The upside of deflation

The new Howard Marks memo is about negative rates and deflation…
both of which mysterious

… and full of peril.

As with all Marks memos, it is best read entirely. The point, as always, is well taken.

Though there is one consideration, perhaps implied in the analysis, that opens up the possibility for a less troubled view…

The consequence of tech proliferation.

  • Tech enabled offerings have been deflationary in nature, and are becoming dominant worldwide.
  • Consumers and businesses both benefit from low and declining costs (often free) in the environment that is forming.
  • Businesses however are increasingly confined to competitive power law patterns, where a few take the most of economic pools and the shrinking remainder gets shared among the long-tail multitudes.
  • As a result, a concentrated group of businesses have seen their cash troves surge, which excess liquidity needs to be invested, reinvested, distributed, or deposited somewhere.
  • The internal reinvestment opportunity is of (proportionately) narrow magnitude in the low-cost tech environment described, while externally directed funding is similarly limited for the growing cash piles at the top.
  • Deposits, thus, including government debt purchases, could by elimination be more than typically desired, circularly contributing to the low-rate deflationary spiral…
  • … and shareholder distributions more than typically triggered, extending similar cash choices and considerations to recipients (disproportionately institutional and increasingly also concentrated in power law formations).

And there is broad-based benefit to all of this…

  • The consumer gains in purchase power and diminished costs of living.
  • Governments, businesses and institutions fund economic deficits at nothing rates to plug the holes that happen.

… until something causes the trend to reverse, most likely at some point of excess, which is not unheard of.

Like many things nowadays, this is a theory, and probably not mine alone. Subscribe at your own peril.