| | | It is the long term increase in Aggregate Demand that causes sustainable growth.
Correct. And where does that demand come from?
Consumption. Because if production isn't consumed, it sort of sits there in inventory. Which is why inventory levels are an important predictor of future economic growth.
Good example. Look at the DRAM market. It tends to have booms and busts. It is a typical commodity in that it doesn't really depend on the manufacturer, DRAM is DRAM for the most part. So, when production lags demand, prices go up. When that happens, the manufacturers tend to add supply by building fabs or converting old ones. Now it takes a few years and lots of money to build a fab. And, once built, it is only useful until a new generation of chips come out that uses a technology the fabs can't handle. Anyway, as production starts to satisfy demand, prices stabilize. When production outstrips demand, prices drop. Because of the lag time to build fabs, this often happens before all of the construction of fabs start to slow down. If they are not to the point of equipment being installed, they can halt construction and wait for the next cycle. If equipment is already being installed, the manufacturers are sort of stuck. Because each day that passes, they lose some of their investment. Unless a fab is running, their investment is ticking away because it is only useful for a limited time. So they have no choice but to keep production running at a high rate or they lose an even larger percentage of their investment. Which causes prices to drop even more. Until one or more manufacturers go bankrupt or merge, cutting production and stabilizes prices.
Demand is hard to predict. Which is why it is very difficult to manage construction of fabs. And then there are factors like Windows 8-10. They had the unsavory effect of taking a big bite out of demand, maybe 20% as people realized they didn't like the new operating systems and didn't really need to upgrade. Which also caught the industry by surprise because many started to ramp up in anticipation to the surge in demand that had in the past accompanied new releases of operating systems.
So it is all about consumption, which drives demand. If there is no demand, addition production just drives down prices and leads to bankruptcy.
But that's too complicated for you, isn't it? |
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