QE/ZIRP Is Crushing The Global Supply Chain, Product Quality, & Profits

Tyler Durden's picture

Submitted by Charles Hugh-Smith via OfTwoMinds blog,

We will soon wish we were allowed an honest business cycle recession once the current overcapacity implodes the global economy.

We all know the quality of many globally sourced products has nosedived in the past few years. I addressed this in Inflation Hidden in Plain Sight (August 2, 2016): not only is inflation (i.e. getting less quantity for your money compared to a few years ago) visible in shrinking packages, it's present but largely invisible in declining quality.

When products fail in a matter of months, we're definitely getting less for our money, as what we're buying is a product cycle, not just the product itself. We buy a product expecting it to last a certain number of years, and when it fails in a matter of weeks or months, this failure amounts to theft and/or fraud.

When a costly repair is required in a relatively new product, we're getting less for our money, and when the repair itself fails (often as a result of a sub-$10 or even sub-$1 part), we end up paying twice for the inferior product.

Why has the quality globally sourced products nosedived? The obvious response is corner-cutting to lower costs to maintain profit margins, but this simply poses the next question: what's changed in the past eight years that's made corner-cutting essential to maintaining profit margins?

The answer may surprise you: central bank stimulus: QE (quantitative easing) and ZIRP (zero interest rate policy. Gordon Long and I discuss this dynamic in Bankers Crippling the Global Supply Chain (34:50).

Nearly free money was intended to bring demand forward as a means of boosting a stagnant global economy. But there are unintended consequences of this policy: nearly free money doesn't just distort demand--it also distorts supply.

Nearly free money (what I call free money for for financiers encourages the expansion of production: since a corporation can borrow capital for next to nothing, why not expand production to grab more market share? Once market share expands, profits will follow.

Nearly free money initially boosted demand for goods and services, and this demand boosted profits and incentivized expanding production. Globalization enabled corporations to expand production overseas in cheaper labor markets (known as labor arbitrage), which lowered production costs and raised profits.

Now that everyone boosted production, the world is awash in overcapacity. The capacity is in place to produce quantities of autos, widgets, phones, etc. far in excess of demand.

Overcapacity leads to the collapse of pricing power, and the collapse of pricing power leads to the collapse of profits. In a market of strong demand, producers have pricing power: they can raise the wholesale and retail prices of goods a notch at a time and reap more profit.

But when demand is stagnant or supply far exceeds demand, pricing power vanishes: any attempt to raise prices causes retailers and consumers to flee to other suppliers.

In an economy of overcapacity, the only way to maintain profit margins is to lower production costs (including labor) or cut corners: lower quantity and quality, or cheat the labor force or customer (or both) in on way or another.

Production costs have already been cut to the bone. Profit margins have been razor thin in China for years, leading to widespread factory closings that left the workers unpaid. (There's one way to maintain profit margins: don't pay your employees.)

There is no way left to cut costs except to cut corners: in effect, defraud the customers with deceptively reduced quantity and quality, and/or defraud the end-producer by shipping pirated defective parts.

The Dangerous Game Behind Fake Ball Bearings (and a lot of other parts, too)

This culture of do whatever it takes to maintain profits and maximize private gain by any means available is a core reason why Why Our Status Quo Has Failed and Is Beyond Reform. What the pirated ball bearings and the opening-fake-accounts scandal at Wells Fargo prove is that when otherwise honest employees are presented with impossible demands, they are effectively forced to lie, cheat and steal from somebody: either the customer or the end-producer.

The only other ways to maintain profit margins are:

1. Consolidate the industry into a monopoly or cartel that fixes prices (for example, the pharmaceutical industry, where a $60 Epi-Pen can be repriced to $600)

2. Impose a costly extended warranty on the customer--in effect, tell the customer the product is garbage and will fail soon, so they better pony up a third of the purchase price for an extended warranty.

This is madness, and the only solution is mass closure/bankruptcy of excess capacity. But this would mean lay-offs of employees and debt that must be written off as a loss, and central bankers have shown they will not tolerate a business-cycle recession.

Since central bankers have banned an honest business cycle recession, the only possible alternative is a culture of pirated shoddy parts, lies, deception, fraud, cheating, declining quality and a supply chain that is collapsing along with quality and profits. We will soon wish we were allowed an honest business cycle recession once the current overcapacity implodes the global economy.

 

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BuddyEffed's picture

No, this is just a symptom.  It's resource constraints at the top of the chain of causality that Is Crushing The Global Supply Chain, Product Quality, & Profits

Backin2006's picture

Almost all the basic functions in our life can be serviced by products from the village/arts and crafts economy. Global trade is a mirage of consumerist fulfilment that misrepresents our basic human needs.

LawsofPhysics's picture

Almost, but not quite.  This can be avoided if and only if money creation absolutely requires the creation of real/tangible COLLATERAL of real value...

You also have to allow bad people and bad business to FAIL/DIE.

PTR's picture

You also have to allow bad people and bad business to FAIL/DIE.

Sometimes, they just need a little push...

SelfGov's picture

Absolutely correct. If oil price upswings led to big upswings in global production like they did before the global production plateau then we could still get quality for cheap.

 

Elco the Constitutionalist's picture
Elco the Constitutionalist (not verified) Oct 17, 2016 12:15 PM

QE? Is that what we call it when we allow Jew Bankers to implement the ultimate Usury economy AKA Fiat + Fractional Reserve + Debt driven economy?

It is fucking simple math and irrefutable that a Usurious Economy using Fiat money can only accomplish redistributing all wealth into a very few hands. There are no possible controls that would prevent this from happening.

Reducing systems to few variables only works when those variables have gigantic coefficients like usury and fiat do. Which means the modeling of the macro economy over a long period of time can be done in your head. And the result is disaster for the middle class.

Fiat money always collapses, because it always allows the establishment to capture all the wealth while discouraging the creation of new wealth. It is a Rent Seekers paradise, because the Rent Seekers are not hindered by having to compete with producers.

LawsofPhysics's picture

Bingo.  Yes, the bankers and financiers have access to all the free money they want while everyone else has to perform real work and face real risk...

No matter, such "let the majority eat cake" monetary experiments have in fact been tried before...

forwardho's picture

5 years ago you mentioned supply chain failure in many of your posts.

You were not wrong then.

MPJones's picture

Absolutely right. However a rent-taker system is also catastrophic for the working class, being gradually made redundant as technology progresses. In the end it is also terminal for the 'elites' since they will eventually be taken to meet Mdm Guillotine - or something similar. Taking value without adding value always leads to systemic failure.

gregga777's picture

It's also because all of the crap products are made in China.

Elco the Constitutionalist's picture
Elco the Constitutionalist (not verified) gregga777 Oct 17, 2016 12:26 PM

Quality from China and elsewhere is actually dropping as manufacterers look for ways to squeeze pennies of profits out as demand dries up. The financialization of corporations is a global problem that relegates production to a cost of business instead of the purpose of business.

Fanakapan's picture

Dropping ? it dropped years ago when Western distributors found that Chinese have no quality level beneath which they will refuse to go.

The Chinese are entirely capable of producing reasonable kit, and 9 times out of 10 its the Western 'Bidnessman' who drives the quality lower than chit. The Chins will never say fuk yoo we cant produce crap as bad as that. And why should they worry when it wont be their name on the product :)

Kasperfx's picture

in regards to the words Wells cheating, come on it's  clearly "scamming" not and should be prosecuted 

RaceToTheBottom's picture

"Profit margins have been razor thin in China for years,"

Yep, that explains all the extra money running from China into places like SF and Vancouver, NYC, etc

/s

Jason T's picture

Quality is beyond gone.  

too many consumers are dumb as shit and have accepted this.

 

MPJones's picture

In all honesty: if you were a manufacturer would you take your profit in fiat with absolutely no credibility or backing in real assets? Of course the massive fiat fraud has crushed initiative, product quality and growth. When everything you produce in your factory is immediately stolen from you then if you have any sense you obviously stop producing.

You can only steal so much before Atlas shrugs.

khaproperty's picture

There are parallels to the implantation of the weak (for Germany) Euro. It replaced the productivity whip DM and products were cheaper to sell in exports - or generate more gains. Too expensive prices for buyers in Greece pp were replaced by Target II (creditgiven-) paying through Germany itself.

So Germany´s taxpayer pays a lot of inner-EU-exports (between 500 and 1000 Billions every year in EZB-TargetII-Saldo ) to spare the buyers of German exports. What do you think it will end?

 

scaleindependent's picture

Excellent analysis.

This is what happened in Latin American countries.  

What have the banksters wrought? 

bidaskspread's picture

Fixing the business cycle or allowing the state pension bomb to explode, that is the trillion dollar question. 

moneybots's picture

"Fixing the business cycle..."

 

There is nothing to be fixed. A cycle has 360 degrees. A down phase follows an up phase. For each action there is an equal and opposite reaction.

Batman11's picture

The idea was that supply created its own demand.

Another myth from Milton Freidman's fantasy economics blown out of the water.

moneybots's picture

"This is madness, and the only solution is mass closure/bankruptcy of excess capacity. But this would mean lay-offs of employees and debt that must be written off as a loss, and central bankers have shown they will not tolerate a business-cycle recession."

 

Math beats central bankers. Math will not tolerate central bankers. Math always wins. A cycle always has a down phase.

MrBoompi's picture

Planned obsolescense, inflation, and managing only for short term profit pre-date QE and ZIRP.  Many businesses realized long ago quality cuts into future profits.  One of the first examples was the light bulb.  They could manufacture bulbs that lasted decades, but a cartel was established which limited the lives of the bulbs so they would need to be replaced much more often.  The drive for money and profit increases waste, wastes valuable resources, and usurps common sense.  

polo007's picture

http://www.reuters.com/article/us-usa-fed-fischer-idUSKBN12H1XO

Fed's Fischer: downshift in potential means 'not that simple' to raise rates

Mon Oct 17, 2016 | 12:16pm EDT

The U.S. economy may face longer and deeper recessions in the future if interest rates remain stuck at current low levels, Fed Vice Chair Stanley Fischer said on Monday as he mapped out a world in which low growth hamstrings central banks from effective recession-fighting.

Though officials would still have tools such as quantitative easing and forward guidance if rates remain low, he said, "these alternatives are not perfect substitutes for conventional policy. The limitation on monetary policy imposed by low trend interest rates could therefore lead to longer and deeper recessions when the economy is hit by negative shocks."

However it is "not that simple" for the Fed to coax interest rates higher in a world that central bankers increasingly believe is one where an aging population, weak demand and low investment may have undercut the country's and indeed the world's economic potential, Fischer said.

Many of the forces holding down growth, such as demographics, are beyond the reach of policy. And hopes of boosting productivity or investment may rest more with other branches of government that could boost spending at their discretion, Fischer said.

Fischer's remarks prepared for delivery at the Economic Club of New York did not touch on current policy or the likelihood of an interest rate increase at the Fed's November or December meetings.

But they offered a more detailed restatement of arguments he and other Fed officials have made in recent weeks warning that the current state of affairs may be about as good as it gets.

That line of thinking has become more prevalent among policymakers, and is consistent with aspects of the "secular stagnation" theory offered by economists who feel the country's long-run potential is less than it used to be.

Fischer said he has tried to quantify the implications for monetary policy, and the results are not encouraging. A decline in longer-run trend growth in gross domestic product, for example, may have cut as much as 1.2 percentage points from the expected long-run federal funds rate.

Demographic trends, weak investment and slower overseas growth are pulling it down even more.

The closer that long-run rate comes to zero, the less room policymakers will have in the future to counter any downturn.

hooligan2009's picture

just another way to say "pay me heaps of money to do nothing and sound plauible"

a.k.a a "jaffa" (an orange with no pips"

:)

hooligan2009's picture

great comments and artcile - far too much truthiness and quality for lying, cheating and stealin politicians to understand and far too much greed for global companies/bankers to admit to

Willard J Clinton's picture

I have been seeing so many of these product failures with Chinese components, particularly in tools,  that I've just stopped buying the cheaper Chinese product any time a more expensive (and higher quality) substitiue is available from another source.  I am beginning to think that this trend is not so much planned obsolecense on the part of the Chinese, but planned defectivity.