The Way Out of Depression

Technology. Innovation. Debt. And currency crises.

We continue our recent theme. Having dwelled on it for so long, like a teenaged girl with a new Taylor Swift song stuck in her head, we seem to think only of that one melody as we view the world around us.

And so we offer an assertion for your consideration: Technological innovation is a counterbalance to crushing debt levels, rapid currency debasement and gargantuan government… but it isn’t automatic.

“Properly understood,” write Peter Thiel and Blake Masters, in Zero to One, “any new and better way of doing things is technology.” By extension, old, worse and established ways of doing things are destroyed as technology advances.

“Our ancestors lived in a static, zero-sum societies where success meant seizing things from others.” Theil and Masters continue. “They created new sources of wealth only rarely, and in the long run, the could never create enough to save the average person from an extremely hard life.”

Fast-forward 10 millennia, to about the 1760s — during which farming, wind power, astrolabes, the printing presses and steam engines emerged — and technological progress exploded. Trains, planes, automobiles, phones, medical advancements… the sky was the limit until roughly 1971, when the pace of progress slowed.

Our parents and grandparents, explain Theil and Masters, “expected this progress to continue. They looked forward to a four-day workweek, energy too cheap to meter and vacations on the moon.” Bummer. Today, the average workweek is over 47 hours, our homes are still metered (albeit by “smart meters”) and Americans take “staycations.”

In point of fact, America’s prosperity has been squandered. According to James Dale Davidson of Strategic Investment, annual average GDP growth between 1949-2009 was 3.3%. Between 1979-2009, that rate fell to 2.7%. From 1989-2009, the average annual growth rate fell to 2.5%. From 1999-2009, it was 1.9%, and then just 0.9% between 2005-2009. “The unprecedented accumulation of debt on the corporate, consumer and government level,” he writes, “is both a cause and consequence of the dramatic deceleration of growth since the 1970s.” That debt, we’d add, has been enabled by fiat money, the cornerstone of the global economy since 1971.

“The smartphones that distract us from our surroundings,” add Thiel and Masters, “also distract us from the fact that our surroundings are strangely old: Only computers and communications have improved dramatically since midcentury. That doesn’t mean our parents were wrong to imagine a better future; they were only wrong to expect it as something automatic.”

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Thiel and Masters suggest there are two types of progress: vertical progress and horizontal progress.

“If you take one typewriter and build 100, you have made horizontal progress,” they explain. “If you have a typewriter and build a word processor, you have made vertical progress. At the macro level, the single word for horizontal progress is globalization — taking things that work somewhere and making them work everywhere.” (Ahem, China.)

“This age of globalization,” they write, “has made it easy to imagine that the decades ahead will bring more convergence and more sameness. Even our everyday language suggests we believe in a kind of technological end of history: The division of the world into the so-called developed and developing nations implies that the ‘developed’ word has already achieved the achievable, and that poorer nations just need to catch up.”

Technology, or vertical progress, on the other hand, takes what economist Joseph Schumpeter called “gales of creative destruction.” Our co-founder Bill Bonner explained that the process “destroys mistakes to make room for new innovations and new businesses.” As the French cabbies demonstrated yesterday, that’s not always in line with the objectives of government or other people.

Bill continues:

“When people make mistakes, they maintain that they are blameless. ‘Who could have seen this crisis coming?’ they ask. ‘And,’ they say, ‘someone else should pay for the loss.’

“So today, the feds, who mismanaged their regulatory responsibilities during the bubble epoque are bailing out mismanaged corporations to protect lenders who mismanaged their money. They are determined to prevent capitalism from making major changes — in the worst possible way.

“What’s the worst possible way? Simple. Leave the mismanagers in place. Keep the brain-dead companies alive — along with the zombie banks. Let the government take ownership of major sectors of the economy. And stick a debt-ridden society with even more debt!”

“The severity of a depression,” he concludes, “is inversely correlated with government’s efforts to stop it. The more the feds try to delay and distract the process of creative destruction, the longer it takes to get the job done. And the higher the eventual bill.”

But there are reasons to be optimistic. We believe we’re on the cusp of new technological breakthroughs that will earn you outsized returns, transform the way your raise your children and, yes, even help the economy grow. Click here to see a specific example of one technological innovation.

Cheers,

Peter Coyne
for The Daily Reckoning

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