Inflationistas and the global supply shock Here's a funny thing. There was an amusing altercation between self-declared Austrian Peter Schiff (of "I see inflation everywhere" fame) versus The Money Illusion's Scott Sumner on Monday. It happened on Larry Kudlow's show on CNBC. Scott Sumner kindly rubbished many of Schiff's more notable delusions (among them the idea that inflation is here, but people just can't see it, or that it is being reverse-engineered out of the CPI by government statisticians.) Though, as Pragmatic Capitalism's Cullen Roche has already pointed out, Sumner could have done a better job. Among other things, he probably should not have perpetuated the myth that banks are not spending excess reserves purposefully and rather pointed out that excess reserves are in fact the intentional by-product of central bank policy. Only the central bank can get rid of excess reserves, and they stay on regardless of whether banks lend or do not lend. But, we digress. This was Sumner's first time on CNBC, and it's likely that he was just simplifying for the sake of, you know, TV people. As Roche identifies, Schiff's bigger problem really is that he thinks that money creation always equals inflation, irrespective of what happens to output. But as we all know, inflation is a rise in the price level. And no, as Noah Smith has wonderfully spelled out for the inflationistas before, a rise in asset prices doesn't count. But this post isn't really about rehashing old ground of that sort. This post is about debunking Schiff's other misleading statement. In the interview Schiff claims that the only reason the US is currently not "feeling" the horrid impact of inflation is because so much of it is being exported to places like China. And that's funny because, as Capital Economics points out on Tuesday, the fear is - if anything - that China is suffering from disinflation, if not deflation outright - albeit due to falling commodity prices. Here, for example, is the downward move of China's GDP deflator: Though it's worth adding that disinflation is not a China issue but rather a global phenomenon, meaning the "export explainer" simply doesn't cut it whichever way you look at it. Which brings us to the following chart from UBS" Global Economic Perspectives report from last week, which observed the trend juxtaposed with unemployment: As you may have guessed UBS argues this is mostly down to technological supply shocks. The world, it seems, is increasingly suffering from an abundance crisis rather than the archetypal scarcity problem most inflationistas would have you believe. That means less rivalrous consumption, and less fighting and haggling over goods at the market price like this: And more distressed (or heavily discounted) selling like this: Or, lacking that, more "just-in-time" inventory management. So, if you're still an inflationista, one question worth asking yourself at this point is when was the last time you saw empty shelves at your local supermarket (outside of a super-storm/weather/act of God event)? We think it's fair to say that apart from long waits for some fad new products, i.e. Apple iPhones, fashion items and Christmas toys, it's rare to encounter an out-of-stock problem these days, at least not one that cannot be easily circumnavigated with online ordering. As UBS also observed, this is not a trend that's going away any time soon (our emphasis): As we noted above the economic impact of shifting technological progress is akin to a supply shock. Put simply, it reduces unit costs of production. At the same time as this, however, the nature of these technological changes also enhances competition for the consumer. Both factors - lower unit costs and heightened competition - ought to generate lower levels of consumer prices than might otherwise be the case. To use the jargon of the economic textbook, they ought to generate an improvement in the so-called output inflation trade-off with lower inflation for a given level of output growth/unemployment. And this is exactly what we can see - at the global economic level - in the data, as evidenced in the charts below. Globally, inflation levels have been extraordinarily benign in recent years both in absolute terms as well as relative to levels of output growth and unemployment. Many factors are responsible for this, including the demand-sapping nature of the financial crisis, but the influence of developments in information and communications technology (i.e. the internet) in fostering competition and restraining unit cost pressures should not be under-estimated in our view. A few more charts for Schiff to chew over: Because, yes, technology makes us smarter, meaning it takes fewer resources to achieve the same outcome. And yes, we're probably being too productive rather not productive enough. As for Schiff's other favourite "the dollar is bust" meme, here's the closing point from UBS" report: For currency markets we believe the US dollar will be the main beneficiary of these transformations. That's because the US economy stands to benefit the most from these prospective technological advances, partly because of its favourable cyclical position at present relative to most European economies. In addition it has a comparative advantage in the production of much of this new technology. In the case of energy moreover is it one of the only countries - at present - that appears to be exploiting shale extraction techniques. As Tomas Hirst noted the other day, with the market awash with global supply chains it's increasingly likely that outsourcing will orientate towards cheap energy, which can only be a good thing for Saudi America. Last and not least, we should mention that if GDP is indeed restructured to include more intangible capital inputs - like, err, the Kardashians - this will not be yet another conspiratorial coup for the government's stealth reverse-engineering department. Rather, it will be a reflection of the fact that statisticians are catching up with the changing nature of our economy. This, as we've noted before, is migrating away from an "added material" value model and increasingly towards "knowledge value" instead. We'll leave you with the opening thought from Tom Streithorst's latest at the Los Angeles Review of Books: WE LIVE LIKE GODS, and we don't even know it. Related links: Scott Sumner vs. Peter Schiff - Pragmatic Capitalism David vs Goliath - The Money Illusion