Friday, April 1, 2011

To buy, sell, and get gain

In July, we got a 2009 Subaru Impreza to replace my husband’s 1995 Geo Prizm. Recently my husband and I got an offer in the mail from a nearby Subaru dealership to buy our Subaru from us. The letter said that they were experiencing extra demand for our make and model and they wanted to buy our new car from us so they could fill that demand.

To a certain extent, it was a rather tempting opportunity to make some money from our new car. But ultimately, I felt like it would be rather silly to sell our car so quickly after having bought it. Finding a car to buy in our household is a monumentally long process consisting of many months of discussion in night walks around the block, hours perusing internet car sales sites, and lots of test-driving sessions. We worked so long and hard to find a good car at a good price to buy that I didn’t relish the thought of having to repeat the process all over again.

It made me think of stories I’ve heard of people who buy an in-demand product at a low price and then immediately sell it to someone else on eBay. And this little phrase from the Book of Mormon started playing itself through my mind: “to buy and to sell, and to get gain” (Helaman 6:8). And I started thinking through what an economy is like that buys and sells to get gain.

In order to make a profit, a seller has to buy something at lower price than what he sells it for. If there’s only one stage of this between producer and end user, it’s okay, but what if few people hold on to what they buy and the majority continually tries to sell at a higher price? Eventually it runs up the price to ridiculous levels and soon the market will no longer bear it. This causes several effects:
• It puts the producers at a major disadvantage if they can’t directly profit.
• It puts great pressure on the market to find cheaper ways of acquiring the goods or services at a lower price.

With such great pressure many people will jump into that market both to take advantage of high prices and to try to find a lower-priced source of that good or service for themselves. At some point, there is a glut and the price falls. Then this causes several other effects:
• Sellers have to go find new markets to tap where their products are scarce and in demand.
• Sellers who can’t find new markets go bust.
• Or they take matters into their own hands and collude together to control the supply and means of production so they can create artificial scarcity.

Meantime, the producers are still unable to profit and may be even worse off because the market glut makes their goods and services worth even less than before.

Here’s an interesting example of what happens when people don’t buy what they need and hold it: on May 6, 2010, the Dow lost 400 points in a matter of minutes as stock broker computer programs bought and sold future contracts to each other faster and faster and faster. This created what has been called “the Flash Crash.” “SEC/CFTC Report: SKYnet Caused Flash Crash”

Another more serious problem is that it is easy for markets to forget about the importance of adding value and get addicted to the easy profit from buying then selling higher that happens during a boom period. A market that has forgotten the importance of adding value is a market that is desperate for the next boom and will go looking for it and is determined to create it. That kind of market is parasitic. It is precariously close to becoming seduced into secret combinations and fraud. It is a few steps from that to a revival of slavery of production.

Again, how to escape? Be industrious and add value to what you sell.


Jocelyn Christensen said...

Amen, sista!

Kimberly said...

Oh my-that motivation is the reason the US is in a recession. That desire to buy and sell to get gain without actually doing anything. In other words-speculation. I didn't realize the BoM specifically mentioned it though.

Thanks for sharing!