Tuesday, July 10, 2012


Chief executive Thorsten Heins of Research in Motion will meet with investors today to convince everyone that the company is not in “in a death spiral.”

There are a variety of reasons why RIM's profit is on shaky ground. So let's go right to core problem that affects all businesses: the market is using fiat currency.

This is a big problem.

Let's use a primitive island community to illustrate this point.

All economies need capital; this is the precursor for wealth. A primitive island community may have nets to catch fish. If these nets are destroyed, stolen or wear out, the community will catch less fish and thus be poorer. The fishnets are the capital.

If the consumption of fish is replaced by ownership of a Blackberry, the capital is also going to change. Fishnets don't contribute to the production of Blackberrys. RIM's capital consists of many goods it acquires from other producers through voluntary exchange. Labourers at RIM use this capital to produce Blackberrys for the consuming public.

Individual valuations will determine the price; consider again the primitive island community. Away from shore, deep in the forest, a band of hunters catch rabbit. They take rabbit to shore to trade with the fishermen. Bartering determines the fish-price of rabbit, or the rabbit-price of fish. Soon the community develops more goods - like berries, nuts, and more adequate clothing. Bartering limits trade potential so eventually a decorative type of sea shell appears as a functioning medium of exchange. That is, sea shells appear as money. A "hoarding" of sea shells has its uses for the island economy. Savings are capital in money-form. The best thing about money capital is that it can be used for a variety of uses. Not only can it purchase other types of capital (like fishnets), it can be used for investments into new technologies and inventions.

A primitive island community won't increase its wealth by consuming all its capital. Fishnets need to be replaced and time must be spent to do this. Contrary to popular belief, rabbits don't perpetually repopulate and care must be taken in preserving this "capital stock." Anything that preserves or increases capital increases the overall wealth for the islands inhabitants. But this can be misleading. Increasing the quantity of sea-shell monies does nothing for prosperity other than to ensure individuals that they will never run out of sea-shells. Wealth arises from capital and capital can be money - but money is not wealth.

Off the island, back in the world of RIM, money is represented by numbers on a computer screen. Paper and plastic are used during exchange. The system is easily abused. The creation of additional money (inflation) only consumes capital, making everyone poorer.

Consumption limits the resources that can be allocated for capital. Even in our complex modern economy, all resources remain scarce. RIM loses capital from an increasing money supply. Every individual involved with RIM, including the consumers, are poorer because of this. They contribute less to RIM's successes (as well as their own) because their money is purchasing less.

Consumers determine how many Blackberry's should be on the market and what the price should be. Consumers always want more for less, capitalists always want less for more. This process balances itself out on the free market. Government intervention will always benefit one group at the expense of the other. In the case of RIM and its consumers - both are losing out as Goldman Sachs alumni continue to debase the Canadian dollar.

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