Deflation may be the new normal...

The Futurist: The Techno-Sponge:

...Most high-tech companies have a business model that incorporates a sort of 'bizarro force' that is completely the opposite of what old-economy companies operate under: The price of the products sold by a high-tech company decreases over time. Any other company will manage inventory, pricing, and forecasts under an assumption of inflationary price increases, but a technology company exists under the reality that all inventory depreciates very quickly (at over 10% per quarter in many cases), and that price drops will shrink revenues unless unit sales rise enough to offset it (and assuming that enough unit inventory was even produced). This results in the constant pressure to create new and improved products every few months just to occupy prime price points, without which revenues would plunge within just a year. Yet, high-tech companies have built hugely profitable businesses around these peculiar challenges, and at least 8 such US companies have market capitalizations over $100 Billion. 6 of those 8 are headquartered in Silicon Valley.

Now, here is the point to ponder: We have never had a significant technology sector while also facing the fears (warranted or otherwise) of high inflation. When high inflation vanished in 1982, the technology sector was too tiny to be considered a significant contributor to macroeconomic statistics. In an environment of high inflation combined with a large technology industry, however, major consumer retail pricepoints, such as $99.99 or $199.99, become more affordable. The same also applies to enterprise-class customers. Thus, demand creeps upwards even as cost to produce the products goes down on the same Impact of Computing curve. This allows a technology company the ability to postpone price drops and expand margins, or to sell more volume at the same nominal dollar price. Hence, higher inflation causes the revenues and/or margins of technology companies to rise, which means their earnings-per-share certainly surges.

So what we are seeing is the gigantic amount of liquidity created by the Federal Reserve is instead cycling through technology companies and increasing their earnings. The products they sell, in turn, increase productivity and promptly push inflation back down. Every uptick in inflation merely guarantees its own pushback, and the 1.5% of GDP that mops up all the liquidity and creates this form of 'good' deflation can be termed as the 'Techno-Sponge'. So how much liquidity can the Techno-Sponge absorb before saturation?

At this point, if the US prints another $1 Trillion, that will still merely halt deflation, and there will be no hint of inflation at all. It would take a full $2 Trillion to saturate the techno-sponge, and temporarily push consumer inflation to even the less-than-terrifying level of 4% while also generating substantial jumps in productivity and tech company earnings. In fact, the demographics of the US, with baby boomers reaching their geriatric years, are highly deflationary (and this is the bad type of deflation), so the US would have to print another $1 Trillion every year for the next 10 years just to offset demographic deflation, and keep the techno-sponge saturated...