The Broken Supply Chain and Excessive Money Creation: Is There A Link?
Unprecedented money creation has spawned record consumer demand that strained supply chains to the breaking point.
A “supply chain” is a physical network of production and distribution that gets an item from its creation into your hands. For example, the supply chain of a new bicycle consists of the part suppliers, the factory that assembled the parts, the trucks and ships that moved it to the warehouse, and the delivery van that brought it to your door.
But supply chain disruptions have become common. I waited eight months for a new refrigerator, but only a year ago, it would have arrived in just four weeks.
Most financial pundits blame these delays and other economic troubles on a supply chain that’s been “broken” by pandemic-related factors such as sick workers, lockdowns, and mandates. These interruptions create choke points in the supply chain, causing shortages and higher consumer prices, or so the story goes.
There’s some truth to this “supply disruption” theory. A ship can’t sail with quarantined sailors, and there are no deliveries if truck drivers stay home. But this account leaves the impression that we’re producing fewer goods with fewer resources than before the pandemic, and it’s shortages that cause higher prices.
The pundits might be surprised to learn that increased demand, driven by government stimulus spending, causes both higher prices and supply chain glitches.
Consider the current poster child for supply chain disruptions, the much-publicized bottlenecks at the Port of Long Beach near Los Angeles. The repetitive images of stacked shipping containers convey the impression that the stuff we’re waiting for is sitting on the dock and not being delivered.
But wait. According to a prominent maritime trade magazine, total tonnage passing through U.S. ports, including Long Beach, just set a record high.
“Retail imports at the U.S.’s major container ports are expected to end 2021 with both the largest volume and fastest growth on record. The National Retail Federation (NRF), forecasts that 2021 saw an increase of better than 18 percent…The retailing trade group expects when the final tally for 2021 is completed that retail imports will have reached 26 million TEU at U.S. ports, an increase of 18.3 percent over 2020…This has been an unprecedented year…”
(“TEU” is “twenty-foot equivalent unit,” a measure of cargo volume.)
So, it’s not true that fewer goods are being delivered because of a broken supply chain. More goods are moving through the ports than ever before. Things were working pretty well before the surge in demand for transportation at the port, so the record throughput at the port must be part of the problem.
The swelling demand for consumer goods affects not just the seaports but the entire economy. The graph below shows that real GDP rose to an all-time high in late 2021. The GDP index mainly measures demand for consumer items, the same goods and services that make up the Consumer Price Index. Note that “real” GDP is adjusted for consumer price inflation, so this record high level of spending, like the record high maritime “TEU,” is also a measure of record real physical stuff.
The point is, despite the breathless accounts of supply chain disruptions, Americans are buying and consuming more physical goods than ever before in our history. The supply chain has not yet adjusted to the new level of demand, but that doesn’t mean we can blame the delays and disruptions solely on a “broken supply chain.”
The pundits’ problem is concentrating only on what they see while ignoring the “unseen.” When we look at empty grocery store shelves or containers piled on the docks, it appears things are not moving through the supply chain. That’s what we see, but it’s not the only thing that happened. We don’t immediately understand that an abrupt increase in the demand for goods has overwhelmed a link somewhere in the existing supply chain. For example, record volume overwhelmed trucking capacity at the Long Beach port due to a physical limit of parking space, contributing to the stacks of containers waiting to move.
But what caused this surge in demand that drove prices and volume to new highs?
It’s none other than our old friend, the money supply, which grew by almost 40% in the two years ending January 16, 2022. As we wrote in August and October, the unprecedented surge in money supply has abruptly lifted consumer prices by percentages not seen in 40 years.
U.S. Federal Reserve data
It’s worth pausing to consider the impact of such a massive addition to the monetary weight of the financial system. Imagine your healthy body weight is 150 pounds, but over two years, you gain 60 pounds (an increase of 40%) to reach 210 pounds. A rapid growth in body mass of this magnitude could not possibly be healthy. Such a burden would cause profound changes in your entire life, requiring significant adjustments in your whole physical and mental state. How differently would you eat, sleep, move and act?
This enormous quantity of new money, all of $6.1 Trillion, was birthed in the commercial banks by the direction of the Fed (through “quantitative easing”) or by order of a free-spending Congress and Administration (through“stimulus” programs). A significant part of this new money went directly to consumers who quickly spent all or part of it, driving up the prices and quantities of the goods and services that make up the CPI and GDP. Unprecedented money creation spawned record consumer demand that strained supply chains to the breaking point.
HardmoneyJim exists to investigate money creation and its consequences. Over the past year, we’ve examined the effects of excessive money creation, including the increasing shift of wealth to already wealthy people, the impossibility of conservative saving, the soaring cost of shelter, and record-high consumer prices. We now add stress in the supply chain to this list of inflation woes.
We dislike predictions, especially predictions about the future (apologies to Yogi Berra). Still, we won’t be surprised if the consequence of the government’s radical money experiment is price controls – not tried in this country since the 1970s and beyond the memory of most policymakers and readers. Price controls would only multiply the economic harm caused by inflation.
In the meantime, rest assured the supply chain is not “broken.” The supply chain is just fine. Barring further government intervention in the economy (not likely), the supply chain will heal its own fractures.
HardmneyJim No. 11
I'm not in agreement that it is not broken for a couple of reasons, that I'll elaborate on after this statement. While money is the most sophisticated motivational tool human being have ever invented, it is not the primary driver of human beings. At the root, we are all driven by morality. the evidence ... look at how many blocks we'll drive to avoid dealing with a supplier that we have grown to dislike.
That said, from reading Human Action I realize an economy is the total active choices made by all people, all human activity. Every choice that I make is added to the choices that all other people make and it is all based on the circumstances each of us encounters. In other words it is a very difficult thing to accurately predict, human being having free will.
When a government puts the brakes on normal, or stable human action, the predictability factor that business relies on is shattered. 'Just In time' supply chains rely on predictability. From digging up some rock to delivering a CPU requires a near phenomenal lead time and changing a few order will disrupt the flow of goods, and sometimes permanently when an individual business is capitalized too thinly.
Covid restriction drastically altered the behaviour patterns of all of us and the degree of permanent change is still unmeasurable and possibly will remains so for decades.
While I'm sure you are right, that many goods were in containers and flowing through the system continually, prior to Covid most people were happy to have 4 rolls of toilet paper on hand. After Covid restrictions were implemented, how many people were unsatisfied even with 400?
So yes, the government throwing money around is a disruptive factor, but so is the government telling all of us to sit on our hand and wait for the experts to solve an exaggerated health problem. That there are still many people advocating and wearing ineffective paper masks shows the degree as to how much has changed in the past 3 years.