"Cruel Summer"
by The ZMan
"Way back when the Covid panic began, smart people pointed out that shutting down an economy was going to have unforeseen consequences. A modern economy is an incomprehensibly complex organism. Even turning off some parts of it for a short time will change the organism, resulting in downstream changes. It is why people who work with complex things are very careful about the changes they make. They accept that there is much about the system that they cannot known in advance.
Of course, the people in charge are sure they have it all figured out, so they just blundered ahead with their lock downs and new rules. Shutting down most of the restaurant industry and closing the schools. for example, radically altered the demand side of the food market. Suddenly, goods for the restaurant business had no demand, while demand for home products shot through the roof. This should have given them pause, but they kept blundering ahead with their schemes.
Anyone who has been in a grocery store of late knows that food prices are jumping like it is the 1970’s again. There are also weird shortages. Something like mayonnaise will disappear from the shelves for a week and then come back, but then plastic bags become scarce. The same phenomenon is happening with other things like building supplies and petroleum products. The official statistics are complete nonsense, so we have no idea how much food has jumped. It is enough that people are talking about inflation in private conversations for the first time in decades.
The usual suspects, of course, are spilling into the streets to chant about fiat currency, hyperinflation, and the rest of their stuff. It is as if the Great Pumpkin has finally risen out of the pumpkin patch. They have been waiting their whole lives for the Weimar moment foretold in the prophesies. Because these people are always wrong it is good to remember they are wrong now. The problem now is actually much worse than too much money chasing too few goods. It is systemic.
For starters, governments around the world have been taking sledgehammers to the global supply chain. These supply chains evolved over a long period of time to solve the problems of getting goods to the market. In response to Covid, government willy-nilly started turning things on and off without much thought. The system can respond to short term emergencies like natural disasters, but it was never equipped to respond to random outages imposed by people who have never had a job.
Then you have the stimulus plans. Having idled large swaths of the economy for periods, the same people frantically turning things on and off started pumping money into the retail side. At first this new money was absorbed in the system. Personal debt fell in 2020 as people got conservative in the face of the crisis. They also began to change their lives in response to the lockdowns. Going to the movies and out to eat is a habit, not a necessity. Lots of habits changed in 2020.
Labor markets have been radically changed by Covid and the efforts from the rulers to make a big show of dealing with it. Entry level jobs are now hard to fill, because unemployment still pays very well. If you are a restaurant opening for the first time in a year, finding help is difficult. It is not a shortage of labor as much as a shortage of people ready to go back to work. Labor shortages, however they are created, result in a spike in labor costs, which appear at the cash register.
Finally, we have monetary policy. Central bank policy has evolved over the last thirty years based on certain assumptions. Government policy, for example, has been predictable going back to the 1990’s. While there have been the usual problems, the global economy has settled into some predictable patterns. All of a sudden, none of this is true, so monetary policy has to adjust. Adjusting to erratic government behavior and unpredictable consequences in the economy is practically impossible.
The upshot to all of this is we are seeing real inflation for the first time in generations, but we have a variety of causes this time. In the 1970’s, it was too much money chasing too few goods. Pulling money out of the economy was painful, but it worked. This time, we have too much money in some areas, but we have broken supply chains and labor markets contributing to the problem. The Fed cannot do anything about shortages of aluminum cans or chicken farm with too few chickens.
To make matters worse, pulling money out of the system is probably not possible, given decades of ultra-low borrowing rates. The world has become so accustomed to low interest rates, it has become an axiom, like the changing of the seasons or the laws of thermodynamics. Any significant change in the money supply to combat retail inflation would send the financial markets into a tailspin. Housing would collapse if mortgage rates returned to anything resembling normal.
None of this means there is no answer. Often, the right answer is to do nothing and let things run their course. That was the right answer with Covid. As with Covid, the rulers cannot accept that answer, so they will thrash around some more. The people animating the corpse of Joe Biden are promising to smash things up some more for the greater good. After all, what matters to them is that we know the people in the mansions and castles really care about us, while they live like royalty.
The result of all this is we are heading into a cruel summer. The bill for the Covid response is coming due. How a society responds to crisis is the result of the social trust in that society. America is a low trust society now. Further, the people who will be counted on to dig out of the mess created by the rulers are now treated like second class citizens by those rulers. The fix to the 60’s and 70’s was to first repair the loss of faith in the system. It is hard to imagine that happening this time."
No comments:
Post a Comment