Sorry About that Inventory, Prices Must Come Down

As George Reisman notes in a recent column, falling prices are not the cause of deflation, they are the solution to it.

Reisman defines deflation as the lowering of DEMAND for goods - this lower demand drives prices lower so that equilibrium is reached.

The losers in a deflationary environment are asset holders. People with fixed assets (like houses) and even liquid assets (like stock market investments which are held long term), as well as companies with large finished goods inventory; all have seen a large decline in the value of these assets over the course of 2008.

Reisman rightly implies that holding off on clearing the market is not the solution. This is what happened during the 30's in America, and Japan in the 90's. In the former case money tightened thus driving prices higher, not lower as they needed to go to clear the market. In Japan, the money supply was opened wide, but institutional restrictions held prices artificially high.

In our current situation, the Fed has opened the money supply widely putting short term interest rates close to zero. By pumping lots of liquidity into the market they hope to stimulate demand. As well, prices are falling in the housing market, and no restraints on falling prices have yet arrived (e.g. beware price controls, remember them from the Nixon era?).

The market must be allowed to clear to get the economy moving again, however the looseness the Fed is now encouraging and enforcing through it's various powers, will most likely result in rampant inflation sometime around late 2009 - 2010 so beware.

Are You Raising Prices Yet?

The National Federation of Independent Businesses ("NFIB") just released it's quarterly look at the economy. Among general signs of a slowing economy, it shows that more than one third of small companies are raising prices - and the issue is inflation to some extent. Is this happening to you? Are you feeling the crunch?

Margins are being squeezed by the increases in raw materials, benefits, and all to do with transportation. Survey participants reflected a 9% decline in sales for the last three months ending April 2008 while earnings were down 28%. Clearly price increases are needed but in a tough retail environment it's not the first thing you think of doing. Yet it must be done.

Witness the micro-brewing beer industry. They have seen price increases of more than 500% on some inputs. As a premium product their offerings have more latitude to increase, but only so far.

Think hard about your competitive situation beforehand, but if it's between losing money and losing a few customers, the latter is probably best. Depend on your quality and service and you will retain the customers who appreciate you the most.

Bush not a friend to Small Business

The figures from the Bush 2009 budget are stark; despite a solid reputation as a friend to small businesses, the figures say otherwise.

As the budget describes it, discretionary spending from 2001-2009 (the latter year as proposed) increased by an annual average rate of 5.5%, well out-pacing inflation which has averaged 2.7% since 2001, for a total increase of 53.4% over the period.

Meanwhile, the Small Business Administration budget has declined by 3.9% annually, or a full 27.0% over that time. It was the biggest percentage decline of any Agency.

Now, I get the free market and all, big fan, and the Administration's cuts at Labor and the EPA were not a surprise, but where is the love for small business, got to find your success on your own I guess. While the big tuna's like Agriculture continue to increase and bring in big bucks, not to mention the big cahuna Defence, the SBA is on it's own.

This will not change much this year, but stay tuned for what the Dems will do in this final Bush year to set things up for the new guy/gal whoever that might be.