Money and Markets: Supply Chain Problems Caused by Money Supply

The Covid pandemic has injected too much money into the global financial system, causing inflation and creating the current supply problems.

Hysteresis was a word conveyed by the President of the Fed at the start of the Covid pandemic. It’s a word engineers will pick up on immediately, but not a word that is generally understood. For me, that was a particularly scary word to use under the circumstances. Such a dramatic situation which could bring about systemic change in global society is tantamount to suggesting that a revolution could take place, and these things usually end very badly and take generations to sort out. Fortunately, the overwhelming barrier seems to have been limited to the economy.

As we find ourselves exiting the pandemic (at least hopefully this is where we are), hysteresis is back in full force, this time around as the delay and resistance had to be overcome to that the world economy is once again functioning smoothly rather than as a barrier broken by dramatic events.

In my first novel in 2005, one of the characters says that the global economy is like one of those complicated £ 50,000 watches, in the sense that with one bad blow everything can stop spinning.

The book wasn’t called “The Armageddon Trade” for nothing, but the premise was that the global, virtually invisible supply chain that makes everything in our world work so easily and cheaply, and is vital to our comfortable lifestyle, might not be as rugged as you think.

As I write this reality is taking center stage.

Just in time is a wonderful thing, except when the going gets tough. ‘Not on time’ can be a nightmare on any scale, and as the global economy accelerates after the global Covid lockdowns, the global economic engine is not spinning as well as one might hope. It turns on him like an old-fashioned internal combustion engine when it comes to life.

Looking back at 8:20 p.m., it’s pretty obvious that there have been and will be major disruptions and now we see them appearing as gaps on the shelves, queues at gas pumps and bills. shocking household energy.

With luck, capitalism will quickly find a way out of trouble, even in an environment of almost unprecedented and inflexible regulation. There is, however, more to these conniptions than meets the eye.

Markets have catapulted and are catapulting various commodities to new heights. As of this writing, it is natural gas, and soon we may well see oil approaching $ 100 a barrel. Commodity prices could get much higher and much longer than expected. The transitory inflation that we have been reassured by the central banks is all we are going to suffer, suddenly seems entrenched for a decent length of time to come. Energy prices are appearing at the forefront of this trend and energy shortages are appearing around the world and, more surprisingly, in China, even after the phantom threat of Bitcoin mining has ended.

You will read about how cold last winter was, how Asia wants more gas, how supplies are tight, how x does from y to z, it’s the Russians, it’s China, it’s ( make up your own story here). That may be true and, when the wind isn’t blowing a gale this winter and it’s the fault of a power shortage, it may have nothing to do with it and everything to do. with too much money in the financial system.

What does the money supply have to do with this?

Energy is work. That is, in essence, energy: latent labor. Work is not a particularly fungible thing. It takes a long time to get more work from a unit of energy by engineering and technology. Money, on the other hand, can be typed into the world from a keyboard in a central bank. When more money is earned, if it has no application, it is worth less. During this time, the work remains immutable. So, as money devalues, the notional price of energy increases, because a joule is a joule and cannot be bought at a low price without consequences.

Energy is denominated in dollars and the dollar is degraded and therefore energy is rebased upward in dollars.

When you offer to pay people in a degraded currency, they will not play the game.

So there is a shortage of truck drivers not only in the UK but in the US and Europe where the story says the drivers will come. There is of course no shortage of drivers, just a shortage of drivers ready to get into a taxi. Quadruple their wages and the shortage will go away soon enough. But then the prices will go up and everyone will strike for more wages and the prices will go up.

Supply chain disruption is created by inflation, and supply chain disruption creates inflation. It is of course a vicious cycle, but what drives it is the excess money in the system.

The Covid pandemic has created a lot more money while destroying quite a bit of wealth and, to rebalance that, the price of things will have to strike a new equilibrium. There is no “reset”, no turning back. The world is poorer. He has a lot more money in nominal terms, and governments are in a critical fiscal crisis with the future unresolved. It is a cocktail of volatility and disruption.

Hopefully capitalism is not dead, because in the past it has proven to be the best doctor for these types of post-traumatic periods.

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