Deflation: A Manufacturer’s View

This article was originally posted in 2004 (but was since destroyed on the server when I accidentally blew up Biiwii.com‘s database last year).  This is the original article, posted from my local hard drive, added to give some archived historical perspective for the current Biiwii.com.

Deflation: A Manufacturer’s View

September 17, 2004

Biiwii.com seemingly appeared out of nowhere, with its editor writing commentary and sounding alarm bells about inflation and its effects on the greater well-being of the USA.  Just another financial commentator throwing his thoughts into the mix, right?  Well yes and no.

You see, in real life I am the owner of a small American contract manufacturing firm and have witnessed 24 years of constant deflationary backdrop in the sector.  I am here to tell you this has not been a bad thing!

I was moved to write this essay after a back and forth message forum exchange with some friends and after reading some of the latest analysis from certain “deflationists”.

A few facts:

  • The prices my company charges its customers are generally lower than in the 1980’s.
  • The company is much more profitable than it was in that period.
  • The work environment is more pleasant, cleaner and less stressful than it was then.
  • We produce the same output with 1/3 the people as 20 years ago, and we do it with near zero defects and pride of workmanship.
  • We are a proud American company that pays good salaries and wages.
  • None of the above would have been possible if we had not dedicated to automation, quality and a competitive spirit.

What do you suppose has been the constant driver to the success of the company?  The deflationary trend that I believe is the secular backdrop to all such micro and macro economic “miracles” our great country has experienced.  In short, for companies large and small, the word has been “innovate and automate or die”.  Many died.  Many thrived.  “Deflation” or whatever that force is that has driven costs down and driven companies to be the best they could be, to the ultimate benefit of consumers and the nation as a whole, has been a “good thing”.  It is called productivity, and it is what built America, gave it its power and leverage and kept its people on an upward path economically.

In previous articles, I have alluded to deflation being a more natural “corrective” to man-made inflationary excess.  But what really concerns me now is that we have certain Fed governors readying their helicopter fleets to forestall yet another deflationary correction of financial paper alchemy.  Although at this point, I am not sure it truly matters whether we proceed directly to deflation or a more intense inflation of the money supply.  This is because “deflation” has long since become a malignant potential outcome (as opposed to the backbone of progress it had been) due to policy makers’ inability to leave well enough alone.  The well-spring of productivity has been drained by ever larger government and spending.  Not only has productive value been drained, but the spending has continued right off the balance sheet and into mind boggling debt.  Thus, a deflationary spiral could only be painful now.  The same entities that have told us they will defend us against it are the ones who made it malignant to begin with.  I can’t help thinking of the Jungian “shadow”; the longer it is denied, the more fierce it will ultimately be in exacting revenge for that denial.

I have read respected analysts who believe deflation is on the doorstep, others who believe it has virtually no chance of occurring while the Fed is on the watch, and yet others who see inflation leading to deflation or visa-versa.  I regret to say that what I see, as a member of the real productive economy, is a blow-up of some kind either way as a virtuous continuum of productivity has been destroyed.  Furthermore, with the debt levels off the charts and an electorate more concerned about George Bush’s IQ or John Kerry’s backbone, we are in no position to deal with it either.

To think, it didn’t have to be this way.

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