There is a hot theory gaining currency on Wall Street.
It is a big picture idea, but it explains much of what is going on in the economy and society.
It is called technological deflation.
Moelis & Co. chief executive Ken Moelis was on CNBC’s Closing Bell on Thursday, and brought it up.
According to Moelis, we’re in a deflationary world. That would normally be reason to be concerned: deflation is considered by central bankers as a destructive force. That is because a reduction in the price of goods is usually associated with a slowing economy and increased unemployment.
In this case, however, the deflation is a good thing. It is improving the standard of living, even in an environment where wage growth is stagnant. Here is Moelis:
I think in our world right now, you have so much technology driving price transparency, pricing power, efficiency. These are great things. I mean, what Amazon is doing – if you are a retailer, look, you better take your profit down and give the consumer an awfully good deal if Amazon is going to replace you.
An oft-cited example of this in action is the Apple iPhone. Before the advent of the smartphone, a consumer might have had a mobile phone, an MP3 player and an internet connection at home. Now they have all three combined in one device, along with mapping and much else besides.
iPhones aren’t cheap, but they are cheaper than buying all of those things separately. It has much broader applications too.
Everything from Uber to AirBnB to the advent of fracking technology have increased the supply of certain materials and services, increasing competition and putting pressure on prices.
Rick Rieder, BlackRock’s chief investment officer of fundamental fixed income, highlighted the game-changing impact of technology earlier in the year. He said:
Put simply, technology is reshaping the entire economic, social, inflation, and investment landscape. And some of the benefits, especially to the US, are profound.
Others have caught on too. John Ameriks, Vanguard’s head of quantitative equity, told Business Insider earlier this year that it was a technology that was driving markets.
“The ways in which we extract energy — there are completely new ways for us to do that that really change the cost structure in a particular industry,” Ameriks said. “That’s going to matter to particular firms.
“In the end, it’s great news for everybody — but that will drive what happens in markets.”
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