Defrag Blog

The Sponge Bob Economy

by Eric Norlin on Aug.30, 2010, under Uncategorized

If you’ve been reading along with the defrag blog for any period of time, you’ve probably figured out that I like to have a macro-economic view inform how I approach things. For over a year now, I’ve been pounding on the theme of a “productivity boom” as an economic meta-theme — one that was driven by the databases/spreadsheets of the 80’s, email/e-commerce/productivity apps in the 90’s, and SaaS/productivity apps/shift to the cloud in the 00/10’s.

If we look at the current economic situation (from my admittedly, U.S.-centric viewpoint), we find ourselves in a world where a massive amount of liquidity has been pumped into the system (via the actions of the Fed and other central banks). Companies (technology and otherwise) are now sitting on a massive amount of cash in the face of fears around economic recovery, and as I’ve pontificated over the past few weeks, we’re going to see a huge M&A surge heading into year’s end (before cap gains taxes increase substantially around these transactions). Just this morning, we see over 2 billion in M&A transactions (Intel and 3M).

One of the great debates raging in macro-circles is around deflationary vs. inflationary cycles. And so, I read with great interest this blog that Phil shot my way over the weekend. In “The Techn-Sponge” the blogger (I can’t seem to find this guy/gal’s name) asserts that the technology sector (via Moore’s law) is having two effects:

1) as 1.5% of the world’s GDP, the tech sector’s march via Moore’s law (where the price for similar functionality gets halved every 18 months) is soaking up all of the excess liquidity that has been pumped into the system

2) the second order derivative of that is an increase in the rate of productivity gains (via - the tech sector)

In plain speak: all of the money and low interest rates that SHOULD have kick-started the economy and effectively brought real inflation back is being “sucked up” because of the very nature of the tech sector itself (a sector which plans for and KNOWS that falling prices — ie, deflation — is the order of the day).

The blogger goes on to assert: “We have never had a significant technology sector while also facing the fears (warranted or otherwise) of high inflation.”

His (or her?) final assertion is that the only way from dropping into dangerous deflationary territory is to start up the printing press again and keeping injecting trillions into the economy until we see inflation.

Now, I’m not sure about his conclusion (which is to say that I’m willing to question the magnitude of the effects that he asserts), but I’m fascinated by the idea that something structural changed with the rise of the tech sector - and that structural change is directly related to the productivity boom. To be fair, TONS of people (from Mary Meeker to Thomas Friedman) have theorized about structural economic changes (related to worldwide tech growth) - that is certainly nothing new. What I like here is the direct tie to tech being a deflationary force that has set up its own positive feedback loop.

So, if this guy is even half right, what does this all mean? A few guesses:

1. Unemployment in double digits is just a symptom of this deflationary environment we live in (the “new normal” - ugh).

2. Our beloved tech sector (and all of its SaaS-y, e.20, cloudy goodness) is soaking up all of the liquidity that would normally lead to inflation (and lower unemployment). And the continuing productivity gains that we’re all making our living selling will just make sure that it stays that way.

3. Tech product cycles can only get faster (in a deflationary environment the only way for tech companies to maintain price points is to release new products at a faster and faster rate).

4. “Collaboration” (ie, e.20, social software) will hit a cycle where we see some sort of productivity jump (a leap) that coincides with mainstream adoption.

5. The deflationary force that is the baby boomers layers on top of all of this and makes it more than likely that the debt-to-GDP worriers (John Mauldin) are right — we don’t see another secular bull market until 2017-2020.

Bottom-line: in some strange way, we (the tech sector) are the architects and perpetuators of this low growth, no inflation, rising productivity era we find ourselves in.

Which I suppose is better than the alternative. Maybe I’ll just start referring to this as the Sponge Bob economy (hat tip: “the techno-sponge”).

By the way, wanna chat more about deflation, collaboration, markets, innovation cycles, baby boomers and other goodness — join us at Defrag — the super early bird rate expires this Friday.

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