Thank you for having me.
These are obviously important times as a response to COVID-19 and what the economic situation will look like in the future.
Before we talk about solutions, we really need to understand the problem we're trying to solve. The inflationary economic system that we have relied on all our lives is breaking down. COVID-19 only amplifies the phase transition.
For some time, two opposing forces have been competing against each other, moving in opposite directions. These forces are, one, the exponentially deflationary aspect of technology; and two, an inflationary monetary policy that's trying to overcome it. While we might not like these facts, it does not change them.
Technology advances are sweeping across society. They have been hugely beneficial. Your smart phone is a compelling example. It was invented only 13 years ago, but it is no longer just your phone: it is your camera, virtual assistant, map, music device and flashlight. For me, it's my guitar tuner, and there are hundreds of other applications that I pay very little for or that I get for free. More for less, and that gets better every year—that is the nature of technology.
As technology accelerates, from your phone across every industry, we can expect that type of step change in performance versus cost everywhere—automotive, agriculture, energy, health care, it doesn't matter. It will reshape them all, and in doing so, provide far better outcomes for society at dramatically reduced prices.
If technology makes everything cheaper and more abundant and is moving into every industry at blinding speed, it is logical to assume that prices should go down and that society should enjoy increasing benefits everywhere. The problem with that logic is that deflationary pressure makes it hard to pay debt back. As a consequence, current economic dogma has us on a growth and inflation trajectory at all costs.
In a desperate effort to achieve growth and inflation, which we hear about every day, and in the face of a structural change brought to us by technology, central banks, not only here but also all over the world, through artificial low interest rates and monetary policy, have only added more pain. Incentives designed to make cash less valuable and to encourage spending do just that. In doing so, they also discourage savings and encourage individuals and companies to take on additional debt and risk.
Because of that, debt is being added to society at a rate that is really hard to comprehend. Since 2000 the world has added $185 trillion of debt to achieve $46 trillion of global growth per year. Each year, more debt is added to achieve smaller growth rates as technology pushes the other way. This was before our current crisis, which has seen an explosive rise in debt while the economy shrinks. In itself, that debt burden must slow future growth, because taxes need to go up on a range of industries and households that will have to pay for it, which further restricts demand.
Because that debt has grown so large, central banks and governments continually bail out the existing system, not by desire but out of fear of letting the system fail and go through a disorderly unwind. It might be a better alternative in a set of bad choices. By doing so, society is forced to run on a treadmill, requiring more work to support ever-higher prices, which themselves have been inflated through monetary easing, artificially low interest rates and bailouts. The devastating irony of the bailouts is that they artificially keep prices high. The government then needs to allocate more to social programs for those left behind by the same high prices that it created in the first place.
For the wealthy and those with assets that are artificially boosted by this leverage, it has played out well. Assets, including real estate and stocks, are the beneficiaries, having run up in value far beyond what they would have been without the easing. For every person on the winning side of those decisions, there are many others on the losing side. Their costs of food, shelter, gas and education are rising because of policies designed to make their cash and wages less valuable.
Paradoxically, COVID-19 actually speeds up the adoption of technology and is driving the trend to lower prices faster. Technology companies are the beneficiaries. Consider just one example, the system we are using right now, Zoom, going from 10 million users to 300 million users in just over three months. Those additional 200 million people might not occupy the same amount of real estate on the other side of this pandemic. If that happens, real estate prices will fall, as will rents, creating additional deflationary pressure.
Therefore, we stand at a crossroads, similar to the one in 2008, only bigger, with calls for massive bailouts of taxpayer money to save the same system that was so clearly failing in the first place. Policy response is required and justified because too many people are going to get hurt otherwise. However, we need a new set of rules, one that starts with a far deeper understanding of the risks in using the same playbook that worked for a different time. Looking forward, productivity gains from technology advancements, especially in AI, will become so large that it will be impossible for central banks to counteract their effect.
By understanding the key structural change that technology has enabled, governments can step in and provide a transition to a very bright future for all Canadians. Not doing so would be analogous to Kodak trying to retain its film business while competing against digital cameras, or Blockbuster adding candy aisles to their stores to counter Netflix. Massive money will be wasted, and it will fail regardless. If that happens, more people in the end will be hurt.
Thank you.