....If such a state were to exist, how would it deal with business cycles and growing inflation w/o interest rates?
As the adage goes, 'let's get down to bidness'.
Interest rate is basically an extra tax on a good. Without interest rates, prices are likely to be lower. To the customer, this means they have more disposable income. To the company, it means less profits. However, since the price per good is lower, more customers are likely to purchase. Some would argue that for products such as Fast moving consumer goods (FMCGs) such as milk/bread and various other food stuffs, the affect of price on consumers would be inconsequential. However, since the profit for the companies decreases per product, due to lack of interest, the added consumer base (even though, comparatively small) will compensate for the loss and in most cases will actually increase profits;.
e.g
Product = Bread.
Price = £0.50 (plus 10 percent interest) = £0.55
Customer base = 100
Total income = £0.55 * 100 = £55.00
Now without interest;
Price = £0.50
Customer base = 100 (Plus 10% increase due to price drop) = 110
Total income = £0.50 * 110 = £55.00
Obviously, in real life, the percentage increase in customer base is likely to increase over time. THe example was to illustrate immediate response.
Thus, with the price of the product decreasing by 10%, and the customer base increasing, the product's actual life cycle is likely to increase since more customers are purchasing it. Additionally, with this increased life cycle comes more profits - which are usually injected back into the business to either aid existing products are create new ones.
Obviously, the product's life cycle will come to an end, however the profits already obtained will help carry on the business.
Inflation
Since the price has now dropped and the consumer has more disposable income, the consumer price index (CPI) is likely to increase. This will innevitably lead to a higher price for goods, since consumers can now afford it or so one would think. Remember that the consumer now has more money to purchase OTHER goods - thus, prices are not likely to inflate since the majority of goods are all being purchased, not just the cheapest. If anything, this is likely to lead to a decrease in price since companies will be competing a helluva lot more than usual.
Though, since demand has increased, more jobs will required to ensure this demand is met, whether this be by an increase in employees per outlet or by an increase in outlets themselves (there are other ways of course) i.e. the multiplier effect. Thus, the figure for wages will have to increase since there are more employees. Obviously, this would lead to a decrease in profits - however, due to the surplass of customer (which is due to the lack of interest), the effect will not lead to bankruptcy since consumer spending per time perioud is usually more than an employees wages.
E.g.
An employee is paid £5.00 an hour; average company has 20 employees (figure varies depending on industry/type of business etc)
So in one hour that is £100 out of the profits
A consumer spends on average £15 an hour; average company has around 100 consumers.
In one hour, that equates to £1500 ----- even if the spending is lower, say £5, the customer base more than makes up for the loss since the employee:customer ratio is always going to be 1 to many.
Then, we take into account that advertising costs are minimised, since the customer base has increased considerably due to a price drop. The company therefore, has less to spend on advertising/promotion [though to be fair anyone in the advertising industry may be put out of a job] - again, this money can therefore be redirected in a number of ways - all equating to a stronger economy and all without the aid of inflation and interest, might I add.
Just simple honest business
noname55 said:
...and where the hell are these so-called mods? getting sick of them allowing idiots to go around around in circles, then they wonder why I am not admiring their "dahwah" efforts.
I'm sorry, I was busy having a life. In case any of the members have forgotten, the moderaters do not stay on LI all day since they have little incentive, unless of course they're sadomasachistic, and enjoy being flamed over the internet.
