This started as an essay about recession, but I found it pointless to predict macro-economies:

“In the study of such complex phenomena as the market, which depend on the actions of many individuals, all the circumstances which will determine the outcome of a process…will hardly ever be fully known or measurable.”––Friedrich A. Hayek

As this essay unfolds, we’ll detour from recession and digress to prosperity. I know that sounds dumb, but it ties together (keep up if you can). Truthfully, it’s important that you understand my fear of being broke in the future. On the opposite–perhaps more profound point–this is written to share an optimistic worldview that I’ve come to adopt. It’s a “blueprint” of sorts, a type of reasoning for where I see the future unfolding. But I digress…

99 Problems, Inflation Is One

Recession has entered the group chat.

An economy is a machine made of short-term and long-term cycles of debt and spending. Recessions are down cycles that historically happen every 3-10 years for most nations. The United States had its longest period without a recession just over a decade. These past 40 years were an era of abundance mainly because of technology, globalization, and stimulus. The last 3 years, not so much:

1. Global pandemic

2. Panic

3. Lockdowns

4. Economic stimulus

5. Inflation

6. War

7. Energy crisis

8. Monetary tightening

9. Recession

The global economy is in a vicious downward spiral. People lose jobs, spend less money, and demand for non-essential items goes down. Low spending is bad for business, meaning even more unemployment, and much less consumer demand–blah blah blah–Depression (economic collapse lasting for years rather than several quarters, which is a recession). During down cycles like this, governments usually pump the economy by creating new money. This monetary stimulus encourages consumer spending by funding infrastructure projects, supply chains, and unemployment benefits. Alas, this is no longer an option.

You see, most finance models are based on using decades of historical performance. What does history tell us about this?

“U.S. money supply1 grew approximately 45% between January of 2020 and April 2022. This translates into approximately 31% of the total U.S. Dollars in existence having been “created” within the past 26 months. It should come as no surprise that an unintended consequence of decades of policy aimed at supporting asset and economic growth is inflation. “Inflation” first came in the form of financial asset inflation (i.e. stocks, bonds and private assets), followed by consumer and producer goods (e.g. CPI, PPI), and now, seemingly, everything.”––INFL Semi-Annual Commentary

A story of inflation told in 4 images:

The result of “financial engineering” is record high money supply of US dollars globally circulating (grey parts being previous recessions):

The supply of money has risen to levels where we can no longer “print the difference.” The aftermath of the current monetary policy:

Markets are far too complex for anyone to predict, let alone navigate. We know that inflationary periods have begun. What to look for next are the positive and negative incentives that will come into play. The complexity of economics is beyond the scope of this essay. My purpose is to explain how downturns can still unfold prosperity. Periods of recessions are rarely a straight line. The rest of this essay will digress into optimizing for progress. When people want inflation to stop, it typically means that they want disinflationary growth to return. For that to happen, supply-side improvements and greater productivity must increase. Technology for most of civilization has been disinflationary.

Pinpointing Prosperity

"Why cannot we write the entire 24 volumes of the Encyclopedia Brittanica on the head of a pin?"–Richard Feynman

The chairman of Intel, Gordon Moore wrote an essay in 1959 predicting the miniaturization of electronics in the future. It was this essay that became known as Moore's Law:

“roughly every two years, the number of transistors on microchips will double”

Moore effectively forecasted the rapid rate of computing capability doubling every two years, while also reducing cost. Moore’s law continued not just for 10, but for 50 years:

• Transistors today have shrunk to less than 100 atoms

• Billions of transistors can exist per chip

• There are billions of microchips in existence

• By order of magnitude, the number of transistors could equal the amount of sand on Earth

This is what Moore had to say about Intel’s design and product strategy in 1976:

"We out a product of given complexity into production; we work on refining the process, eliminating the defects. We gradually move the yield to higher and higher levels. Then we design a still more complex product utilizing all of the improvements, and put that into production. The complexity of our product grows exponentially with time."

The birth of the first digital computer is another analogy for complex solutions simplifying over time. The ENIAC (Electronic Numerical Integrator and Computer) is considered the first computer that was programmable, electronic, and general purpose. It was built in 1945, weighing 30 tons and being the size of a house:

The first Apple computer just 30 years later (with vastly more compute power):

"When you first start off trying to solve a problem, the first solutions you come up with are quite complex, and most people stop there. But if you keep going, and live with the problem and peel more layers of the onion off, you can oftentimes arrive at some very elegant and simple solutions. Most people just don't put in the time or energy to get there."––Steve Jobs

Although the rate of technology has evolved exponentially, our outlook of the world is quite linear. People intuitively assume the current rate of progress will continue into future periods. That fails to account for the knowledge humanity will have in the future. As a result, elegant systems that people can eventually create are disregarded. Fragile systems continue to be maintained due to incompleteness of knowledge. The state of our current economy is a clear example of this.

Trial-and-error is what led our evolution to become a positive feedback loop. Despite uncertainty, there must be a model of reality–even if imperfect–to steer where we want to go. A much-needed ingredient to create anything is to imagine what it is and how we get there. Technology has risen exponentially because of such experiments. The recipe for our prosperity has been innovation, the ingredients of which are solving complex problems with elegant solutions. While the future is uncertain, we can organize these ideas into the following framework:

• Innovation creates exponential progress until the technology runs out of potential

• Disruptive technology is often complex in the beginning, but simple solutions unfold overtime from trial-and-error

• Once a solution is exhausted, a fundamental change in approach must happen for progress to continue

• Optimism is necessary for such paradigm shifts to happen

The Principle Of Optimism

“Optimists believe that bad things are produced by temporary causes that can be overcomed, while pessimists believe bad things always happen, and if anything good happens it’s temporary.”––Kevin Kelly

There’s an object in space at this moment coming toward us. Nothing to stop it, except the knowledge that people have built over the years. The odds of an asteroid hitting Earth is one in every 250,000 years. If a rock the size of one kilometre smashed into Earth before the twenty-first century, we wouldn’t exist. Yet we live in a time with the technology to defend against such impacts. An era of historically unprecedented safety. Just look up (even if Hollywood convinces you otherwise):

According to the physicist David Deutsch, the principle of optimism is that: “all failures are caused by insufficient knowledge.” What does that mean? True optimism is a stance towards future success, while also assuming the failures yet to come. Being able to explain failure is how you can avoid making them in the future. The result of no mistakes means success. In other words, an optimist is someone who can explain the failure, not predict success. Bad news is good news on a long enough time scale, but only if you can recognize the failure and fix it. Optimism is being experimental so that we can see what works. In the worst case, mistakes are repeated without questioning what’s not working.

The Future Isn’t Dangerous

Recessions are tough to navigate because it limits the risk people are willing to take. Tough financial times brings out pessimism in people. The extra–often unneeded–precaution makes us avoid everything not known to be safe.

Economies work in short-term and long-term cycles. People tend to overestimate the impact of new technology in the short-run, but underestimate it in the long-run. By not being experimental and trying things out, we fail to extract information on the other side. This very absence of knowledge is how mistakes are often repeated. Problem-solving becomes static, eventually leading to complacency.

The financial future is dire, yes, but optimism is the most rational, realistic, and helpful stance to take right now. When we embody the idea that bad things are temporary until a viable solution can be found, the world becomes a cooler place. Of course, this doesn’t mean every problem will be solved, but it moves us one step further at the very least.

Truthfully, writing this essay felt like a waste of time because the points made seem rather obvious in hindsight. On the bright side, there is now a chain of reasoning I can continue to build upon. If you’ve made it this far, consider exchanging emails with me. In return, you’ll receive future letters that will unfold the practicality of what we discussed:

Alas dear reader,
The future is prosperous.
Go further. Thank you.

-rushil

The reasonings for this essay came from the following explanations:

The Law Of Accelerating Returns
The Case For Optimism
Role of Scientific Culture in Modern Society
The Beginning Of Infinity
How Innovation Works
Investing During Stagflation
The Pretense of Knowledge
What Bear Markets Look Like