EC Current & Future Supply Side Inflation Shocks

A Particularly Difficult Type Of Inflation

Even if the really "smart" thinking at the Fed, U.S. Treasury, IMF and ECB has moved well beyond those basics, one of the cornerstone principles underlying economics is supply and demand. Something that has been long forgotten in the abundance of the modern era is that the two are not equal - a means for creating the supply has to be there first, or the demand is not necessarily all that relevant.

Our modern standard of living is based upon an abundant supply of inexpensive food. The demand has always been there for cheap and plentiful food, but that didn't necessarily matter in earlier years because the agricultural technology wasn't there to create the supply. When that abundant supply wasn't there, then people paid more or they went hungry, as was true for the great majority of human history.

Our modern standard of living is also dependent upon an abundant supply of cheap energy. If the demand is constant or growing while the supply is not because the wells, power plants and the pipelines have shut down, well, that can lead to a real problem at some point. If the plentiful supply of cheap energy isn't there, then it just isn't there, and that is a very tangible and real world physical issue that is quite difficult to overcome with monetary policy, or political talking points, or by having a consensus among the experts and the media.

What beliefs about universal basic income, modern monetary theory and the pandemic policies of the U.S. government and Federal Reserve all have in common is the assumption that a plentiful supply is the natural order of things. Once that assumption is made, then there are no limits with regard to how many people can benefit, and it comes down to making political reallocations of the abundant and ceaselessly flowing stream of wealth, on what is presented to be a fairer and more equitable basis, even as in practice the concentration of wealth flowing to insiders seems to somehow always be increasing as well.

Furthermore - from that perspective - if there is a source of abundant supply that is politically, environmentally or socially objectionable, then it is fine to shut it down. Because the state of abundance is natural, then removing the offensive source of supply would therefore not impact the abundance to be reallocated, as a more or less irrefutable matter of correct thinking political theory.

Demand, Supply & Recessions

The usual impact of a recession or depression is for demand to plummet, with people spending less money, and fewer taxes coming in, even as businesses reduce investments and inventories. This lack of demand then leads to further business closures and rounds of layoffs.

One of the many interesting parts of the workshop earlier in May was going through the long term and bipartisan development of our current new form of monetary creation, that enables far larger government deficit spending, even while permanently federalizing ever more of the U.S. economy, and concentrating ever more of the nation's wealth with Wall Street and major institutional investors. The blue print has been under development for many years, it was the plan, and it wasn't just an emergency response to the Financial Crisis of 2008 or the pandemic of 2020.

What drove the then radical theory that our financial system and investment markets are now effectively based upon, was the idea that the Federal Reserve had far greater powers of money creation than was being taken into account.  This would allow the government to provide massive fiscal stimulus in the event of crisis - such as sending out rounds of stimulus checks that showered the population with money - and the Fed would create the money to fund the resulting increase in the national debt. Because the artificial increase in stimulus spending would overcome the natural drop in demand, this would then prevent a depression while shortening the recession.

What was completely lacking from the new theory was physical supply, as in not the supply of money, but the supply of physical goods. An abundant and even excessive supply of physical goods was taken for granted, it was one of the implicit assumptions of the United States in the modern era. So, what would happen if draconian government actions shut down the supply of goods even while unprecedented government spending simultaneously kept demand for those goods high - was not even under consideration.

Keeping the dollars increasing and the spending up while the physical supplies shrink is like writing out a prescription for inflation - and that is exactly what we are seeing. There aren't enough supplies to go around, everyone has money to spend between the stimulus checks, enhanced unemployment checks and rising investment markets, and therefore the prices must rise and quickly.

Transitory Versus Structural

The new establishment buzzword for responding to reports of fast rising inflation is "transitory". The talking points are that what we are seeing are the transitory effects of the high rate of growth that comes from rebooting the economy from its pandemic lows. We are told to expect that this transitory inflation is a temporary development that will disappear by 2022, or 2023 at the latest.

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Disclosure: This analysis contains the ideas and opinions of the author. It is a ...

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