Netflix is an American subscription-based movie and television show rental service that offers media to subscribers via internet streaming and US mail. Last week, their profit result blew past expectations and analysts scrambled to upgrade their estimates and price targets.

The share price rallied 15 per cent on the back of the result and many of the short-sellers were forced to cover their positions at significantly higher prices than they sold at.

We have written before about Netflix and how the online business model is reshaping the way that movies are watched and how entertainment is, and will continue to be, digested in the age of the internet.

The waves of creative destruction that we continually refer to loom larger than life.

Blockbuster is now in bankruptcy in the US due to falling sales and a crippling debt load.

The costs of producing a DVD, the transporting and storage costs virtually disappear under the Netflix model of online subscription and instant screening.

Netflix results illustrate some interesting trends and highlights to me that the ascendancy of China has had a positive affect on the US technology sector where the Americans still lead the world and will for the foreseeable future.

Netflix's subscriber growth, seen in the chart below, is a great illustration of the ‘network effect’ which will enable so many businesses as commerce continues to gravitate to the online world.

More bad news for the owners of the bricks and mortar retail store.

Just to stay ahead, the Americans need to run faster and develop better products. The consumer wins as progress accelerates and great products are brought to market more rapidly than ever before.

The American economy is built on technological and organizational innovation up to and including what the noted economist Joseph A Schumpeter called ‘Creative Destruction’, the process by which an economy continually destroys and rebuilds itself largely through the advance of disruptive technologies – Apple, Google, Facebook, Yahoo, to name a few.

Not so bad.

In the great Depression, GDP in the US fell by around 50 per cent whereas between 2007 and 2009 US GDP fell by around 4.1 per cent – hardly a comparable number but certain sectors of the press played it up and would have us believe that on a continual basis the end is nigh.

In fact, the recessions of the 70s and 80s were far worse, unemployment and inflation were both over 10 per cent and interest rates on mortgages were closer to 20 per cent than the levels of today.

While the slowdown is still painful, the adjustments are necessary and useful.

Our future economic problems may in reality revolve around a labour shortage as the aging demographic shrinks the potential workforce. As nations around the world have less and less children, this situation will exacerbate.

As we have noted previously in our published demographic pyramids, the US is still much better placed on a population basis than many people realise. The impending demise of the US is called more times than any of us remember, yet they seem to always end up re-emerging and re-energizing just when the rest of the world thinks they are finished.

In this new decade, irrational exuberance will hit the pause button. Although the US will remain as one of the foundation customers of the Chinese economy, they both need each other.

Recent rhetoric regarding a political decision to limit Chinese access to the American market will fast-track Chinese efforts to stimulate domestic demand in order to avoid internal social unrest which is what the Chinese authorities fear more than anything.

To build prosperity, the Chinese have needed export markets to continue to boom, which until now they have done so nicely therefore helping China to avert social issues that fester below the surface.

Until now, China’s chief and primary asset has been its cheap labour. Now that we are seeing ongoing inflationary pressures, China’s abundant human capital will shift dramatically.

Demographic forces and technological innovation are the predominant drivers of the economic cycles of boom and bust.

As we move forward, Western economies are having less and less children. Recent prosperity in developed nations was primarily driven by the baby boom, the cohort following the post-war period.

The baby boomers are ageing and this cohort that previously created abundance and irrational exuberance will, in turn, be an albatross around the collective economic necks and create a financial burden for many unprepared countries in the upcoming years.

In addition to population declines, we will see increased demands for end-of-life care and other medical-related issues and increased costs.

We will also see a shrinking workforce as people will not enter the employment market until a much later age due to increasing educational requirements that keep people in the educational system until their early to mid-twenties.

As people live longer due to breakthroughs in medicine, the costs of this increasing burden on the economy will eat into economic growth potential.

Providing all this care will have an increasing drag effect on many company earnings and economies over the next decade.

How do we know when irrational exuberance has unduly escalated asset values, which then become subject to unexpected and prolonged contractions as they have in Japan over the past decade?

Choose wisely before you invest or speak to someone who immerses themselves in the future.