"If you defer purchasing a new factory you have also deferred purchasing computers and networking hardware and software and paper clips."
Okay, if you are going speak of interest rates affecting capital expenditures in this manner, then I will buy the argument that rising interest rates may slow the rate of purchases for technology.
Question:
But, prices and interest rates typically rise and fall together. So, if prices/costs are rising, how do firms compensate for this to maintain current levels of profitability in the short run? In the short run, we must agree that the price that a firm can charge for its products is somewhat sticky. While the raw materials used to produce goods and services may be rising, it is hard to pass those rising costs on to your consumers.
Answer:
Purchase technology that improves efficiency and productivity. The only way to maintain current profits is to get the goods and/or services out more cheaply. Since the cost of raw materials are rising, you must become more productive and efficient in your process. This is a critical need in todays highly competitive business world and, therefore, puts a near priceless tag on technologies which will do this.
Currently, one could make the argument that technology stocks have been suffering because prices have been so low. With low costs of producing goods and/or services you can afford to be less efficient and productive. Previously it may have been felt by firms that upgrading networks was not as necessary because of the generally lax environment on costs. As these costs begin to rise, suddenly you do not want your labor waiting around for data to upload and download. This time is costing you money and, now as prices are rising, this becomes less affordable.
To sum what I have said up, there is a positive relationship between the need for technology and prices. That is, as prices for raw materials rise, so does the need for technology because prices for finished goods are sticky, at least in the short run. Since existing business demand is going to rise sharply, new business demand that is going to be lost by increasing cost of capital, will become insignificant or more than compensated for.
Wayde. |
