Love of Liberty : supply and demand

Peter Schiff on the bailout

ChrisR — Mon, 06 Oct 2008 17:42:00 GMT

I remember reading one of Gary North's older articles where he was discussing shortages. Mr. North wrote that whenever you hear of a shortage, the first question that should come to mind is: "At what price?"

Well, Peter Schiff uses the same line of thinking when discussing the $700 billion bailout...with the shortage in this case being buyers of mortgage bonds.

Mr. Schiff writes:

"We are being told loudly and repeatedly that the gargantuan mortgage bail-out package is necessary because illiquid mortgage-backed securities are clogging our financial arteries, threatening the economic equivalent of cardiac arrest. The idea of the plan is to transfer these supposedly valuable, but currently unmarketable, assets to the government so that private institutions can freely lend once more. The monumental flaw in this argument is that the mortgage backed securities are in fact highly liquid, just not at the prices the owners would like to receive.

Mortgage bonds are just like houses. They won’t sell if the owners stubbornly refuse to drop the price. However, they can find buyers if they acknowledge reality, and lower their expectations accordingly.

The government tells us that if these assets are held to maturity their full value will eventually be realized, and that it is only because of a lack of current liquidity that their value is not reflected in the market. However, as many private transactions have shown us in recent months, these assets will find buyers at the right price. These are not overly exotic assets but relatively straight forward mortgage obligations. The inability to find buyers is not a function of liquidity but simply of price. The government is seeking to 'create liquidity' by overpaying."

Don't miss Lew Rockwell's podcast with Peter Schiff.

It's a powerful 12 min.

Demand Destruction = Poor Choice of Words

ChrisR — Fri, 08 Aug 2008 17:43:00 GMT

The term "Demand Destruction" strikes me as a bit absurd.

For example, let's say Bob & Joe are going to make a simple trade.

Bob produces apples and Joe gives haircuts.

The terms of the trade are 10 apples for 1 haircut.

Bob's supply of 10 apples are also his demand. Without the apples to exchange, Bob has no demand. He would have to either renegotiate the terms of the trade, or Joe would have to perform the haircut out of charity.

So if we were to apply the term "demand destruction" to this situation, would it be a good thing to destroy Bob's 10 apples? In other words, would it be good to destroy his demand?

No.

The thinking behind "demand destruction" is that a slowing economy will relieve rising commodity prices. This totally ignores monetary inflation as the cause of the higher prices.

Peter Schiff summarizes the current economic situation nicely in his latest column:

The benign outlook on inflation is rooted in the hope that a slowing economy will pop the commodities "bubble" and break the back of inflation. Despite these pronouncements, most rational observers understand that inflationary pressures are currently intensifying, not abating. Rising commodity prices are not the source of inflation, but merely the symptom of rampant monetary expansion from the Fed and other central bankers around the world. By all indications, the liquidity injections are about to shift into a higher gear. The recent housing bailout bill is the most inflationary legislation ever enacted and there is already talk of yet another economic "stimulus" bill. The new money creation needed to finance these schemes, together with exploding federal budget deficits, will not only reverse the recent declines in commodity prices, but send other consumer prices soaring as well.

It is also worth noting that a slowing economy does not, by itself, bring prices down. If it did prices in Zimbabwe would be falling. When combined with responsible monetary policy, a growing economy would tend to push prices lower (based on greater productivity and expanded supply).

Record Profits for Oil Companies...What Does it Mean?

ChrisR — Mon, 04 Aug 2008 15:30:00 GMT

With oil companies earning record profits, there have been calls for a "windfall profits" tax to be placed on them by the government. From an economic point of view, this totally ignores the meaning of profits and losses.

Oil company profits are a signal...If the marketplace could speak, it would say:

"Increase the supply of oil!"
"Remove your resources from losing ventures and invest them here!"
"This is where the demand is!"

If oil companies were experiencing losses, the marketplace would say something different:

"Decrease your output of oil."
"Your customers are well supplied."
"Apply your resources elsewhere, where the demand is higher."

It's actually a beautiful setup...and it's all natural...central planners need not apply.

So record profits are a signal. However, instead of increasing supplies of oil, I've read (over and over) how investment has to take place in alternative fuels.

But does it?

Possibly...if alternative fuels are something people desire, then entrepreneurs would be wise to test the waters. However, like everything else, such an investment is risky. And without a doubt, private entrepreneurs, and not politicians, need to make the decision as to whether or not the risk is worth it.

Do alternative fuels have a future? Only the market can tell us...and it will do so with profits and losses.

But what about oil? After all, oil companies are the ones earning record profits. We know this is where the demand exists.

So isn't it silly to talk of an arbitrary "windfall profits" tax? Does it make sense to hinder those who are hearing cries from their customers (via record profits) that supplies need to be increased? Instead, the government needs to get out of the way and let the marketplace operate. Profits and Losses are signals...It's much wiser to listen to them, then to try to fight them.

My Thoughts on the Wii Shortages

ChrisR — Fri, 14 Dec 2007 21:19:00 GMT

In Jan. 2007, I was fortunate enough to purchase a Wii from Toys "R" Us. Back then, I never would have thought that the same supply/demand situation would still exist today. They are still very hard to find.

One recurring thought that I've had throughout this year is that Nintendo priced the Wii way too cheap. One quick look on eBay shows that people are willing to pay much more than $250. If everyone really desired immediate availability of the Wii on store shelves, a simple price increase would do the trick. Unfortunately, such a move would be attacked instead of praised.

Analysts are saying that Nintendo is leaving hundreds of millions (or maybe billions) of dollars on the table because they aren't producing them fast enough. I find it very hard to believe that Nintendo is purposefully not producing larger quantities. They have no guarantee that consumer demand will remain; and if billions are at stake, it would be a tremendous risk to take. They would be well within their rights to take such a risk, but I highly doubt that this is the case.

I don't think this a case of Nintendo leaving money on the table, I think this is a price issue. Unfortunately, the video game market does not operate like eBay or the stock market. If prices could freely fluctuate and adjust to supply and demand, there would be no worries of shortages.