Arthur Laffer’s Scary Journal Piece – and What it Means for Procurement

I'm sure a good many folks in the Spend Matters audience remember reading about the Laffer Curve in Econ 101. Essentially, it states that a decrease in tax rates can actually result in an increase in tax receipts/revenues. Knowing his theory, I read with interest his recent column in the Wall Street Journal which suggests that we ready ourselves for higher inflation and interest rates. In the piece, Laffer pulls no punches. He starts by describing the state of our current crisis where our budget deficit is 13% of GDP, a number "that's more than twice the size of the next largest deficit since World War II". The result of the current policy is that we "can expect rapidly rising prices and much, much higher interest rates over the next four or five years, and a concomitant deleterious impact on output and employment not unlike the late 1970s".

The main backbone of his prediction for significant inflation has nothing to do with tax policy -- or little to do with it, at least at this point in time. Rather, Laffer does a detailed job explaining how current Fed monetary policy has led to an increase in the money supply that is unprecedented in shape. It represents the largest "percentage increase in the monetary base in the past 50 years by a factor of 10" and "is so far outside the realm of our prior experiential base that historical comparisons are rendered difficult if not meaningless". If we believe his thesis -- and it's hard to dispute it -- that current Fed monetary policy has to lead to inflation, what are some tips we can take back to our own companies from a Spend Management perspective?

First, in an inflationary cycle, cash is not a bad thing to have, as the value of cash rises with interest rate levels. Debt is not bad either -- if it's your own -- as its value is easily inflated away in a drastic upturn. Inventory and physical assets, however, are a big negative (especially given Obama's drive to do away with the LIFO accounting method of inventory valuation (which during an inflationary cycle will be paramount to a new tax on business). In other words, at least as a starter, if you can push off inventory to your suppliers, minimize order sizes and hold onto cash in an inflationary cycle, you'll be in better shape than if you don't. Additionally, as Laffer's predictions take shape, dialogue with your principle supplier's to share strategies on how best to structure the extended supply chain amidst this developing landscape.

Jason Busch

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