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Inflation and the Supply Chain are Joined at the Hip

Back in the early eighties, inflation was on everyone’s mind. Prices on everything had been going up since the Vietnam War, and the country was caught in a vicious spiral of people and businesses getting rocked by higher prices, expecting them to go even higher, and raising prices in anticipation of them going still higher.

Rinse and repeat. The expectation of higher prices drove prices higher.

It was an eye-opening experience. The candy bar that cost a dime when I was a kid was suddenly 75 cents. My first mortgage carried a 12-percent interest rate adjustable every year, which meant it could’ve escalated to 18 percent in six years, a terrifying prospect.

Luckily, interest rates peaked before that could happen, and the so-called Great Inflation of the seventies and eighties finally subsided.

But ever since that time, big business has been obsessively paranoid about anything that smacks of inflation. Inflation cuts into their precious purchasing power. It degrades the value of their assets. It raises their labor costs, which they absolutely hate. And when big business doesn’t like something, the Republican party doesn’t like it either. Hold that thought.

Because inflation is very much in the news, and there’s every reason to expect that prices are heading upward faster than we think. We can already feel it at the gas pump, in the supermarket, and in dozens of ways we haven’t even noticed yet.

This is one of the many ripple effects of the pandemic, and the whole world will be riding it out for a while. It’s directly tied to — and aggravated by — major disruptions in the global supply chain.

We’ve all heard about the acute shortage of Chinese microchips. How that snarls everything from next year’s car models to this year’s MacBooks. How that forces long backorders for any machine with a chip in it.

And chips are just one of millions of components that go into thousands of products that are currently late to market. When the supply of these components becomes unreliable — when it gets choked off or diverted — price increases ripple through the entire supply chain.

Especially with demand going through the roof, as it’s doing right now. We all spent the last year cooped up, going nowhere, eager to get back to consuming stuff. That created a pent-up demand for goods of all kinds, with a whole lot of money looking for something to buy.

But the businesses making those goods haven’t yet recovered from a year with no customers. A lot of their products are on back order. Long wait times are now commonplace. Customers are grumbling. Too much demand is chasing too little supply. Which means — as I learned in Econ 101 — prices must go up.

This is already inflicting plenty of pain. Businesses in dozens of major industries are struggling to stay afloat. Unable to get the parts they need for the orders they can’t fill, a bumper crop of business bankruptcies is in full swing. And for each business failure, workers lose their jobs and families go hungry. Some countries have a safety net for that.

Global business has long been heavily invested in the “just-in-time” manufacturing model, in which every component that goes into a product must arrive exactly when it’s needed in the production timetable. Container ships, ports, trucking fleets, railroads, and workers of every stripe play a crucial role in a system that insists on everything being in the right place at the right time.

But at the moment, that’s not happening. Those timetables are going seriously awry, and the ripples are being felt everywhere. You can almost smell the inflation.

Seventy-five or so huge container ships are currently anchored off the ports of Los Angeles and Long Beach, waiting for a parking place to unload their containers. The delays in delivery are forcing bottlenecks upstream and down.

Every port facility is facing multiple logistics crises at once, which drives up the price of shipping. These disruptions ripple outward to the trucks, trains, and planes that move the cargoes inland, causing more missed deliveries, more production delays, and ultimately more businesses going under.

There are plenty of other disruptors:

Like a nationwide shortage of truck drivers, who — like restaurant and grocery workers — have decided their jobs aren’t worth either the pathetic paycheck or the health risk.

Like the blocking of the Suez Canal by a huge container ship run aground, closing a major shipping channel, adding weeks to the delivery process, and causing economic ripples that are still rippling.

Like the massive damage all over the U.S. from hurricanes, wildfires, and extreme weather events, to which many pieces of the supply chain are not immune.

And like, oh yeah, a global pandemic that removes people from the workforce, just as all kinds of workers are needed.

But let’s get back to Republicans. Because there is no part of this picture that they haven’t compounded. Yes, there were flaws in the supply chain before Covid, but those flaws were evident for some time. They have long required thoughtful policy changes to address.

But Republicans don’t do thoughtful, especially when they’re in charge. So it didn’t help that we levied those ludicrously misguided tariffs on imports from just about everywhere, but especially from China.

This was exactly the wrong thing to do, and the supply chain would be considerably more resilient now, were it not still hurting from the distrust deliberately spread by a lunatic in the White House. International trade depends on cooperation and good communications. The Trump tariffs undermined both, eroding trust between trading partners. Inflation is an inevitable consequence. Republicans couldn’t care less.

There are a lot of easy things they could do to slow down the inflation they supposedly loathe. They could stop screwing around with the debt ceiling, instead of periodically playing chicken with it. They could stop undermining the safety net, which is porous enough without them making it worse. They could stop lying about the environment, which is coming for everyone, including their billionaire donors. They could stop killing unions, so workers might consider working for them. They could stop pretending that tax cuts and deregulation are the answer to everything.

Most of all, they could start treating the pandemic as a public health emergency, instead of a propaganda tool. It seems they’re invested in sickness and death, though the economic and political benefits of that are not clear. They willfully look away as Covid kills their constituents, trashes their healthcare systems, wreaks havoc with city and state budgets, and yes, pushes up prices.

You would think their donors would object. You would think billionaires would have an interest in making this better, or at least not worse. But then, maybe inflation is just a loss leader for them. Maybe it’s a cost they’re happy to absorb to advance their corporate interests.

For the rest of us, rising prices will be part of the new reality. Economists are saying it’s a temporary phenomenon, that it’ll go away as the supply chain repairs itself. I’m not so sure. But regardless, we should brace ourselves for more ripples.

Because inflation and the supply chain are inextricably linked. And as long as the supply chain stays as broken as it is currently, inflation will have a field day.

 

Comments

  1. It is a category error to think in terms of a single national economy. Statistics like inflation and unemployment, indicators like interest rates, are nominally national in scope, but that only means that they conceal the real workings of the three economies.

    The first economy is the one that trickles down from government procurement. If you are, or work for, a supplier to (a supplier to..., etc. etc.) government, you are doing fine.

    The second economy is based on the manipulation of financial instruments such as overnight repo's. Firms large enough to play in this space derive essentially all of their revenue from it; doing what it says on the sign is only a cover. This economy will be fine until, one morning, it totally implodes.

    The third economy is what is left after setting aside the first two. It is what used to be, and what certain idealists still see as, "the" economy. It is dead, which is not to say that its activity has already gone to zero everywhere (in some places it has) but that it is on an irreversible ramp to zero. The resources that would be required to revive it no longer exist. It will never be revived.

    "Setting" interest rates or inflation targets at a national level would have entirely different effects on the three economies. Pretty much any perturbation would cause them to further diverge from each other, leading to unstable behavior, like a power grid losing synchronization in the last few seconds before a blackout.

    What I have called the first economy could be the only thing left standing: government as the lender, spender, and vendor of first resort. If even that fails, due to ideological addiction, the way is down, with no net.

    ReplyDelete
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