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It’s mostly a demand shock, not a supply shock, and it’s everywhere (bridgewater.com)
389 points by knasmai 76 days ago | hide | past | favorite | 454 comments

What this doesn’t really address is the why?

Yeah there’s more money floating around, so perhaps more people want to spend it, but why? Most people aren’t getting materially more stuff or even need that much more stuff, consumption’s already god damn conspicuous.

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

To me, this still looks like the bullwhip effect, which is expected to have an outsized effect on demand over at least a year or two.

Buyers, who got used to “just in time” shipping, got spooked by shipping delays and shortages from their suppliers, because of supply demand imbalances during shutdowns, and as a response they all put in orders for 2 to 3 times the amount they usually buy from their suppliers with the intent of rebuilding domestic stock so they don’t miss out on sales.

All of a sudden, aggregate demand explodes.


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

You can easily see the massive increase in savings in data from the Fed (for the U.S., at least):


Typical growth in household checkable deposits/currency/savings deposits was around $500 billion/year during the mid-2010's. last year it was... $2.6 trillion

$2.6T... good lord. I wonder whether it will level off at $500B/y again?

>Some lockdown policies directly affect your 'need for stuff'

I think this was the root cause of the toilet paper shortage. People who normally spend a large portion of the day at the office were now spending that time at home. There was a popular viral video at the time of a man driving around on a forklift in a warehouse full of toilet paper laughing about the shortage, but it was all commercial toilet paper not what you would use at home. Anecdotally I noticed a correlation between the level of traffic on the freeway and the amount of toilet paper on store shelves. When the freeways were empty the shelves were bare and as traffic started picking back up the shelves started replenishing.

After the panic buy I've never seen a toilet paper shortage anymore. I therefore doubt your theory of correlation. Maybe it was so in the us but it definitely does not correlate for everyone.

It took forever for it to get back to normal here. There was limited TP available after the initial panic, but it took months to get anything decent on the shelves. I was ordering it online for a while.

48-72 hours after the initial panic my local large food store had literally more toilet paper on the shelves than I have ever seen in there before. However it was all super low quality and from brands I've never seen before or since.

It's the cheap stuff that you normally find in the bathroom at an average office building, fast food place, etc.

With the world shutting down the companies that supply those kinds of places had a warehouse full of inventory and most of their usual customers either were entirely shut or going through a lot less product.

I'll wager your grocery store called one of them up and got a few pallets to resell, creative move on their part.

John Wayne toilet paper... it’s rough, tough and doesn't take shit off anybody.

Nothing captured my imagination and horror more than an advertisement I once saw for "splinter-free" toilet paper.

Back when I used to use toilet paper, I would sometimes encounter a kind which would fall apart while I was still wiping, breaking up into a bunch of tiny "rollies" which would, as you may guess, would remain stuck to my butt. It was one of the "extra soft" brands, I think.

The root cause is that toilet paper is bulky and the stores simply didn’t carry as much of it as (say) tinned goods.

It didn’t take a big demand increase to start seeing gaps in shelves, and once that happened a degree of panic took hold and even though there was plenty in stock in warehouses, it wasn’t able to be distributed fast enough.

The difficulty is that the big supermarkets have got their supply chain down to a fine art and it only takes a small fraction of people to start buying an extra here and an extra there for it to start having an impact and they then have to struggle to keep up.

People really underestimate how small the slack is/was in parts of the supply chain.

I remember a couple of years ago when we had a lot of snow (for England) and it kiboshed the supply of things like milk and bread for about a week, even once all the roads were clear.

You only need a chunk of people to buy a few more toilet rolls than they usually would "just in case" and suddenly the shelves are empty.

Toilet paper is bulky for a store, but it's non-perishable, so under normal circumstances people buy a couple of month supply and return to the store when it runs low. The COVID shock meant that everyone replenished their TP supply at once, which screwed up the system by increasing demand x10.

Plus the commercial domestic imbalance.

That and I believe I read that most people used the stimulus to paid down/off debt [1][2]. I would suspect at least a portion of those used that opportunity to also take on more debt down the line as jobs came back

[1] https://www.census.gov/library/stories/2021/03/many-american...

[2] https://www.businessinsider.com/half-of-americans-used-1400-...

The causes of the lockdown shortages are cultural, toilet paper disappeared in Northern European and English speaking countries, while in Italy (and I think in some places in Spain) yeast could not be found.

Yeast and flour were gone in the US as well (at least where I live).

yeast was hone in slovenia too...

People were afraid they won't be able to buy bread, so they bought flour and yeast... then bought bread, and eventually threw away the yeast.

Yeast also ran out in Northern Europe.

I can confirm that lockdowns made our family save a lot more money then usual - despite us buying quite a lot of new stuff do to lifestyle changes.

My experience supports that - on public transit alone our family saved more than 5k USD last year, it would’ve more than made up for any equipment I would’ve had to buy (turned out though that I already had everything needed to work from home).

because of remote work, I have to heat the house 7 days per week, instead of about 0.25*5+2=3.25 => that's about twice as much. Given the rise in energy cost, this will have a huge impact.

At the same time that is largely a problem of the colder areas. In more sane (temperature wise) places, that energy cost is negligible.

Also, that assumes you are the only one (or the other person (s) in the house have very similar schedules) in the house. An assumption which if you have a house wife and a few kids, is largely invalid

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...

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

Shutting down a natural gas pipeline that people depend upon just before winter, and then lecturing them about solar panels is not a good look. Artificially increasing the price of natural gas causes famines, it causes food and fertilizer to be more expensive, and it makes it hard for people to heat their homes.

But one thing it doesn't do is increase reliable renewable energy sources. Solar is not a replacement for home heating oil during the Michigan winters. And renewables do not spring instantly into existence out of suffering. Another thing it doesn't do is help the air, because instead of this pipeline, we will need to run 5000 trucks per day from Canada to the Midwest to deliver that natural gas in time for winter. So it's a good thing we don't have a shortage of truck drivers or any supply chain issues.

This idea that we should be punishing end users who need to heat their homes and buy fertilizer instead of actually deploying reliable alternatives is a form of scolding eco-sadism. It may be fine for you to absorb an increase in home heating oil prices, but other people really suffer. It's pure mismanagement and very much has a "let them eat cake" vibe.

> It may be a painful few years to navigate that transition

The pain inflicted on households in the midwest will be returned with interest in the next election. The next time you wonder why it's 2050 and the US hasn't raised any gas taxes or instituted carbon credits, or really done much to reduce CO2 emissions, then remember that to pass a green agenda you need to win battleground states like Michigan, and then remember back to this moment and the kinds of finger wagging lectures that were being delivered all over the country to people worried about how they will heat their homes in the winter.

I sympathize with this, but if climate experts are to believed, we’ve stalled to the point where we have perhaps a decade to get emissions under control in order to meet targets, and most countries haven’t even begun to make significant changes. At some point there will be pain. The question is, “do we want a little pain now or a lot of pain down the road?”. And to be clear, “wearing a coat inside during winter” may just constitute “a little pain” compared to the famines and wars that are likely if we fail to get our emissions to zero in time.

"we have perhaps a decade to get emissions under control"

Every year we're told it's our absolute last chance. Environmental brinkmanship hasn't work and the tune needs to be changed. Literally no economies are planning for mass famine or wars because no-one actually believes that is going to happen, except religious cults.

Because every year IS our absolute last chance. Each emitted ton is there "forever" (at least for multiple centuries). Climate change can be stopped (like, paused indefinitely) but can't be reversed.

You are right that there is no absolute deadline. Now we are stuck with our hotter summers "forever". But we are not yet stuck with what comes next.

> no-one actually believes that is going to happen

That is the problem exactly. We do not listen to scientists, because it's more convenient to ignore it. And when their models become reality, we'll just blame them for it, as they "knew" and did not prevent it.

All I'm going to say is always look at where these 'scientists' are getting their funding from. I'm not a climate denier, but realize much of the NGD is really a redistribution of funds. Driving EV machines will still require electricity, most of which is still generated by fossil fuels. Then there's the quagmire of what to do with spent batteries. The Earth has heated and cooled over millions of years, so I really doubt we're at the point of no return.

>Driving EV machines will still require electricity, most of which is still generated by fossil fuels.

Most, compared to all. And power plants are much more efficient at capturing energy than internal combustible engines. I see no real issues with the technology, just small kinks to be worked out, which is expected

Every year the goalposts move a little bit. Thirty years ago the goal was ca. 0° of global warming. Now we're debating whether we can muster the political will to limit warming to 2° (unlikely) or 3°.

Could it also be our understanding is gradually improving and the externalities are just lagging more than first thought?

No,it’s mainly that business won’t change until it’s forced on them. Big tragedy of the commons problem

Right. They want regulation...but NOT THAT REGULATION!! No one will be able to agree on anything as politicians bounce between big donors bitching and various voter poll data.

Somewhere out in left field are the right things that need to be done.

1. The same thing could've been said about the Covid-19 pandemic back in February 2020. In fact, a certain American President said as much. The fact that people are incapable of envisioning major disruptions to their lives does not prove that scientists are wrong; it's proves that humans can be blindsided by their own biases.

2. Countries don't plan their economies half a century ahead. Most struggle to plan beyond the next election cycle.

I have was a denier of: CO2 emitted by humans causes global warming until I studied chemistry. Then it hit me. The earth is warming, we are making it warm faster. This place is normally hot...we are making it worse.

The claims sound fantastic if you don't have a solid education. The people you are trying to convince do not have an education that will allow them to understand for themselves. They fundamentally distrust the people trying to convince them. There is no "to be believed." That has already reached the saturation point.

In democratic countries, the answer to the question of "do we want a little pain before the elections or a lot of pain down the road?" is quite clear - if you accept the pain now, you'll get voted out and get replaced by someone who will proclaim that the pain isn't needed, promise to undo your measures and kick the problem even further down the road to some other future government.

Solar is an excellent replacement for home heating oil during the Michigan winters.

The vast majority of people in Michigan are already connected to an extremely efficient distribution network for electricity. The marginal cost of delivering additional energy through this network does not round to zero, it is zero. Meanwhile heating oil is delivered by trucks with a large cost in depreciation, labor, and fuel (further fossil fuels burnt in support of a system which was designed to make economic sense with <$10 oil). Whereas domestically produced oil can never drop below $40-50 a (marginal) barrel at the refinery, and imported oil never realistically below $30 + the cost of fighting forever wars for resources, there is a clear and feasible convergence of the marginal cost of solar energy generated in the Southwest US to $0. All this would make solar a viable replacement even without the role of heat pumps, which reduce the raw energy cost of heating with solar to around 20% of that of burning fuel.

I live in Michigan. I have a 5.9kwh solar array. Spring/fall, I can produce over 40kwh/day. Summer heat lowers my production to upper 30-40kwh.

January 2021, I produced 197kwh the entire month.

I know this discussion is focused on heating. But from an electric vehicle perspective; 197kwh is not that much. In the winter, I don't think it would be enough electricity for a homes electric needs + EV or electric heat.

I can make 1MWh over 1 month in the summer. Basically, Michigan has short days in the winter. Snow does sit on top of the solar array until it melts, which robs me of production during sunny winter days.

It wouldn't be impossible to use solar to replace heating oil in Michigan, and the over capacity installed to satisfy winter demand could serve as a "peaker plant" during the warm summer months.

While I know renewables have decreased in costs, I think the costs related to building overcapacity is a hindrance.

It's not that hard to store solar power as Hydrogen and turn that back into electricity. The end-to-end efficiency is not as good as for batteries, but building something that can hold Hydrogen for a few months is cheaper than building the equivalent amount of batteries.

It's true that hydrogen is more practical for storing energy for months, but I think that storing energy for a few hours each day between daytime and nighttime (and transporting it from hot, sunny states to freezing, dark ones) is the important problem to solve.

You need to solve both problems to reach 100% renewables, but doing in the order of demand side improvements, short term storage and then long term storage is probably the cheapest way to proceed.

Did you miss the part where Michigan is already connected by a transcontinental electricity distribution grid to places like Las Vegas (8 average hours of sunlight in January, average temp 9C in January)?

That’s a gross oversimplification of reality - to the point of outright falsehood.

Michigan can’t get any electricity from Nevada today - they are on different grid ties, and there would need to be a ton of upgrades in the DC-DC and VFT ties between them to get that significant a chunk of electricity sent the ~2000 miles from Nevada to Detroit.

Can you not get out there with a long handled broom and knock the snow off?

Serious question, I’m debating a similar setup for myself.

There are roof rakes that you use for getting the snow off of roofs. I assume they also remove snow from solar panels.

So connect to some wind power which in the midwest produces 3x the capacity in the winter as it does the summer [0].

[0]: https://www.eia.gov/todayinenergy/detail.php?id=20112

That's the job of utilities, not individual consumers.

Look, if the government wants to migrate utilities away from gas for heating and replace that with something else, the way you to do that is to have the government build, or contract out to build, the something else that is just as reliable and just as affordable, and then when that is in place, you work with the utility to switch over to the new thing and then retire the old thing. This is called a migration.

Shocking, I know.

The way you don't do it is to adopt some neoliberal obsession with turning everything into a market where end users trying to heat their homes are facing higher prices, and the hope is that these higher prices just cause the utility to transition to something else through the magic of markets.

That's not what markets are good at. Funding big infrastructure projects and coordinating the replacement of one infrastructure with another is the responsibility of government, not markets.

We didn't build our hydro and nuclear capacity by relying on the magic of the free market. We had a planned decision to build this infrastructure as a result of public need, and so we built it, and then the utilities hooked up to it, and the end user got power. We didn't build the interstate highway system by relying on free markets either. When people want to deploy subways, the solution is to build subways, not just tax gas and hope subways just spring up out of the market.

Telling individual homeowners "Well, there is wind power technology out there" is eco-sadism.

It is taking things offline or penalizing them instead of having replacements provided, and we just hope that the penalties will cause replacements to spring up.

This is faith-based energy policy. It is not effective governance, and it is not politically sustainable.

The Michigan pipeline shutdown has been discussed for most of this year; back in May the MI governor began her attempts to shut it down by revoking easements issued to the operator.

It's not honest to characterize what has been happening in the last few weeks as a last minute action by the administration "just before winter".

It's also not honest to focus exclusively on the costs of the pipeline being shutdown without also considering the potential costs of it staying open. I'm entirely open to someone presenting the case that the costs of shutdown vastly outweigh even the worst projected cost of it remaining open, but if you're going to present that case, do it while being aware that there are people (including the MI governor and various Indian tribes) who don't agree with this assessment.

MI voted for Biden in 2020, its US HoR representation is split evenly between both parties, and both US Senators are Democrats. If you're suggesting that those in favor of carbon credits and higher gas taxes might lose representation if this pipeline is closed, maybe make that case more explicitly.

Also, it's not unambiguously clear that winning battleground states like Michigan is synonymous with winning Michigan, nor that it's necessarily required at all given the steady drifts of some red states into the purply-blue zone.

Are you talking about the nearly 70-year-old oil and gas pipeline "Enbridge Line 5" that bisects Lake Michigan and Lake Huron?

Indeed, it would be great if the United States proactively funded deteriorating infrastructure before it was past-expiration and at risk of collapsing.

Woah, what are you honestly on about?

You can claim that the US is artificially raising natural gas prices, but the exact opposite is true. By chance of circumstance, we've historically underbuilt LNG processing facilities and that is isolating the US market from the rest of the world, so we have some of the lowest natural gas prices in the world right now.

Please take your uninformed takes and cringey political rallying elsewhere, it's not what this platform is designed for.

Flamewar comments like this will get you banned on HN. You've been breaking the site guidelines in other places too, unfortunately. That's not cool. (Edit: and we've already had to ask you more than once to stop doing it:



If you'd please review https://news.ycombinator.com/newsguidelines.html and stick to the rules, we'd appreciate it.

I feel like you are being unnecessarily confrontational over a difference of opinion.

I think they make a decent point, and contributed to this conversation. Calm down.

I just don't get why everyone maintains JIT manufacturing is bad, it's one of the many reasons we can have such reasonably low cost goods, its efficient.

Efficiency at a trade-off of resiliency. If you're talking about discretionary purchases, you probably value efficiency over resiliency. If you're talking agriculture, we should value resiliency over efficiency.

So we have benefited from decades of cheap consumer electronics and now people had to wait 10 months to get their playstation at RRP so their proposal is to build double the number of playstations for decades and landfill half of them so in the extremely rare case, they will have just enough.

I would consider consumer electronics to be discretionary purchases. So what I suggested is the opposite of that. If disruptions are an acceptable risk, then you should prioritize efficiency. Consumer complaints are meaningless if they don't have a viable competitor to shift their money to.

But we must prioritize resiliency when an economic shock would result in societal instability. I'm willing to pay more for food to be available 100% of the time versus paying 20% less for food to be available 80% of the time.

Isn't that why the US government has longstanding agricultural subsidies, guarantees on prices, etc.? Do we really have a shortage of food?

That's the stated purpose. But it has no teeth. Last year we saw aisles empty of meat and lots of news about meat shortages. But during that time domestic pork supplies were down 40% in the same period that pork exports to China quadrupled.

Those subsidies failed in their stated purpose of resiliency. During the bad times, all that mattered is where more profit could be found.

Meat can be easily substituted, so I'd consider that discretionary spending. Furthermore, producing meat consumes many times the plants, than if humans directly consumed those plants. So in an emergency, just stop producing meat and you'll have plenty of plant-based food left.

Can you eat grass? I know I can't...

Yes, producing meat requires animals eating a ton of plants and they also need a lot of water.

Except that can be mostly grass (that humans don't eat), and the water is just rainwater (that the animals in question will piss later, so it will end on the ground anyway).

The reason why animal-based farming exists is because it is the only way we have to get any food in certain parts of the planet where the only thing that grow naturally is grass.

There is a certain level of meat production that uses only waste as fodder, land that has no other agricultural value, and doesn't require destroying areas of high biodiversity to make room for our animals. The current global levels of meat productions are extremely far away from this. We cut down vast swathes of forests to get cheap farmland, both for grazing as well as for producing grain and soy as fodder.

The Great Plains in the US are huge. Lots of cattle grazing out there in an environmentally sensitive way. Most of the feed is hay cut from fallow farmland. Maybe what you’re describing happens in South America, but it’s not at all what happens in the US.

Cows eat grass? Farmers are all panicking and buying hay (premium hay that tests properly for nutrients) at outlandish prices. You need a crap ton of the right hay to keep beef cattle alive. No to mention all the corn to fatten them so that your meat gets graded as choice+.

That is not how the water cycle works.

I'd claim those subsidies worked fine then. The problem wasn't supply - It was delivery. There weren't enough drivers to move stuff around, so stuff didn't get moved around and shelves were empty. The supply chain's weakest link was delivery, so that broke. Exports to China used different infrastructure that wasn't as affected, so they still happened

The US doesn't subsidize meat production, your comment has no basis in fact.

> During the bad times, all that mattered is where more profit could be found.

The people in China need to eat too; the pork is going to be eaten. It is hard to understate how hard the Chinese have been working to provide goods, services and technologies to the rest of the world for the last 40-odd years. They've been quite clear the whole way through that one of the things they want in exchange for that is support feeding themselves.

Them buying American pork in a tough year is not some capitalist failure. This is what hard work and savings is supposed to get China - front of the line in a crisis. It would be grossly unfair to pay them then tell them that they've actually got monopoly money that can't even buy pork.

If hair clippers become mildly more difficult to procure over a 2-year window of an 80 year lifespan, all-in-all the efficiency seems to be worth it. I get 78 years of low prices for goods are that are useful to my everyday existence, but not critically vital and to which there are reasonable substitutes, if I need something in a pinch.

Human experience simply cannot be averaged over large spans of times while ignoring the extremes. Dipping into the red means permanent damage. Imagine applying this line of thinking to your bank account -- "sure I spent $500k in two years on fast cars and fancy bars, but averaged over 80 years of paying small amounts of interest, the bank should be glad to make the sacrifice of stability in favor of efficiency."

"Sure I spent $500k in two years, but I've been in the positive and saving for 80 years".

The pandemic was just a blip on the radar, a period of adjustment we still don't understand fully economically, but it was not a Great Depression as it lasted only a couple months and affected just a part of the population (layoffs, but with goverment safety nets)

umm... this is kind of the purpose of banks... get car now, enjoy car now, pay 3%, inflation is 5%. If you buy the car cash you pay more, and get it later.

Lets take a C8 Stringray @ $100K, if you buy it today, it will cost $107K over 5 years. In five years it will cost you $128K.

No bank will let you go on a $500k spending binge when you've never had more than $5k in your account. And no amount of averaging over a lifetime will make up for the fact that rent is due now.

Like nearly all good things, it has outsized consequences when taken to the extreme.

JIT iPhones? Sure why not?

JIT ventilators and PPE? Maybe not great. Maybe it’s ok to have some slack in the production of those types of things, you know in case of emergency.

It also eliminated deep discounts of old stock. A lot of people would have relied on that kind of thing to be able to afford something.

Still, I think for the environment it's a win, not producing anything that's not needed. But in the end most of it would get sold anyway at a discount.

Turo* is AirBnb for cars. I’ve used it a few times and it worked well.

* http://www.turo.com

Yeah I imagine Turo is exploding. When I traveled this summer my options for a 5 day rental were $2,200 from all the rental car companies, or $375 from Turo.

How do they deal with insurance? I'm not sure I'd feel very comfortable trusting a random stranger to use my car for 5 days, unless I was sure I'd be paid out in full (or more) if they were to damage or total the vehicle.

Most companies like Airbnb, Turo, Boatsetter (airbnb for boats) offer some insurance they negotiate with an underwriter like Geico. Getting this sort of insurance individually is much more costly or next to impossible, which is why we don't see people short-term renting expensive assets to each other on Craigslist. I imagine negotiating the ability to dole out these sorts of policies at scale with Lloyd's of London or GEICO is fairly arduous, but it seems like one of more key pieces for these companies to successfully get off the ground to me.

Lloyds et al wants to do business. They are super easy to deal with. Far easier to talk to someone at Lloyds than any major tech company. Only Google would be audacious enough not to let someone spending $100k / month not talk to a human / ban them without warning / send canned email responses to business inquiries at scale.

Check their website, they have this crazy idea where you put in the country where you are and then they give you a list of people to call so you can do business with them. The even crazier thing is the people who pick up the phone aren't humanized robots, but are incredibly intelligent and talented people who want your business and will create tailored plans to suit your needs.

If I want to talk to their President all I have to do is call him.


The reason you don't see people renting expensive assets to each other on Craigslist is because the nonmonetary transaction costs are too high. When someone wants to rent a car, they're looking to straightforwardly solve their problem in a predictable manner. They don't want to sift through different Craigslist ads looking for one that meets their requirements, emailing to see if it's available, figuring out if the rental is legitimate, etc.

On the lessor's side, since the primary market prefers bona fide businesses you're left with the customers who cannot rent from the primary market. Meaning you're much more likely to end up on the receiving end of abuse (outright theft, vandalism, being an accessory to a crime), or at the very least problematic customers ("I know I rented it for one day but I have to pick up my kids tomorrow so I'll return it Thursday"). A business can absorb such variance, or at least create the illusion of doing so, whereas for an individual such events present a major hassle.

You can bundle all of that transactional risk up into a kind of insurance, but that only works if you're large enough that the insurance company can verify that you're not defrauding them.

Isn't the crux of insuring anything 'doing it at scale'?

If you are AirBNB, why would you need an insurer at all?

Insurers can spread their risk along multiple insurance lines.

If you're Airbnb, you're exposed to one type of risk: houses getting damaged. If you're Lloyds/GEICO, you're spread out over health risks, housing risk, car risk, maybe some financial assets risk etc

Could you clarify what you mean here? I'm not sure I follow.

Say someone rents an AirBNB and absolutely trash the house, racking up thousands or tens of thousands of dollars of damages. Or steals valuables that are in the house. Or on the flipside, perhaps the property has not been repaired and the Airbnb renter is injured on the property. Surely AirBNB would require insurance for such types of incidents.

Why would they not require insurance when they are in the business of rentals? Most jurisdictions would allow a property owner to include AirBNB in a lawsuit against a renter conducting criminal activity or a renter suffering damages from criminal negligence of the property owner.

To limit your downside. What AirBnB likely has is a high deductible policy. AirBNB pays for minor damages, but if the world goes on a AirBnB party rental spree Lloyds pays.

As a company it’s probably better to just deal with 2 years of chaos every few decades than to have tons of unused inventory sitting around all the time.

> Our economy ... is doing a bad job of adapting to new behaviors [because] just-in-time

I have been astonished at how well the world has responded to the shock. Our first world economies seem to be amazingly resilient (although perhaps I am biased by being in New Zealand so I am unaware of what is going on elsewhere).

It seems to me that just-in-time is helping us, and capitalist price signals are working.

So far I personally haven't lacked anything important (albeit, I live in a rich county. I did have to wait a month for an iPad).

Sure there is plenty of fail, but I'm not sure the obvious "better" answers would actually improve anything.

It is easy to criticise given perfect hindsight, and easy to see from my armchair what should have been done.

We are doing okay because the Chinese supply chain held on even during the pandemic, which is why their orders have grown so much during 2019-2021

If the entire manufacturing line is essential, why would a pandemic create gaps? It was only over a year or so of higher demands. Nothing dramatic. 5 years would be hard. 1 year just uses a bit of warehouse space for most consumer items. No one ever stopped making stuff, and they started shipping more where they could.

Most people who couldn't get what they wanted would have no way to prove that. Whereas people who got what they think they couldn't, would have that memory strongly planted and even shared.

Natural gas isn't expensive. I pay 7.2 cents USD per kW/h and it's still cheaper to heat my house with natural gas. Given that the world is switching to electric cars I only foresee it getting even cheaper (comparatively) given how much hydro will need to be built to service the energy needs of the electric car market.

Didn't more Americans already live in suburbs then cities before covid? What percent of Americans were regular public transit riders?

Re: % transit riders, seems like not a lot except in NYC: https://www.pewresearch.org/fact-tank/2016/04/07/who-relies-...

8 Million people, which, while a small % of population, is huge compared to the c. 100mn cars that get sold globally per year.

And similar to the suburbs point, sure the suburbs existed before COVID, but they are becoming more heavily utilized (extra bedrooms turned to offices reduces the supply of housing) at the same time as an uptick in demand.

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.

What you're finding with A/B testing is local maximums. Which might make sense when your sole goal is squeezing a few more pennies out of a mundane business. But generalizing this to all of existence is sorely mistaken.

Asking "why" is the act of cognition. Discerning structure, compression, building a model (science). Then applying that model to new territory (ie engineering), to achieve better gains than undirected walk. Eschewing this is basically nihilism, and it's far too common these days.

Asking why can lead down two paths. In a system where it's possible to understand the "why" (often overlaps with "hard" sciences), it is crucial.

In fields where the inputs are unknown, obscured, non-linear, and sometimes non-deterministic: asking "why" is going to create cognitive biases that are very difficult to break.

- Why did the Soviet Union fall?

- Why did Trump lose in 2020?

- Why did I eat a cheeseburger when I'm trying to lose weight?

Those all turn into narratives that may or may not be correct, but are usually self-reinforcing. Confirmation bias also means we evaluate the "why" question as follows: "given what I know about this situation, and how I think things generally work, can I see this singular narrative as being true?" That leads to blindness of other possible interpretations, as well as other cognitive dysfunction.

To be a little cheeky - that is why commentators on politics, economics, social sciences, psychology... are full of shit.

Asking why may be the act of cognition, as you say - but my take is that the act of cognition itself will not lead to understanding the truth, or better decisions. Making up fairy tails is also cognition but does not help us build mental models to better understand the world around us.

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.

Was the particleboard really the operative constraint? Or is the explanation about extra demand the correct one?

It seems plausible that golf cart manufacturers aren't ready to handle extremely spiky demand. Also, that the toilet paper explanation begins as a joke or a guess, and takes hold because everyone likes it as a story.

Check out:


I don’t have an academic paper, but I got the same story from several pretty big rental providers. (I needed about a dozen golf carts for a project)

It was crazy - the rental places had no inventory because gold courses weren’t offloading older gold carts due to the supply chain issues.

We ended up buying a smaller number of bigger utility vehicles from Bass Pro Shops, of all places! The techs had fun with that.

> Was the particleboard really the operative constraint? Or is the explanation about extra demand the correct one?

Probably both were contributing factors, along with a slew of other things.

This particular story does seem like it could be a folk-tale explanation, but it's not really about golf-carts - no one cares about golf-cart shortages. It's just a simple example of a broader issue for people to easily grasp. Even if it isn't particularly accurate, the same thing is happening in/across just about every industry

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.

> Now covid is less of a problem every day, and those things are coming back ... we have a huge demand shock.

I suspect that stimulus checks may have also played a role. Those who fall below the poverty line finally found themselves with a little disposable income to spend on basic everyday things, thus driving up demand. Stimulus check detractors prefer to spin this as inflation but you only get that with a generalized increase in demand for basic consumer goods and services.

My personal theory is that this effect is driven mainly by poor people finally getting a break. Those who were already well-off tend to either not change their consumer patterns with small changes in disposable income, or tend to spend it with one-off expenses such as luxury goods and services, or even dump it in risky investments like crypto as we've been seeing in the ongoing bull run.

>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.

I don't think the bullwhip would predict global inventory increases, quiet the opposite from how I read the parent post.

The article shows global lows for raw materials, but production for China is up 20% and exports are 40% higher.

I can't find any reference to retail inventories in the article, but I think some of the stock could be found there - though I imagine that a lot of it could simply be stuck in transit.

I think you and OP agrees - the parent post tries to answer the why of the situation, which the article doesn't spend much/any time on

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.

And that puts more people at home looking at their surroundings thinking about how it might make sense to upgrade. "Well, I'll be looking at this place another 7+ hours a day." Which then puts demand on various hardware supplies and tradespeople.

In our case, with the real estate market so hot, it makes sense to upgrade. Selling and buying a house has a stamp duty here of $50k on a $1m house, meaning it's fairly easy to justify $50k on internal renovations (updating bathrooms, flooring, etc) rather than upping and moving.

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.”

This is one of the factors for current inflation, but it's not sustainable over the long run. Consumers will happily over-leverage themselves to pre-pandemic debt levels, and we'll be left in the same long term situation as before (bad demographics and too much money chasing investment opportunities).

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.

> 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.

Yeah, no. A lot of it just went into stock buybacks and other navel gazing.

This is excellent analysis, thank you

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.

For anyone scratching their head on what "MP3" is: monetary policy 3, i.e. "helicopter money," i.e. "the government be handin out them stimmies," i.e. the government injected COVID-19 relief funds into the economy, giving an across-the-board increase in demand for goods & services, but there aren't enough "goods & services" to keep up with this demand.

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

Actually, that's a good point. Inflation would be even worse if that cash was going into physical goods and services. The government now has an incentive to leave crypto alone aside from providing clarity.

In the macro economic sense, fiat money isn't 'used up' or 'locked away' when you buy something like crypto, it's transferred from your account to someone else's bank account. Worse, it goes through the process of fractional reserve banking and multiplies about ~10x after changing hands repeatedly.

There's no such thing as fractional reserve banking. It's an urban myth that has been debunked by QE for over a decade. Lord only knows why people still believe it.

Banks create money on demand by discounting collateral. Government creates money on demand by discounting the power to tax.

Fiat money disappears by the drain to taxation, to repaying loans and to 'rainy day funds'.

This is easily verified as nonsense.

Fractional reserve banking absolutely exists.

QE is so thinly related I can hardly imagine how you could contort it to have "disproved" something which is codified in law and taught in basic finance and economics courses.

Is it.

The reserve ratio in the UK and Canada is zero. Which means we should have infinite money in the banking system according to your beliefs.

Yet demonstrably we do not.

You have the line of causality backward, as the Bank of England helpfully explains in detail here: https://www.bankofengland.co.uk/-/media/boe/files/quarterly-...

1) It appears to me that the document you provided actually refutes what you are saying. It supports fractional reserve banking. Here is a quote from the conclusion: "Most of the money in circulation is created, not by the printing presses of the Bank of England, but by the commercial banks themselves: banks create money whenever they lend to someone in the economy or buy an asset from consumers. "

2) "infinite money" without a legal limit to reserve ratios would only occur if every single bank actually had exactly 0% reserves, and it would take infinite time and infinite transactions for that to occur.

FYI using the observed absence of 'infinity' as a proof is generally poor logic as there is lots of mechanisms blocking infinity from occurring in reality.

Queen Elizabeth?

Quantitative Easing

That would be HMQ.

Minus all the fees to the crypto miners, which end up wasting many hours of labor and causing pollution.

That money will eventually be used again but it's worse than paying someone to dig and fill a hole.

That's correct. However, investing in Crypto using dollars will inflate the dollar. Thus, the arguments that the government will probably leave crypto alone, still holds.

Not necessarily if the money goes to just a few person though.

But if someone with money to spend transfers it to a crypto scammers account rather than buying say a car, that avoids inflationary pressure on car prices.

The trickiest question in business that noone seems to get right:

Q: How much money flows into "X" market? A: None, money flows THROUGH markets.

Although if you have X in circulation as money, and Y in stock market valuation, you could say Y/(X+Y) of total value is in the stock market.

If the market valuation goes up to Y+Z, you could say money has "entered" the stock market, pushing its share of value to (Y+Z)/(X+Y+Z) even though the money in circulation, X, could be unchanged.

Not sure about that. Money velocity went down a lot. If you pay Apple money, Apple – the company – keeps that money as cash reserves in some form or another. This might be reinvested and circulates a bit more, but is it really spend in the real economy so that average Joe benefits from this?

Discussion is around the stock market.

Yes, when you buy newly issued shares from Apple (rare), cash flows through the stock market into Apple's accounts, but again, no money went 'into' the stock market.

If you're talking about Apple selling devices, then it's another concept entirely.

Yes, although you could argue that money that was transferred from a checking account to a brokerage account has « flowed into » a market, at least for the time it takes to settle any trades and for the counter party to withdraw theirs (since it will not be used for consumption)

Lol you’re giving me an opportunity to be snarky and I will not turn it down. :)

Yes, when an item goes through something, it is briefly inside of that thing. I agree.

First sentence absolutely correct, second sentence absolute garbage.

That is an interesting justification for leaving crypto alone.

“Well if those poor people weren’t gambling on that ponzi scheme for a new dog coin they would actually be materially improving their living conditions and prices for everyone else would go up”

It’s interesting to see the wealth transfer of all these people that usually buy weekly lotto tickets get crypto instead and send their 10s of millions to programmers making an ICO and a fancy website.

I mean what percentage of all money being spent is being spent on cryptocurrency stuff? Surely that’s gotta be approximately 0%.

Don't know if percentage of money being spent is a good metric, but Bitcoin is 92.45% the market cap of silver, and 11% the market cap of gold.

Percentage of money spent ought to be significant if the claim is that demand for crypto is meaningfully substituting for demand for physical goods.

until the bubble bursts and bankrupts shittons of people causing bank runoffs and failures...like in 1929 and 2008...

Banks don't have any significant portion of their assets in crypto, so no.

Banks don't need to be. If half their customers declare bankruptcy or default on their mortgages, loans, etc; The bank won't have enough liquid assets to take on the subprime loans.

It doesn’t work like that though. If I buy BTC at 60k then someone is selling BTC at the same price. The fiat is just moving from one account to the next. The people getting cash-rich from crypto are either spending it (on lambos) or putting it back into the stock market.

It's a little more complicated than that.

You buy 1 BTC from me for 60k. Now let's say I want to buy BTC again, but you want to sell it for 120k, so now I buy 0.5 BTC from you for 60k, and if everyone agrees that 120k should be the fair price, we've just bid up the market cap and value of BTC without really increasing the fiat.

Now imagine that with different crypto, stocks, other financial instruments, real estate, etc etc and in different combinations and with margin and derivatives and what not.

> we've just bid up the market cap and value of BTC without really increasing the fiat

If anyone in their chain borrows against their inflated crypto, that creates new fiat.

Depends who you are buying it from and which country they are spending in

I think most of the fiat money spent on crypto goes to miners, who then turn around and pay the electricity bill with it.

In all probability, you’re selling to a crypto trader or bot who then uses those funds to make more crypto trades, so the money is in a sense trapped in crypto markets until someone withdraws it from the exchange. The extent to which this money is being absorbed by crypto can be seen by analyzing exchange flows.

Exactly, without that escape valve, the value of "real" goods would be skyrocketing even more.

Which contribute to a chip shortage making cars more expensive, seemingly pure financial instruments directly causing inflation for everyday people, there is no escape

Oh I figure he's being super sarcastic and saying that all that money went into propping up prices in NFTs and crypto that will at some point show their inherent worth. Maybe I read it wrong compared to all the other commenters

Pretty sure the poster meant "thank god people burn their cash by putting it into crypto and NFT's instead of buying more goods".

This is not even a joke. Crypto has absolutely helped absorb the inflation.

For every person buying crypto there is someone selling.

Yes, but the marginal propensity to consume matters here. If it’s an average person buying Bitcoin from a millionaire (or many such average people), it acts as a liquidity sink (since the millionaire has lower marginal propensity for consumption)

No, there are new ICOs with trillions of coins minted every month. It’s the FED injecting cash into newly minted monthly ‘stable coin’ wallets. Can’t wait to see the documentaries on the overnight millionaires who set up fancy ICO websites during the pandemic :D

No, it hasn’t. As money spirals deeply into inflation, crypto holdings and equities will have to be liquidated so that people have money to live off of. This will only feed into the inflation more. Investments haven’t absorbed inflation. They’ve delayed it slightly.

> No, it hasn’t. ... They’ve delayed it slightly.

So it has, by your own admission. You predict a worse eventual outcome, which is not insightful. When this will all end badly is the question, not if. Rome lasted a good long time playing these games.

You can assume some stickiness on investment decisions. If people end up panic liquidating it would on the one hand deflate crypto on the other indicate lower demand.

If 10000 people buy bitcoin at 60k per coin as an investment and later have to sell at 10k per coin to make ends meet, I somehow doubt that the guy that pocketed the difference will contribute to inflation as much as the 10000 guys trying to put up a meal for tomorrow.

It feels like saying Elon Musk will make make your next stop at the grocer's more expensive, because selling his 10% of shares for $20 billion will contribute to inflation because of all the stuff he's gonna buy with that money.

Unlike most billionaires, we have a fair idea of what he’s going to buy with it: more employee wages in companies like SpaceX

I wonder about the price of real estate in Brownsville though

I don't think Elon has actually spent or loaned any of his own money to Tesla or space x. Maybe in the very early days, but not now.

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.

Not sure where you live, but a family of two adults and 3 kids got $13,900 in stimulus checks so far in the USA, not counting the expanded child tax credits (which would be another $5400 if the kids are young, dispersed in $900 monthly payments for the last 6 months of the year).

Even a single adult with no kids would have gotten $3,200 so far.

I mean, damn, how much is rent in your city?


I wonder why that think tank you linked doesn’t have a handy fact sheet on rent prices.

I don’t think any of the stimulus checks covered a month’s rent in any major city, and the checks weren’t coming monthly.

My 1 bedroom is >$2800/mo, not counting utilities, so they're might technically be wrong, but they're not far off the mark, really.

(Now, I also don't qualify for the stimulus, and if I did, I would probably have been unable to afford a 1 bedroom apt. here.)

I got nothing. Your link explains that the stimulus checks were income-capped.

It isn’t just direct stimulus to private citizens.

It’s the near zero interest rate policy, the literally illegal purchasing of mortgage and corporate bonds by the fed and so much more that is flushing the entire economy with trillions of dollars.

So what exactly happens in between the fed purchasing mortgage bonds and allegedly consumer driven supply runs on everything from toilet paper to golf clubs?

Bond rates move inversely to price.

As the fed buys bonds, it raises the price which lowers the rate.

As rates are lowered for things like mortgages and corporate bonds, people and corporations have more money to spend. Which they do generally spend which stimulates the economy.

Lower rates also cause corporations and people to borrow more which in a fractional reserve banking system actually creates money out of thin air. The reason why corporations borrow more is because with a lower WACC (weight average cost capital) they can invest in more projects (I.e. spend money) for any initiative that has a positive NPV.

Not everyone is a homeowner and on top of that not every homeowner has refinanced their home during covid. I don't think people are borrowing money to buy toilet paper or a golf club. How do lower rates for corporate loans affect behavior that's at the consumer level? I'm trying to understand this relationship better.

It doesn't directly go from fed to toilet paper. It starts with fed, inflates assets like real estate, stocks, commodities and leaks into actual economy due to the expected returns on these assets. For example, rents, prices of hardware and capital intensive sectors, oil all go up because on one hand these are getting indirectly pumped up by suppressed yields on bonds thanks to fed while on the other hand they are also getting consumed by economy (industry/people) which has to pay more to match the appreciation in prices to use/consume them.

All this results in higher wage expectations due to people expecting higher wages based on higher prices (gasoline, cars etc) which moves the fed money to people's hands and increases the prices of consumer goods including fmcg like TP.

As you can see there is a long link from cause to effect which is why we are seeing the slow increase in inflation. In many sectors like agriculture this is not even priced in yet as they are ultra competitive. But as their inputs go up (people and raw materials, hardware ), they will also have to increase prices.

Even when eventually fed raises rates or tapers their buying, prices once gone up have a way of sticking around unless efficiency improvements like automation reduce input costs.

Are people actually seeing higher wages on the whole? Some cities have raised minimum wages like a few dollars more an hour but minimum wages have not been keeping pace with inflation as it was. Has median wage gone up in this time? My understanding has been that wages have been pretty flat for middle income earners for years despite cost of living increases rising over these same years.

Picture two scenarios:

Scenario 1: Fed buys $20 billion of corporate bonds per month from Microsoft.

Scenario 2: Fed does not buy $20 billion of corporate bonds per month from Microsoft.

Consider all other things being equal, in the first scenario Microsoft's borrowing costs are drastically reduced. This means that Microsoft has more money. This means that Microsoft is able to hire more people, that the people that work for them get larger bonuses because they are typically tied to the profitability of the company.

This puts more money into real people's hands to buy toilet paper and golf clubs. That then multiplies throughout the economy. Suggestions for additional reading if you are really interested in these things:

1. Money Multiplier


2. M1 vs M2 money supply


3. Fractional reserve banking


4. Fed open market operations


But do we see this trend, that companies are using these corporate bonds to hire more staff or raise wages vs just buying more of their own stock?

Mostly stock buy-backs to reward the capital holders (the top 0.1%) at inflated stock prices before they crash 20%.

The cost of servicing debt decreases and disposable income increases.

People are borrowing money to buy toilet paper and golf clubs? I think you are missing some details in the path from mortgage bonds -> your average consumer buying average consumer goods. I'm not being cynical or anything, I'd just like to understand this relationship a bit better.

I think it's less taking a loan to buy golf clubs and more "feeling less financially stretched makes people more willing to spend money."

Example: Joe just had a kid and was going to buy a house in a good school district no matter the cost. With a higher mortgage rates, he'd have wound up house poor for a few years. With today's rates, he has a comfortable savings rate. Since he's not scrimping, he decides this month he'll buy that putter he'd been eying.

My understanding with housing is that is nearly always costs the same amount no matter what mortgage rate is, so in times of high rates list price is lower, times of low rates list price is higher, and adjusted for inflation the ultimate montly payment of mortgage+interest remains about the same. Seems like if you bought today you'd have to cough up a huge down payment vs when rates were higher, and its this initial costs from things like down payment and paying pmi that makes people initially house poor.

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

Using acronyms before defining them is really unforgiveable.

Thanks you!

Just a warning that this is an article by a hedge fund expressing a view of our current inflationary period that I would argue is heterodox among the economic mainstream. I suggest reading Paul Krugman and Claudia Sahm for dovish views, or Adam Ozimek for a more critical view. In particular, the idea that “inflation expectations” can perpetuate inflation via a self-fulfilling prophecy effect has been called into question lately: https://www.federalreserve.gov/econres/feds/files/2021062pap...

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.

> 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.

"Hedge funds guy" are extremely partisan, in that they will fight hard to prevent any kind of legislative or other systemic change that would threaten their rent-seeking. They invariably favor the status quo and/or anything that increases their ability to profit, regardless of other consequences it may have.

I'm not going to claim that Krugman isn't "partisan" (although I think using this term to describe him undermines the meaning of the term), but I'm also not willing to accept that "hedge fund guys" are not.

Ray Dalio, billionaire founder of Bridgewater, has recently written a book "Principles for Dealing with the Changing World Order" where he advocates systemic change, including effective government action to address inequality.

Ray Dalio is one of the exceptions that prove the rule, and even then, he's deeply committed to the fundamental "bestness" of capitalism even if he thinks it needs some government tweaking around the edges.

You are correct.

To be honest, I am not a huge fan of hedge funds either. But in this specific case, I'd rather take their advice. In my opinion, for this specific case --discussing inflation trends--, I don't see a lot of room for hedge funds to be partisan? No new legislation, no wrinkles in the system, etc. And they may be wrong, and Krugman may be right after all. Economics, especially Macroeconomics forecasting analysis, should be treated with some reservation. I just find the particular post quite convincing given what I've observed in the last few months.

> I don't see a lot of room for hedge funds to be partisan

They have billions of dollars of bets on where interest rates go. Inflation trends and how they are interpereted are what drives interest rates.

If the fed took on board this particular interpretation at the next meeting Bridgewater would make low double digit billions on those trades.

Doesnt make them right or wrong, but anytime you see a talking head on cnbc or putting out a research note - they are talking up their positions.

Nobody thinks inflation is a good thing ceteris paribus. The main questions are whether it’s better than the alternative, and whether it will be transient or not. “Any inflation at all is bad” is not a view held by any serious economist these days, especially not after the Fed has been below target for so long.

I described Sahm and Krugman as dovish and I think that’s more than fair to people who disagree about what inflation means right now. I don’t like pieces like this one that speak authoritatively on so little evidence.

First off you have to define 'transient'. Fed supporters seem to define it as the level of inflation going up for a while and then reverting to a historical norm, leading to permanently higher prices. Fed critics define it as a temporary rise in prices followed by deflation back to pre-inflation prices.

Fed critics like that definition because it lets them more easily paint the fed in a bad light. They claim the fed is crazy because prices never fall. I think that's disingenuous because of the improper definition of 'transient'.

Will inflation be transitory? Probably yes, if you use the first definition. I don't think there has been a situation in modern history where prices in America have backed off significantly. Prices are sticky, especially when labor shortages combine with inflationary pressures to drive up wages and therefore the costs of production. I suppose you could take a few hits off Cathy Woods' pipe and claim robots will take all of our jobs and send us into a deflationary spiral next year, but I think that's likely several years away at best.

I take the first view of transience, and I would be a lot more concerned about the current level of inflation if we weren’t seeing significant wage growth and job growth. What made the 1970s a nightmare was inflation without wage growth. I think as of yet there’s little evidence that we risk such an eventuality, but at the end of the day I’m just a programmer reading econ papers, not a professional economist.

No need to guess. Fed officials have openly stated that by transient, they mean they will go up a bit, then stabilize.

What evidence do you need? It's been already spelled out. High demand coupled with lagging supply, which does not have the capacity to adjust to new behaviors in the short and medium run. Especially if you consider the regulatory barriers, such as ramping up energy production. What little evidence do you speak of?

It’s clear that demand is up. What’s not clear is the argument at the end of this article, that this will lead to an inflationary cycle with no clear way out in the long run. This is what they claim is their opinion. It is not widely accepted, and I find it insufficiently supported. It’s mostly just tucked away at the end.

That's a fair take actually

"I rather listen to the hedge fund guys, at least they have skin in the game, don't they?"

Not really, right? They make a lot of money even after they get it wrong?

"Right now, it feels like the supply issue cannot be remedied or solved because of heavy regulations and a stagnant productivity."

This supply issue has existed for, what, a few months? We can literally see the containers piled up on the coasts, is there a good reason to believe that once the backlog is cleared there will be some kind of permanent problem? I have not seen a compelling argument, the original article here doesn't make much of an argument for sustained issues although they give that impression with the headline and the intro.

I will be very shocked if heavy sustained demand doesn't induce productivity gains (which have evaded the US economy for quite some time), but I will also be very surprised if the level of demand we are seeing from pent-up COVID-19 cash sustains itself much longer, a lot of goods demand is going to convert into services demand - if only because of shipping delays.

>Not really, right? They make a lot of money even after they get it wrong?

If they get it wrong clients may move their money elsewhere

If the 2008 crisis taught us anything, it is that hedge funds can get it arbitrarily wrong and still profit tremendously overall.

What are you even talking about? Bet you can't give even one example.

Heavily lopsided upside risk means they are never in danger of personal financial calamity. Nicholas M. Maounis looks like he is doing just fine even though he seems to have lost enough money for a hundred lifetimes.

All the incentives are aligned to go big on a theory and talk it up, and then if you are wrong just dust yourself off and try again- all the while cashing your paycheques.

I rather listen to the hedge fund guys, at least they have skin in the game, don't they?

A significant role in bringing the world economy to its knees in the financial crisis - that sort of thing?

>I rather listen to the hedge fund guys, at least they have skin in the game, don't they

Haven't you ever heard of "talking your book"?

Before attacking Krugman (who has a Nobel Prize in this subject, btw) and dismissing him out of hand in favor of random hedge fund guys, please cite evidence, any evidence, that his supposed "partisan" attributes have affected his work or made it less reliable or accurate.

From where I sit, Krugman has been right a lot more often than the competition over the last few decades.

Krugman does not have a nobel prize in the subject. Krugman's nobel prize is in another area in Economics, not monetary policy. His contributions are mainly in trade, which were very important no doubt. But it doesn't make him an expert on monetary policy and inflation. I understand that Economics may look like a single-blob to outsiders, but Economics has a wide range of topics and sometimes they barely intersect.

If I remember correctly, I think Krugman's view is less that there won't be sustained inflation pressure (he's speculated it's transitory, but expressed a lot of uncertainty about it), but rather that the Fed tightening to address that pressure won't necessarily lead to a recession (although of course getting the timing right is tricky).

(I remember him discussing it in detail in this [1] debate with Larry Summers, although it's been a while since I watched it).

That view doesn't seem to contradict the original article, which says prices will increase "unless there is a significant boost in productivity so supply can catch up with demand, or policy makers shift to a tighter stance".

[1] https://www.youtube.com/watch?v=EbZ3_LZxs54

> least they have skin in the game, don't they?

They do, but not in the game of writing truthful blog posts. If you think the market consensus on future inflation is wrong, you can buy TIPS, maybe even with leverage. People buying and selling those literally have skin in the game for future inflation.

> supply issue cannot be remedied or solved because of heavy regulations and a stagnant productivity.

Atleast the labor supply is artificially constrained in the usa by immigration restrictions. All they have to do is loosen some (they wouldn’t need to be completely removed).

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.

Krugman's political takes are scorching, but he's still a respected economist.

Agreed. Krugman should win an award for most incorrect predictions of any economist.

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.

This simply isn't true when it comes to the topic of economics, and there are heterodox-y economists (Tyler Cowen for example) who also respect Krugman as an economist even if they don't agree with him on everything.

As for paying much attention to him in academia, afaik he's not really active in the publish or perish academic game anymore so I don't get this as a criticism, but his influences are still there.

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