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In a recent survey — jointly conducted by CFO magazine and Duke University
— one of the top concerns being expressed by industry executives across
the United States, Europe, and Asia was that of the rising cost and —
to a slightly lesser extent — the reduced availability of labor, especially that of the skilled variety.
 The worry most forcibly competing with this angst was that of whether
"consumer demand" would hold up in coming months.
For a Keynesian this conflict can have no meaning,
for the central chicanery around which the General
Theory is constructed is that depressions can be warded off
through monetary debasement, simply by stuffing the workers' pockets with
extra cash, while simultaneously fooling them as to the real value of the
nominal wages being received in such a newly clipped coinage.
In the case where wages are rising (labor costs are mounting) because employment is near full
(suitable candidates for work are hard to find) then, assuming the mythical
"propensity to consume" remains broadly constant, consumer demand
should be a shoe-in, and unlearned industrialists need not lose too much
sleep over their prospects for either sales or profits.
Granted, "end demand" could also become
(temporarily) curtailed by a sudden outbreak of thrift, that virulent, unpredictable strain of global
pandemic feared by the macromancers more than dirty
bombs, bird flu, melting ice caps, and a direct asteroid strike, combined,
for its potency in disrupting the pristine, academic beauty of their
consumption functions and ISLM curves.
The unlikelihood of this taking place in a world
whose mail boxes bulge daily with unsolicited offers of new credit, and whose
masses have been conditioned to view shopping as a sacramental rite, should
be all too apparent.
In fact, what our survey results really display are
the classic symptoms of the unhealthy discoordination
that an unbacked credit expansion induces in the
body economic.
What we see here is that most of the businessmen
canvassed are finding their costs are rising and, in particular, the dominant
cost they typically bear: that associated with retaining a competent and
motivated workforce. At the same time, those who do not directly play a part
in satisfying the needs of end consumers (an overriding majority, if our
sample is representative of industrial and commercial organization as a
whole) are beginning to fret about a slackening of demand for their (mainly
higher and intermediate goods) output.
As Mises, Hayek, et al. took great pains to explain,
what this means is that the seemingly golden age — in reality, a thinly
gilded one — during which the first, most favored
issuers of cheap credit and artificially boosted equity prices enjoyed almost
effortless success, has reached the limit of its ability to postpone the
workings of fundamental economic law.
Even if financial capital once appeared so abundant
as to provoke strange, Swiftian fantasies about the
"saving glut" and the "asset shortage," real, physical capital was never called
into being quite so readily, since its
creation requires not the staccato keystroke of a fiat banker, but
entrepreneurial vision, hard work, and genuine saving.
By that last we mean a voluntary abstention from
current consumption, undertaken in order to improve the chance of greater
plenty in the future, and not the corrupt preemption
of a man's spending power — effected with
monetary trickery — which inflationists laud
as "forced saving." Being a species of initially unrecognized
compulsion, this is a deceit doomed to fatal self-contradiction, once its
dupes wake up to the nature of the con being practiced upon them.
Since the boom has been driven forward according to
the projections of the borrowers and the low-hurdle eagerness of their
lenders, rather than being predicated on meeting the imperatives of consumer
sovereignty, we eventually find ambition has come to overmaster achievability
and hope to have triumphed over hardheaded
calculation.
To be harmonious and self-consistent, production
should be guided by the wants of those whose ability to express them comes by
virtue of being in harness to the same web of mutually supportive processes
that help satisfy the needs of others, in turn. If not, scarce physical resources
will be squandered in trying to realize misplaced visions of a world as overbrimming with affordable means as the unnaturally low
interest rate treacherously seems to imply.
Worse still, once the fever of the boom spreads from
its initial promoters and their preferred clients to infect the populace at
large, sobriety and forbearance tends to vanish in a kind of Gresham's Law of the spirit. A world awash
with "liquidity" is not one where the steady flame of good
husbandry can outshine the neon-lit promise of instant gain.
To recap, what then we find is that not only does
the availability of financial capital become wholly divorced from the extent
of the pool of physical capital goods; not only does much of that pool become
misused (and, hence, ultimately, stripped of its original "capitalness"); but that the wellspring of capital
maintenance and augmentation — namely, voluntary saving — is
concreted over to provide a gaudy, Baroque fountain of greater exhaustive
consumption.
As this happens, many final-goods prices will rise
as they are revealed to have been undersupplied in relation to the monetary
means now pouring into the hands of their would-be consumers. Where such
goods also comprise inputs to production taking place further upstream (as is
archetypically the case with, say, energy), this increase in expense will
primarily add to costs and may therefore begin to sap profitability, if these
are not either offset with greater efficiencies or fully recouped in higher
selling prices.
Furthermore, as they find their standards of living
slipping, those workers who are so enabled — and they will be legion at
the height of the boom — will be far less shy about insisting upon more
from their employers, by way of compensation for their efforts. Labor costs will now feature in the list of boardroom
anxieties.
Simultaneously, since "demand" will have
come to a white-hot focus of insistency on end-consumer items, all those who
can do so will be shifting resources towards meeting it. If this means
abandoning half-completed schemes for long-duration projects in favor of pursuing more mundane but now more lucrative
goals, such as putting food on the average man's table and keeping his boiler
stoked with fuel in the here-and-now, so be it.
Unfortunately for the Keynesians, with their quaint,
quasi-hydraulic depiction of the economy, such intensified end demand will
not automatically translate into higher revenues for all the businesses
strung out along the chain of production, just as a sudden appetite for beef
will not instantly cause the grass upon which the cattle feed to grow more
luxuriantly in the pasture.
What it will tend to do instead is to strip those
not immediately involved in meeting that end demand of their ability to call
upon productive resources on the same terms as before.
Squeezing margins as in a vice, this development may
also diminish the orders received from those closer to the shop front, since
these erstwhile business customers will now be too busy scrambling to restack
their emptying shelves to contemplate closing off the sales area for a refit,
much less to ponder the purchase of a gimmicky new IT system, or to think of
splashing out on an expensive and distinctly nonessential corporate makeover.
This last may not wholly be a
matter of discretion since, besides seeing their own wage bill expand,
consumer-goods merchants are likely to see inventory replacement come
complete with higher invoices, so working-capital needs may soon start to
crowd out much more deferrable fixed-investment schedules.
Costs up, labor more
pricey, yet demand flagging: this is the fate of all too many of the myriad businesses
which comprise the vast, hidden, submarine bulk of the iceberg that is our
modern, highly specialized, vertically stratified, distributed assembly-line
economy — to the befuddlement of a mainstream lacking a proper theory
of capital or a true appreciation of the role of time.
Welcome to the crisis point of the inflationary boom!
Sean
Corrigan
Diapason Commodities Management
Sean Corrigan
is Chief Investment Strategist at Diapason Commodities Management (Lausanne
and London)
Copyright © 2006 - Copyright © Diapason
Commodities Management - Sean Corrigan
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