News about major retail chains such as HMV
and Blockbuster closing shop inevitably attract
greater than usual attention because they sell
media content and therefore operate on the edge of
the world of entertainment. That said, the demise
was fairly obvious to anyone who had read their
balance sheets, which have been decimated by
technological changes led essentially by Apple but
more generically by the broader applications of
the Internet and improved hardware.
Selling and renting films respectively,
HMV and Blockbuster were a key part of all retail
malls and "high" streets in the UK with similar
brands in other countries including in Hong Kong
and Singapore. The advent of amazon.com was the
first shot across their bows; one that both chains
failed to heed. As the business
of selling books through
bookstores evaporated in the late '90s, the retail
chains selling and renting movies and music failed
to make the connection between the physical world
and the augmented reality shopping of the
Internet.
The process was to accelerate
with improved software - Apple's iTunes comes to
mind - even as hardware continued to provide an
underwhelming experience. The inability to bridge
the quality gaps in films and music (or else apply
them to an environment where more people were
using crummy mobile devices for enjoying the same)
simply meant that all competition ended up being
about price. This was the wrong battleground and,
much like Napoleon's forces marooned in the harsh
Russian winter 200 years ago, the retail chains
were destroyed.
Oddly enough, HMV also
played a small part in the global financial
crisis; one of the largest lawsuits from that era
pertained to Guy Hands' private equity firm Terra
Firm filing suit for misrepresentations against
its banker, Citibank, over its purchase of EMI
from which HMV had been spun off to a separate
listing in 1998.
Although the suit was
pretty quickly dismissed, opportunities for mirth
abounded from the materials provided as part of
the proceedings. Such large leveraged buyouts
generated billions in loans that were purchased by
collateralized loan obligation vehicles, which in
turn were partly funded by the shadow banking
system that helped to fell the global economy in
2007-08.
In any event, the various
reorganization plans filed by HMV management
provided fodder for private equity firms on its
own; in parallel, Blockbuster went through its own
interaction with the forces of competition. While
the global business of Blockbuster went into
administration in 2010, the company continued to
operate in many parts of the world. Last week's
closure of the UK business is a continuation of
the global process.
The circle of
stupidity On the other end of the scale
from market forces is the circle of stupidity that
underpins global monetary policy today.
An
industrial version of the HMV/ Blockbuster process
of creative destruction is Japan, an article about
which I wrote late last year, touching upon the
effects of competitive landscape changes ushered
in by the pincer grip of South Korea and China at
the branded and generic ends of manufacturing
respectively; even as sclerotic politics and inane
monetary policies end up accelerating the decline.
(See The
end of Japan as we know it, Asia Times Online,
November 27, 2012).
Following the
elections, Japan's monetary policy impetus has
moved into aggressive easing as the government and
the Bank of Japan attempt to push the yen sharply
lower by easing quantitative policy and
accelerating the purchase of bonds issued by the
US and European governments (the Italians and the
Spanish sent a couple of "thank you" notes to the
new government, presumably).
Meanwhile,
other Asian countries - primarily Korea and China
- are increasing their own purchase of Japanese
government bonds to offset the effect of a falling
yen on their own currencies. And all along,
Federal Reserve chairman Ben Bernanke and European
Central Bank president Mario Draghi are cheerfully
printing money by the trillions to support yawning
fiscal deficits and to keep their currencies from
rising.
Think of the average pensioner
anywhere in the Group of Eight leading
industrialized nations and the picture is
downright depressing. With regular income from
bonds and bank accounts whittled down to barely
nothing, they are being forced to take on
financial risks by purchasing "high dividend"
stocks or worse, corporate bonds. These are not
folks who are equipped to analyze such risks, let
alone manage them.
Businesses go bust when
they run out of liquidity, not when they run out
of "capital" or any such esoteric concept. Granted
that HMV and Blockbuster were so bad that not even
all the money sloshing around the global financial
system could save them, but that also raises the
question of how many companies and governments
survive today because of the excess money sloshing
around.
At the very least, we know that
interest rates and risk premia are severely
depressed in G-8 countries and, as a result,
across much of the financial world. There are
countries that would be considered borderline
default where government bond spreads are trading
well under 5%, an anomaly that makes no sense
irrespective of the "base" funding rate.
Similarly, equity markets are getting record
inflows at a time when valuations aren't exactly
cheap anywhere in the world.
Such
conditions are usually spelt b-u-b-b-l-e; and I
entirely hold Bernanke, Draghi and their kin
responsible for this state of affairs. There will
be time of reckoning later, but for now we will
have to live with all the Keynesian
rationalization.
Why is Schumpeter
important One of the key defenses used by
those seeking to broaden the ambit of monetary
policy whilst emptying government coffers is that
corporate closures are bad form and cause
disruptions for employees and other stakeholders
alike. This is indeed true over the short term,
but over the longer term the truth is perhaps in
the opposite direction and in line with the views
of Austrian economist Joseph Schumpeter on
"creative destruction".
Systems that weed
out inefficient capital users end up deploying
funds to more deserving users thereby reducing the
overall risk of the system and increasing the gap
between risky and less risky ventures; this extra
compensation therefore ends up attracting more
robust capital - and perhaps more appropriate
capital for risky ventures.
In contrast to
this, folk who lend money to French companies -
typically only other French folk - see their risk
analysis dulled by constant government
intervention and corporate subsidies (internally)
to their worst divisions. When the car firm
Peugeot decided to shutter some plants and fire
workers recently, the howls of protest were
loudest from the country's socialist government,
which may however not have quite realized that by
denying the company such internal efficiencies
they inevitably put the firm at a longer-term
disadvantage that increases the chances of a
comprehensive collapse at a later date.
Investors in such countries will also be
confused as to the correct risk premium for a
loss-making company compared to that for a
profitable company; because debt is about getting
one's funds back, the question becomes academic if
loss-makers are routinely bailed out. This dulls
the calculation of risk, inevitably driving
inappropriate funds - pension funds and the like -
towards risky assets.
That is the reason
why the HMV and Blockbuster stories are important.
By providing a timely reminder that bad businesses
will not survive even the easiest of monetary
conditions, they have served to remind all of us
of events likely to unfold when the price of money
starts adjusting towards more appropriate levels.
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