I've written favorably of Amazon in the past, noting that it gets thrown a lot of shade simply for being big. But big - even monopoly-sized big - isn't necessarily bad if a company is merely edging out the competition through better prices and better service.
But this narrative doesn't sit well with me, because Amazon's core e-commerce business has barely scraped a profit in two decades. In a free-market system, companies that aren't profitable don't last, because shareholders and creditors will eventually pull out in pursuit of better returns elsewhere. And yet we have Amazon, the stock price of which continues to soar to unprecedented heights despite its negligible profits. This is the conundrum of Amazon.
A recent Tom Woods podcast, "Is Amazon Evil?", reminded me of this conundrum. The podcast itself, which defends Amazon against the typical complaints about promoting materialism, is good as far as it goes. But what really piqued my interest were some of the comments to the podcast. The common theme was this conundrum to which I've referred: is Amazon really a free-market, Internet-Age success story? Or does its online domination stem from less-than-free-market forces?
One commenter sums it up neatly:
I receive dozens of package shipments from Amazon each year. If I paid UPS or the USPS per package, I'd pay far more than my subscription fee. I own no shares, so the company's and its creditors' losses are my gains as a customer, but Amazon's business seems built on sand.
So why do Amazon's creditors continue lending?
Then I came across a link to this article, "The Amazon-ization of the Nation and Its Long-Term Consequences", in which David McAlvany and Kevin Orrick provide some much-needed insight into this conundrum:
Kevin: How does a mom and pop store compete against an Amazon who knows that the money is going to keep flowing from two directions? One is unlimited amounts of debt if they need it. The second is all of these indexed funds and the funds that are focusing on these FANG stocks going in and just buying stock and so it raises the capitalization of the company. I’m going to throw this out, Dave. What if the business that you run here, the company that we work for, really didn’t have to make money as long as you could get more debt and get the stock price continuing to rise?
David: Right, and then use the stock as it rises as a form of cash.
Kevin: It’s like the financialization of the economy.
David: That started to happen in the 1990s, and arguably, the late 1980s. But really began to catch fire after Glass-Steagall was done away with in 1999.
Glass-Steagall was enacted after the Great Depression to separate commercial and investment banking. On the topic of Glass-Steagall, Tho Bishop of the Mises Institute writes:
The existence of the Federal Reserve, the FDIC, and other state-backed institutions undermine market discipline in lending and create moral hazard. The 2008 crisis was a perfect example of how bank CEO’s benefitted with massive bonuses during the housing bubble while taxpayers ended up bailing them out when their government-subsidized behavior went bust.
As Frank Shostak wrote when defending Glass-Steagall: "As long as we have a central bank, it makes sense to impose tighter controls on banks in order to minimize the damage the central bank's policies inflict."
I hope you're beginning to see, as I am, the subtle thread that runs from a company like Amazon back to the central bank and its ex-nihilo credit creation. The Fed's easy-money policies have transformed capitalism into what Richard Duncan, in his book The Corruption of Capitalism, calls "debtism." Rather than a market based on real wealth (capital), we now have a market based on credit (debt). The economy has shifted from its heels to its toes, endlessly chasing credit and thereby deferring the debt burden to future generations. Of course, this can't last forever.
But it's not just the Federal Reserve that's playing the enabler. Another state entity - the United States Postal Service - is also doing its part. In a Wall Street Journal article published last week, Josh Sandbulte writes:
Like many close observers of the shipping business, I know a secret about the federal government’s relationship with Amazon: The U.S. Postal Service delivers the company’s boxes well below its own costs. Like an accelerant added to a fire, this subsidy is speeding up the collapse of traditional retailers in the U.S. and providing an unfair advantage for Amazon.
An April analysis from Citigroup estimates that if costs were fairly allocated, on average parcels would cost $1.46 more to deliver. It is as if every Amazon box comes with a dollar or two stapled to the packing slip — a gift card from Uncle Sam.
I'm not convinced a behemoth like Amazon would actually exist in a truly free market, nor would I call it a success of the Digital Age. I'm not advocating that Amazon is "evil" or that we ought to disavow its services. But Amazon, like other byproducts of the "debtist" economy, can only last as long as the system that's supporting it lasts. If Detroit, Illinois, and Puerto Rico are any indication, the debtist system can't last forever.
I won't even get into the details of Amazon's $600 million deal with the CIA to provide all 17 U.S. intelligence agencies with cloud computing services via AWS. That is a topic for another day.