The Marcro Moment: The Solution For Higher Prices Is Higher Prices
This is a concept that is well known in the commodity world. It is something that, over time, proves true and is one of the reasons why hyperinflations always get it wrong.
In this video I discuss how consumers reject higher prices when they cannot afford them. It is simple mathematics. When a household budget is getting hit with higher prices in one area, unless it is also increasing, spending in other areas needs to be cut. This affects the demand part of the equation in particular areas, causing economic contraction. This ends up have a multitude of ramifications.
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It's common sense but most people just don't realize it. I was considering things more about how producers can pass on the extra cost to the consumers. We all see prices going up but at some point, people will just have to either revolt or cut back. Then again there are dumb people who just use debt to cover what they can't afford.
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Summary:
In this video, the speaker discusses the concept that the solution for higher prices is in fact higher prices. He explains that when prices become too high, people's affordability becomes an issue, leading to a decrease in demand and a subsequent decrease in prices. The speaker uses the example of rising energy prices leading to higher food prices due to the connection between energy and food production. This decrease in demand for discretionary items causes economic contraction in certain sectors, leading to businesses lowering their prices to stimulate purchasing. This cycle ultimately results in deflationary pressures in certain segments of the economy. The speaker emphasizes that when people's incomes do not rise along with inflation, economic contraction is inevitable.
Detailed Article:
The speaker begins by addressing the concept that 'higher prices are the answer for higher prices,' which might seem counterintuitive at first but is grounded in economic principles. He explains that when prices of commodities, such as energy, reach a point where they become unaffordable for consumers, demand starts to decrease. This decline in demand is a result of people removing themselves from the market due to affordability constraints.
The speaker delves into the interconnected nature of different sectors in the economy, highlighting how rising energy prices can lead to an increase in food prices due to the energy-intensive processes involved in food production and transportation. This correlation between energy and food prices showcases how fluctuations in one sector can have ripple effects across various industries.
Furthermore, the speaker expands on how rising prices in essential goods like energy and food can impact the average household budget. When expenditures on necessities increase, individuals are forced to cut down on discretionary spending, such as dining out, shopping for non-essential items, or subscribing to various services. This shift in consumer behavior from discretionary to essential spending has repercussions on businesses reliant on discretionary purchases, leading to economic contraction in those sectors.
The video continues to explain how economic contraction compels businesses to lower their prices in an attempt to stimulate demand. However, this reduction in prices often leads to squeezed profit margins for businesses, prompting cost-cutting measures such as laying off employees, reducing investments in research and development, and increasing automation.
The speaker emphasizes the domino effect caused by changes in consumer behavior, where reduced spending in discretionary areas ultimately affects industries such as automotive manufacturing, home building, and other related sectors. This interconnectedness between different industries further underlines the intricate balance in the economy and how fluctuations in one sector can have far-reaching consequences.
In conclusion, the speaker reiterates that the solution for high prices is ultimately more high prices since unsustainable price levels lead to decreased demand, economic contraction, and eventually deflationary pressures in certain segments. He underscores the importance of understanding the dynamics between affordability, demand, and pricing to grasp the broader implications of economic shifts on various sectors and industries.