Technology, The Markets and Deflation

April 13, 2000

One can hardly read the financial press these days without being deluged with exuberant praise for the wonders of the technologically-based "New Economy." Technology, being the backbone of the modern U.S. economy that it is, has become a veritable altar over which the masses come to worship. Indeed, this has sparked well-known financial analyst and cycle theorist P.Q. Wall to style this phenomenon the "Church of American Technology." Incidentally, Wall predicts that this "church" will come crashing down this fall due to a number of destructive influences it contains.

As we approach the precipice of the deflationary stage of the Kondratieff Wave cycle, we must consider just how much technology has contributed to our predicament—both to our past and present successes as well as our anticipated future failings (in the form of a vicious deflationary bear market). Our principal concern here is not to examine the financial miracle that technology has helped effect, but to examine the other, overlooked aspect to technology; namely, its destructive influence. For with every benefit that technology confers upon a nation's economy, it also sows its own seeds of destruction. The destructive phase of technology follows the constructive phase as surely as night follows day, and we will attempt to prove our thesis here.

Technology as a socio-economic phenomenon (and not merely a technical one) was first identified and examined by the great French sociologist Jacques Ellul in his groundbreaking book, "The Technological Society" (1964, Alfred Knopf). Ellul's penetrating—at times chilling—analysis of technology (which he described mainly as "technique") offers us many insights into what the future we are faced with will likely hold as long as technology exerts its influence.

"There has been only one industrial revolution and that consisted in the replacement of human muscle as a source of energy," writes Ellul. "And…there is a second revolution in the making whose objects is the replacement of the human brain….What we are witnessing at the moment is the rearrangement of the world in an intermediate stage; the change is not in the use of a natural force but in the application of technique [i.e., technology] to all spheres of life." What Ellul is here alluding to—and bear in mind he wrote nearly 40 years ago—is the inevitable progress of technology and the ubiquity with which it now surrounds and controls us. This "second revolution" promises to far surpass the first and is well on its way to completely altering the way in which our world is structured. And, as Ellul will show us, this technological transformation carries with it far greater destructive potential to our private lives, our financial system, and our world in general than its does constructive potential.

The implications of technology are far-reaching but nowhere so profound than in its impacts on the workforce. "The machine, along with organizational development, is now the means of reducing both the number of employees and expenses, and also of reducing, on the collective plane, the tertiary sector of manpower," writes Ellul. "Here the progress to be made seems limitless, and consists primarily in the efficient systemization of society and the conquest of the human being."

Here Ellul underscores an important point: technology renders traditional labor redundant, and if allowed to advance too rapidly, leads to wide scale unemployment. In the 1950s and '60s, during which time technology was still in its incipient stages, there was tremendous anxiety over the possibility that "automation" would render obsolete huge sections of the labor force. Today, those fears are becoming reality, but for reasons different than what the workers of that time feared. The reasons are varied, but it concerns mainly the fact that technology turned loose tends toward absolute efficiency.

This hyper-efficiency not only is responsible for making the industrial worker and common laborer (eventually) obsolete (witness the millions of job elimination in "Old Economy" industries of recent years), but also restructures the entire division of labor. For instance, technology makes possible the phenomenon of globalism, in which national borders which were once a prevention and a protection against liberal foreign trade are torn down. American-based companies, with today's technology, can just as easily set up their production lines in a third-world country staffed with slave labor than to continue producing in the U.S. (This is another, though unrelated, point—technology makes necessary the resurrection of the old institution of slavery for economic purposes). And with the unlimited capabilities of today's electronic data systems, billions of bits of information travel freely around the globe every second.

"The individual's role is less and less important in technical evolution," continues Ellul. "The more factors there are, the more readily they combine and the more evident is the urgent need for technical advance. Advance for its own sake becomes proportionately greater and the expression of human autonomy proportionately feebler. Human beings are, indeed, always necessary. But literally anyone can do the job, provided he is trained to do it. Henceforth, men will be able to act only in virtue of their commonest and lowest nature, and not in virtue of what they possess of superiority and individuality. The qualities which technique requires for its advance are precisely those characteristics of a technical order which do not represent individual intelligence."

Ellul makes a statement relevant to our present economy in the following: "It is well known that to the standardization of production corresponds a standardization of taste which gives to social life its collective character." Ellul here is referring to the "mass economy/society," which now exists in America and throughout much of the world, largely due to America-led efforts of standardizing the economies of the world through technology. This is yet another catalyst for deflation. Since continuous technological advance allows for (indeed, necessitates) mass production in almost every area, it demands that consumer tastes be molded to conform to the products that pour off the assembly line. Specialty and niche marketing are anathema to the high-tech world of mass production and tend to be subsumed by it. Standardization in production is the result. Ellul explains it this way: "Standardization provides certain democratic effects…for two reasons. First, it reduces prices; consequently consumption is increased, welfare is more widely distributed, and living standards are equalized. Second, it reduces the reduces the types of available merchandise; there is less diversity on the market and choice is limited…The search for what is 'distinctive,' which is based on a diversity of economic powers, is rendered impossible."

Ellul's conclusion is a frightening one: "[Technology] is, therefore, the most important factor in the destruction of capitalism."

Continuous technological progress is deflationary, because it upsets the balances of supply and demand. There are a thousand such instances of this in our present technology-driven world. In the area of food production, "biotechnology" makes possible the production of billions of bushels grain with lower input costs and higher output and quality. While this development should be seen as positive as far as its potential at lowering global starvation rates, it is devastating to farmers because it ensures season after season of bumper crops, hence an increase in global supply and a decrease in global grain prices. The technological revolution in agriculture, in large part, is responsible for the ongoing farm depression in the U.S.

Continuous technological progress in the area of computers and electronics also has deflationary effects, and herein lies the paradox because computers and electronics—the backbone of today's technology—are of themselves deflationary forces. They provide the framework for the modern-day technology society and without them technology as we presently know it would cease to exist. The continued advancement of computer technology is also the principal conduit of today's monolithic financial system. Of this, we will have more to say.

This brings us to our next point. The latest technological development and obsession—the Internet—is nothing more than the logical conclusion of technological advance. It represents the apogee of man's impressive technological advance over the past 150 years. The Internet is a massive catalyst for price deflation since it provides the consumer with a tool for leveraging his purchases and for finding the highest bidder and the best bargain at the mere stroke of the keyboard. The Internet threatens to eliminate a huge section of the retail industry, cutting out the middleman, and will render largely obsolete myriad more who cannot hope to stay in business in a business environment of hyper-competition and ever-falling prices, which the Internet inevitably engenders.

Today's technological mechanism allows for the free-flow not only of information via the Internet, but of money via electronic transfers. This in turn facilitates the fluid movement of money and credit (in electronic form) anywhere in the world. And it is this free flow of money which is our chief concern and objection to the technological society. All the talk about the so-called "New Economy" really hinges on nothing more substantial than this: that today's electronic global banking system can ensure the free flow of money to anywhere they wish to send it. It is this easy access to bank credit that is the lifeblood of the New Economy and without it, the New Economy ceases.

With the modern magic of debt finance, ten dollars of credit are created for every one dollar of real money. Over time, this rapid buildup of debt-based securitization (including consumer and national credit, equities, derivatives, bonds, etc.) takes on monolithic proportions. This is precisely how the high-tech New Economy was allowed to take shape and expand, for without credit it is certain our technological and economic progress would be nowhere near as advanced as it is today. But of course this carries the risk (indeed, the eventuality) that the debt pyramid will collapse of its own weight since all credit (i.e., debt) must return to its original lender. The sum of our argument is this: when over-capacity (due largely to high technology) in the industrial and service sectors reaches the point where the entire market becomes super-saturated with supply (and we have very nearly reached that point), there cannot help but be a call for debt to return to its original source since the producers find their investment capital tied up largely in items which the market has no room for. Debtors, meanwhile, who have enjoyed the benefits of this rapid capacity buildup (in the form of lower prices and easy access to advanced goods and services) will be forced to return their original borrowings, plus interest, to the lender. Keep in mind that for every dollar that is called in, ten dollars or more are added onto that—money which does not exist and never did! Thus, we see that credit-driven technological development has created an imaginary paper wealth that has no bearing in reality and can only tend to the general penury of the public. With our society's present obsession with technology and credit (the staples of the New Economy), we are assuring ourselves of meeting this very fate.

We do not mean to berate technology and its many benefits; after all, our present high standard of living would be impossible without it. We are calling only for sanity and fiscal responsibility when dealing with this two-edged sword. The ancient Chinese Book of Changes makes a timeless observation—"success breeds failure, and failure breeds success." Our success as a socio-economic culture has been due mainly to the influences of technological advancement. Our subsequent failure (in the form of a coming bear market) will be largely due to the influences we have mentioned in this essay. But inherent within the failure that is certain to come will be the birth of yet another success—the eventual widespread acceptance of gold as the only sound and inviolate form of money and perhaps even a return to the gold standard after the present debt-based financial mechanism has exploded.

Clif Droke is the editor of the three times weekly Momentum Strategies Report newsletter, published since 1997, which covers U.S. equity markets and various stock sectors, natural resources, money supply and bank credit trends, the dollar and the U.S. economy.  The forecasts are made using a unique proprietary blend of analytical methods involving cycles, internal momentum and moving average systems, as well as investor sentiment.  He is also the author of numerous books, including “2014: America’s Date With Destiny.” You can view all of Clif's books here. For more information visit www.clifdroke.com.

78 percent of the yearly gold supply--is made into jewelry.

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