Internet Deflation

One Small Plug for Man . . .
One Huge Deflationary Force for Mankind
[courtesy Google Images]

The New York Times

“Walmart and Google have recently established websites that allow consumers to compare the premiums of various companies for auto, home and other types of insurance, and buy policies.  Both companies have entered partnerships with insurers.

“To the list of jobs threatened by the Internet, add one more: insurance agent.

“Technology start-ups, and companies from the insurance industry, are introducing websites that sell or promote a range of insurance including auto, homeowners and small commercial policies. These portals, which promise savings by showing consumers many price quotes so they do not have to shop site by site, are putting pressure on insurance agents, who collect 10 percent or more of their policyholders’ payments.”

The story of ruinous internet competition among insurance agents is a common theme for internet businesses.

Of course, doing business over the internet was initially a great advantage for the first companies to sell there.  But now that almost all businesses are selling on the internet, the competition is cut-throat and many businesses are being “cut”.  Although the internet commerce was initially viewed as a great advantage to businesses, it is now an enormous threat to businesses.

Competition on the internet is so efficient that it’s easy for potential buyer to quickly find the lowest price for almost anything they want to purchase.  There are programs and websites that will “instantly” track the lowest price on the entire internet for whatever product you’d like to purchase.  Sit at home in your underwear, pick the product you want, pay for it with a credit card, and wait for it to be delivered to you by the Post Office or UPS.  You don’t have to shower, get dressed or start your car to take you to town.  The internet does it all, and does it very economically.

With the internet, it doesn’t matter if the retailer is local or far away; open 9AM to 6PM or open 24/7.  The primary issue is price.  Who has the lowest price?

Those retailer outlets willing to sell for the lowest price (and lowest profit margin) are going to get most of the business while those who charge higher (though reasonable) prices are going to be driven out of business.

Result?  The internet relentlessly drives prices lower and lower.

Let me give you an example.  Suppose you learn that the average profit on a refrigeration sold in a brick and mortar store was $100.  You think, heck, I could set up a website for next to nothing and sell refrigerators where I only made a $50 profit–but my volume would be so big that I’d kill that silly, archaic brick-and-mortar store’s business.  You might make $1,000 a day for doing nothing!  You could get rich!

But imagine that some illegal alien in Arizona realizes that he could set up a website and sell the same refrigerator for only a $25 profit and still make a small fortune by his standards.  He could make $500 a day (good money for illegal aliens).  He could get rich!  Plus, he’d get to put some silly gringo (that would be you) out of business by selling for less!

OK–now let’s suppose some guy in loin cloth in Bangladesh scrapes together enough money to buy a computer, set up a website and start selling refrigerators in the US for just $10 profit.  He might make $100 a day (good money for people wearing loin clothes).  He could get rich (by Bangladesh standards)!  Plus he could put a couple of Americans (you and the illegal alien) out of business!

On the internet, there’s always somebody willing to work for less.  Result?  Prices tend to fall.

Lower prices are evidence of deflation.

Implication:  The internet is inherently deflationary.

In fact, it might even be argued that the internet is the primary cause of the deflation we currently see in US and global markets.  Insofar as the internet cuts prices and contributes to deflation, the internet also pushes the economy towards economic depression.

Internet competition may simply be too efficient, too fierce, to support lucrative or even reasonable prices.

Given that competition is so fierce, it’s inevitable that some internet businesses will go broke and cease to exist.  If so, before those businesses go bankrupt, they can be expected to have the equivalent of a “fire sale” where they liquidate their inventory at prices that will not only be low, but even below cost.

Result?  Those businesses that are still viable will be unable to reduce their prices enough to match the “fire sale” prices.  If they match the fire sale prices, they’ll go out of business.  If they don’t match the fire-sale prices, the viable businesses will lose sales to the nearly bankrupt competitors.

Either way, internet sales make viable businesses less viable.

The internet may the primary reason why Quantitative Easing has failed to “stimulate” the economy back to healthy levels of profitability.

If so, you can expect to see efforts to somehow restrict internet sales, or fix internet prices to prevent “fire sales,” or enact laws to “nationalize” whichever internet businesses (Amazon, for example) that so dominate the markets that there are no more competitors, and therefore no more free market.

Al Gore once claimed that he invented the internet.

I think he was lying.

I think the real internet inventor’s name was Pandora.