellyou's picture

"cluster production" "located next to the nuclear reactor cooling system"
City mayors will compete desparately for local placement of a nuclear reactor.

Catullus's picture

Inflation targetting is unsustainable. 2% over 30 years still dilutes half your purchasing power. Even the robot worker gets fucked in that scenario.

Victor999's picture

But the wealthy make out just fine as they collect their wealth before the money value evaporates.  It's those who live paycheck to paycheck who will suffer the most.