Inflation, the real story

from Naked Capitalism

“James K. Galbraith attributes the supply-chain problem in the US to a system that was built for efficiency, not resilience” [James K. Galbraith, Interest]. “None of these interpretations withstands scrutiny. The excess demand story fails on a glance. After all, there is no shortage of goods. Ships bearing the supply – 30 million tons of it – are sitting right now outside US ports, with more on the way. Nor have production prices risen by much. Most of the “inflation” so far has been in energy (driven partly by a rebound from the pandemic slump) and in used cars and trucks, previously produced goods that are in demand because of the semiconductor shortage affecting automakers. And no, that particular shortage is not the result of “excess demand,” either. During the pandemic, chipmakers predicted a bigger shift in the composition of demand – toward household gizmos and away from cars – than actually occurred. Now they have too much of one kind of chip and not enough of another. As for the “central planning” jibe, that is to be expected from certain circles. The implication is that all would be well if only the Biden administration had not been paying attention. Never mind that the extent of Biden’s intervention was merely to urge port managers to work “24/7” to get the boats unloaded – an idea that one assumes would have already crossed their minds. The point about “efficiency” gets closer to reality, except that the problem is not too little efficiency, but too much. To be precise, the extreme efficiency of today’s global supply chains is also their fatal flaw. Well-run ports are models of high throughput and low costs. They incorporate docks, railheads, truck bays, storage areas, and heavy-lifting equipment to suit the traffic they expect. Building capacity beyond a small margin of safety would be a waste. In normal times, any excess capacity sits idle, yielding no revenue while interest on the debt issued to build it still must be paid. Over time, efficient operators will minimize the excess and keep the docks and machinery they have humming away. The spectacular success of global supply chains – up until now – reflects the relentless operation of this principle…. A supply chain is an entire ecology, a biophysical entity. It requires all of its parts to function smoothly all of the time. Failures are not isolated to one segment, nor can they be fixed with a simple increase in prices or fees, or by some rapid change in techniques. Instead, they cascade through a system that was built in a specific way; a breakdown in one part can become a general one.”

 

In other words...cost-push, not demand-pull inflation is what we're witnessing. Also absent from conventional news coverage: how good it is to have the end of deflation.