I have made a career out of accurately figuring the value of things — particularly machine tools — and placing bets on my guesses.
For a long time the prevailing wind was behind appreciating prices. If I bet on inflation, scarcity would usually bail me out. But now I believe that paradigm is played out.
I think Ben Bernanke, student of the Great Depression, sensed the end of scarcity when he became head of the Federal Reserve, but he could not announce it at his confirmation hearing for fear of being hanged for economic heresy. The Fed Blubberers (excuse me, Governors) still babble about the threat of inflation, but have so far shown the fortitude to keep interest rates low, enabling banking sharks to cover their losses and frauds.
Let’s look at a few interesting data points. Gold prices are plummeting. Copper is soft. Corn is half of what it sold for a few years ago.
Wages are stagnant. Unemployment stubborn. Home prices at levels of 2005. Most prices of tangible things are flat or falling.
The “stuff economy” is so yesterday. We are in the idea, experience, and time economy.
What does this mean in the world of making things?
I believe prices will continue to trend down, especially if you factor in quality improvement. To win in this milieu you will have to produce more with less, because you will receive less money for what you make. Your employees must be smarter and your bosses shrewder. This means paying for knowledge, training, creativity, cleverness, and connectedness. A few days ago, I wrote about utilizing Section 179 to buy equipment with the tax code’s assistance. Longer term, the answer to the need for productivity growth is both machinery and ideas. You can buy a new Index multi-spindle for over $1 million bucks, but if you do not spend the money to retrain your people to run the machine you won’t recoup the cost.
As I look at my used machinery business going into the new year, I ask myself, do I want to go to the bank to buy more stuff, or should I spend my cash on stuff like advertising, exhibiting at shows, visiting clients, joining associations and making new connections? Do I want to focus primarily on enhancing my brand in every way?
I have come to understand that my customers do not buy iron. They pay for our expertise, reliability and making their business lives simpler and safer.
Our challenge in this period of non-inflation and non-scarcity is to provide what is always scarce — belief in us, our products and our reputation.
Question: Do you worry about inflation?
4 Comments
Well, I certainly agree with you on the issue of low interest rates and quantitative easing which is basically a system of giving money directly to rich bankers so that they can become richer and the rest of the economy crumbles. It’s a sham. However, I fundamentally disagree that making stuff isn’t the backbone of any stable economy. Look at the havoc our service and banking based economy has wrought on our system. It’s nothing but a giant casino, the banks are the house and we’re the suckers. It’s all just made up numbers and games that eventually come crashing down and we’ve seen it time and time again since the 80’s.
Yeah people are making a lot of money and yeah there are a bunch of pretty numbers going up and I’m certainly no economist but I fundamentally believe that an economy that doesn’t have a large manufacturing sector is doomed to fail at some point. Societies NEED material goods in order to survive and cannot be reliant upon other nations for staples of society. What happens if trade relations or worse military relations fail with the people supplying all of our goods? Did you know that crucial components to antibiotics are no longer manufactured in the US? If India and China cut off trade we would be screwed!
Unfortunately the deck is stacked against our labor and manufacturing sectors these days in favor of the banks and overseas labor markets. This is the result of 40 years of strong corporate influence on our government and deregulation of the banking sector. I think this is an absolute failure of government, not an achievement and the rise of our banking elite is not something to be lauded. What we need is a return to emphasis on a strong high tech manufacturing sector and technology sector, that is where the real future lies. Playing with numbers on a spreadsheet is not a sustainable economy it’s a house of cards and I’m positive in 50 or 100 years history will back me up on this. Look at the worst and best eras of this nation. The depression was fueled by out of control banking, but eventually we rose to power as an economic powerhouse during the 40’s and 50’s through manufacturing power. The cycle has turned the other way for now, but it will come back around.
Josh, I agree with everything you stated.
Without manufacturing our economy is not sustainable. The market at 16000 is a disgrace to US fundamentals and proves that our bankers still run the show.
Changes are not being made, not even the easy stuff. Due to global labor unification and the ease of manipulation by extreme greed we no longer have the safety net of what is good for America eventually prevailing.
Well, QE also helps anyone with an IRA, 401K, etc. Look at the stock market returns this year. Things wouldn’t be so great, imho, if bond yields were higher; they’re not so the market is, almost, the only game in town.
I’d rather have a pension than a gift certificate to the casino.