Moore was one of the three founders of Intel, the world’s major
producer of microcomputer chips. When you hear the word “pentium,”
think Intel. It is one of the most successful manufacturing companies
on earth. Year after year, it dominates a highly competitive,
highly innovative market.
in 1965, Moore made a prediction: the capacity of integrated circuits
(computer chips) over the next decade would double every 18 to
24 months. He did not say that this will continue indefinitely.
implication of this observation that he failed to spell out is
this: that portion of a computer’s purchase price that is attributed
to the cost of chips will fall in value by approximately 50% every
two years. Another implication: within three chip-generations
— six years — this computer will become obsolete as
far as most users are concerned. They will decide to buy a replacement
it has turned out, to the amazement of everyone, computer chips
are still doubling in capacity — transistors per unit of
space — every 12 months. This means that the half life of
the value of a computer chip is one year.
doesn’t mean that computer speed doubles every 12 months. There
is more to computer speed than chip speed. There is also access-to-memory
speed. This isn’t increasing every 12 months because the size
of memories continues to grow rapidly.
is another inhibiting factor: the ever-increasing complexity of
software code. There is a proverb in the microcomputer industry:
giveth, and Microsoft taketh away.”
new computers do get faster, year after year. This means that
used computers get cheaper, year after year. This means that previous
capital investments made in computers become less valuable, year
after year. This means that in order to stay competitive, companies
that use computers extensively must make heavy capital investments
in new computers every few years. Their capital in effect wears
out very fast. It doesn’t stop working, but it ceases to work
profitably. It’s as good as worn out.
means that high tech industry is very expensive compared to mid-tech
and low tech industry. The capital costs and the learning costs
remain high. This means that the new technology must produce very
high rates of return in very short periods of time in order to
justify the expense of capital, for the half life of computer-driven
technology is very short.
has become obvious since March 10, 2000, when the NASDAQ peaked
at 5040, that the hope of high profitability was mostly hype.
The bubble burst because the rate of profit was so low —
and getting lower — that the price of NASDAQ shares was economically
insane. In December, 1999, the P/E ratio — price to earnings
(profits) — was 207. You had to spend $207 to get one dollar
in earnings. In my newsletter, Remnant Review (February
and March, 2000), I announced this couldn’t last much longer,
and it didn’t. The NASDAQ crashed. It hasn’t come back. It won’t
come back. Investors now know the truth: competition and high
depreciation undermine the long-term profitability of the vast
majority of high tech companies.
isn’t profitable because of its innovative technology. It is profitable
because of its enormous market share, its installed base of existing
consumers, and the enormous cost to anyone of replacing Windows,
learning the new operating system (e.g., Linux), and finding programs
to run on it.
there is Moore’s second law: the cost of building computer chip
factories doubles every 12 months. This is exaggerated, but Moore
himself thinks that this will be an inhibiting factor in the extension
of his first law. Nobody will be able to afford to build such
plants. By 1997, Intel was spending $5 billion on two plants.
In a 1997 Interview, Moore said:
where you get into numbers that sound impossible again. If we
double it for a couple of generations, we’re looking at $10
billion plants. I don’t think there’s any industry in the world
that builds $10 billion plants, although oil refineries probably
our first reaction is to see what we can do to keep the technology
moving but the costs down. For example, we used to build a completely
new set of equipment each generation. Now our development people
try to reutilize as much of the previous generation’s equipment
as possible. And they’ve been pretty successful. We may bring
a $10 billion plant down to the $5 billion range. But these
are still huge numbers.
there is the question of what we can do with these ever more powerful
Even with the level of technology that we can extrapolate fairly
easily — a few more generations — we can imagine putting
a billion transistors on a chip. A billion transistors is mind-boggling.
Exploiting that level of technology, even if we get hung up
at a mere billion transistors, could keep us busy for a century.
. . .
most advanced chips in design today will have less than 10 million
transistors. So, we’re talking about a hundred times the complexity
of today’s chips. We wouldn’t have the foggiest idea what to
do with a billion transistors right now, except to put more
memory in a chip and speed it up. But as far as adding functionality,
we don’t know what can be done.
doesn’t think that this doubling of chip capacity can go on indefinitely.
But, year after year, it has. So far, so good.
the history of man, nothing has doubled every two years. Anything
that does absorbs too many resources. It runs out of resources
and stops doubling. Moore’s law is unique, or so we thought until
last year. But then Raymond Kurzweil, the inventor of voice-recognition
software, discovered that Moore’s law has been going on since
the late 1800’s. Information-processing capacity per dollar of
cost doubled every three years from 1910 to 1950. From 1950 to
1966, it doubled every two years. Now it is doubling every year.
He thinks the process is accelerating.
this rate of increase continues — and Moore himself is highly
skeptical about this — then by 2023, the computer chip’s
capacity per $1,000 will equal the human brain. By 2036, one penny
will buy this much capacity. In 2049, we will be able to buy a
chip with the capacity of the entire human race’s brains for $1,000.
In 2059, this will cost one penny. This, Kurzweil says, will change
guess is that SAT scores of public high school graduates will
nevertheless be lower in 2023 than today, and lower in 2059 than
calls this the law of accelerating returns. To prove its existence,
however, he has to show that the law of diminishing returns will
also be abolished in the construction of chip manufacturing factories.
So far, the law of diminishing returns still applies to the capital
costs of plant construction.
Crisis in Capital Depreciation
have argued, following the lead of Dr. Kurt Richesbacher, that
the present recession is a corporate profits recession, not a
falling consumer demand recession. He and I agree that one of
the important factors in the reduction of profits is the rising
cost of computer capital. The depreciation rate of computer-related
production processes is high. Moore’s law indicates that this
rate of depreciation will get higher over time because the half
life of these investments keeps getting shorter.
implies that older, larger firms will suffer continuing attrition
because of tough competition from newer firms that have newer
capital and less overhead investment in depreciating capital.
This is what we have been seeing for a generation: the shrinking
of employment of the S&P 500 manufacturing firms. Layoffs are
continual even in boom phases of the business cycle. Computers
replace workers. Then newer computers replace older computers.
High tech businesses cannot get off the ever-accelerating treadmill
of depreciating capital.
output increases in the computer-driven high tech sector, prices
of consumer goods fall. We are seeing price deflation in many
industries, especially the computer industry. Think of the hand-held
calculator’s power in 1975. I paid $50 for a four-function hand-held
calculator. For $20, I can get a complete business function calculator
that runs on solar power. Think of the cost of computer power
consumers love falling prices. The greater the output of some
industry, the lower the price of its output should be. The great
economic benefit of free market capitalism is that it increases
output. This is another way of saying that it decreases consumer
prices. The lower these prices go, the richer we consumers become.
If consumers can maintain the same monetary income because of
increases in their own productivity — greater output per
hour — then falling prices make them richer. This is the
best way to get a raise: your money income doesn’t increase, so
you don’t get kicked into a higher income tax bracket. Falling
consumer prices are the economic equivalent of a tax-free raise.
Keep those prices falling!
we hear cries of alarm about falling prices. Why? Because of the
existing levels of debt. The problem with capitalism isn’t falling
prices due to rising output. The problem is that people have loaded
up on debt on the assumption that prices will rise (money will
depreciate), so they can stiff their creditors by paying off with
less valuable money. This stiff-the-creditor strategy blows up
when the central bank (the Federal Reserve System) stabilizes
the money supply and allows the free market’s output to lower
is the problem with falling prices due to increased output and
a stable money supply: there is larceny in the hearts of millions
of people — the desire to steal from creditors by using newly
created counterfeit money. They want the central bank to increase
its output of fiat money, so that they can pay off their debts
with money of reduced value.
is why the hue and cry to inflate, inflate, inflate occurs every
time the FED’s prior policy of rapid monetary inflation to stimulate
the economy is changed, and the growth of the money supply slows
down. This slowdown of the digital printing presses creates an
economic bust: recession. Millions of debtors — from the
average Joe to the largest corporation — who counted on the
counterfeiting skills of Alan Greenspan to bail them out when
it comes time to pay off their debts start screaming bloody murder
when the money machine slows.
Federal Reserve System controls the money machine. When it buys
government debt, it creates new money to make the purchase. The
government depends this newly counterfeited money into circulation.
This is what millions of larcenous debtors want.
may think the money isn’t counterfeited. Well, if you or I did
this, we would be arrested. Why? All we’re trying to do is give
the local economy a shot in the arm! I mean, that’s how we can
fight the recession!
Federal Reserve System
are lots of academic textbooks on the FED, and most of them aren’t
very good. I have never seen one that gets the FED’s economics
and its history straight. It is legally a private corporation
that is run by a Board of Governors that is an agency of the U.S.
government. The proof of this is this: the Board of Governors
does not pay postage; local FED branch banks do.
also knew the history of the FED. He has written a good little
book on this, The
Case Against the Fed. But there is still no major book
on the FED’s history. The FED’s files are not open to the public,
FED controls the monetary base. On this is built various money
supplies: M-1, M-2, M-3, MZM. The FED doesn’t control these directly.
FED is worshipped by the academic economics profession and the
investment world. It is the one major government-created economic
monopoly that is never identified by academic economists as a
school of academic economics except the Austrians (Mises, Rothbard)
accepts the legitimacy of the FED. The investment world cries
for the FED to create new money every time there are signs of
a recession. Writers who call themselves free market believe that
this government-created monopoly is far more efficient than a
free market in banking could ever be.
everyone believes that the FED can keep a depression from happening.
How can it do this? By creating new money. This is why we hear
continual calls for more monetary inflation today. We are in a
issue of The American Spectator, which high-tech columnist
George Gilder bought this year after it almost went bankrupt,
we read an analysis by Gilder and Bret Swanson. (I wrote for Spectator
in the early days, 1970-75, back when it was called The Alternative,
before it became a neoconservative tabloid — just old fashioned
believes in high tech with a nearly religious devotion. This same
religious commitment to high technology was what lured millions
of gullible investors who chased the NASDAQ over the cliff in
pursuit of easy wealth. I think they were fools, and I said so
in February and March of 2000, when the NASDAQ was at its peak.
and Poverty (1981) was a great book, and The
Spirit of Enterprise (1984) was almost as good. But ever
since he wrote Microcosm
(1989), he has become a full-time apostle of high technology.
High tech is a great thing for consumers, but not very good for
long-term investors. He now promotes high tech investing. (As
a person who has been earning money as a writer since 1965, let
me say that Gilder’s writing style began to decline when he took
up high tech. I have always regarded Wealth and Poverty
a rhetorical masterpiece, not just a logical presentation. But
as he has aimed his mind into the microcosm — the quantum,
as he calls it — his writing style has become quantum-like:
unexplainable and increasingly random. It has also become more
like Microsoft’s code: bloated.)
believes in tax cuts. I do, too. But unlike Gilder, I don’t believe
in fiat money or the FED. I see fiat money as the cause of unsustainable
booms that lure the sheep to the slaughter. Gilder criticizes
The cosseted, cretinous world of Washington economics and media
punditry sees economic growth as an effect of the Prozac of
“consumer confidence” and government spending. It imagines that
seven trillion dollars of wealth can disappear because of bubble-headed
investors rather than bubble-headed policy makers.
agree entirely with Washington on this issue. The bubble-headed
investors were indeed greedy. They thought they were on a one-way
ticket to Easy Street. Then the FED’s inflationary policies made
their greed seem rational. Greenspan gave speech after speech
lauding the new economy and its new technology. Meanwhile, he
continued to crank the money machine’s digital handle. Gilder
Congressional pundits aver that all we need to overcome a deflationary
spiral is avid avoidance of permanent tax rate reductions and
artful application of stimulus from the dildonic pen of Paul
it’s not proven yet that there is a deflationary spiral. Money
is being poured into the economy at 8% per annum — high for
a recession period. This began before the recession hit. Prices
are still going up, especially if we look at the median CPI. As
for tax cuts, they are always welcome by me. But to expect anything
major along these lines in a nation that is politically divided
right down the middle on this issue is incredibly naive. The Senate
is Democrat-controlled. The House is closely divided. Bush didn’t
win the popular vote in 2000. Besides, Clinton got a tax hike
in 1993, but the economy boomed anyway. Bush, Sr. threw the economy
into recession in 1990 when he got Congress to hike taxes. He
listened to idiot advisors who were not economists. That cost
him the presidency.
it’s still anti-business as usual in Washington. Gilder needs
to find another scapegoat. This won’t do it:
Prosperity, we are told, comes from taking money and benefits
from productive and ingenious people — thus reducing their
productivity and investment — and giving it to tax avoiders,
thus ensuring that they stay out of work.
what’s new? That’s been the Republican’s Party Line ever since
Abe Lincoln went to war in 1861 to keep the tariff high and mighty.
(On this point, see the book by Charles Adams, When
in the Course of Human Events.) It has been the Democrats’
Party Line ever since William Jennings Bryan delivered his “Cross
of Gold” speech in 1896.
then turns to the technology sector. I agree: this sector is in
the bad shape that he says.
In key technology sectors, capital spending has sunk some eighty
percent. Semiconductor sales have been halved since autumn 2000.
Our most innovative fiber optic equipment firms now exhibit
revenue half-lives of about three months. Running at $10 billion
a month, defaults by Internet carriers are helping push bankruptcy
levels to record highs. Even the producer price index, one of
the foggy rear-view mirrors Washington favors, has just plunged
1.6 percent in a single month, the largest drop since 1947.
Forty percent officially — but in reality more than one
hundred percent — of our economic growth since 1995 derives
from technological advance.
then he adds a conclusion: “A high-tech collapse portends not
mere recession but depression.” This doesn’t follow.
high tech sector is in recession because the naive, inexperienced
kids who ran the companies thought that investment bankers were
a bottomless pit of money to fund projects that had no visible
market. For years, the venture capitalists conformed to the script.
The best and the brightest were all greed-driven, gullible fools.
They figured that profits would come from lowering prices. They
wanted to be Henry Ford. Well, Henry Ford almost went bust after
General Motors’s Alfred Sloan imitated Ford’s assembly line and
invented a new management structure to crush Ford. The competition
was fierce. The techies always figured that they would win the
competition. Pareto’s 20-80 law has now wiped out the plans of
most of them. While learning this lesson, investors shoveled oceans
of money down a high tech rat hole. Consumers were ready to pay
only discount prices.
world of high tech is the world of Moore’s Law: a doubling of
chip capacity every year, which means a loss of the value of last
year’s computer investment by something approaching 50%. Not quite
50%; software stays the same and learning curves are high. You
can’t actually take advantage of most of the chips’ increased
capacity, which is why I’m typing this on a 1983 keyboard, using
a 1990 piece of software on a 166 megahertz computer.
world is also the world of Pareto’s law. At least 80% of the players
won’t survive the cut.
bright, techie types in Silicon Valley who thought it would be
fat city forever, along with the greedy, bonehead venture capitalists
who threw their investors’ money down hundreds of digital ratholes,
are now wailing for help from Alan Greenspan. Well, there is no
help. The benefits of high tech are for consumers, not investors.
This is what the free market is all about: serving consumers.
The depreciation rate is five to ten times faster than depreciation
on old economy plant and equipment.
sustain the advance into the microcosm, as Gilder has called it,
is to require ever-greater quantities of capital that will, in
most cases, come a cropper when the companies falter and get replaced
by innovators. In the world of high tech, “buy and hold” is like
buying and holding a computer. If you can use it personally, fine,
but the asset depreciates by about 50% per year. Competition never
ceases in the high tech world. It grows more severe as new technologies
appear. The price of this accelerating competition is ruined companies
and well-served consumers.
law of diminishing returns is alive and well in Silicon Valley.
The bankrupt ex-millionaires who are trying to sell their homes
are testimony to its power. The falling price of homes in Silicon
Valley are also testimony to its continuing power.
D’Souza wrote a good book, which came out in 2000: The
Virtue of Prosperity: Finding Values in an Age of Techno-Affluence.
It begins with a description of a 1999 party of young multi-millionaires
and several billionaires in Silicon Valley, “home of 250,000 millionaires.”
That was in 1999. Chapter 1 is titled, “A World Without Limits.”
That was in 1999. The NASDAQ giveth, and the NASDAQ taketh away.
The book was written at the top of the NASDAQ bubble. The hot-shot
kids got hit by a dose of economic reality in March of 2000. Lo
and behold, there have to be consumers willing to buy the output
of all those high tech firms.
will say it again: capitalism is based on consumer sovereignty,
not producer sovereignty. When you hear cries of pain and calls
for government aid from businessmen who thought the system favored
them rather than consumers, you are hearing the call for mercantilism
once again. The call for the FED to inflate is one more call for
the government to bail out inefficient entrepreneurs who lost
their competitive edge. It is mercantilism revisited.
collapse of high tech firms’ markets and also their stock prices
portends a return to sanity. Every recession is a re-pricing period
in which widespread bad economic decisions are eliminated by free
market forces. If depression arrives, it is because of fractional
reserve commercial banking and a government-created central bank
caused widespread distortions with fiat money. The toppling houses
of high tech cards were built by the FED’s prior policies of monetary
inflation. Yes, high tech investments were a house of cards in
early 2000. So is the S&P 500 today, with its price/earnings ratio
of 39. Industry needs to get its earnings up. If it can’t, then
the market will at some point get stock prices down.
inflationists-mercantilists want the FED to create a new round
of expanded debt and misallocated resources, which the FED has
been doing for over a year. They are like a tavern full of alcoholics
who want another round of government-subsidized drinks. What they
need is not another round of drinks. What they need is some quality
time spent in a de-tox center. That’s called a recession.
is Gilder’s answer? More fiat money. He writes:
That most have failed to grasp deflation as part of this equation
is understandable. Not only has it fooled policymakers, but
it has also swallowed some of the nation’s best business managers.
. . .
has hobbled Japan for a decade and demolished the airline, auto
and telecom industries. Because it is so rare, and because it
mimics inflation, deflation — nothing more or less than
an insufficient supply of money — is inconspicuous. In
an inflation, the government prints too much money. In a deflation,
people and firms hoard scarce money in risk-averse accounts
more likely to be included in government M statistics. Unlike
inflation, however — where people quickly spend their depreciating
dollars — a deflationary rise in the Ms is coupled with
much slower money turnover. The economy needs more money to
sustain even diminished economic activity. The famous monetarist
Friedman, who assumes constant velocity, warned recently of
imminent inflation. But today, with some seventy percent of
all dollars circulating overseas, the monetary Ms are nearly
irrelevant. Even as the Ms expand at record pace, real liquidity
— signaled by plunging spot commodity prices — is
velocity seems logical to me. I know; the statistics published
by the St. Louis FED indicate lower velocity. Whatever that statistic
means, and however it was compiled, it is true that whenever it
appears in the data, price inflation slows. It may be, however,
that the statistic merely indicates that price inflation is slowing,
and economists blame this on something they call lower velocity.
My point is this: every dollar of FED reserves that isn’t used
for currency will get used by the commercial banks. Somebody is
spending bank account money. Most money is bank account money.
Likewise, a lame and lagging indicator is the consumer price
index. Automobile sticker prices are not falling, but ubiquitous
zero percent financing has the same effect. Big Three incentive
packages, averaging $2,400 in October, are $1,000 more than
a year ago. Annual sales of 16 million vehicles, therefore,
means reduced Big Three revenue of $16 billion. “That’s almost
double the combined pre-tax earnings last year of Ford, Chrysler
and General Motors,” said Saul Rubin of UBS Warburg in Barron’s.
“The Big Three are going to post tremendous losses for the foreseeable
future,” writes analyst Michael Churchill of Polyconomics. “The
auto industry provides an excellent illustration of why and
how deflation trumps interest-rate cuts in terms of their impact
on the economy.”
sounds very bad for the auto industry. They have shot their wad
in 2001. Who will buy new cars at higher interest rates in 2002?
They bought this year instead.
To every man and nation comes a moment to decide whether to
embrace reality and truth, however harsh and harrowing, or to
indulge in evasions and alibis. Cleaving the global economy
like a titanic force of nature are two imperious trends. Originating
in the private sector, one is overwhelmingly positive and redemptive:
the ever accelerating advance of technology. But it faces a
powerful force of negation and decline.
short, man shall not live by bread alone, especially when it is
getting cheaper. He must live also by fiat money.
are supposed to get cheaper when there are more of them to buy.
Computers get cheaper. Why not other things?
problem is not the fall in prices of consumer goods and raw commodities.
The problem is that the financial house of cards that was created
by fiat-money misled investors is now shaking. The idiots created
the NASDAQ’s house of cards, especially the dot-com house of cards,
and it toppled. Now the fractionally reserved house of cards of
the interlocked daisy chain of debt is looking shaky. “I’ll pay
you when he pays me.” There is in the range of $100 trillion of
these promises to pay. All of them rest on an assumption: central
banks will keep cranking out digital money and buying government
debt with it.
best and the brightest got their heads handed to them in 2000.
The insanity of the NASDAQ’s 207 P/E ratio finally got exposed
for the insanity it was beginning on March 11, 2000. Now the industry’s
defenders are calling for Greenspan to increase the money supply.
WHAT DO THEY THINK HE HAS BEEN DOING FOR OVER A YEAR?????
are trapped in a world of debt that they voluntarily entered into,
one by one, contract by contract, on the assumption that the FED
will forever crank out unbacked counterfeit money. The thought
that the government might return to a full gold coin standard
with 100% reserve banking — stable, non-fraudulent money
— terrifies them, for they would then face a horrifying prospect:
no more counterfeit money to stiff their creditors, no more FED-managed
economic shots in the arm, no more fiat-money safety nets for
overextended debtors, no more government-insured bank accounts
(or anything else) — insurance guarantees that can be redeemed
only through additional fiat money.
the addiction to counterfeit money becomes widespread in a free
market economy, the only permanent escape from the boom-bust cycle
is going cold turkey: a recession that is overcome, not by another
round of monetary debasement, but by a permanent readjustment
of prices downward and new era of entrepreneurship based on a
stable-money environment. This solution is unacceptable to everyone
except Austrian School economists and their disciples. The universal
worship of the State today is manifested by the universal acceptance
of the fraud of government-authorized counterfeit money: fractional
reserve commercial banking and its guarantor, the central bank.
deflation-fearful advocates of ever-more fiat money really need
to read Rothbard’s Mystery of Banking and his 60-page masterpiece,
Has Government Done to Our Money? (1964).
problem with today’s economy isn’t Americans’ supposed distrust
of high tech. We love high tech. We want more high tech. And we
want it at half the price that the kids in Silicon Valley have
pasted onto sales tags this month. We’ll get what we want, too,
if necessary when the kids’ companies go belly-up, and the liquidators
sell off the inventory.
tech is for us consumers. We don’t give a rip about the producers
who just can’t cut it, nor should we. That’s what the free market
is all about: a denial of producer’s sovereignty (mercantilism).
High tech is all about rapid depreciation and the creation of
consumers’ surplus. If the kids can’t stand the heat, they should
get out of the kitchen.
what is the economic problem? The problem is the government-granted
monopoly of central banking, the fractional reserve commercial
banking system that central banks protect, and a government that
is addicted to debt, taxes, and fiat money.
is the solution? A full gold coin standard, 100% reserve banking,
the abolition of the Federal Reserve System, the abolition of
the IRS, and the replacement of the income tax with a national
solution, in short, is less government — not the supply-side
economists’ version of less government, but the Austrian School’s
version. Or, to quote the original Austrian economist, the prophet
And he said, This will be the manner of the king that shall
reign over you: He will take your sons, and appoint them for
himself, for his chariots, and to be his horsemen; and some
shall run before his chariots. And he will appoint him captains
over thousands, and captains over fifties; and will set them
to ear his ground, and to reap his harvest, and to make his
instruments of war, and instruments of his chariots. And he
will take your daughters to be confectioneries, and to be cooks,
and to be bakers. And he will take your fields, and your vineyards,
and your oliveyards, even the best of them, and give them to
his servants. And he will take the tenth of your seed, and of
your vineyards, and give to his officers, and to his servants.
And he will take your menservants, and your maidservants, and
your goodliest young men, and your asses, and put them to his
work. He will take the tenth of your sheep: and ye shall be
his servants. And ye shall cry out in that day because of your
king which ye shall have chosen you; and the LORD will not hear
you in that day. (I Sam. 8:11-18).
day that politicians cut the US government’s tax rate to a flat
10% is the day that we return to good, old fashioned tyranny —
traditional tyranny. Spare me the Laffer Curve. I go by the Samuel
Curve. Don’t cut taxes so that government revenues will rise.
Cut them until government revenues fall. Then cut them some more.
subscribe to Gary North’s free e-mail letter, click here.