Acquire Capacity, Never Build in Inflation

“Overall, most of Power’s diversification, especially by acquisition, had occurred during the ’70s, when the tax regime and mounting inflation made it cheaper for industries to buy greater capacity, rather than build it or create diversified divisions. New facilities were built only as a last resort. As in the Abitibi decision to go after Price, the logic was simple. Inflated prices made for inflated profits, which had to be spent quickly before inflation eroded the value of the earnings. Physical assets were appreciating in value at a rate equal to, or greater than, the rate at which money was being eroded. So, in a year of 9-percent inflation, the purchase of a fully fitted and operational factory that appreciated at a rate of 30 percent meant a 21-percent increase in capital value. The money had been put to good use. Conversely, if building that factory and getting it into production were to take a year, the money committed to it would be eroding at a rate of 9 percent per year. Inflation would increase the cost of”

“The roots of the inflation problem lay partially in the ’60s, when the administration of President Lyndon B. Johnson fought the Vietnam War and his domestic war on poverty without increasing taxes to finance these efforts. The resulting inflationary pressures — too few goods being pursued by too many dollars; government competing with consumers and industry for goods and services because of the war; government overspending — drove up prices without increasing output or pro¬ ductivity in the u.s. economy. The eroding u.s. dollar, the world’s benchmark currency for foreign exchange and trade, especially in oil, caused dislocation in the world economy. The economic problems were further complicated by the policies of Richard Nixon’s administration. By 1974, inflation in Canada was running at around 11 percent annually, the same as in the United States. As a result of this inflation, it was cheaper for a company bent on expansion to buy its competitor’s production capacity than to build new factories. The resulting lower overhead on the production floor translated into better profit margins down the line.”