Ignore the lessons of history, and the cost to your portfolio will be great. Especially if you are a bond trader.
In Britain they celebrated something unusual last year. The government reported the first year on year decline in consumer prices in 54 years (see chart below).
In fact, prices for the things they buy day to day were 0.1% lower than they were 12 months before.
Meet deflation, up front and ugly.
If you looked at a chart for data from the United States, they would not be much different, where consumer prices are showing a feeble 0.4% YOY price gain. This is miles away from the Federal Reserve’s own 2% annual inflation target.
We are not just having a deflationary year or decade. We may be having a deflationary century.
If so, it will not be the first one.
The 19th century saw continuously falling prices as well. Read the financial history of the United States, and it is beset with continuous stock market crashes, economic crisis, and liquidity shortages.
The union movement sprung largely from the need to put a break on falling wages created by perennial labor oversupply and sub living wages.
Enjoy riding the New York subway? Workers paid 10 cents an hour built it 120 years ago. It couldn’t be constructed today, as other more modern cities have discovered. The cost would be wildly prohibitive.
The causes of 19th century price collapse were easy to discern. A technology boom sparked an industrial revolution that reduced the labor content of end products by ten to hundredfold.
Instead of employing a 100 women for a day to make 100 spools of thread, a single man operating a machine could do the job in an hour.
The dramatic productivity gains swept through then developing economies like a hurricane. The jump from steam to electric power during the last quarter of the century took manufacturing gains a quantum leap forward.
If any of this sounds familiar, it is because we are now seeing a repeat of the exact same impact of accelerating technology. Machines and software are replacing human workers faster than their ability to retrain for new professions.
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