Dana Blankenhorn

Resources and the New Era: What the Best Futurists Got Wrong

This coming year represents the start of a new era.

It’s an era defined by technology, as much as the previous era was defined by resources.

I’ve written here many times that the gating factor for technology is human capital. The more trained, empowered, and willing human minds you can bring to bear, the more you can grow. Contrast this to the resource era, where the key to growth was control, over the land and what lay on or beneath it.

The politics of 2020 were defined by the clash of these two economies. It was expressed throughout the culture. But the market made its verdict clear, and it was a true landslide.

The Greediest Generation

We are closer to the start of 2030 than we are to the heart of 2010.

In the year 2030 the average baby boomer (that’s me) turns 75. Millennials will be entering menopause.

More important, labor of all kinds will be in short supply.

I’ve talked before about the talent shortage. Programmers and scientists can name their price. Locking the door to emigrating talent is economic suicide.

But the same problem will also exist with ordinary labor.

Cash Flow Rules The World

The biggest financial discovery of the last decade is cash flow.

Cash flow created the Cloud Czars. Cash flow is why Amazon is worth $1.6 trillion while AT&T is worth one-eighth as much.

Cash flow has always existed. But it was something to spread around. It was profit. When calculating whether a company could afford its dividend, analysts would do it in terms of cash flow.

That’s because business accounting isn’t just about cash. It’s about all the kinds of money that flow through the business. It’s about loans and equity, about costs that are capitalized and those that are written off on taxes.

Dividends paid for with cash flow are the lifeblood of conservative investing. Financial planners make their money moving retired folks’ money into bonds or companies that pay a regular dividend. A company that pays fat, regular dividends has its stock bought by retirement funds who don’t make trouble for management.

Tech companies don’t like to pay dividends. The thinking goes, if I’m giving money to shareholders it’s because I don’t have any other use for it. Until the last few decades very few tech companies paid dividends. They saw capital gains, the rise in the stock price that comes with growth and profit, as the shareholders’ reward.

Creating Demand

Right now, the biggest problem for the U.S. economy is a lack of demand.

We didn’t go on vacation. We didn’t go out to restaurants. We’re not getting on planes, or trains. We’re not even using our automobiles much.

This service sector of the economy, where today’s unemployed were working before the pandemic, has been crushed. It remains crushed. It will remain crushed until the pandemic is over.

The only solution offered has been to subsidize spending. That subsidy ended in September. Trump’s people stole the money, and the Fed pumped trillions into Wall Street investors who didn’t need it. The result is the greatest transfer of wealth in history, from the poor and the middle class to the wealthy and, indeed, to the ultra-wealthy.

Public Goods and Private Goods

Democrats re-made Woodrow Wilson into a liberal to win the peace of WWII.

The myth was that the peace of the Civil War, and that of WWI, were punitive. This hurt economies and led to new war.

Determined not to make those mistakes again Roosevelt called his alliance against Hitler the “United Nations.” His wife, the forever-underestimated Eleanor Roosevelt, was a key actor in creating today’s UN. FDR’s top general, George Marshall, became even more important after FDR’s death because of the Marshall Plan.

The Marshall Plan did more than just pour money into Europe’s economies. It created a new economic model. It assumed that, while private goods are important, there should also be growing demand for public goods. These include education, health care, infrastructure, defense, civil law, and the environment.

The Cost of Free Money

With the Federal Reserve having thrown trillions of dollars into the economy, many people ask where inflation went?

Look at your portfolio.

What should have happened in March was that helicopter money would go into spenders’ pockets. That money would have then gone into rent, into food, and into other necessities, increasing the value of companies that made and sell those goods, keeping the economy going.

Instead, the money went to investors who, with bonds priced near zero, bought stocks. Meanwhile the economy collapsed.

Anything that works now carries a ridiculous price. Amazon.com (AMZN) is a great company, but is it worth 110 times earnings? Apple (AAPL) faces huge supply chain problems, so is it worth 27.5 times earnings? Microsoft (MSFT) is at 35 times earnings, and slow-growth Walmart (WMT) is at 25 times.

Money is also flowing into things that should be worthless. AMC Entertainment (AMC) admits its movie theater chain may have to go out of business. Yet the stock is worth $5.50 per share, the market cap is still $575 million. Luckin Coffee (LK) is practically Enron. It lied about its revenues and is facing delisting. But it still trades, at $2.61 per share, a market cap of $650 million.

There’s your inflation. It’s hiding in asset prices.

False Dawn

Because the government (once again) threw money at people who didn’t need it, Wall Street is great again.

Anything that works, the growth stocks and the big retailers, is overpriced. People are even throwing money at things that don’t work, like airlines, cruise lines and casinos.

But this is a false dawn.

Opening too early puts us on track for what the underwriters at Willis, Towers & Watson call their “limited success” scenario.  In this case, deaths continue through the summer, but the fall brings a new, even more-severe outbreak than before.

This is precisely what happened in the 1918 flu pandemic. There were three outbreaks. It was the second one, in the fall of that year, that was the killer.

People think this thing is licked because, as restaurants open and idiots demand haircuts now, there has been no spike in cases. That’s only because most people aren’t going to those restaurants or running out for haircuts. If no one around you has the virus, you’re safe. If one does, and you’re around them for about an hour, then you and dozens of other people get sick at once.

On top of that, we have outright lying about how many people are sick and dying. Georgia, where I live, transposed dates so it seemed case loads were declining. Florida fired a woman who refused to fudge the numbers.

The virus doesn’t care about any of this.

The Great Bull Trap of 2020

Three times in the 12 years, Republicans have convinced the rest of us to bail out common stockholders.

• During the Great Recession, banks were bailed out by the Federal Reserve creating cash, subsidizing consolidation, and forgiving them the crime of creating fake “insurance” for mortgages.
• In 2017, the Trump Administration bailed out the bull market with a tax cut that went almost entirely to propping up stock prices, extending the disconnect between stock values and the real economy.
• In 2020, the Federal Reserve created trillions of dollars of new money, and Trump wound up giving it to people who didn’t need to spend it, once again propping up assets like stocks.

Cooperation in a New Century

There are two kinds of cooperation between people and government.

There is the kind China has engaged in, cooperation by force. It seems to have worked. They’re getting back into business. Many people will say, out of ignorance, that this proves authoritarianism works.

Then there’s the second kind of cooperation, voluntary cooperation. It’s a cooperation of the mind, not just the body. It’s what I’ve talked about for years now. It’s what makes America great. We call it liberty.

It’s this kind of cooperation that will be essential to America’s comeback, not just over the virus but over the authoritarian Chinese threat, which will be the hallmark of the coming decade. It’s why getting rid of Trump is essential.

I’ve written a lot about economics here. I’ve talked about various economic eras in American history, how each featured a dominant industry, which rose to power and fell as the next took over.

But there’s something these earlier eras had in common. They were all built on resources. They were all built with possession of physical goods as the limiting factor to growth, as the main ingredient in the wealth of nations.

The Gating Factor

Why will liberals win in 2020, why should they win, and why should businesses applaud?

It has to do with the gating factor. 

The gating factor is whatever is limiting something. In an Internet session, it’s the speed of the slowest connection between server and client. This is true on a micro level as well. Chip companies put memory on-chips because the speed of data movement into processing is the gating factor. 

In an economy, the gating factor changes, usually every generation. In the early days of the Republic, the gating factor was labor. That’s why owning slaves made economic sense for Washington, Jefferson, and Madison. Then the gating factor became transportation, and then capital had to be organized. When manufacturing dominated, demand was the gating factor. Failure to grow demand by expanding the money supply caused the Great Depression.

In my generation, resources were the gating factor to growth. It made sense to invest in troops and military hardware who could control vital resources like oil.

In today’s technology economy, the gating factor is brains. Not just people, but smart, motivated, empowered people.

We’re just starting to understand what this means in terms of economic policy.