Fake Growth Till We Make Growth
Something is clearly happening to the prices of commodities over the last year.
Lumber: +115%
Soybeans: +59%
Copper: +46%
Coffee: +25%
These staggering jumps in prices seem out of step with the opinion of the Bureau of Labor Statistics, who have measured the CPI at +1.4%
In 1956 a gentleman named VF Ridgeway stated:
‘What gets measured gets managed.’
The quote implies that the metrics we choose to focus on impact behavior in an organization.
But what is management? Is it leadership? Is it spin? Is it manipulation?
Are elites properly managing the KPIs of economic stability? Or are they instead manipulating the metrics we use to set monetary policy?
If manipulation is present, is the purpose of the lie simple self-preservation, or something more nuanced (and potentially brilliant)?
Are We Lying About Inflation?
The Consumer Price Index (CPI) is calculated by the Bureau of Labor Statistics (BLS), and is the main metric used to determine the inflation rate in the US. There is much debate amongst economists regarding the methods used to calculate CPI, and by proxy, inflation.
While the BLS version of the CPI calculation is the official calculation there are in fact alternative methodologies that indicate different levels of inflation.
While I can’t speak to the mechanics under the hood of these methodologies, what I do know is:
“It is difficult to get a man to understand something when his salary depends on his not understanding it.” - Upton Sinclair
It’s certainly curious that the official CPI calculation in the above table is rosier than the alternatives. This bias would be in the same direction as the incentive structures of a government trying to hide inflation. So if there is even some doubt in the veracity of official economic figures, we should pay some mind to how much inflation may actually be in the system and to what degree our economy is truly growing.
Inflation is impacted by fiscal policy (taxes and government spending), along with employment, industrial output, the velocity of money, and money printing.
Modern monetary theorists tell us that governments who pay debt in their own sovereign currency can effectively print themselves out of any pickle. My own intuition is that we should remember the lessons of Hungry, the Weimar Republic, Venezuela, and Zimbabwe in this regard.
Still, if you consider those factors that impact inflation, even I’ll admit most factors aside from money printing seem to point in a deflationary direction.
During the pandemic we saw an overnight haircut in industrial output. Lower production due to lockdowns led to a reduction in supply, and thus higher prices. But since this was offset by a demand free fall for many goods it is possible these dynamics cancelled out.
Lots of money printing can create stagflation if unemployment and real growth is low. But money printing can be offset by the velocity of money (or how often money is circulating the in economy). During the pandemic, the velocity of money has slowed for many goods and services.
Furthermore, some middle and low-income households have been acting like wealthy households by pouring their stimmys into speculative assets like GameStop and crypto. None of that activity is captured in CPI.
So, a surface level consideration of the trends seems to suggest that inflation could be well in check. The official figures may be in line with reality, at least for now.
Regardless of how one divines the real inflation rate, there is a deeper issue afoot.
The efficacy of the aforementioned fiscal and monetary hacks are contingent on an upwardly sloping productivity curve. In order to maintain the desired 1-2% inflation and 3% real GDP growth we still need growing industrial output.
This ultimately comes from either innovation (doing more with less) or exploration (unlocking new frontiers that can be expanded into).
Are We Really Innovating?
America paid off its WW2 debt not through tax hikes, but through real growth. Much of this growth was built on the backs of the wonks and squints.
Engineers and scientists created true scientific breakthroughs to win the war, and then those breakthroughs were declassified and commercialized. These goods were based on innovations from physics and chemistry, real world disciplines from which real world products emerged.
Microwaves, detergents, televisions, pharmaceuticals. The CPI never met a consumer gizmo it didn’t like.
The emergence of computing and information theory in the 1980s sparked an innovation explosion in the digital realm. The sons of industrialists went to Wall Street, as computers beckoned a financialization of the world which unlocked a new dimension of wealth creation. When the underlying technologies of the financial services revolution started also minting millionaires, specialized labor flooded into tech.
We wanted flying cars but we got 140 characters. - Founders Fund
Since the ‘80s, ‘atoms’ innovation has stagnated while ‘bits’ innovation has run wild. While it can be easy to lament this it’s hard to argue that the information age has done plenty to deserve a spot on a Steven Pinker diagram of human flourishing. Still, the digitization of value creation has a dark side.
Human creativity is a renewable resource, and it can be invested in a variety of ways each with different degrees of utility. While digital technologies do make it cheaper to leverage creativity for good, they make it equally frictionless to propagate creative fake (or at minimum poorly validated) innovations.
In the 2000’s the internet’s rise made it easy for speculators to bid up dotcom valuations as traditional business valuation methods fell to the wayside. Computers made it easier to cook books at places like Enron. Today, we have NFTs that allow a high-schooler with a Canva account get the attention of Sotheby’s.
Some Creativity Misallocation Is Healthy
Like unemployment, a zero percent rate of what one could call ‘creativity misallocation’ is undesirable. What a culture deems ‘misallocation’ could in fact unlock a new frontier of real growth. This is how all paradigm shifts occur.
Let’s say that a 5-10% ‘creativity misappropriation’ quotient is a good target for a society. In this scenario, most humans would be investing their creativity and cleverness into improving existing paradigms and driving important incremental innovation.
Meanwhile, a small subgroup of crazy outsiders are over in the corner betting on alchemy, tulip prices, and bigfoot detection technology.
Most of that will go to zero, but hey, maybe we get penicillin out of it.
Incremental innovation within existing paradigms is a critical mechanism of productivity growth over time. It has historically been how the middle class move up into the echelon of elites and how elites grow and nurture their status. Elites aren’t incentivized to create or encourage disruptive innovations.
Why disrupt a system if you’re on the top?
But as our institutions have become more calcified, elites have given up on the yeomen work of incremental innovation as a mechanism of status and wealth preservation. Instead, the human creativity of our elites is being misallocated into regulatory capture, tax evasion, and other non-productive labor. This potentially is a problem for us if we want to maintain positive productivity growth.
This could very well be where we’re going, and perhaps even where we are today. Instead of attempting incremental innovation, elites are using creative accounting to tweak the metrics by which the status quo is preserved to make it appear that we’re continuing to grow, while in fact we are not.
The Elite’s Gambit
There are two ways to interpret this. On the one hand, you could see the disinterest of our elites to reinvest in incremental improvement as a dereliction of duty. A cynical tactic to maintain power in a time of late stage decadence.
On the other hand, it could be a brilliant and bold last gasp to save their children from the debt-fueled stranglehold they’ve summoned to the horizon.
Perhaps elite modern economists, so called modern monetary theorists, have invented something that looks like an economic policy, but is in fact a clever protection racket for nerds working on disruptive innovations.
Perhaps they are so optimistic about the disruptive breakthrough technologies like bioengineering, fusion energy, and AI that elites heavily discount the ‘incremental innovation’ labor typically needed to maintain 3% GDP growth. This would mean wasting labor on incremental innovation is inefficient because the disruptive bets are going to payoff so huge they reset the whole board.
In this hypothetical steelmanning, elites know that while these magical new breakthroughs are gestating in university labs and bland Palo Alto office buildings, lots of capital will be needed to nourish their R&D.
The types of limited partners that fund such risky endeavors typically do so when the overall economy is healthy. Risk capital likes low inflation and growing GDP.
So if you were a policy maker seeking to keep the type of LPs that fund breakthrough tech happy, what would you do?
You’d cover and move.
You would cook the CPI to keep that LP money flowing into deep tech. If the economy started to tank, capital invested in high-risk low payoff technology risks would be yanked and placed in hedges.
Maybe this is the grand plan, just keep signaling growth (even if it is fake) to the global stage so that we can hang onto our global reserve status and continue to fund breakthrough tech. If we can do it long enough, this will lead to a few Deus Ex Machina breakthrough innovations that will create overnight efficiency boosts to industrial output. This is the same playbook that some founders run that I discuss in the Wolf In Steve’s Clothing, but on a national stage.
So in summary, if the Keynesianism mantra was:
“Markets can remain irrational longer than you can remain solvent.”
The Modern Monetary Theory mantra is:
“Lie about being solvent long enough to luck into solvency.”
If this is really what we’re doing, it’s a strategy that would make even WallStreetBets envious.
The risk of course is what if the squints fail? What if AI never happens, quantum computing is a dud, and fusion fizzles.
What if the promises don’t come true.
Then we’d be in the same place the Weimar Republic was after WW1. They thought they could use war to expand to new lands which could be monetized to pay down the cost of conquering those lands. When they lost, they couldn’t cash the checks they wrote and hyperinflation burned the economy to the ground. Things only got worse from there as we know.
If disruptive innovations don’t bail us out of our stagnating state, the repricing of our real GDP would lead to economic shock, the outbreak of extreme violence, and the implosion of America.
The good news for the elites is that nerds make great scapegoats, so I’m sure the elites will be just fine.