Sale Sale all the time…

The past decade or more has been witnessing round the year discount sales all over the world. About three decades ago there used to be definite period for sales which used to precede major festivals like Diwali, Dussera, Christmas, etc in India. Gradually the number of festivals have increased to the point where we have sales with high discounts right round the year like Bill Haley’s Rock round the Clock.

The bedrock of capitalism is free markets and competition. Generally it starts with few early companies reaping supernormal profits. Seeing this there is a herd instinct, and like lemmings, there is a stampede of entrepreneurs and companies to get in quickly in order to appropriate part of the supernormal profits as long as the going is good. The banks and authorities who permit these companies to enter these apparent El Dorado  commercial areas are oblivious to the reality that there is an optimum supply demand band which can be supported at any period of time.

So when through indiscriminate growth of production units catering to the same market place, there is in due course a surfeit of supply resulting in lowering of prices, fall in quality, This excess supply position is also the result of hyper competition, so called innovation of products which in reality are mostly incremental improvements, spread of mall culture, mass consumerism driven by TV ads and keeping up with joneses, hyper capacity, low effective demand, economies in recession, ageing population, highly leveraged consumerism based on liberal proliferation of credit cards and retail loans.

Some of the other fundamental reasons are the bursting of the property bubble which dissipated the feel good notional wealth factor which had led to wanton consumerism. In certain other economies like China, the State subsidises industry which helps in selling at lower prices and gaining new markets. But this debilitates the economy over time as debt to GDP rises to unsustainable levels.

Basically humans have become shallow and are always looking for something to excite them. So retail therapy has become a way of life among all classes of society. So people are caught in a perpetual cleft and disequilibrium between wanting to satiate their materialistic desires all the time and having the necessary means for fulfilling their carnal desires.  

Most companies who find themselves trapped with excess old stocks and discover that the only way to avoid a massive loss would be to sell as much at discounted prices. This way the companies are able to cover their fixed costs  for some time and hence keep their heads over the waters. Finally they have sell out to their competitors or declare bankruptcy.

These events in the real sectors of the economy have a domino effect on the financial system. The later has to carry some of the bad loans on their balance sheet for years.  As it is the financial system is over leveraged. So when substantial portions of loan portfolio become hard, the failure of the financial system is even greater.

We are really living in incredible times where individuals, companies and countries are all over leveraged with high debt ratios and as a result everywhere discount sales have become the normal way of life. This raises one fundamental question: in the system like this is there any true invariant measure of value. What is the intrinsic value of a set of goods? Is it their cost prices, fair market prices or the discounted price at which it’s being sold mostly? At the same time the stock markets and currency markets are always in a state of perpetual gyrations. Gold was earlier the standard measure of value. Then dollar took over in 1972. With the mounting fiscal deficit in US, the dollar is no longer a strong currency. We are living in indeed troubled economic crises times, an age of uncertainty and flux. China is flexing its muscles to step as the world’s reserve currency with its Yuan and its large holdings of US treasury bonds.

It is the best of times and the worst of limes. We are indeed at an inflection point of international history.