June 16, 2021

Customers Don't Set Prices.

Customers Don't Set Prices.

So, when was the last time you walked into the grocery store, and informed the grocer you would give him $1.50, for instance for his bunch of carrots? Or told your department store that you'd pay so much for his shirt?

 

It just doesn't happen. Customers don't set the price.

 

Oh, sure there are certain instances, like buying a large ticket item like a car or a house, when negotiation does occur. And at certain points in the business cycle, the buyer can indeed have some impact on the overall price. But generally that's an exception to the rule: that overall buyers don't set prices.

 

This is especially true for long-term business to business relationships. Often in the beginning of a vendor/client relationship there can be a great deal of negotiation. I'm sure this was the case, for example, in the initial relationship between Apple Computer and it's Chinese vendors, especially Foxcomm, or any of the American Semiconductor companies and their Chinese Factories. In the beginning the American's may indeed have had influence. But that influence fades over time. And as the Apples, and Broadcom and all the rest become more dependent upon their suppliers, the old rule applies more and more: customers don't set prices.

 

From my point of view, what we're seeing right now in our economy, is the fulfillment of this basic theme.

 

For over 30 years, beginning in the mid 1980's America has ridden the wave of low cost imports. Our multinational companies and big box retailers have taken full advantage of the low cost production of Asian Countries, especially China and Japan, and even of European Countries such as Germany.

 

This has provide the USA with a rising standard of living driven by these lower and lower cost of offshore goods.

 

But we didn't see it that way.

 

If you'll remember Wall Street and the Academics, primarily Ivy League Economists, would explain that China, with it's low cost, was exporting “deflation” to the USA. And we'd brag about how the Federal Reserve could not raise inflation, no matter what. It was as if disinflation was a given, after all we'd had disinflation for over 40 years. And so, America lived in a bubble, where prices declined while wages increased. It was the best of all worlds.

 

But behind the scenes something entirely different was at work. Something that we wouldn't allow ourselves to see.

 

What was really happening in those 30 years of economic bliss, was that our trading partners, read China Japan and Europe. Our trading partners were taking over our markets. Predatory pricing allow them to take an increasing market share.

 

Today, when America looks for Lower Prices, to combat our overall rising price complex. The realization is hitting that we have no alternative. The factories and plants that used to produce items such as consumer electronics, p/c's and cell phones, are no longer located here in America. The Chinese and other's have pretty much a lock on our supplies. You see the current supply chain issue isn't just a matter of logistics, its also the complete lack of alternative.

 

There is a fascinating chart to be found on the Federal Reserve Reseach site, I'll reproduce it in the show notes. The Chart shows, that in a little more than 15 years, our manufacturing sector of the economy has declined by yet another 20% plus. And today manufacturing represents a little over 10% of our economy. It's true to say that America doesn't manufacture.

 

In fact today's America is the world's most imbalanced economy in history. With nearly 3/4ers of our economy consumption, and the balance in production and manufacturing.

 

We are totally dependent upon our Off Shore suppliers.

 

We may call what's happening to us today inflation. But that's really just a disguise. Another attempt by Wall Street and Academics, to suggest that we are the master's of our economic fate.

 

We're not.

 

Ultimately we are reliant on others, to provide many of the essential goods and services we need to maintain our standard of living.

 

And after all, “customers don't set price.”