The great war between finance and technology

The world’s third great technological revolution is upon us – and posing an existential threat to banks. But there’s no stopping the wave of cheap global labour and technology.

The going rate for this article on freelancer.com is about $5, total. The freelance journalist rate in Australia these days is 50 cents a word (it used to be $1) so $467 in total (my going rate is, ahem, a little more again).

I haven’t actually commissioned an article from one of India’s or Africa’s aspiring journos who are bidding for work on freelancer.com but I’m guessing there’s a bit of a difference in quality. But one-hundredth as good? Interesting question.

The potential revenue from the article is a little harder to estimate. Two ads per page at a typical CPM (cost per thousand) of $5 and 10,000 views gives you $100, so on that basis: nice profit from a freelancer.com article and a big loss from the Aussie going rate.

But there’s a huge range of CPMs and page views being achieved in the media so it’s impossible to generalise. For example Business Spectator’s CPMs are much higher.

Fair to say, though, that revenue pressures are tending to drive down unit costs and forcing publishers to look for cheaper ways of doing things.

Not just in publishing. The range of cheap services available from the Third World on freelancer.com is huge and represents another wave of the cost deflation that began with the entry of China into the World Trade Organisation in 2001, as a result of which the prices of tradeable manufactured goods like TVs and cars have been falling for ten years.

Now the prices of previously non-tradeable services will fall as another billion or two low-cost workers are ushered into the global trading system by freelancer.com and other platforms like it.

The rapidly developing “internet of machines”, or M2M, is also deflationary.

Within China, the relaxation of the Hukou system, or household registration, will bring a new wave of cheap rural labour into urban factories and, so the government hopes, stem the increase in China’s labour costs.

The combination of cheap labour from emerging countries and the Digital Revolution is very disinflationary indeed.

This is the third great technological revolution, the first two being the Neolithic Agricultural Revolution and the Industrial Revolution.

It’s a bit hard to find data on costs and prices during the shift from hunter gathering to large-scale agriculture 10,000 years ago, but between 1820 and 1920, as I understand it, prices fell by an average of 2 per cent a year as the Industrial Revolution drove down costs.

In those days “stable prices” were interpreted as 2 per cent per annum deflation, and there were no central banks to worry about such things. These days we have central banks holding the levers of monetary policy and they regard price stability as 2 per cent inflation. Deflation is their true enemy.

To the Digital Revolution in 2008 was added a collapse in aggregate demand as a result of the GFC and that combination of technology and demand recession has, for the past five years, threatened to turn disinflation into outright deflation and has completely reversed the normal role of central banks.

In the past their job has been to prevent inflation and protect the value of money; now they are desperately trying to create inflation and prevent deflation.

Inflation in Europe is 0.7 per cent, and falling. Recently the European Central Bank unexpectedly cut interest rates from 0.5 to 0.25 per cent to try to arrest the fall. In the United States it’s 1 per cent, and stable, thanks to historically unprecedented printing of money by the Federal Reserve.

But what constituency wants inflation? Banks and borrowers. Consumers and savers like falling prices. Central bankers argue that without inflation consumption would fall because people would put off purchases because prices would be lower in future.

But that argument is false, which is shown by the steadily rising consumption of cars and TVs, and other things whose prices are falling.

Why do borrowers and banks hate deflation and love inflation? Because inflation erodes the value of money and therefore debt, so that over time the debt, in effect, disappears. That’s why the world’s indebted governments are instructing their central banks to create inflation, please, and hurry up.

Banks like inflation because it results in a positive yield curve, which is how they make money. Banks borrow short and lend long: they need short-term interest rates to be lower than long-term ones (a positive yield curve) so they can earn the spread in between.

Between 1820 and 1920 the yield curve was consistently inverse (long-term rates were lower than short-term ones) because of deflation. Banks struggled to make a profit and frequently collapsed.

The end of the gold standard in the 20th century and the rise of inflation – as governments robbed from the future to pay for their promises today – also led to the rise of the banks. Steeply positive yield curves as a result of inflation produced huge profits for financiers.

As we entered the 21st century, banks had become by the far the most powerful corporations the world has ever known, richer and more powerful than the great industrialists of the 19th century.

But now they face an existential threat from deflation and the dreaded inverse yield curve. Happily for the American banks, which were recapitalised by taxpayers five years ago, the US yield curve has been steepening this year as Quantitative Easing does its work and holds off deflationary pressure (although long-term rates have been falling again recently).

In Europe, where the banks were not recapitalised by taxpayers and remain insolvent, the yield curve has been flattening as inflation continues to decline. They are now calling for the ECB to Do Something.

It is, in fact, the Great War between Finance and Technology, between the forces of inflation and deflation.

Which side you’re barracking for depends on whether you are a saver or a borrower.

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