One Entrepreneur’s Case for Inflation

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I read recently that a Swiss court fined a driver $290,000 for going 35 miles per hour over the speed limit. Good for them. In fact, I'd like to see that fine go up.

Entrepreneur'sIn fact, I hope the price of a lot of stuff goes up this year. Two bucks for a cup of coffee at Starbucks (SBUX)? Not enough. Five hundred dollars for two Eagles tickets and two hot dogs? I say prices should be higher. Forty dollars for the Sharper Image Deluxe Nose and Ear Trimmer (with a built-in vacuum, no less!) that my wife got me recently? I think she paid too little. I demand that Sharper Image raise that price, and it's not just because I have a lot of nose hair. I do.

I am a business owner. And I like inflation.

For years, inflation has gotten a bad rap. Economists have warned against it being too high. Ronald Reagan once personified inflation as "violent as a mugger, as frightening as an armed robber, and as deadly as a hit man." I say that's just not fair. Inflation is good for business, both big and small. I'd rather have inflation than deflation any day. Sure, too much inflation is no fun. But deflation is worse.

Deflation is not disinflation, which is when inflation is still present, but at a lower rate. Deflation literally means negative inflation. When there's deflation, prices go down. And down. And down... Economists argue about what causes deflation, but most agree it's usually the result of a recessionary, non-growing economy. In other words, when an economy significantly slows, people have less money to spend and want less stuff so the stuff drops in value. This is deflation. And it's pretty bad for business owners like myself.

Bad because a sustained drop in prices would indicate lower demand for what we do. That's not a good sign. No business owner wants to experience lowered demand for their product. Even if your product is a nose hair trimmer with a vacuum. Business owners like growth. It means more sales. More action. Higher prices. Even more nose hair if that's what it takes.

Given enough time, lower prices will put many small businesses out of business. That's because even in a deflationary economy some prices stay the same, particularly labor costs. Sure, the state of Colorado is set to lower its minimum wage but that's just Colorado. Don't forget, South Park is set in Colorado. For the rest of the world, it's pretty much verboten to reduce the salaries and wages of your employees. And if you're dependent on materials from overseas that come from non-deflationary economies you're going to have a tough time getting a break there, too. So as a company's prices charged to customers are being forced down, a lot of our costs are staying the same. That means losses. That means problems.

Another bad thing about decreasing prices: Buyers delay buying things. In Japan, a country suffering under a long period of deflation and below-average cartoon production, consumers are holding off buying big-ticket items like washers and TV sets because they're afraid that, a week later, the same item will cost even less. So demand slows. Which causes prices to go lower. Which causes people to wait longer. And so on and so on...

Small Companies Would Suffer

A deflationary environment kills those small companies that are in the not-as-liquid asset business, too. It's better to sit on the cash. Would you want to buy a piece of real estate or a new robo-press for your shop floor only to see its price decline on the market over the next few months? And God forbid if you decide to finance those big-ticket items. You'll be making interest payments on a depreciating asset with appreciating currency. In other words you'll be paying more interest. Not a good business move.

This is why we need a healthy dose of inflation. Not too much, mind you. But a good 5% to 6% per year would be nice. Without it, many small business owners, like myself, would need to make some significant changes. And I'm not just talking about driving slower. Or avoiding Switzerland altogether.

I'm talking about finding other products or services to sell. Big companies can survive periods of deflation because many have the ability to offset revenue streams affected by this with revenue streams that are more profitable. Small companies don't always have this option. If the prices that we charge for our products and services are forced lower through deflationary pressures, I would need to find other products and services that aren't suffering the same effects. Otherwise, I'd literally have to leave my business altogether.

If we enter into a period of deflation, I would hoard cash. That means no more nose hair trimmers. This is because cash becomes more valuable than other, non-liquid assets. Like so many other companies do in the same situation, I'd cut back on capital expenditures. I'd stay away from real estate. I'd avoid writing any big checks for big machines.

I would, however, invest in technology. As mentioned earlier, some costs, particularly labor, are difficult to reduce even in deflationary times. But with the right technology I can reduce head count and attempt to get more things done with fewer people. And less people-related overhead. It's a bummer, I know. Laying off people is not a fun thing to do. And more unemployment doesn't help the economy. But that's what business owners do when prices fall.

The good news is that prices probably won't fall. We seem to be heading out of the recession and into a mild recovery. Americans like to spend. And if they keep spending, the prices of coffee and nose hair trimmers (with a vacuum no less!) will keep rising. Let's hope so.