The inflation bears get another sharp stick in the eye, courtesy WhatsApp
by David Atkins
Do you hear that deafening silence? That's the sound of the sky-is-falling inflation bears' embarrassment by events that have totally contradicted their every prediction. The destruction of the middle class, the rise in income inequality, and continued wage declines have produced an extremely low-inflation economy, much to the chagrin of conservative "experts."
Now you can add another woe to the pile of mockery for the inflation hawks:
Larry Summers gave a speech today at the National Association For Business Economics (NABE) conference in Arlington Virginia.
In his speech he said some really sharp stuff about the significance of WhatsApp — the messaging company being purchased by Facebook for $19 billion.
Here's the exact language, via Bloomberg:
Ponder for example that the leading technological companies of this age, I think for example of Apple and Google, find themselves swimming in cash and facing the challenge of what to do with a very large cash hoard. Ponder the fact that WhatsApp has a greater market value than Sony with next to no capital investment required to achieve it. Ponder the fact that it used to require tens of millions of dollars to start a significant new venture. Significance new ventures today are seeded with hundreds of thousands of dollars in the information technology era. All of this means reduced demand for investment with consequences for the flow of - with consequences for equilibrium levels of interest rates.
In other words, if you hardly need any cash to start huge companies, then cash just piles up in investor bank accounts with nowhere to go. And if cash isn't moving, because there's no demand or use for that money, then interest rates will fall.
Summers notes that there are other factors putting downward pressure on real interest rates, including the aftermath of the deleveraging, the declining rate of US population growth, the unequal distribution of income, resulting in a lot of wealthy people who have a high propensity to save, and a global trend towards putting money into safe assets, especially dollar denominated ones.
It's almost as if allowing obscenely rich people to have all the money, and creating a world in which companies requiring little startup capital and employing only 53 people can make $13 billion, might produce deflationary economic results with little circulation and growth.
Who knew? Aside from anyone with an ounce of sense, that is?
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