The End is Near

Over the last several weeks, I have had several conversations with people in various industries and occupations.  Every conversation ultimately turned to the supply chain challenges every business faces.  Every conversation included the same question:  “When is it going to end?”

I think it is critical to understand how we got to where we are today before attempting to predict when the supply chain will get better. 

I wish I could take credit for the statements below.  They are genius in their simplicity for summing up how we got where are today with regards to the supply chain.  The quotation comes from the brilliant people at Bridgewater Associates, the world’s largest hedge fund manager.  MP3 refers to monetary policy that is coordinated with fiscal policy that world governments have pursued over the last decade or so.  The commentary below it comes from John Mauldin of Mauldin Economics.

“The MP3 response we saw in response to the pandemic more than made up for the incomes lost to widespread shutdowns without making up for the supply that those incomes had been producing.”

This is simple math. Under MP3, governments and central banks responded to COVID by sustaining incomes (and in some cases actually increasing them) without sustaining supply. The result was rising demand relative to supply, and here we are.

In a nutshell, governments throughout the world (especially in the US, the world’s largest consumer economy) subsidized consumers directly and indirectly while they shut down production of goods in order to try to contain covid.  As a result, we now have too much money chasing too few goods, causing shortages of goods and increasing prices.  (The link includes a graphic depiction that shows what has happened to supply and demand of US consumer goods over the last four years.    Markets eventually find equilibriums; this time will be no different.  Covid and government responses to covid distorted equilibriums.  Suppliers will adjust their output if they think they can make money.  Consumers will reduce spending if things become too expensive.  The Federal Reserve is done saying “We haven’t started even talking about talking about raising rates” and other gibberish; money supply contraction is on the horizon.  I do not have a crystal ball but my best guess is the supply/demand gap will narrow sometime in the summer of 2022

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