And he noted that arithmetically that would mean a somewhat higher rate of inflation, but would not consider that to be an inflationary problem. And I guess if we were to have a poster child for that phenomena, it would be Detroit. Detroit is selling pot loads of cars and losing money on every one.
Granted that the 94% of Americans who have a job-and the unemployment rate is still low at 6%-the 94% that have a job are getting a sweetheart of a deal. But ultimately, we live in an integrated economy and the consumer is also a worker. And the companies that workers work for must ultimately make some money. So actually the consumer smiles as long as he's got a job during deflation. But ultimately, he stops smiling if he loses his job.
I think pricing power restoration comes about through easy money, a lower dollar over time and probably some degree of re-regulation in various sectors, including the telecom sector, where effectively, you can get long distance phone calls for free. Ultimately, the provider of long distance phone calls does need to make a rate of return on capital.
Simonoff: Aren't you probably likely to see more regulation in the airline industry?
McCulley: What we have here is a number of industries in America that are quasi-natural oligopolies or monopolies. It's a dirty little secret that nobody wants to talk about, but it is a fact. When an industry has very high fixed costs and very low marginal costs, which describes the airline industry, and you deregulate it, then effectively you end up with cutthroat pricing that destroys the inherent profitability of the industry. And you get the same thing in utilities. You get the same thing in long distance telephone. And you arguably get the same thing in motor vehicles.
A lot of industries that have high fixed costs but low marginal costs are natural monopolies and, therefore, need to have a referee, otherwise known as a regulator, to put some degree of order in the pricing.
Where I think longer-term thinkers are putting their energy these days, is trying to figure out what the regulatory structure is going to look like three to five years down the road. We've got a mess on our hands in the airline sector, and the government is directly involved there because of the unfortunate tragedy of September 11 last year. Whether or not the government would have gotten involved in that industry without September 11 is a question we'll never know the answer to.
A lot of the disinflation and deflationary pressures of the last decade or so have been one-off, i.e., you can't repeat them for the simple reason the act of doing them destroyed profitability and solvency in associated industries.
Simonoff: Some people call what we're going through right now a process of creative destruction.
McCulley: I use the phrase frequently. So does Bill Gross. It comes from Joseph Schumpeter and was his description of what entrepreneurial capitalism is about, which is that risk capital is constantly seeking the new innovative technology and method of production in order to make profits. But the fact that the profits and innovation means that you attract new interests and extraordinary profits are but fleeting as competition erodes extraordinary profits.