So Why Is It Again We Don’t Have Inflation…


How Inflation Works

Yet why does everything cost so much?  While you know all this jobless recovery noise you hear in the popular media?  Well this is the reason and a USA Today story got me thinking more about this along with the questions I hear people asking about inflation.  First, let’s talk about what exactly is inflation?

Inflation simply put is when more money is chasing too few goods or services.  So what this means is enterprising firms who have these “high demand” products (like Apple™) see an opportunity to charge a premium for them over the “normal” rationalized price.  For example again using our friends at Apple™ if we look at their Mac-book computer (which is Intel based just like Windows) and compare it to a normal laptop it’s about twice the price, why because you can only by an “Apple” from Apple ™ however you can by a “normal” notebook from over a dozen companies.

Ok, so where does all this extra money go?  Yes to the bottom line that is, as this is capitalism at its best as it’s creating customers (Drucker’s first directive is: to create a customer) as well as delivering to the bottom line which in theory returns value to the stakeholders.  Hey just look at Apple ™ stock if you want proof.

If this is the case why when inflation rises, does the banking system typically increase interest rates?  Short answer is to curb borrowing as we can’t seem to do that on our own any more as we have become a “consuming” society hell bent to spend every dime that we get in our hands and then twice that (credit).  Now don’t get me wrong, as with everything moderation is the key however we have lost our way and the debacle of 2008 was that wake up call, however not everyone has gotten it much like the failed new years day alarm on the iPhone.

However in today’s market, while we don’t have the issue of inflation we do have the reality that mercantile and services worlds are not chasing the consumer down the rabbit hole any longer.  What do I mean by this, as in the past like the post 2001 terror attacks many companies namely autos raced down the path of  cutting prices (note prices not cost) to keep customers on their crack addicted buying sprees so companies could keep fooling themselves.  This would later catch up with them in 2008 where the ones who failed to cut cost had their hands out for bailout moneys.

In today’s economic world we are paying the piper for something which started a decade ago which we tried to starve off, however the grim reaper of capitalism will always get its due, written about in other posts concerning the workings of capitalism.  As with everything in life, the lack of “minor” cycles will yield “major Black Swans if you will to reference Nassim Taleb’s work.

As let’s use an example our Californian friends live on a regular basis, as their fine state is mostly situated on a major fault line.  Typically what happens is the land on this line “slides” apart a couple inches a year.  So a little change is manageable, however if this sliding is halted, pressure builds until it overcomes the force which has been holding it back and what was many minor “manageable” movements is now a single unmanageable event which was 2008 with aftershocks felt into today’s market place.

So back to today, since companies aren’t chasing consumers down the rabbit hole, they are scaling back workforces (firing people and not hiring new) while also holding to higher profit margins on fewer sales. This folks is a “jobless recovery” and our future as with less credit we will be forced to become more responsible consumers…

About Joseph Campbell

As a strong believer in the fact that "people work for people", it has been a life driver to better to understand the complexities of the various aspects which drive efficiency within this axiom, especially the concepts of leadership. Supporting this, I have been fortunate enough to having experienced this as leader on a global basis over the last decade and half. During this time it has been clear there are three core drivers being Life, Leadership and Economics.
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