The title of this blog post is directly related to a key tenant in Austrian economics, which says that the joy of consuming wealth is derived from the self evident supply of given good or rendered service X,Y,Z. We shall skip the semantics regarding resource transformation to fulfill this desire.
The primary goal of creating any supply of capital is to sustain the individual for a lengthy period of time in order for him to complete other tasks he deems satisfactory or necessary to bring him in a state that he strives to. Capital accumulation in a free market is a wonderful process because it is based on voluntary compliance of a mass of individuals, each seeking its own end.
This process is disturbed when a self appointed entity with a monopoly on the judiciary system can appoint how and what resource may be effectively employed in a certain endeavor. This entity compounds the problem when it, through the banking system, legalizes the counterfeiting of the currency through fractional reserve banking, creating an artificial boom in the capital goods industry and subsequent inflation.
According to business.hr, the inventory of the manufacturing industries fell 12,3% YOY. While this may be a bullish sentiment for commodity broker dealers, who may just take a long position in a certain commodity and with the same demand dynamics that prevail YOY expect to profit from a spike in inventory products, this is bad for the average consumer, because it will eat away a part of his income when purchasing the final product.
Unfortunately, this is what happens when the economy is shaking of the addiction of cheap credit from the banking system. When the boom faze is over, the manufacturers are forced to dump their inventory onto the market at deep discounts in an attempt to salvage themselves from insolvency. Sometimes, they go under. The subsequent step in this process, is the curtailing of expansion, brought by lower inventory levels.
Some of this inventory had to be sold at a deep discount, as some inventory, due to the artificial boom, have been used in an accelerated manner as the boom faze continued, as more often in industries where day were wasted in suboptimal projects. So, now, it will take time for these stocks to be replenished.
If the government stays out of this process, the recovery will happen sooner than later. If the government interferes in this process through subsidizes of purchases or outright price controls, there will be even less inventory numbers YOY.
The market has to clear. The malinvestments must be liquidated and capital must be freed in optimal projects. If the government inflates it will only lead to more resource consumption and with that lesser inventory numbers.
To reiterate what was said at the beginning, capital formation makes economies tick. A greater unused level of inventory that is known to satisfy future demand in certain industries boosts the economy. Artificial credit gives a artificial boost and excess inventory consumption.
The government better let the market clear and make it easier for producers to sell their products in lines of production which are most profitable for them. Until that happens, expect more inventory volatility…
