by Simon Bond

Since I first explored the Internet and it's impact on the global economy I was convinced that we were entering a period of extended Deflation, I delved into how technology and it's advances would continue to bring downward pressure on prices and the deflationary issues that would follow.

It seemed to me so obvious that there would be efforts to stimulate economies in times of economic recess and I was certain that these efforts would be ongoing.

Over the past few weeks I have read every speech I could find that has been delivered by Janet Yellen, the new Fed Chair. I went back to 1995 and poured over the messages that she has given the market.

Janet Yellen has always been what is known as a dove, (Doves prefer low interest rates as a means of encouraging growth within the economy because this tends to increase demand for consumer borrowing and spur consumer spending. As a result, doves believe the negative effects of low interest rates are negligible in the larger scheme of things. However, if interest rates are kept low for an indefinite period of time, inflation could rise considerably).

But what happens if the Internet and technology keeps inflation at levels below what has conventionally been seen in past periods, remember the Internet and its impacts really have only just begun.

The Fed recently lost one of its Governors, a fellow by the name of Jeremy Stein, who has returned to teaching. This leaves 2 vacancies, I would lean towards the view that Janet Yellen will move the Fed towards a more dovish leaning.

Whilst the employment numbers may have improved somewhat (my feeling is that the numbers are skewed anyway) the issue for the Fed will soon become more about wage price inflation of which there is precious little.

I remain convinced that Janet Yellen and the Fed are working on what could be called "The Great Reflation". Wall Street is fixated on the Taper, what happens if big changes are forthcoming.

A while ago I wrote to you about labour versus capital.

In The Wealth of Nations written by Adam Smith in 1776, he defined three major inputs for business: labor, capital, and land. The two industrial revolutions the world has seen thus far focused primarily on labor and capital rather than land, which can be thought of broadly as resources such as food, water, and wood that can be produced from that land, mined from it, or disposed of on it.

The Watt steam engine produced radical improvement in labor productivity in the late 1700s and early 1800s—one person could operate numerous machines spinning cotton into thread at high speed, rather than having hundreds of people manually producing thread at spinning wheels. The first industrial revolution also gave us the limited liability corporation to drive this growth at scale.

The second industrial revolution, from the late 1800s into the early 1900s, gave the world oil and the electric grid, cars and roads, skyscrapers with elevators and air-conditioning, and a host of other developments that required a massive deployment of capital. Not so coincidentally, the capital-based revolution also gave us scientific management practices, global corporations, and the modern banking system.

But neither of the first two revolutions focused on Smith’s third input: land and natural resources. That is precisely what we see happening now, and we believe the benefits to businesses and their customers will be every bit as great as the benefits accompanying the first two revolutions.

Just as in the first industrial revolution, plenty of companies fell by the wayside. Andrew Carnegie put hundreds of steel companies out of business. Hundreds of car companies disappeared after Henry Ford beat them to the possibilities of a mechanized assembly line by leveraging massive capital and the electric grid.

Today, people are surprised when most of the world’s 300 solar-energy companies go bankrupt as the technology matures and scale becomes more important, but that’s only because we forget that most of the world’s auto companies also failed early; more than 1,800 American car companies were reduced to three in the first decades of the twentieth century.

The companies that provoked the war over bird guano lost when Haber and Bosch provided more bountiful sources of nitrogen for fertilizer. Chile, the major source of bird guano, went into the doldrums when its economic engine disappeared.

In terms of the three economic inputs laid out by Adam Smith, automakers have invested huge amounts of capital and have pushed hard on labor productivity in the decades since Ford. Companies have focused on speeding up the assembly line and employing fewer workers, leading to innovations such as the lean production system pioneered by Toyota and necessitating the increased use of robotics in manufacturing. But the pendulum has swung back in the other direction. Having been a paragon of efficiency for so long, cars now have obvious problems that can only be solved by paying attention to Smith’s third input: land and natural resources.

After motorized travel showed early promise in the mid-1800s, a backlash developed. Cars were classified as “road locomotives,” and speeds were restricted to 4 mph in the country and 2 mph in towns and cities—where, for good measure, a man carrying a red flag had to walk in front of each car.

There were incorrect assumptions about how the technology would develop. Many worried, for instance, that the adoption of cars would be limited because, after all, at some point the world would run out of chauffeurs to drive them. Many also initially assumed that cars would be electric, if only so that a driver didn’t have to turn a crank to provide the compression that would start a gasoline engine—while risking a kick from the crank that broke many an arm.

Cars spread across the landscape, as did roads and the cities they enabled. The development of the oil industry and the automobile saved New York and London from being buried in manure, saved whale populations worldwide, allowed suburbs to develop, allowed fresh produce to be delivered to cities, and opened a new era of dramatic economic growth.

Car companies don’t want people to drive less, but that’s what’s happening in developed countries. Miles driven per capita peaked in 2004 in the United States and have declined steadily since then.

The reasons aren’t entirely clear, but it certainly isn’t just the Great Recession. The decline started before the recession and has continued even as the economy has rebounded. Higher gas prices are surely a factor, but probably more important is that many people are doing things virtually that they used to hop in a car to do.

Teenagers have shown a declining interest in driving, according to statistics on the age at which Americans get their first license, and the speculation is that the ability to connect via Facebook, Google+, and other social media is one reason. Skype and other video-chat software further reduce the need to drive somewhere to see someone.

Work is gradually becoming more virtual as people telecommute more often. Virtualisation will happen whether the car companies want it to or not, so they need to prepare themselves.

Though most cars still have five seats, the average occupancy has dropped to 1.6 people per vehicle. American cars have more than tripled in weight from the 1,200 pounds of the Model T to more than 4,000 pounds today.

As physicist and environmentalist Amory Lovins has pointed out, less than 1 percent of the energy in a tank of gas really goes toward moving the passenger from point A to point B; the rest is lost in heat, tyre wear, and moving hunks of metal and air. Even worse, most of us own a car mainly to park it 96 percent of the time.

Cars are typically the second biggest capital expenditure we make9—the first is buying a house—yet they spend almost their entire lives sitting at home or in parking lots.