Amazon on Steroids
If Amazon was a country, the U.S would place trade restrictions on it for illegal dumping. Illegal dumping in trade occurs “when manufacturers export a product to another country at a price either below the price charged in its home market or below its cost of production.”
We permit Amazon to do what other countries are denied the right to do: dump their products into the U.S. Why? Because it would kill many of our industries. Often times, foreign companies receive massive assistance from their governments. One example, Airbus in Europe is subsidized by government funds which helps it stay competitive with Boeing. If we allowed these private/state owned companies to operate freely here in the U.S, domestic companies would not be able to compete.
Amazon is not owned by the government; however, due to the nature of capital markets, it has massive advantages over its competitors. The genesis of this advantage stems from the banking crisis in 2008.
During 2008, many banks were shut down and/or merged. As part of the bailout and mergers, terms set by the Federal government barred banks from continuing to carry risky assets on their balance sheets. Then, the Federal Reserve infused the banks with billions of dollar in bailout money. The regulations put in place restricting trading by banks while loading them with money, caused the banks to begin buying and investing in things that were “government approved.” The banks bought billions of dollars in government bonds and other “approved investments” that would not raise the ire of the federal regulators.
What happened as a result?
Many legitimate small businesses and startups were frozen out. Why lend one million dollars to a startup if the regulators were going to complain? So the banks stopped lending to smaller firms and only invested in “sure things.” Asset managers and fund managers figured out the game and started mimicking what the banks were buying, thus only buying the safest and surest of investments.
Recognizing that it had the opportunity to raise billions of dollars, Jeff Bezos went on a buying spree…buying out Amazon’s competitors and making massive investment in its infrastructure. It wasn’t that Amazon was making a ton of money. It wasn’t. What it had was access to the capital markets, something its competitors did not have.
Infused with cash, Amazon kept on tightening its profit margins lower and lower which was effective in driving its competitors out of business. Amazon is literally killing the retail industry and the malls that support those retailers. Malls across America are dying and some analysts have estimated that 50% of all malls will be closed within ten years.
Here’s the point. Many of these retailers are small business owners and have no access to the capital markets and, therefore, must make a profit. In contrast Amazon, which has access to billions of dollars of capital, is not pressured to make any money and so lowers its margins to the point where it freezes out its competitors. As stated earlier, the U.S. would never allow a country to operate so brazenly knowing the goal to be crushing domestic competition in order to make more money and monopolize the industry. But the rules appear to be different for Bezos and Amazon.
Larry Kudlow once said “profits are the mothers milk of all business” yet we obviously live in a time where the rules no longer apply. At some point this anomaly that allows Amazon to operate on minuscule margins with access to unlimited capital will end. The market will turn rational at some point and demand a return on the billions that was invested into Amazon. However, by that point, all serious competitors to Amazon will have been wiped out and it will be free to charge you whatever it wants.
I am a capitalist and a libertarian at heart; but what Amazon is doing is mercenary and illegal…or needs to be. Amazon is skirting the laws barring monopolies and participating in the perversion of our current capital markets, which have not been fixed since the 2008 crisis. Amazon should be reigned in and broken up before its too late. We are literally letting one company destroy the fabric of our economy by rapidly destroying the retail industry in order to assure its own survival.
Many Amazon supporters claim that Walmart was guilty of many of the same things that Amazon is doing. I disagree. Sam Walton started with one store, limited access to capital and built has empire one store at a time. His success was based on profits and reinvesting those profits back into his company to buy more stores.
What Walton did was something available and accessible to all Americans. He had no special advantage or received no special treatment. Amazon currently has an advantage shared by only a handful of companies: unlimited access to capital. With this advantage, those few are literally laying waste to the American retailer and, to a greater extent, the personal liberty and equality of access inherent in free market choices.
Originally published at abovethefraypodcast.com on July 2, 2017.