November 28, 2010

The Price Drop Stimulant

Sticky Profit Margins and Executive Payout Packages come in the way of price adjustments to the New Normal in disposable incomes.
Among the Intellectuals and influencers, Consumer Price Disinflation suffers from the Blanket Belief that "when prices fall, workers will get fired" although, in actuality, this is very situational, and does not fit current circumstances.

The Standard approach of Superlow interest rates and Excess supply of money has been attempted since the onset of the "Great Recession". The idea has been to reduce the Cost of Investment Capital for producers, in order to induce demand for Capital Investment that will improve employment levels in the Economy. However, a producer has not only the price of his borrowing to worry about, but also the fact that he has to return the Principal. Seeing viability of Capacity Expansion, however, is dependent on another Demand: Consumer Damand. If the producer can see no incremental sales, there is no point in increasing capacity. And consumer demand too is elastic: it responds to price reductions, in fact more than the Demand for Capital does to interest rate cuts.

It has become increasingly difficult to stimulate Demand and Employment in the Economy with Govt spending and Governmental protection of Corporate longevities -the people have rejected that and courted fiscal prudence instead.
The thought in the air is that the system has to be run, rebalanced, and oiled on the monetary base already in existence, rather than expanding it in an attempt to make things right via a disguised State-Corporatism.

Consumer price fall, including that in health services, medicines, prescription eyewear et al carries tremendous potential for growth in sales. It is MORE stimulative than tax cuts, which again swing public finances towards fiscal profligancy. "Tax cuts will pay for themselves with higher growth while net increase in Govt spending won't" is a bewildering axiom of ideology that is best rejected. When taxes are cut, people use the extra cash for a mix of spending, financial/speculative investments, and paying down past debt. The exact mix is different in different economic strata. It is highly suspect that tax cuts to the Upper middle classes and up will achieve any Demand stimulation and incremental employment at all.

Now, what comes in the way of courting Consumer Price Disinflation is the Blanket belief that *when prices fall, workers will get fired*.
...Yet, in actuality, this is very situational. The sum of the Angles enclosed in a triangle is 180 degrees...But it holds only in Planar Geometry, i.e. On a Flat Surface Only!

When a Business is at equilibrium (that is, it can fire no more if it desires to hang on to its current sales level), THEN price cuts can only be delivered by cuts higher up the food chain, NOT by cutting any more workers. Upon the demand plop with the popping of the Home Equity consumption bubble, Businesses already made the cuts in number of workers to meet the new normal in consumer demand. In fact - Now - to swoop the incremental demand shored through a price-cut strategy, more workers will have to be hired.

The price cuts will nominally come at the 'cost' of the businessowners - lower margin per sale yet larger sales volume, reaping the price elasticity of demand. In large Corporations, price cuts can as well come at the cost of fixed portions (overtly fixed as well as the practically assured) of the Executive Compensation packages. Businessowners and Managements, of course, want the easy way forward, and lobby for Govt spending, Corporate Tax Cuts, Reduction in personal taxes etc., bamboozling forth a Generic Deflation-Unemployment-Prolonged Global Recession Wolf.


  1. Hi, Ohm. A comment you left at Winterspeak led me here.

    Yours of 28 November strikes me as an original thought: that deflation may not lead to decline. Strikes me as risky, but I'll think about it.

    I like your 270-degree triangle and the related note that 180° "holds only in Planar Geometry" which reminds me of Keynes:
    The classical theorists resemble Euclidean geometers in a non-Euclidean world, who, discovering that in experience straight lines apparently parallel often meet, rebuke the lines for not keeping straight -- as the only remedy for the unfortunate collisions which are occurring." [The General Theory, Chapter 2]

    Forgive me, I'm gonna link back to myself here. You write:
    The price cuts will nominally come at the 'cost' of the businessowners - lower margin per sale...
    There is another way.

    Resistance is futile :)


  2. Hi Art,

    Thanks for your comments and the linked post. I digged deeper from it into another of your posts where you say, "Cut old debt; that's the key. "

    That's exactly what the Corporates probably will do with the Trillion dollar retained earnings that they are holding -- BUT before that they try to extract corporate welfare from public policy - Corporate Tax cuts, Regressive Taxation, Government spending on buying their produce et al.

    The generic key is that Companies need to **organically** manage stimulating demand on their products with price cuts: Retiring old debt with retained earnings, cutting margins per sale and executive excess, are all good options that they have.

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