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Raoul Pal's Thoughts on Inflation vs Deflation | Superteam Clips

By Superteam

Published on 2022-11-09

Real Vision co-founder Raoul Pal discusses the future of inflation, deflation, and the impact of technology on the global economy. Learn why he's bullish on risk assets and predicts a new golden age.

The notes below are AI generated and may not be 100% accurate. Watch the video to be sure!

Raoul Pal's Insights on Inflation vs Deflation and the Future of the Global Economy

In a recent episode of Superteam Clips, Raoul Pal, co-founder of Real Vision, shared his thoughts on the ongoing debate between inflation and deflation, as well as his predictions for the future of the global economy. As a respected voice in the financial world, Pal's insights offer valuable perspective for investors and entrepreneurs alike, particularly those interested in emerging technologies and digital assets like Solana.

The Current Narrative: Persistent Inflation

Pal begins by outlining the prevailing narrative in the financial world, which he doesn't personally subscribe to. This view suggests that we're entering a period of persistent inflation due to several factors:

  1. De-globalization: The removal of major players like Russia and China from the global economic system is creating supply constraints.
  2. Energy transition: The shift away from fossil fuels is leading to underinvestment in traditional energy sources, potentially driving up prices.
  3. Reshoring: As countries like the US and European nations bring manufacturing back home, wages are likely to rise, contributing to inflationary pressures.

According to this narrative, we can expect inflation to hover around 4% for the next five to six years, with interest rates following suit. This scenario would represent a significant shift from the low-inflation, low-interest rate environment we've experienced in recent years.

Pal's Contrarian View: The Case for Deflation

While acknowledging the current inflationary pressures, Pal presents a compelling argument for why deflation is likely to be the dominant force in the coming years. His reasoning is based on several structural factors:

Demographic Shifts in the Western World

One of the key drivers of potential deflation, according to Pal, is the aging population in Western countries. He points out the stark contrast between India, with an average age of 28, and the United States, where the average age is 58. Europe's population is even older.

This demographic shift has significant implications for consumer behavior and economic growth. Pal explains:

"Now, if you've ever seen your parents retire, one thing they end up doing is not spend as much money. Why is that? It's just human psychology. You don't know how long you're gonna live for, and you've got a fixed amount of money left. So the first thing you say is that, oh, shit, I need to stop spending, 'cause I don't want to be 85 and homeless."

This reduction in spending as a large portion of the population enters retirement can lead to deflationary pressures on the economy.

The Continuing Force of Globalization

While acknowledging that we're seeing some retreat from globalization, Pal argues that it's not disappearing entirely. Instead, it's evolving:

"Even though we're in globalization retreat, so forget places like India become the net beneficiary here. If China's not the great counterparty, then India is more neutral in the middle and is a more trusted counterparty with the rule of law, et cetera. So globalization continues, but maybe more regional."

This ongoing, albeit altered, globalization can continue to exert downward pressure on prices, particularly as countries like India step into larger roles in the global economy.

The Deflationary Impact of Technology

Perhaps the most powerful argument Pal makes for deflation is the impact of technology. He states emphatically:

"Basically, everything that gets digitized goes to zero in value. I mean, everything. So cloud computing, computing power, computing chips, I mean, you name it, televisions, mobile phones, everything goes to zero. So it's an incredibly deflationary force."

This trend is set to accelerate with the advent of new technologies:

  • Green energy becoming increasingly cost-effective
  • Artificial intelligence replacing human labor
  • Robotics automation
  • Advancements in biotech sciences
  • The Internet of Things
  • Space technology

As these technologies continue to develop and become more widely adopted, they are likely to drive down costs across various sectors of the economy.

Historical Comparison: Post-World War II Economy

To support his argument, Pal draws a parallel between our current situation and the post-World War II economy. He explains that during World War II, the global economy was effectively shut down, similar to what we experienced during the COVID-19 pandemic.

In 1946, as people returned from the war and entered the workforce, there was a massive supply-demand imbalance. This led to a spike in inflation, with the Consumer Price Index (CPI) in the United States reaching 20%. However, this inflationary period was short-lived:

"The Federal Reserve raised interest rates. And then what happens is we went straight to deflation 18 months later. Then we have a rebound and then we settle in this period of interest rates were about 3%. Sorry, inflation was about 3% and interest rates were about 2%. And we did that for 20 years, a massive fiscal stimulus."

Pal suggests that we might see a similar pattern play out in the coming years, with a period of high inflation followed by deflation and then a more stable period of moderate inflation and interest rates.

The Path Forward: Volatility and Opportunity

Based on his analysis, Pal predicts a series of economic shifts in the near to medium term:

  1. Central banks will continue to raise rates or keep them stable until demand collapses.
  2. Deflationary forces will take hold, forcing central banks to reduce rates and potentially engage in quantitative easing again.
  3. This will lead to a rebound in risk assets, creating new opportunities for investors.
  4. Another period of volatility may follow as the economy adjusts.
  5. Ultimately, Pal believes we're setting up for a "new Renaissance golden age" driven by technological advancements.

This outlook presents exciting possibilities for innovators and investors in the tech sector, including those involved with platforms like Solana, which are at the forefront of the digital asset revolution.

Implications for Real Estate and Asset Allocation

When asked about the implications of his outlook for real estate investments, Pal offers different advice for different markets. For India, with its young population and growing economy, he suggests that property prices are likely to continue rising:

"Indian property is expensive. It's gonna get more expensive 'cause all of you need to buy a house."

However, he also acknowledges the argument for renting and investing in other assets, particularly for younger investors:

"I mean, if you think about it as well, this same group of 28-year-olds is becoming financialized. One of the reasons we set up Real Vision India, right? And they're not gonna buy boring assets."

This perspective aligns well with the growing interest in digital assets and decentralized finance (DeFi) platforms like Solana, which offer new ways for young investors to grow their wealth.

The Indian Exception: A Different Economic Trajectory

While much of Pal's analysis focuses on Western economies, he notes that India is on a different trajectory. He compares India's current situation to that of the United States in the 1970s:

"Right, you've got to go back and look, what happened to the United States in the 1970s? That's where India is. And what happened was you actually got quite a lot of inflation because everybody left home, got a job at the same time, bought a house, bought a car, bought their first suit, bought their first table chairs, everything, right? That purchasing power is enormous."

This demographic dividend could lead to a period of higher inflation in India as a large young population enters the workforce and increases consumption. However, Pal also notes that technology could potentially offset some of these inflationary pressures, making India's economic future particularly interesting to watch.

The Rise of Financial Literacy and New Investment Trends

One of the most intriguing points Pal makes is about the changing investment landscape, particularly in countries like India:

"This same group of 28-year-olds is becoming financialized. One of the reasons we set up Real Vision India, right? And they're not gonna buy boring assets. I mean, India, the stock market has been an extraordinary good asset and that'll continue because of the demographics and the low debt and all of that stuff and the technological revolution going on in India still won't outperform crypto."

This observation highlights the growing interest in alternative investments, including cryptocurrencies and blockchain-based platforms like Solana. As younger generations become more financially literate and seek out higher-yielding investments, we're likely to see continued growth in these sectors.

The Role of Blockchain and Cryptocurrencies in the New Economy

While not explicitly discussed in the transcript, the implications of Pal's analysis for the blockchain and cryptocurrency sectors are significant. As he predicts a tech-driven deflationary environment and a new "Renaissance golden age," platforms like Solana are well-positioned to play a crucial role.

Solana's high-performance blockchain, capable of processing thousands of transactions per second at minimal cost, aligns perfectly with the deflationary tech trend Pal describes. As more economic activity moves onto blockchain networks, Solana's efficiency could make it a preferred platform for developers and users alike.

Moreover, in a low-interest rate environment that Pal foresees following the deflationary period, yield-generating opportunities in decentralized finance (DeFi) on platforms like Solana could become increasingly attractive to investors seeking returns.

The Importance of Adaptability in Investing

Throughout the discussion, Pal emphasizes the importance of understanding macro trends and being adaptable in one's investment strategy. This approach is particularly relevant for those involved in rapidly evolving sectors like blockchain and cryptocurrencies.

For Solana enthusiasts and developers, this means staying attuned to both technological advancements and broader economic shifts. As the global economy navigates the complex interplay of inflationary and deflationary forces that Pal describes, being able to pivot and capitalize on new opportunities will be crucial.

Conclusion: Preparing for a Tech-Driven Future

Raoul Pal's insights offer a fascinating perspective on the future of the global economy. While his predictions of deflation and a technology-driven renaissance may seem at odds with current inflationary pressures, they provide a compelling long-term vision.

For those involved in the Solana ecosystem and the broader blockchain space, Pal's outlook is largely encouraging. If his predictions hold true, we can expect continued innovation and adoption of blockchain technologies as they play an increasingly central role in the deflationary, digitized economy of the future.

However, it's important to remember that the path forward is likely to be volatile. Investors and developers should remain agile, ready to adapt to changing economic conditions while keeping an eye on the long-term potential of transformative technologies.

As we move into this new era, platforms like Solana, with their focus on scalability, efficiency, and innovation, are well-positioned to thrive. By enabling faster, cheaper transactions and providing a foundation for a new generation of decentralized applications, Solana could play a pivotal role in shaping the economic renaissance that Pal envisions.

Ultimately, whether Pal's deflationary scenario comes to pass or not, one thing is clear: technology will continue to be a driving force in the global economy. For those ready to embrace this change and innovate accordingly, the opportunities ahead are immense.

Facts + Figures

  • The current prevailing narrative suggests inflation will remain around 4% for the next 5-6 years, with interest rates following suit.
  • The average age in India is 28, compared to 58 in the United States, and even older in Europe.
  • Post-World War II, the US Consumer Price Index (CPI) reached 20% in 1946, followed by deflation 18 months later.
  • After the post-war volatility, the US settled into a period with inflation around 3% and interest rates around 2% for about 20 years.
  • Pal predicts a "new Renaissance golden age" driven by technological advancements in the coming years.
  • Key deflationary technologies mentioned include cloud computing, green energy, artificial intelligence, robotics, biotech sciences, Internet of Things, and space technology.
  • India's current economic situation is compared to that of the United States in the 1970s, with potential for significant inflation as young people enter the workforce and increase consumption.
  • Real Vision, co-founded by Raoul Pal, has set up Real Vision India to cater to the growing financial literacy among young Indians.
  • Pal suggests that while the Indian stock market has been an "extraordinary good asset," it still might not outperform crypto in the future.
  • Major cities in India, such as Mumbai and Bangalore, are noted to have very expensive real estate markets, with Mumbai being compared to New York in terms of cost.

Questions Answered

What is Raoul Pal's prediction for inflation versus deflation?

Raoul Pal predicts that deflation is more likely to be the dominant force in the coming years, contrary to the current narrative of persistent inflation. He bases this on structural factors such as aging populations in Western countries, the continuing force of globalization, and the deflationary impact of technology.

How does technology contribute to deflation according to Pal?

Pal argues that technology is a powerful deflationary force because everything that gets digitized tends to decrease in value over time. He cites examples such as cloud computing, computing power, televisions, and mobile phones. Additionally, he points to emerging technologies like green energy, artificial intelligence, robotics, and biotech as accelerators of this deflationary trend.

What parallels does Pal draw between the current economic situation and post-World War II?

Pal compares the current post-pandemic economy to the post-World War II period. He notes that after WWII, there was a spike in inflation (CPI reached 20% in the US) due to pent-up demand and supply constraints. However, this was followed by deflation 18 months later, and then a period of stable, moderate inflation and interest rates for about 20 years.

How does Pal view India's economic trajectory compared to Western economies?

Pal sees India on a different economic trajectory compared to Western economies. He likens India's current situation to that of the United States in the 1970s, with a young population entering the workforce and increasing consumption. This could lead to a period of higher inflation in India, although technology might offset some of these pressures.

What is Pal's advice regarding real estate investments?

Pal's advice on real estate investments differs based on the market. For India, he suggests that property prices are likely to continue rising due to the young population's need for housing. However, he also acknowledges the argument for renting and investing in other assets, particularly for younger investors who might prefer more dynamic investments like stocks or cryptocurrencies.

How does Pal view the future of risk assets?

Pal is bullish on risk assets over the next 10-15 years. He predicts a period of volatility followed by a "new Renaissance golden age" driven by technological advancements. This outlook presents opportunities for investors, particularly in innovative sectors like blockchain and cryptocurrencies.

What role does Pal see for cryptocurrencies in the future economy?

While not extensively discussed in the transcript, Pal implies that cryptocurrencies could outperform traditional assets, even in strong markets like India. He notes that the young, financially literate population is likely to seek out these more dynamic investment opportunities rather than "boring assets."

How might Pal's predictions impact platforms like Solana?

Although Solana isn't specifically mentioned, Pal's predictions of a tech-driven deflationary environment and increased interest in cryptocurrencies among younger investors bode well for high-performance blockchain platforms. Solana's efficiency and scalability could make it an attractive option in the kind of future economy Pal envisions.

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