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The Great Misread: Secular Lower Prices In Semiconductors

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Just a quick note on what we believe has been one of the largest factors, along with globalization to the disinflationary forces over the past 30 years. That is the secular decline in the price of semiconductor prices.  Semiconductors are the basic building block of today’s economy, as was oil during the industrial revolution.

Semiconductor Prices

The price of semiconductors and other electronic components has been declining for more than 30 years as illustrated in the monthly year-on-year price changes in the chart below.

Stunningly,  320 of the 368 months since January 1990 or 87.0 percent of the observations, the price of semiconductor and other electronic components have experienced negative year-on-year growth.

Deflation, no.  Relative price changes, yes, brought on mainly by technology and to some extent globalization.

The Great Misread

The kneejerk reaction of most economists, including yours truly,  when observing such steep secular declines in prices — down 48 percent over the past 30 years — is to attribute it to collapsing demand.  Not so, with this commodity, however.

The above chart and table below illustrate the rapid and sustained growth in semiconductor production over the past several decades.

Since 1990, for example, semiconductor shipments in the U.S. have grown by 37K plus percent or 21.4 percent annually. Pretty amazing as prices have fallen by almost 5o percent.

Clearly, the positive supply shock of technology and globalization has put downward pressure on the “new oil” of the modern economy, which is a major factor contributing to the macro disinflationary pressures the economy has experienced over the past 30 years.

Here’s to hoping the trend continues but de-globalization and geopolitical instability make us less sanguine, however.

Taiwan, The Most Important Geopolitical Important Country In History? 

Lastly, a little sidebar on the geopolitical and strategic importance of Taiwan as the Straight gets hot, hot, hot.   See here and here.

If Intel falls further behind and leading-edge semiconductor manufacturing becomes concentrated in Taiwan then Taiwan will become geopolitically important in a way that the Middle East never was. Modern semiconductor manufacturing is at least as important to the economy as oil was in the 1970s. But in the case of oil, at least it was available all over the world albeit at higher prices than in the Middle East. Imagine a world where oil only came from one country, and how important that country would have been for the last hundred years. That is what the world would look like if Intel cannot find its footing and continue to manufacture chips at the leading-edge here in America. Taiwan could become by far the most geopolitically important country in the history of the

Stay tuned, folks.


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