My Two Cents:
Inflation Is A Liberal Thing, deflation is conservative
There are developments
that seem contradictory and, on the surface, make little sense. These are
analogous to what the economist Paul Krugman calls "the paradox of deflation."
Television program sales are experiencing deflation at worldwide levels,
while the entertainment industry is facing inflation, or increased
costs. Now, I agree that deflation is "a general decline in prices," but I disagree with
the explanation of the cause, given as "a consequence of collapse of demand
(producers must cut prices in order to find buyers)."
All reports indicate that, despite repurposing, split sales and increased local
production, international program sales have steadily gained in quantity and
volume.
According to The Economist, deflation, not inflation is the greatest concern
of the world economy, and I tend to be in agreement with that assessment. Various
financial publications are good at explaining the various aspects of deflation
and inflation, but they tend to be politically biased. This because a "deflationary
recession" is something favored by the conservatives, while an "inflationary
recession" is more attuned with the Keynesians and, therefore, the liberals.
Both camps, however, in the view of someone who doesn't know how to balance a
checkbook, miss the boat: this deflation in revenue and inflation in costs is
the consequence of vertical integration run amok.
The practice of selling something to oneself, one of the purposes of vertically
integrated companies, goes against all economic common sense accrued since the
time Italian mathematician Giovanni Ceva began studying monetary systems, and
deflation in particular, for the city of Mantua in the early 1700s.
But let's analyze what we know. Vertical and horizontal integrations are speculative
tools used to face both inflation and deflation. Inflation offers companies the
excuse to merge in order to reduce the number of employees and, thus, cut costs.
At the same time, companies can tangibly benefit from repaying loans with discounted
money and increase the value of their assets.
These integrated companies also confront deflation by cutting excess production
and reducing wages, even though these tend to fall more slowly than prices.
But, by cutting production and their labor force, companies put themselves in
a position of not being able to compensate lost revenue with more volume, therefore
profitability becomes poor and deflationary pressure intensifies. If, to this,
an expectation of further price decline is added, investment spending, such as
marketing and advertising, is postponed: as prices go down, money becomes more
valuable, creating disincentives to spend money. This vicious cycle causes further
cuts across the board and reduces companies' revenue and profitability.
In addition, the only advantage of integrated companies is that they can save
money on supplies, but they lose the opportunity of getting better prices outside
the group. Plus, if internal revenues are too high they run the risk of having
the whole house of cards collapse, especially in cases of low profitability.
In summary, consolidation, particularly vertical integration, has caused inflation
(for the reasons mentioned above and because excessive money from company sales
fed into the economy fosters inflation) and deflation, which explains the Krugman
paradox.
Dom Serafini
