It’s mostly a demand shock, not a supply shock, and it’s everywhere (opens in new tab)

Covid lockdowns have a a lot to do with that too.

People used to spent their money in restaurants, bars, cinemas, theaters, parties, festivals, massages, hairdressers, and a bunch of other services. If you add lockdowns, many things happen:

* people have leftover money, that they instead spend on "things"... and since they're used to using less services, this is also true for some time after the lockdowns

* If you're stuck at home, you'll buy stuff that makes that nice... a better tv, a game console,...

* Some lockdown policies directly affect your 'need for stuff' - school from home? Kids need their own PCs, you need to buy a scanner and a printer for them,...

* People working from home also have more free time, and decide to do the long delayed house work and projects - so people buy more construction materials (also people want houses outside of cities, because it's nicer to be there during lockdowns), so prices of that go up too

* and last but not least, manufacturers fuck up their orders, don't have stock buffers, and fail horribly

What everyone is going to have a real hard time wrapping their head around for the next few years:

We built a highly efficient economy for a set of behaviors. A shock happened that caused a lot people to change their behaviors (probably for a long time, since they've had 2 years of 'practice').

Our economy, which was built for those old behaviors (living in cities, riding public transit, eating at restaurants, travelling internationally, etc.) is doing a bad job of adapting to new behaviors (Living decentrally, driving more, ordering out more, travelling locally. etc.) because we used to think 'People don't change very fast, we can build a just-in-time economy.'

But here's the thing about cycles, soon things will adapt to those new baselines.

Companies will carry more inventory. (until a new generation of FP&A underlings forgets what a pandemic is)

Not enough steel to make enough cars? Here's my amazing ' Airbnb for cars' startup (Hey Sand Hill, did you know, dollar for dollar, they are the most underutilized asset in the world?).

Natural gas extremely expensive? Let me introduce you to renewables, which btw are getting better and better every year.

It may be a painful few years to navigate that transition, and Bridgewater's (weak) point here is that 'hey, consumers are changing behaviors' and nothing more, which to me is a great reminder why this is happening: https://www.bloomberg.com/news/articles/2021-09-02/dalio-s-h...

Looking for “why” is often a path to becoming more fragile and/or frustrated.

I do a lot of split tests (a/b testing). People always want to know why a treatment worked. I believe this is human nature.

However, the answer to any specific situation is generally unknowable. I may have only changed one color and gotten way different results, but there could be a billion or a trillion situation dependent factors that cause the situation to happen. It is pure chaos.

But our brains latch onto our cognitive biases to scaffold a reason, such as “because people find blue more reassuring than red.”

This is not generalizable, but more importantly: it probably doesn’t matter in order to resolve the decision that was the reason for the test.

Since then, I have accepted that seeking the “why” is generally a fools errand, unless you are doing pure science in a controlled, closed-input system.

That’s the beauty of not asking why. It’s a competitive advantage.

It’s a whiptail effect. Shifts in demand and supply cascade and create unpredictable effects.

For example, the rush on toilet paper triggered more production, which reduced pulp supplies, which constrained golf cart supply.

Why? Seats are made from particleboard, made from pulp. Plus, golf courses bought more carts than usual due to lockdown restrictions.

I may be wrong, but I don't think we need anything special to explain this, other than COVID.

Covid came, the economy died. No travel, restaurants, theaters etc, plus work clothes, beauty products ... Now covid is less of a problem every day, and those things are coming back ... we have a huge demand shock.

>Maybe everyone can afford a jet ski all of a sudden? No, the stims didn’t really do /that/ kind of wealth expansion.

US money supply M0 in late 2019 was low around 3.5 trillion.

Today it's around 6.4 trillion. This doesn't equate to 100% inflation, but it certainly equates to affording jet skis.

M2 money supply is sitting around 21 trillion and ought to be more around 16 trillion. This is the equivalent to 31% locked in, happening within a few years inflation. Though looking deeper than this, easily 40% inflation locked in.

You are incentivized to buy a jetski even on cheap debt because as this inflation erases the debt. The asset even with depreciation will end up being more expensive than you bought it selling used.

In terms of 'wealth expansion' it's sitting around 400% right now.

Your hypothesis of "bullwhip effect" would predict that global inventories are increasing (thus causing a surge in demand). However it doesn't square with all the graphs in the article that show inventories across the world at global lows.

Overall, I believe the Bridgewater story to be more correct.

Remote work. Hundreds of millions of well-off middle class people gained 2 hours of extra time and energy per day from not having to commute.

Thats equivalent to a population boom.

I think they address the why:

  “Household balance sheets are now in a materially better state than they were pre-pandemic, as MP3 created a significant amount of wealth, pushing up the value of assets like equities, housing, cryptocurrencies, and so on. These gains have been broad-based across the economy, not just in the top decile or quantile. Ongoing stimulative financial conditions have further lowered debt service costs, and incomes have also benefited as economies have reopened. In short, households are wealthy, flush with cash, and ready to spend—setting the stage for a lasting, self-reinforcing surge in demand.”

Overall expenditures are still pretty close to pre-covid trend. Stimulus prevented aggregate expenditures from falling below trend, as they have in previous economic shocks. What’s happened is people have shifted spend from services (particularly healthcare and travel) to goods.

Alot of people really didn't pay their rent with their stimmy's and were able to "afford a jet ski" and experiences and have done that.

This isn't meant to be a conservative talking piece, a lot of people just reacted to the lack of consequences and futility of their prior aspirations.

Also, Congress acted haphazardly and sent some forms of stimulus to anyone with an AGI below like $75k. AGI is influenced by how many deductions you make, not "income", as widely reported. Many people that were not cash poor but had or rolled forward deductions had $0 or negative AGI and automatically received stimulus payments.

And we all know how the Paycheck Protection Program went. That was an anything goes lottery.

It all are factors. I'm going to go with Ray Dalio on the weighting of the factors. Disruptions, readjusted priorities by individuals, and capital misallocations from what people want to do and how the capital entered the market.

I didn't see this yet, so I'll throw in my own experience: with prices inflating in a widespread way, I want to lock in my losses now. Yes, you could point out that investments will probably continue to outpace inflation, but I have never in my life triggered a taxable cap gains event, so for all intents and purposes investment is a one way street to me (money never comes out.) So while my two central air systems continue to work, I'd rather pay 10K to replace them now than 15k in a year when they finally do break. And while I feel it's silly to be driving around a minivan for just the one kid and one dog, it was better to have bought at the end of 2020 and feel silly until kid #2 comes along, rather than be sitting on the wrong end of the enormous swing in car prices.

> What this doesn’t really address is the why?

Consumers base purchasing decisions on their monthly outlays. When interest rates go down, they can afford more in payments, so they increase their consumption until their expenses match what they can afford. A good example here is housing.

The US and many EU states provided an under-appreciated amount of stimulus during the COVID-19 lockdowns. Even when this wasn't given directly to citizens, as it was in the US, it still trickled down from businesses to labor through steady wages. It also kept the wheels of the economy greased by keeping businesses out of bankruptcy, so when the lockdowns ended, the unemployed could return to work.

The steady wages piece here is key, because the lockdowns led to a significant reduction in daily expenses. So, i.e., if you had 5K in monthly expenses that were matched by 5K in income, for a non-negligible amount of time, you had 5K in income going against 3K in expenses. Even without direct stimulus payments, this led to a significant increase in average savings.

Now that the lockdowns are over, consumers - who now have money in the bank - also happen to have access to extraordinarily low interest rates (too much money chasing too few investment opportunities). Because of post-COVID structural issues, there is also an increase in the demand for labor, so wages are also increasing. And there's the much touted structural part of all of this.

We've never, ever (at least, from the early 20th century), seen as large of a reduction in global peacetime economic activity as we did in early-mid 2020. The closest example out there is the end of WW2. We've also never seen global economic activity drop, and then rebound, in such a short period of time.

> Maybe everyone can afford a jet ski all of a sudden? No, the stims didn’t really do /that/ kind of wealth expansion.

Getting back to your post, debt allows leverage. Consumers now have either lower monthly expenses (if they used their savings to pay off debt) or they have more money in the bank to use as a down payment. To use your example of a jet ski, a Yamaha EX at $7,200 USD can be purchased with 1K down and a 60 month repayment plan. The monthly payments will be $118 USD at a 5.2% (high) interest rate. So, the average American consumer, using only government-provided stimulus checks (3.2K per person), can afford the down payment along with almost two years of monthly payments for a jet ski before they have to start paying from their income.

Can they afford the jet ski outright? No, but consumer purchases are based on short term impulses, and the US stimulus checks, along with easy access to low interest debt, certainly pushes the equation towards consumption.

Also, a lot of suppliers and shipping companies are trying to recoup their covid losses from 2020. They have increased their service costs, which causes the next guy in the chain to increase their costs, etc.

In networking we have TCP global synchronization. This is probably going to be similar for a couple of cycles, but for goods.

Also LEAN is the practice of globally optimizing a system, with the less known drawback of making it globally fragile. We have seen this before when supply chains are disrupted, like the flooding in 2011 disrupting HHD's. https://spectrum.ieee.org/the-lessons-of-thailands-flood

Yeah, this is what happened with toilet paper writ large. Then you add in the supply shocks and it is exacerbated. The other issue is that the ports and trucks staffing was already short handed and then they backed off hard during covid. Either prices will rise enough to attract the workers back or we'll just be in this new world for a long time. I definitely can see some business like fast food switching to a drive-thru only model. You need less staff and don't have the interior maintenance costs. Previously that would have hurt their business but people are now used to the wait. I see lines of 20 cars at all fast food drive-thrus most of the time now.

>No, the stims didn’t really do /that/ kind of wealth expansion.

Of course they did, but indirectly. By propping up the economy by keeping an artificial demand for treasuries, it caused a securities bubble.

I bought a bigger house, and so did plenty of my friends, and so did everyone else my real estate agent was working with, which meant I needed a new couch, bed, desk, curtains, speakers, tv, etc.

All of the move up buyers who moved some of their money from the stock market into housing likely also spent money buying more 'stuff' for the bigger space.

>Yeah there’s more money floating around, so perhaps more people want to spend it, but why?

Even if they don't spend the money, it still drives demand. That's because investment also drives demand. How do you get a return on investment? If you invest in a company, it will expand. Even if you put money into property that will drive renovations and new construction. All profits from investment come from profitable economic activities somewhere down the chain.

I’d say wealth effect from people seeing their retirement account ballooning in such a short period of time. The demand will last for awhile especially in places like EU where the stimulus was substantially higher than in the US for lower middle class.

By the way, if we DON’T see sustained inflation from this level of stimulus, that should raise eyebrows and we should really question the role of CBs and efficacy of monetary policies.

> or even need that much more stuff,

That's a fairly rich-world centric view of things. I suspect the majority of humanity hasn't reached the point where "they don't need much more stuff".

If that were true, inventories ("domestic stock") should be very high. Actually, they are at historic lows

When money has no value (rates=0%) you are better off spending it rather than saving…

Crypto has added a lot to aggregate wealth over the past 12m.

Thank god we have crypto & NFTs to help people use all this free cash

The government didn't even grant people a months worth of rent in my city. Not sure how that lead to such a huge infusion of demand that continues to persist, unless there are just that many people with very little rent who are driving this demand. Seems like such a small amount in the grand scheme of things considering most people even working a minimum wage job might see more money back on a tax return than the measly $1200 that's been dispersed.

Thanks, I was scratching my head wondering why an old music format was related to recent events!

Thanks you!

Claudia Sahm? Krugman? I rather listen to the hedge fund guys, at least they have skin in the game, don't they? Claudia Sahm is extremely partisan, and so is Krugman. You know it's going to be bad when we are starting to hear from the media that inflation is actually a good thing --because people have more disposable income to spend on things. First, it was just a blip, then they told us it would go away in half a year, now it is here to stay --but it is a good thing, see?

The reality is that the explosive demand, alongside with a lagging supply can lead to an inflationary pressure not seen since the 1970s. At least in the 70s the information technology revolution was just around the corner. Right now, it feels like the supply issue cannot be remedied or solved because of heavy regulations and a stagnant productivity.

I also highly suggest reading Paul Krugman, and turning all his "wills" into "won'ts" and "won'ts" into "wills." His insights are worse than political talk between a couple drunk guys at a bar.

What is most definitely a heterodox economic view is taking Paul Krugman seriously. He has fully become a newspaper opinion pundit, and very few people among academic economists pay much attention to him because of that.

Organic demand growth is what we want, not this Frankenstein economy that's been created since at least 2008 if not earlier. Demand doesn't boost GDP, producing real goods and services boosts GDP. You can't spend your way to prosperity despite what any of the insane MMT economists might say.

I agree that wage growth is good but not in the manner it's happening right now, through insanely easy money policies creating massive inflation that's easily outpacing any of those wage gains. Again, you can't print and spend your way to prosperity. Maybe some of these tools would work if they'd ever let off the gas and removed them but that's not what's happening.

Corporations and capital class had huge piles if cash, that douubled while real Economy stuttered during the pandemic. Noone is talking about the fact that share price and real estate is inflating. But for once there is pressure on wages, and suddenly people are running for the hills

Personally, I don't want any more growth. Infinite growth is not sustainable. Developed countries are way past what's necessary for a good life.

I'd like to advocate for a slow controlled de-growth so we can reach climate agreement goals, and sustain humankind for a few more centuries, in decent living conditions.

I suspect the second half of this is where a lot of the cheap money will flow towards:

> Addressing this imbalance will mean placing upward pressure on wages to entice more workers to work longer as well as requiring investment to improve productivity.

Exactly, this is what a functional economy that is not crippled by financial logjams looks like. It's possible to overdo it but that is much less damaging than under doing it like in the 2010s.

Yes I was wondering why economists would think this was a bad thing. To someone like me who knows nothing, this seems like an obvious good thing.

Yes, the complete system is way too complex to understand. Even the FED admitted that[0]. Especially forecasting anything is very hard and the luck factor is very high. That's why business "science" (not a real science IMO) is only reactive, not proactive. They keep the system running, see it fail, adjust the screws on the machine we call "the market", and try again.

[0] https://www.nytimes.com/2021/10/01/upshot/inflation-economy-...

Nitpick but nothing grinds my gears more than people using niche acronyms without first defining them in long form, especially when its something like MP3 that's going to give you a million hits of the wrong result when you try and search for a definition.

it's 2021... People should just switch to Opus. The lower latency should wrap up the supply/demand buffering problems nicely.

I think we can finally label neoliberalism a failure, it cant even direct capital to productive industried

I’m not an economist, but it’s hard to shake the feeling that the CPI is gamed somehow, or at least the official government numbers do not reflect the bubble of the US I live in. My friends and family are seeing record wages and investment growth, but when my generation cohort looks at housing and all the numbers there are proportionally even higher, and people are selling 3 year old cars for nearly the nominal price they paid for it 3 years ago.

It feels to me like assets all inflated first, and when that failed to pop it was an omen of the future inflation which would follow. It seems like there is a tsunami of inflation that is just starting to hit the economy, and because of the early asset bubble it is too late to find obvious safe havens to protect inflation vulnerable assets.

Your choice at this point, barring some insider information on specific companies, seems to be to have to follow the FOMO wave into an already insanely overvalued market with the hope that you can get out before it all comes crashing down.

Do treasury yields actually have a causal relationship with anything besides the demand and supply of treasury bonds? I don't see any reason why we can't have a negative real yield (indeed, I suspect that is presently the case).

Totally agree. We have been living a long period of low inflation with a huge QE at the same time...

It is worse than what we've already seen if what we've already seen is CPI

Demand shocks would manifest themselves as bottlenecks in different places along the supply chain as supply attempted to catch up.

The articles does talk about lack of productivity and "not enough labor". Just my guess that that would could be likely causing bottlenecks as there isn't enough staff/equipment/ machinery to unload everything in time.

Check the graphic here - https://www.bbc.com/news/58926842

Certainly shutting down the economy is a factor too.

Exactly! The data makes the opposite point.

https://hbr.org/2021/09/who-is-driving-the-great-resignation

>Employees between 30 and 45 years old have had the greatest increase in resignation rates, with an average increase of more than 20% between 2020 and 2021.

>Interestingly, resignation rates also fell for those in the 60 to 70 age group

I also had trouble with this, especially as it got to the supply chain, where one company's demand is another's supply.

One explanation that fills some gaps for me is that the shift itself reduced efficiencies. They give an example of this at the consumer level, where spending moved from services to goods, putting a new kind of pressure in raw materials and shipping. Another I'm aware of is in energy, where disruptions and shifts in use case for energy are forcing use of less efficient types of energy production.

Reduced efficiency doesn't show up cleanly in supply and demand curves because it happens in between the transactions where you measure them. And after thinking once about it, it's impossible to unsee all the ways a sudden shift reduces operating efficiency of almost every kind of economic unit.

> 2) speaking of stimulus, despite the claim that it's a demand shock, the article makes this claim early on: 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.

Most American workers just produce local services, they aren't a part of the supply chain for consumer goods. When they work the money just goes around in the economy, they neither add nor remove anything. So before another person paid them to do a job, and then they bought some good. Now the another person buys a good, the state prints dollars for the worker so the worker can buy a good without working, meaning the good now got bought twice when before it would only have been bought once.

You can have a record supply and still not have enough supply to meet demand. Apple is selling record numbers of products, they have trouble getting the additional supply to meet the extra demand.

The furlough system transferred a large amount of money to households, because people had substantially reduced expenses (due to not having to commute, and service-based industries being closed, for example) but only slightly reduced income.

This is generally true in most countries: although the exact mechanism was different, people ended up with more discretionary income and fewer services to spend it on, and so demanded more goods.

Bridgewater would love to show you their content without the modal.

The only problem is, the lawyers who interpret things the US government says, are requiring them to show it.

Unfortunately, the government has decided you're too stupid to critically read words written by an investment firm. Your elected representatives believe you need to be reminded that investment firms might be writing bullshit to try and take your money.

The only problem is, if you're too stupid to use critical thinking when reading words on the internet, you're also not likely to be the type of person who would read a terms & conditions.

Welcome to exciting world of well intentioned but poorly thought-out legislation with hilariously irrational unintended consequences.

Nearly all investment management companies do this, I presume because of SEC rules.

Crazy how much more pleasant web is with uMatrix. I did not even notice this until you pointed it out

i really miss the pre 2011 internet sometimes

Because the obvious response to insufficient supply is to make more stuff, thereby growing the overall real economy. Yes, it's a lagging function. But it's frankly insane to insist that today's transient supply chain issues mean that people need to be paid less than a living wage in general...

It's similar to the old argument over slavery. Yes, removing slavery causes large realignments in the economic system. But overall removing slavery grows the economy, both by encouraging automation of jobs people don't want to do and by increasing the number of people buying stuff and performing more productive labor. Add in additional points about recognizing basic human dignity as needed.

Personally, I believe UBI is a good offset for automation strength - an offset for lack of jobs.

We're no where near full automation so probably a bit early for UBI, but I do think there's an argument that if the workforce demand isn't met, automation will be used to backfill. Takes time of course, but it's a one way street.

Don't have a strong opinion on UBI, but considering the magnitude of the coronavirus pandemic I consider things now to be much better than I would have anticipated.

"do not help produce the supply only push up the demand"

Somewhere between 30% and 50% of jobs do not 'produce' anything, they are Starbucks, Macdonalds, etc. They have no bearing on supply of goods and their shortage.

"yet everyone has tons of money furthering pushing up demand"

This was happening at the top of our wconomy for the past 30 years, thata whu the stock market and house valuations have sky rocketed.

USA never stopped consuming, they just import more and more. Trade balance is even more negative now than before the great depression, there should be a correction happening real soon:

https://tradingeconomics.com/united-states/balance-of-trade

Everyone??

Are you just making stuff up to argue about??

Bridge water is very much on the record saying what they think comes next. Inflation, low rates, poor performance for bonds, poor performance for many assets.

Also, as the pandemic fades, people will probably start spending more money on services and less money on goods.

Very true. A family of 5 with 3 toddlers making $50k/yr got $19,300 in stimulus and expanded child tax credit, whereas that same family would have gotten considerably less if they had a $200k/yr income. It would seem that the benefit of the economic stimulus was rather intentionally concentrated at the bottom and middle of the income curve, obviating the need for private charitable contributions. Let's also not forget that those in the top 20% already pay nearly 80% of the taxes, kinda seems like they're already doing more than their share.

That supposes that everyone, in all sectors globally has the resources to double or triple order. The money supply to do that has to come from somewhere though.

If you are right then this is a temporary shock and will subside quickly. If the article is right then this is a systemic problem that will persist for years to come. I suppose we'll see. One indicator to watch is services demand because I wouldn't have thought that would suffer from a 'grab the toilet paper while you can' effect.

The argument is that the monetary policy response to the pandemic caused the demand shock, so seems unlikely that it would have been predicted ex ante.

"Governments transferred a massive amount of cash to households, more than offsetting lost income from COVID."

I don't understand this calculation either. It does not fit my own experience, or anyone else I know.

I don't know about you, but I've managed to save 2 to 3 times as much of my income compared to before the pandemic started. I must not be alone. In most countries, those most affected by the shutdowns (restaurants and the likes) got government help. All in all, there's gotta be lot of disposable income, thus people are trying to spend it.

75 dollar turkeys??? Where in the country are you?

Turkey here is retailing for $1.51/lb grocery brand, $1.94/lb here for brand name with curbside pickup. Slightly higher than normal but nowhere near $75 for a turkey.