Wednesday, December 5, 2007

Productivity Miracle? (Musical Tribute)

Santa Claus is working on his year end stock market rally. He's once again found a way to create more toys with even fewer workers it seems.

Productivity miracle investing environments are generally associated with rising real rates of return (the blue line), a rising stock market, and falling (and/or low) inflation expectations (the red line). That's what we've been seeing since hitting the bottom just over a week ago (November 26, 2007).

So, let's assume for a moment that this new environment is sustainable.

As stagflationists, it hurts us in the short-term. As real rates of return rise, the value of our current investments tied to real rates of return falls. For example, my TIPS fund lost 1% today (well up for the year though). Gold and silver also had a bad day.

As savers, it helps us in the long-term. My TIPS fund now has a higher real yield. That higher real yield in the coming 30+ years will more than offset any temporary short-term losses. As a long-term saver, I would therefore welcome the productivity miracle.

As retirees, it helps us in the long-term. It is far easier to protect savings in a productivity miracle environment.

As workers, it helps us in the short-term. Companies are more willing to hire if the economy is doing well. However, I do not believe it helps us in the long-term. We've been seeing this in the median incomes since 2000. They are not keeping up with inflation. Productivity miracles mean fewer workers are needed to do the same amount of work. Productivity miracles certainly do help the CEO though. If one extrapolates this to its logical conclusion though, how are people supposed to earn a living in a world where ever increasing numbers of jobs are automated and/or outsourced away?

Here's a musical tribute to the ridiculously compensated CEO who continually finds ways to do get more done with fewer people. You make it look so easy.

See Also:
Productivity Surges by 4.9 Percent Rate
Productivity Miracle
Automation and Inequality

Source Data:
FRB: Selected Interest Rates
Bloomberg: Rates & Bonds


Anonymous said...

I'm still contemplating your stagflation theory. Personally, I think we are experiencing a drought of ideas. That is, no good capital formation ideas. Despite a long period of record low interest rates, the best we could come up with was a housing boom (and a war). I guess we can always throw money at global warming, but maybe people would be better of with a shorter work week. All this time and effort building second homes for which there was no true demand. Same thing with the internet boom. For me that's the hard part. If you recognize the false premise upon which the mass investment is being made and don't want to participate (time the boom & bust) your're left with Utility stocks, Treasuries and a few blue chips.

Stagflationary Mark said...


What you are basically describing is a lack of growth opportunities.

Once you have decided that you can't make your money grow as easily as you once could in the past, you might be just a hop, skip, and a jump from simply hoarding goods (which tends to be inflationary).

Further, since the government needs its cut regardless of whether or not we grow, it could be forced to go down the inflationary path. It isn't popular of course, but it tends to be more popular to inflate and blame a scapegoat for the inflation than it is to raise taxes directly and out in the open.

Lack of growth with inflation pressures is stagflationary.

I'm not saying that it is a certainty that's where we are headed. It is simply my bet. As I have stated in this article, I still have many reasons I'd love to be proven wrong. I'd be better off in the long-term if I was.

Anonymous said...

As much as I hate the prospect, I think stagflation is baked in the cake. Its more than just the parallels with the late sixties and early seventies. I can't help but think that America's obesity is emblematic of our creative malaise. Can you do a waistline time chart? By the way, Tim Bond, an economist from Barclays Capital, agrees with your Stagflationary view. I'd give you a link, but I'm new to this whole internet thing. I really need to get out less.

Anonymous said...

Oh yeah, I forgot to mention that: "Its uplifting to know that I'm unique like everyone else." Again, where do you get this stuff?

Stagflationary Mark said...

Thanks MAB!

I found the stagflation link and will post the article.