Friday, October 28, 2011

On Prices… and the ‘battlefield’ of the marketplace

The marketplace is the field where people ‘battle’ to have their product stand above and compete with others’ product. Prices reflect hotspots where flags are to be raised so resources can be relocated and bolster the specific good; the higher a price, the higher the flag is raised. With the flag going higher, more in the field can see that there is an area needing support – customers are spending/buying. Seeing an area that needs more support, those in the field may move their resources from their current location to where it is needed more – is more activity. Whether it is a new innovation in a type of phone, or a hurricane-ravaged area needing (re)building supplies, rising prices signal to the rest of the marketplace that help is needed and more resources will be relocated to assist. Those who relocate their resources take part in those higher prices because it is profitable to them to move, and it is beneficial to those who would otherwise be out-of-stock are able to get supplies.

When the need has been met, the flag will lower because it will no longer be such a hotspot; resources will be relocated to another area. This is the way it should work. With the flag being the marker showing a hotspot where resources are needed, if the flag isn’t allowed to be raised or lowered accordingly, whatever prevents the flag’s movement will make it so the resources aren’t diverted properly. What are the ways that it will not work?

Preventing prices to rise: though the flagpole allows the flag to be raised higher, a bracket has been placed somewhere blocking the flag being raised. Though there is more need, without the flag being raised those in the marketplace do not see the demand, or do not see it as needed enough to relocate their resources to assist that spot.

Picture Steve Jobs being told he cannot sell the iPhone for more than $50. He might still produce it with a long-term agreement that whoever bought one had to pay a monthly service fee to offset the cost of production. Now picture a cap being set on that monthly service so the cost of production cannot be recouped. Apple wouldn’t be producing the iPhone; others in the field wouldn’t be putting their resources into producing like models. Or, for hurricane-ravaged areas, if there was a limit placed on canned goods, then those goods would quickly consumed. Without seeing the demand needed with the raised flag, others who also sell the canned goods won’t see the flag and won’t relocate their resources to assist the area.

Preventing prices from falling: though the flag needs to be lowered so resources can go to other areas, there is a bracket blocking the lowering of the flag so the resources keep coming. Other areas need the backing, but they are not getting the resources while the original area doesn’t need or want it, and even needs to purge the excess; resources flood the area as the flag is not being lowered. More and more resources will pile up, saturate the base and inevitably will overtake the flagpole leading to it collapse under the pressure of the piled-up resources – the prices, following the flag, will be down on the ground – a crash, or bust.

Recently, this can be seen in the housing market. This is tied to something good: home ownership. But just because something is linked to something good, doesn’t mean that all parts of it are good for everyone, especially at any time. Sellers want to make the most they can from their product, but the market will state that any given thing is only worth so much. When the flag is kept higher than the marketplace says it should be is by giving the product an artificially high value and paying for the difference through infusing a value difference. Not everyone needs to buy a home. For those who do want a home, it doesn’t necessarily mean it is the right time for them; they may not be able to make monthly payments. But with making home ownership easier with guarantees or assistance, the flag isn’t lowered to where it should be to allow the marketplace to find the true value. Non-market infusions mean that along with an artificially high price to be paid, there will be a debt created that will also siphon value, helping that flagpole, when it does fall, fall that much quicker.

Picture a city with an average house cost of $100k. At first, the prices will reflect the proper market value. With so many people being able to purchase a home with assistance (non-market value credit) – not having to take on the normal market purchasing process, the home ownership rate will rise. The housing market will become saturated because the purchases will continue because all of those who couldn’t normally afford a house, buy one. With all the purchasing of houses, the price will rise, and continue to rise as long as the demand is being met; the price may increase to $120k. Multiple factors will force the decline in the housing market, among them are the limitations that any given area can support at any given time, those who normally wouldn’t have been able to afford their house have the reality that they can’t afford the house and foreclose, and like any trend even in optimal circumstances, it will slow on its own. It will come to a point when the prices need to fall because the area has been otherwise saturated. Those who bought, or got a loan for a house in this city during the boom may have paid $120k, though when the market settled and corrected itself, the value of that purchase is only worth $80k. Those who didn’t buy, but already owned their house also lost some value.

Nothing in the marketplace is static. There will always be some degree of fluctuation. With the market being left to correct itself, the fluctuations will be smaller and more quickly corrected. If the market isn’t allowed to correct itself (of which it cannot actually be stopped, just delayed), the market will build and bring forth a collapse forcing the correction.

There is only one who can actually ‘force’ the brackets into place, and that is the government. The government is the non-market factor that sabotages the marketplace, through guaranteed loans, subsidies, licensing fees and regulations. All these things are enacted with the goal of helping people, under the guise of equality, but a scorched-earth policy’s form equality is in the shared destruction. Any individual in the system who tried the same manipulation would be pointed out and lose their market share as the marketplace would correct itself from such acts – sometimes the correction is quick, sometimes slow. But the marketplace would correct itself, and expunge such manipulators who would be unable to have their affect any longer. There isn’t getting away from the government.

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