It’s been 2 years from my first post, and probably 3 years after i realized that there is a significantly better economic framework that would solve all of the efficiencies and sickness of the current one, and over the past 3 years it has been become apparent that we are, as quoted from the trailer of the soon to be released zeitgeist movie (See below) :
We are on the verge of a great transition
Like every transition, it must be accelerated by a “war” or revolution, this one seems to be led by the current Currency Wars though for most people this sounds very complicated, the concept is actually very simple, and very similar to an price war.
a price war between to companies offering competing products, would mean that they focus on “price strategy” to sell more of their products. For example think about 2 companies, X and Y, selling the same exact product, for example a generic computer. company X sells 1000 computers for $100 and company Y sells 1000 computers for $100, they each might have different economics, for example one is online store and the other one has retail stores.
Now, for some macro reason, company X decides it wants to grow faster (faster than the growth of the market), and it allows itself to reduce prices to $950, they start selling more computers (i.e – 1050). company Y see’s its sales went down to 950 (lets assume fixed size market), so it decides to fight by reducing its prices to $900 – and a price war starts ! company X fights back and reduces its price to 850, Company Y reduces it to 800 etc’ etc’.
This war will end once one company will end in the following scenario :
At some point one company will not be able to reduce prices (in our case the one with retail stores), due to its cost structure which will cause it to loose money.
so Company Y decide to stop lowering prices, ending in a new or similar equilibrium (either both sell 1000, or one “gives up” and sells less).
Both companies should now have lower profits, unless the lower prices resulted in higher sales (more than the 2000 that were sold before now sell in total).
In companies, the price war is a tactic to gain higher profitability through larger market share, other tactics might focus either on innovation (more features) and product line expansion (sell phones), or focus on cost structure efficiency (move to online, automate process).
In the countries examples, growth/market share would be the total GDP or part of its components, it has become very important for the G7 to grow, and especially to the US to stay the largest economy in the world (China is growing faster). by printing more money (like the US), or other forms of Quantitative_easing, countries are actually devaluating its currency making its exports more attractive to other countries, in effect it basically “lowers” the salary of the total employees in the US so companies can become more efficient.
So how does this specific war ends ? if the US if running the price war, and so it seems, i do not entirely understand what they are trying to achieve, all they are doing is accelerating a process which will result in China becoming bigger and bigger. When China GDP per cap is 6.6K and in the US its 41K, it will be very hard for the US to compete on price alone, so the only question is what are the next tactics.
The obvious “other” tactic is interest rate, though it seems the US cant go much lower than it already is, unless Japan and the US will go into negative interest rates, which is what the good dollar is about. The main problem with negative interest rates is the lack of mechanism to collect such funds, i which case the banking system will start imposing it first leading people to run from the banks, the big question is where will they be running too.
lets hope it ends in a price war and not another type of war…
This great transition is eventually about value, value creation, value distribution and from closed economies to one global open economy. There is no doubt that the transition from inequality to equality should eventually be positive, assuming it eventually also reaches average John (or Wong) .
I find it amusing that while in western countries interesting times might sound fun, the Chinese refer to May_you_live_in_interesting_times as a curse.
Bio –
I have just finished to watch the 2nd part of the zeitgeist movie , a really great movement talking about the inefficiencies and sickness of the current economic system.
Although i believe that the movement is a a bit extreme with its messaging, and yet to offer a real solution, the fact that they have been able to show the inefficiency of the current system is very inspiring. I hope that the leaders of zeidgeist if offered a new economic framework would understand that it is not economics or the monetary system that is the cause of the sickness, but specific attributes of the existing system, mainly lack of transparency and corporate interest rates.
The words ‘to make money’ hold the essence of human morality. (From one of the great speeches in the book)
Another amazing book I have recently read, is Atlas Shruged. I think truly identifies the problem not having an alternative to a working system, and trying to replace it with nothing. I truly believe that when converged the essence of the Zeidgeist Movement and the quite opposite notions in Atlas Shrugged, create a the foundation of a new economic framework.