The Sky Is Falling!

Beyond Saving
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The Sky Is Falling!

I just read an article that is almost laughable and shows the convoluted contortions that the prevailing economic theorists running the worlds central banks have to go through. 

www.bloomberg.com/news/2015-01-21/why-falling-prices-is-actually-a-really-bad-thing.html

Shobhana Chandra wrote this article trying to convince the regular consumer that it is actually a bad thing when you go to the store and save money. She lists six reasons why, let's look at them. 

 

Quote:

When shoppers see persistent price declines, they hold out on buying things. They ask, will I get a better deal next week, next month, next year? As a result, consumer spending flails. For most nations, that’s a big chunk of their economy, and any slowdown in consumption threatens growth.

Huh? The reason a consumer purchases something is because they need and/or want it. The price going down doesn't change the fact that they need and/or want it. They walked into the store for a reason and that reason is likely because they wanted to buy something. Have you ever walked into a store and walked out because the price was too low? Give me a break. The retail sector has known for a long time that putting things at huge discounts is a great way to dramatically increase sales and to attract consumers to purchase more items (sometimes full priced items) than they initially intended. The whole practice of having "loss leader" products. Supply and demand 101, lower prices increase demand.

Even if some consumer has a really good reason to believe the price will fall further next week, they will only wait so long because they actually want it. Consider computers for example. Every new computer/tablet/smart phone that has come out drops in price relatively fast. Everyone and their brother knows that you wait a month and iPhone 854 or whatever number we are on now will be cheaper, and tons cheaper if you are willing to buy used. Yet Apple and other hardware makers have experienced stronger demand and better profits than any other consumer product. 

 

Quote:

2. Businesses behave pretty much the same way. They postpone buying raw materials, hoping to get a break on costs, and delay investing in that splashy new facility or hiring an extra hand.

Really? Obviously, Ms. Chandra has never ran a business. The expected break in raw materials would have to be astronomically high to justify delaying building a new facility or hiring a needed person. You build a facility or hire an employee because you believe they will make you a profit. Every month you delay, is one less month of profit, which is usually dramatically more than whatever money you might save if raw materials drop 10% next month. In business, time is money and unproductive time is the worst loss you can have long term. Every businessman has a keen sense for that. A dollar today is worth more than a dollar tomorrow.

 

Quote:

3. Additionally, their pricing power -- the ability to charge more -- vanishes. That makes it harder for them to grow profits.

In such an environment, if companies want to grab a bigger market share, they have to slash prices. That makes things worse.

Do we want corporations to have the sole control over pricing power? I sure as hell don't. It is extremely healthy when companies are slashing prices to compete for consumers. It attracts more consumers (because people buy more when prices are low) and it provides an incentive to make production more efficient. The company that is capable of producing at the lowest expense will attract the largest marketshare. Furthermore, if it is raw materials that are falling in price, the costs of production are cheaper anyway, which is the case right now since much of the price drops are attributable to oil and reduced transportation costs. That is a great thing for everyone who doesn't own an oil rig (and not necessarily bad for all of them). Profits of most companies aren't going to drop even with lower prices because their margins (difference between revenue and cost per unit) will remain more or less the same. In fact, they might increase because consumers saving money on gas can purchase more of what they want. This has already been seen by a rather significant increase in restaraunt, movie and bar revenue. Three luxury items that are broadly accessible but have been harmed by consumers having tight budgets. 

 

Quote:

4. Lower profits = less money to go around to workers. Employees don’t get the raises they were expecting, they cut back on spending even more, and the ugly cycle repeats. That’s why they call it a deflationary spiral.

Again, this assumes that lower prices means lower profits, which they don't as evidenced above by the computer industry, but also look at the relative profitability of Dollar Tree vs Macy's. Price is only one factor in profits and not even a terribly important one. Furthermore, this would matter only if the workers income is directly related to revenue, which they aren't except for commission sales. For the most part, employee wages are far more dependent upon the labor market, what employees are willing to work for and what they can get working somewhere else. Someone who works in the retail industry, isn't dedicated to the retail industry.

Labor is a fixed expense built into the cost of the product. The product isn't going to get so cheap that the employer can't afford wages, unless a way is found to deliver the product with fewer people involved in its production (which leads to fewer employees, but generally higher paid employees producing more end product). This is called progress, we've seen it happen in every industry and it has led to the lowest cost of living experienced in the history mankind as a single person often produces what hundreds of people could years ago. What is happening isn't wage deflation, wages actually have finally started inflating slightly after being stagnant for a decade (mostly thanks to dumb asses running central banks and giving money away to billionaires for free).  

 

Quote:

5. The sad thing is, even when prices are falling, the amount you owe doesn’t. Borrowers get crushed under the weight of that debt. In a mild scenario, companies and consumers hold back on other purchases to continue meeting their obligations. When things get really bad, they go bust altogether.

And is it so bad to have an economy that DISCOURAGES large amounts of debt? We saw this in the housing market, and while they pissed and moaned and got their government money, the debtors would have survived just fine. For several decades now our fiscal policy has encouraged consumers to take on ill advised levels of debt, it also encouraged lenders to extend ill advised levels of debt. Eventually, the chickens come home to roost. The good news is that American consumer saving levels have increased, even though the interest rate still discourages it. Our most recent experience should have told us that monetary intervention in the form of cutting interest rates and subsidizing debt to encourage more borrowing isn't a good long term solution. Sooner or later, it will reach the point where people can't make their payments no matter how low the interest rate is. 

 

Quote:

6. Policy makers usually have an antidote to economic slowdowns, but it’s trickier when interest rates are already near zero. That’s exactly the situation with the ECB and much of the industrialized world. That forces officials to turn to unconventional tools.

Policy makers have been raising and lowering interest rates for a long time but quantitative easing -- a Japanese invention from the 2000s -- is a relatively untested tool. Its effectiveness is still controversial among many economic circles.

Which has failed in Japan for 15 years now. It failed to make a significant difference in the US. And now it will fail in Europe. At best, QE is a handout of cash to bankers and speculative investors. That money hasn't filtered down to the average person on the street. It has created the very environment that the left always complains about, a stock market filled with gamblers taking reckless risks and getting rich without any relation to the fundamental realities of the businesses they invest in. 

Which is the dirty little secret. Regular people aren't hurt when prices fall, with the possible exception of their real estate since for most people that is their main asset. Even then it only hurts if they owe a significant amount of money. Those people have already been cleaned out. The people who stand to be hurt the most are the speculative investors and those who have leveraged massive amounts of debt to purchase bad assets. If they are forced to liquidate, what does that do to the average joe? Puts those assets back into a price range that matches reality and thus more affordable for the average joe who is looking to invest intelligently into retirement. 

Yet while constantly bitching about the evils of the 0.1%, our governments monetary policy remains specifically tailored for them to take advantage of it. Meanwhile, idiots like Ms. Chandra write articles like this to convince people that they are in danger when things improve for them. Go buy some gas, save some money. Put a little in savings, then go splurge on a nice meal at your favorite restaurant. Let the fuckers in the Wall Street/DC marriage go broke, your life is going to survive their inevitable fall if you watch out for Number 1. Just stop buying the bullshit that these economist wizards from on high try to tell you.  

 

If, if a white man puts his arm around me voluntarily, that's brotherhood. But if you - if you hold a gun on him and make him embrace me and pretend to be friendly or brotherly toward me, then that's not brotherhood, that's hypocrisy.- Malcolm X


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 I largely agree with your

 I largely agree with your assesment.  However there is one thing that is bad with deflation,  debt.  If it is tied to what is now deflating assets, say...such as bonds that are invested in fracking oil, the bond holders are essentially fucked, or mortgages on homes with homes devaluing, both the bank and the home owner are fucked.  I don't have much sympathy for the banks as they are criminal in much of their activity and bad decisions were bailed out with OUR tax dollars.  I do feel badly for the folks who are the bond holders and who own say, rental property or have been trying to flip homes, as they are not the Wall Street money men/women.  There are many elderly people who hold some of those bonds in their pension funds.  Many blue collar and others who's pensions were invested heavily in oil stocks and bonds in the fracking industry.  They may lose a chunk of their principle investment (if not all of it) and what is sad, those elderly people are too old to gain it back by working.  


Beyond Saving
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Burnedout wrote: I largely

Burnedout wrote:

 I largely agree with your assesment.  However there is one thing that is bad with deflation,  debt.  If it is tied to what is now deflating assets, say...such as bonds that are invested in fracking oil, the bond holders are essentially fucked, or mortgages on homes with homes devaluing, both the bank and the home owner are fucked.  I don't have much sympathy for the banks as they are criminal in much of their activity and bad decisions were bailed out with OUR tax dollars.  I do feel badly for the folks who are the bond holders and who own say, rental property or have been trying to flip homes, as they are not the Wall Street money men/women.  There are many elderly people who hold some of those bonds in their pension funds.  Many blue collar and others who's pensions were invested heavily in oil stocks and bonds in the fracking industry.  They may lose a chunk of their principle investment (if not all of it) and what is sad, those elderly people are too old to gain it back by working.  

With real estate I can agree with you. Although, I don't have sympathy for anyone involved in flipping, when you flip you have to accept the risk that value might decrease. Nor so much with rental property- those who owned rental property actually benefitted substantially due to higher rent averages, only those who were heavily in debt had problems. But the average homeowner, sure. Most people didn't have the option of buying a home without taking out large amounts of debt and many uneducated people were encouraged to add their credit card debt onto their homes, a really stupid move, but our population is woefully uneducated about economics thanks to our lousy school system. And I certainly have a lot of sympathy for the older people who did own their homes outright and were forced out during the boom by increasingly large property taxes. 

With oil you don't have those issues. Pensions aren't big stakeholders in junk bonds and all fracking bonds were junk bond status. No one was accidentally invested in fracking through ignorance. They might be invested in industries affected by it, like Exxon, but while they might take a short term hit, they will be fine. Actually, I expect Exxon to clean up when all the small level fracking companies go defunct, the drills don't disappear into thin air and Exxon has tons of capital on hand. (Rumor has it they are considering buying BP) It isn't far fetched that they will snap up many of the assets for pennies on the dollar from desperate investors. Same thing with Chevron and Conoco. The big dogs have fairly limited exposure to the fracking market and are in a prime position to exercise economies of scale. Buffet is a fucking ass, but he is exactly right that a panicked market is a buying opportunity. Regardless, your typical pension isn't going to be significantly influenced by the fracking market consolidating. The benefits of cheap gas in every economic sector will far outweigh the fall of junk bonds in everyones portfolio outside of a few people who intentionally sunk a lot of their money directly into owning fracking companies (only 2 of which were public). 

If, if a white man puts his arm around me voluntarily, that's brotherhood. But if you - if you hold a gun on him and make him embrace me and pretend to be friendly or brotherly toward me, then that's not brotherhood, that's hypocrisy.- Malcolm X


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 Take care of yourself Han,

 Take care of yourself Han, I guess that is what you are best at.

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Beyond Saving
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Brian37 wrote: Take care of

Brian37 wrote:

 Take care of yourself Han, I guess that is what you are best at.

You should probably work on it, because to be a princess in distress you have to be hot and well, 

Somehow I just don't think this would be a good look for you. 

If, if a white man puts his arm around me voluntarily, that's brotherhood. But if you - if you hold a gun on him and make him embrace me and pretend to be friendly or brotherly toward me, then that's not brotherhood, that's hypocrisy.- Malcolm X


Beyond Saving
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 Pardon the

 Pardon the Brianruption-today's intermission entertainment was brought to you by the lovely Carrie Fisher. Back to rational discussion. 

 

A further note on pensions, while there really aren't many that will feel the effects of lower oil prices, it does bring up the concept of many workers not knowing what they are invested in at all. There is a lot of stupid money flowing into wall street in the name of 401ks and pensions where the people who own the money have no idea what they are investing in and zero control over it. At most, they might be able to fire their mutual fund company and get a different one, but even that isn't a given in many cases. The people investing the money in these funds don't have an invested interest in actually getting a return, all they care about is keeping a decent enough return that they can keep more funds coming in. It is an utterly foolish way for a person to invest an amount of money that is significant to them. Letting some stranger they don't know hundreds or thousands of miles away that they can't even contact directly, throw their money around. When you consider that many for many Americans, their 401k is their second largest or ever largest asset, behind only possibly their home, it is amazing how little control they have over it. 

I don't believe investing is rocket science. It is work, I spend several hours everyday paying attention to my investments. But I am also against diversifying for the sake of diversifying. If you look at people who have become really rich, none have done so through diversifying. Even most billionaires, while they have diversity just because of the sheer amount of funds they have, they tend to have the bulk of their assets in a handful of investments. Why? Because it is humanly possible to become intelligent enough about a handful of industries to make an intelligent investment. It is not humanly possible to become intelligent enough about every industry in the S&P 500.

Just keeping up with the new news is a time consuming task. When I invest, I tend to invest fairly substantially (for me), I do a significant amount of research and I find insider blogs that track the industry, as well as the specific company, often blogs from employees who work for the company and make them routine daily stops. I subscribe to professional magazines. I invest in companies that I am a customer of and companies that are in areas I enjoy (which makes the several hours of research each week more recreational than work feeling). IOW, I pay attention to where the fuck my money is. It isn't hard to determine which companies will do well long term and which won't. The jargon is intimidating, but if you look at purchasing stock as purchasing rights to a stream of income (which is what it is at a base level) it isn't as complicated as the financial industry wants you to believe.  

I guarantee that the 20 somethings managing your money for your mutual fund aren't doing that. They aren't trying to invest in good companies, they are trying to invest in a manner that mimics the indexes averages and maybe does slightly better. They want your commission, whether the investment is profitable is secondary. No one cares more about your money than you, and anyone who tells you different is a conman. And conmen on Wall Street and DC are exactly the people who are going to take your money if you aren't managing it yourself. 

 

If, if a white man puts his arm around me voluntarily, that's brotherhood. But if you - if you hold a gun on him and make him embrace me and pretend to be friendly or brotherly toward me, then that's not brotherhood, that's hypocrisy.- Malcolm X


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 Most of the flippers I

 Beyond Saving....

"With real estate I can agree with you. Although, I don't have sympathy for anyone involved in flipping, when you flip you have to accept the risk that value might decrease. "

 

Most of the flippers I personally know are small mom and pop, or father and son contractors who will acquire 1 or 2 homes a year, fix them up themselves and then flip them.  They are small potatos and really don't make much more than the average working slob.  Those are the flippers I am speaking up.  The big boys who have large financed operations with outside investors, sure, you have a point.  


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Small or not is irrelevant.

Small or not is irrelevant. Mom & Pop businesses fail all the time, it is the risk you accept when you decide to start your own business. Especially when you are entering a business that everyone knows is booming. When the drilling gets cut in Bakken, it is going to suck for all the support businesses that popped up to support the increased population caused by the oil boom. It is what it is, economic resources aren't needed there anymore. You take your loss and move on to something else. Any investor who has never lost their shirt on an investment either hasn't invested very long or has been lottery lucky. Big, small, medium, doesn't matter. 

 

If, if a white man puts his arm around me voluntarily, that's brotherhood. But if you - if you hold a gun on him and make him embrace me and pretend to be friendly or brotherly toward me, then that's not brotherhood, that's hypocrisy.- Malcolm X


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Easy fix.The government

Easy fix.

The government should just seize control of all the companies and moderate the value of resources so no business will fail ever again. As a bonus, they could have every consumer purchase a set amount so that enough is purchased to continue strengthening the economy.

Alternatively, we could go through a redenomination like Zimbabawe, except that we are fighting deflation rather than inflation. We can introduce a new currency such that 1 dollar = 100 new dollars. However, we'll keep everyone's debt the same "amount" as before. Then, businesses can charge "more" money for their products again. Yay!

Our revels now are ended. These our actors, | As I foretold you, were all spirits, and | Are melted into air, into thin air; | And, like the baseless fabric of this vision, | The cloud-capped towers, the gorgeous palaces, | The solemn temples, the great globe itself, - Yea, all which it inherit, shall dissolve, | And, like this insubstantial pageant faded, | Leave not a rack behind. We are such stuff | As dreams are made on, and our little life | Is rounded with a sleep. - Shakespeare


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I suspect the guy who wrote

I suspect the guy who wrote the article is suffering from observer bias coupled with a failure to recognise a fundamental difference between various commodities.
The savvy and experienced consumer may indeed act as postulated when concerning a house or car or business, but the consumer will act very differently when concerning food and other day to day expenses. Only the obsessed got to 15 grocery stores to find the best price for milk.
More importantly, the average consumer is not savvy and experienced. Nor do they have much free time to waste shopping around. If you're hungry, you won't wait to see the price of a chocolate bar in the next store, you'll buy the one right in front of you. If you want a tv, you won't travel 50 km to the biggest electronics store when you can get a set at the mall two blocks away.

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