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It’s mostly a demand shock, not a supply shock, and it’s everywhere (bridgewater.com)
389 points by knasmai on Nov 9, 2021 | hide | past | favorite | 454 comments



Demand growth is what we want. Our economy has been largely demand-limited for a while. Demand growth boosts GDP growth.

Corporations are sitting on huge piles of cash, so they're not investment-limited. Any labor market tightness raises wages, which have been mostly stagnant for a long time (until very recently). Wage growth is also good.

If wage growth squeezes profits, then that's also good from a wealth inequality point of view.


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.


> 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 appreciate that you feel strongly on this matter. However, the strength of your feelings are less relevant than the fact that different people (who all know quite a lot about this sort of thing) do not agree with you (or with each other). Calling MMT folk "insane" may make you feel good, but it neither refutes their arguments nor substantiates yours.


MMT does sound like those radio commercials they had back in the 90s saying they would teach you how to "borrow your way out of debt" though.


Only because you haven't taken the time to understand what is being said - just the twisted version that isn't actually the case.

Every financial debt has a corresponding financial asset. Why follow the 'debt' and not the 'asset'? Because you have a psychological anchor on the word 'debt' that causes an emotional reaction?

All money is somebody's debt. That's how the accounting works. Rather than looking at the books from the 'credit' side, why not look at it from the 'in credit' side?

What I find amusing is how the bank borrowing from you so you are 'in credit' with the bank is a good thing, but the government borrowing from you so you are 'in credit' with government is a bad thing.

Given those are identical propositions in accounting terms, rationally the view about them should be the same.


Because at some point the credits and the debits need to be settled with real goods and services and when they can’t be someone has to take a loss. The loss either comes through default or inflation but allocating those costs are extremely painful politically. In many cases those costs end up being paid in blood.


> Because at some point the credits and the debits need to be settled with real goods and services

If that happened all at once, for every credit and every debit, it would indeed be a problem. But that doesn't happen, ever.


Money and stuff are inductively connected, like reactive power and active power in electrical engineering.

Assuming the 'power factor' of the economy is one is a category mistake.


When you go to the casino and change your cash for chips you are in credit with the casino. If that casino started handing out more chips without taking in cash, those people would be in credit with the casino too. Would you want to be in credit with that casino? You can create an accounting "asset" with the stroke of a pen but not a real one.


You get your chips in order to play in the casino. Without chips nobody can play.

What is a 'real asset', when nothing exist outside the casino? At most, you could change your chips for another casino's chips.


And when the country requires that you pay the taxes in casino chips - and only those casino chips - what then?

And when the banks decide to peg their liabilities to casino chips to leverage that drive from taxation, what then?

Once you are required to get casino chips, or else, you will offer up real goods and services to get them.

Cash isn't real. It's an accounting fiction.


I dont agree with the previous poster but I think you should recognize that the bank and the government in your example are not playing symmetric games. The incentives for each are different, even though at a point in time accounting principles can describe their respective balance sheets.


MMT is just the credit theory of money plus the realization that the government runs its own bank.

I don't know what you are talking about.


Your comment added nothing of value to this discussion. Replying and telling someone that you appreciate their "feelings" while ignoring the points made may make you feel good, but it neither refutes their arguments nor substantiates yours... if you'd even care to make any.


how would MMT work in a pre-industrial economy? Technological progress that boosts efficiency is what drives real growth, not economists printing money


Boring answer: MMT says boost production.


> not this Frankenstein economy that's been created since at least 2008 if not earlier

For what it's worth the US has economically out-competed the European Union in that time-frame, with the US basically following Keynes and the UE going the austerity route most of the time (and only at times, begrudgingly, also following Keynes as a result of the Americans doing it first). There's also China that has out-competed the US and the UE both, but that's another story.


Both the US and China have paid the costs as that liquidity has flooded into speculative assets such as land which has increased wealth inequality. In addition it likely has resulted in misallocation of capital and a future tidal wave of bad debt.

While households are typically cash constrained economies operating in a fiat system rarely are because cash is essentially created at will by the banking industry. Economic constraints are largely due to the ability to identify, fund and execute in good investments that will provide a reasonable return on capital given the risk.

Is there any investment area in the economy that is currently constrained by the lack of cash?


That's just the nature of imbalanced trade. The US reserve currency mandates permanent trade imbalances. It's a double edged sword.


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


5 year SPY chart is hillarious. Covid was seemingly a blip only a tad bigger than the blip in december 2018, we've been right back into the bull market trend for like a year now. The positive slope from march 20 2020 alone to today has just been insane, just a straight line up with hardly any deviation. So amazingly bullish. Fear doesn't exist in the markets anymore, we've seemed to have abandoned it. Just buy your leaps and profit indefinitely until the end of time. Not even a global pandemic could tear it down as it were.


The 1920s have something to say about markets that climb without reference to underlying production.


If anything the great depression supported this thesis of stocks always going up, and you can safely forget sweating the actual underlying economics. If you held through the crash or bought at the bottom you'd obviously be doing fine. Look at this chart (1). Seem familiar? Looks a lot like the great recession or March 2020 to me: a big plunge that took headlines followed by an unstoppable bull trend, in this case one that kept advancing for decades and decades to today (2).

Keep in mind what is key with this thesis is not some fantastical belief that stocks always go up out of magic. It's the understanding that the actions undertaken by the federal government and major banks that run the global economy will always generate increasing stock prices no matter any local blip or bloop or crash or fall in that moment. Buy the dip and take advantage of the sale price, then enjoy the guaranteed ride upwards supported by every major financial institution and first world government on earth, is what the past 100 years of macroeconomics have taught us.

1. https://static.seekingalpha.com/uploads/2011/8/4/763684-1312...

2. https://static.seekingalpha.com/uploads/2020/3/16/saupload_b...


Japans stock market would like to have a word with you. (https://asia.nikkei.com/Spotlight/Datawatch/30-years-since-J...)

Yes, the US stock market has had a wonderful hundred year run during a time the market went from a backwater developing market to a global hedgemon and through a one-time demographic dividend where it halved its non-working population (children) and doubled its workforce (women) and had an extremely open immigration policy for working age adults.

Of course past performance is no indication of future concerns.


You're misinterpreting the situation completely. China is running a trade surplus vs USA which means China has lots of dollars. Because of foreign exchange policy it will not use the dollars on imports. The only thing the money can be spent on is financial assets. All the Fed does is lower interest rates in response to this "savings glut" and that is the right thing because oversupply should result in lower prices for anything including money.

Because of the reserve currency status almost every country on earth is running a surplus vs the US and buying their financial assets.


With every government in the world buying US finantial assets that should lend even more support to the idea of loading up on assets yourself and riding the wave indefinitely, if the whole entire world is so overleveraged in American markets they will also do nothing to rock this boat since everyone around the world has been eating well betting on the market.


USA losing its status as the world leader might change that trend though. Before the pandemic it could be a few decades away, but now? Possibly within even just a few years, if that happens I wouldn't want to be among those having my savings in American stocks.


Where would you even put your money? There is no alternative. The NYSE and the NASDAQ have a combined market cap of 50 trillion dollars. The next largest exchange, In Shangai, has a market cap of 7 trillion. Euronext is also 7 trillion. JPX is 6.7 trillion. It's clear the world is parking their money here. They aren't going to put it elsewhere. We are the global marketplace.


My good man, stock prices have reached a permanently high plateau!


They have been saying this every single year since 2010. If you bought into that mentality you'd be broke. If you ignored it you'd be up hundreds of percentage points today.


I was riffing off of irving fisher's quote right before the great depression :^)


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.


We are far from infinite growth, no reason to worry. Maybe 10x or 100x should be enough to get everybody to stop worrying about food, housing, working? Then we can argue about slowing down.


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.


You are wrong, 2010 wasn't enough, and now it is back to worse than 2007, USA is currently consuming goods from other countries and doesn't produce enough to sustain it, and it hasn't produced enough to sustain its consumption for 50 years now. USA is just continuing to borrow from the rest of the world (printing a reserve currency is the same thing as borrowing/taking), shipment after shipment of goods gets sent to USA but little is sent back. This includes services like ads, what you are seeing now is just the effect of USA leeching of the rest of the world.

At some point the rest of the world will tire at working for USA's consumption, I wouldn't be surprised if that crash gets much worse than the great depression.

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


>little is sent back.

The rest of the world gets US stocks and other assets. The US as been better than average at producing them. It's true that this might not continue forever and there might be corrections at some points but this does not mean a crash.

I'll give it to you that it's probably not an optimal time for more government debt right now but the monetary stimulation and slightly above average inflation had been desperately needed for a long time. Undershooting inflation was causing gridlocks in private markets everywhere.


Most of the economy isn't tradeable though, including major sectors like housing, education, health care etc.

If other countries get sick of buying US bonds, the relative value of the currency might depreciate. But as long as it doesn't happen all of a sudden that might not be catastrophic - other countries having stronger currencies might reduce US imports and increase exports (narrowing the trade deficit). Plus increasing automation might mitigate the cost of manufacturing in the US vs overseas.


But the cost of all of those things are tied to trade prices. Lets say we halve the value of a dollar, then we effectively halve the salary of every American worker relative to the rest of the world, and also halve the value of the American consumption market. That would massively reduce the stock value of all companies that mainly sells to the American market, which includes most big American companies. It would also mean that skilled workers would no longer be incentivised to move to USA to work since the salary is no longer better.

Or in other words, it could end the American dominance that has lasted since WW2. If it happens slowly enough it wont be a crash, but the American dominance will still end. I see no scenario where USA will maintain its current dominance, the living standards of Americans will get massively reduced and stocks will massively go down, it could happen quickly or slowly but either way it will happen.


I agree that it would affect the US's relative dominance but I don't see why the living standards of Americans would be massively reduced. For things like medical care, housing, education etc those costs are mostly domestic so it seems like the cost of buying foreign currency wouldn't make a huge difference there. The stock market is denominated in USD so at least nominally you'd think it would be OK (although exporters would benefit over importers). Of course it would raise the price of imports, and it looks like imports average around 15% of GDP [1] and exports are around 12% of GDP [2].

So we'd need to manufacture a few % of GDP more in the US for it to balance out. That might make certain things like TVs more expensive, but technology trends have often made those sort of things dramatically less expensive, so overall (and with increased automation) hopefully that wouldn't affect the standard of living too much.

Certainly it might make it harder to attract foreign talent. But hopefully that would mostly be because of increases to the standard of living elsewhere rather than decreases to the US one.

[1] https://www.statista.com/statistics/259096/us-imports-as-a-p...

[2] https://www.statista.com/statistics/258779/us-exports-as-a-p...


Those are pre pandemic numbers though, US imports just ballooned after they printed money to pay for the stimulus packages while exports dwindled. Without the pandemic things could have been fine for a few more decades, but now things looks way worse. At the moment the deficit is 80 billion a month, or a trillion a year, and the deficit is strongly trending upwards rather than improving as the pandemic ends.


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.


There is no increase in productivity.

Inflation can be very costly, especially for the most disadvantaged who do not have investments to hedge against the rise in prices. It may have a positive first order effect in the short run, but it is an elusive one.

Inflation, if out of control, has the potential to bring the interest rate to levels that would turn borrowing extremely costly --therefore making acquisition of capital more expensive, affecting productivity.

Another side effect is that the government debt could become extremely burdensome, which would force the government to essentially print money to pay its debts. That is effectively a tax (called _seignorage_) on the population. In order to pay its debts, the government prints money, which in turn makes goods and services more expensive --i.e. _seignorage_. High inflation can affect consumer behavior and depress economic activity, which would lead to unemployment, it happened many times, and it is called stagflation. A slower economic activity coupled with increase in prices could then make production more costly, which would push inflation even higher but also increase unemployment.

The key here is whether inflation would get out of control. The Fed seems to banking on the idea that this high inflation is transitory, which means that despite its current high levels, there will be some accommodation in the medium run and things would go back to a stable and acceptable target level. Some, like the article above, does not think so. If that's the case, then the Fed will need to act soon.


The more I read about this subject, the only thing that becomes reinforced is that nobody really knows what the hell is going on with the markets. The inflation / deflation debate has been raging on for years now, and it's still not clear what we are experiencing in this virualised economy of ours.

Gun to head? I think it seems that 'inflation' is not really inflation - but a kind of profit tax that seems to be being priced in to charge more for things because everyone else is doing it. A lot of debt was paid down with the stimulus, rents/real estate are frickin skyrocketing, so it's difficult for me to believe that there is a huge surge of demand because everyone is suddenly flush.

As for the the supply chain issues / trade war / materials shortage - again, that doesn't seem to be inflationary or a demand shock, but a temporal supply-side issue not being able to keep up with regular demand as things reboot.


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-...


It seems like there isn’t enough data backing up these claims, or at least not in convenient form. Where are the graphs of things like container throughput at major ports? Compare with the pandemic where it’s much easier to understand whether things are getting better or worse.

Also, economic growth depends on the ability to remove bottlenecks and improve productivity. Yes, there is always another bottleneck. But idea that removing one bottleneck is pointless because there will be another one seems like giving up on growth?

In particular, it seems unlikely that there is no way to build more housing.


For anyone else thrown off by the use of "MP3" to refer to anything other than the file format, here's https://medium.com/alpha-beta-blog/the-three-stages-of-monet...


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.


In all fairness, the intended readership of that blog would know it. It's like handing a random technical Go or Rust post to a strictly-business non-technical person.


Even in my highly technical field we still define acronyms when they first appear in a manuscript, since while everyone works in the field maybe not everyone works in this specific niche and is familiar with all the jargon. Editors or reviewers will want to see it defined in long form. It's really just lazy writing to not do it.


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


First really thorough analysis of this situation that I have seen. It is surprising that this observation isn't more common, it is very obvious from looking at sectoral balance sheets...but, I suppose, not many people do this (it is odd to me that what was done during the pandemic had literally never been tried before, there was no economic logic for doing so, and no economist said: hold on, is this a good idea? And still, just a crowd of nodding dogs...you can only rely on an economist for a convincing explanation of what was happened, never the future, never creativity, never analysis).

One point that I don't think is made clear. Because this problem is totally artificial, it isn't clear how you solve it. Clearly, prices are going to have to increase substantially to choke off demand. But even once you do that, there is a question in some industries of whether supply can increase at all. Some big industrials are trading on mid-single digit P/E ratios, they just can't get money (most are actually being incentivized to return this, repeat that: shortage of almost everything, the market is telling them...reduce supply urgently). There is a flood of money for "risk-free" investments and tech (read: unprofitable, never going to be profitable but has value because you might be able to convince someone that you will be profitable...eventually), everyone else is being starved to death. It is quite terrifying because the govt has managed to debauch almost every price in the economy. Nothing is working.


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


It can. The govt has stopped it doing so.


I'm honestly surprised inflation hasn't been worse than what we've already seen. 10-year treasury yields are still well below their 2019 levels and are currently below their levels from Q2 of this year.


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.


There was an article the other week from Canada about their CPI (I can't find it right now). Their CPI calculation was using prices that were half those available in stores (butter was one product, there are large variations in prices for some primary products in Canada because of producer's co-operatives particularly in dairy), and used sizes for some products that haven't existed for decades.

CPI calculations are very tricky. Deflation in telecoms, for example, has been very understated because how do you compare a data plan with a voice plan (in the UK, they had to adjust two decades of CPI numbers because of this calculation error). Imo, we place far too much reliance on CPI which is, after all, only one measure of inflation. Everyone seems to believe that prices are rising faster than CPI, and they would probably be right (I am in the UK, food prices in Canada particularly are...out of this world...particularly for meat, which seems to cost at least 3x the price here).



Yes.


So, two things.

First? I think this is an ad. Newspapers are paid for placement articles like this all of the time. Now, how much oversight is placed upon such ads-articles, depends upon the publication.

The Star is well respected, so I suspect there's some strong oversight on opt-ads by them. EG "Please write about us", more than "Here's an article we've written for you." However, I'd be surprised if some cash didn't change hands.

Second? This doesn't mean the premise is wrong. Part of the problem is how vast Canada is. Local production in Canada, crossing 4+ timezones and 10000km, is going to result in local shortages of products, and thus, local price spikes in produces.

For example, if you have a local butter shortage one year, shipping from 5k away will raise the price.

Again, my above comments aren't meant to debunk this article, just provide some additional data.

Oh, also.. pricing is indeed different in the UK and Canada. I visited... 5? years ago, during a particularly rain free, heat wave summer. Was nice, btw. :) But during my visit I did see those massive pricing differences in some things.

Of course, UK pricing for wood and fuel was outrageous for me (just things I noticed, and these are things plentiful in Canada).

But you're right about market controls in Canada, which are designed to ensure supply, and keep farmers in a profitable state. The US, for example, does this in a different manner, for example, they don't limit production, they buy excess.

On the dairy side for example, they buy excess milk and make "government cheese", which can be stored longer than milk (years), and is often given to the poor.


Keep in mind that CPI is an average based on what people actually pay, which often lags market rate.

For housing, you might not pay market rate due to having bought a house long ago, or rent control, or some other way of getting a sweetheart deal.


That is a really good point.

I also have a pet theory that CPI understates the cost of housing due to people who are pushed out of entering the market altogether (e.g. homelessness rising, people living with parents longer)

Sort of the same way some people say unemployment figures understate the true number by ignoring discouraged workers / people who have stopped looking altogether. I have a hunch there are many discouraged folks who have stopped looking for housing altogether.


You should take a look at Pia Maloney and Eric Weinstein work.

CPI is broken because it doesn't factor in a "change in taste or prefence"

CPI treats individuals as a giant unmovimg population mean.

To counter they change to use vector fields.


Of course preference is included in CPI. Weightings are adjusted periodically as consumer spending patterns shift, and price elasticity is explicitly factored on a quarterly basis in chained cpi


Housing is not in CPI. They use "owners' equivalent rent" which is a subjective (cooked) metric.


Well, it’s based on a survey. (And surveys are cursed instruments [1].)

> Generally, owners' equivalent rent is obtained through surveys asking homeowners the following question: "If someone were to rent your home today, how much do you think it would rent for monthly, unfurnished and without utilities?" [2]

I would guess that some owners’ ideas of what their house would rent for might lag the market?

[1] https://carcinisation.com/2020/12/11/survey-chicken/

[2] https://www.investopedia.com/terms/o/owners-equivalent-rent....


So what housing cost metric should be looked at? The cost for a retiree living in their paid off home? The mortgage payment for brand new homeowner with minimal down? The cost to split an apartment for 2 people? What objective measure should be used?


CPI will never been perfect. They could even break it down into 3 categories: 1. Poor man’s CPI: ramen, rent & public transit 2. Middle class’s CPI: house, beef & cars 3. Rich man’s CPI: penthouse, luxury goods & sports teams


All of them? The government has this data already it just needs to be aggregated by someone motivated.


How do you combine them into one number, in a way that isn't "cooked"? Proposing we mash up all data ever into one figure, without detailing how, is useless


Why would they necessarily be combined?

If you look at the Bureau of Labor and Statistics they will happily provide you with more detail, for instance the median salary in a field for the top 10% of employees versus the top 90%.

I don't know how you'd keep that updated though, you can hardly say "the amount the richest 10% spend is the rich CPI" because it's a silly statistic. I don't know how you can reasonably say "the minimum amount required to be rich", it just seems silly on its face.

No, I don't think there's much of a way to make it work. It's probably more directly useful to understand whether people are saving money or how much debt they have, though that's going to lag.

I mean, or just ask people. The government is fairly good at doing that.


I don't think they have to ask anyone. IRS and other agencies could pull all this information. IRS knows how much rent my landlord makes. County knows how many units are on the parcel my landlord owns and the landlords property tax burden. Lender reports mortgage data to the government, now you know my landlords mortgage. By aggregating just this info, most of which like the county parcel data already being public, you can get the true costs towards housing paid by everyone in the country living in housing.

For income once again you can turn to IRS tax return data. I believe IRS can also sum your accounts as well as review transaction history. Creditors also report debts to IRS.

All told I believe the federal government can access all the information needed to know exactly what almost every American is paying for housing, how much they are being paid, how much they are spending, and how much debt they have.


Medians aren't crooked.



Is it? Can’t game it much or for long without being obvious because it’s compounding. Let’s say inflation is understated by 4% absolute per year. Over 40 years, that’s a factor of 4.

https://inflationdata.com/articles/inflation-adjusted-prices...

Is the fuel cost per mile traveled 4 times higher than it was in 1981? No. Fuel prices adjusted for CPI are about identical with what they were in 1981 ($3.80/gallon): https://inflationdata.com/articles/inflation-adjusted-prices... And fuel efficiency has improved by about 40% in that time: https://www.epa.gov/automotive-trends/highlights-automotive-... (Even as vehicle reliability and safety and comfort have also gone up.)


Fuel would be hard to game. It’s just fuel. Other components are trickier to calculate, like aggregate food prices or things involving hedonic regression. If there is gaming, you’d have to look at the tricky parts.


Well if you don’t think we’ve gamed fuel but do think we’ve gamed CPI significantly (ie several percentage points per year for decades), then we have made REMARKABLE progress in reducing fuel costs over the last 40 years, with fuel efficiency improvements on top of that.


I don’t doubt that. Oil was expensive in the seventies for geopolitical reasons. Production has since become much more predictable and secure.


Since 2010 the cost of bread and milk has increased below CPI, and in general food at home has been below inflation too


Shadows stats has faced some criticism https://econbrowser.com/archives/2008/09/shadowstats_deb

Some wags have pointed out the price has been constant for many years https://web.archive.org/web/20080512223437/http://www.shadow...

The billion prices project independently collects prices and matches CPI well https://www.businessinsider.com/million-prices-project-vs-th...

Note that the inflation stats in Argentina *were* manipulated and official numbers differed from billion prices. https://en.wikipedia.org/wiki/MIT_Billion_Prices_project


ShadowStats is a crude derivative of CPI data so it’s gamed squared.


Housing in your area might get vastly more expensive, but housing somewhere else might not see the same price increase. The CPI is for the entire country


If they used the real inflation numbers, this problem would be even more astronomical than it is: https://crsreports.congress.gov/product/pdf/IF/IF10522

because

> Mandatory expenditures, such as Social Security, Medicare, and the Supplemental Nutrition Assistance Program account for about 65% of the budget.

The budget is about 6 Trillion US dollars (FY22). Take 65% of 6 Trillion and start multiplying it by CPI and you'll see why it's in their best interest to understate it, and understate it greatly. If it were calculated higher, they'd have to borrow more than the $1.9 Trillion that they already are. To pay for a single year.

https://www.thebalance.com/u-s-federal-budget-breakdown-3305...

If you look at the debt chart, you'll notice it basically starts growing, and growing exponentially, around 1970, when Nixon took the US off the gold standard and going to a fiat currency with no real backing other than the gov'ts word, and the people believing in it. That's waning.

https://fred.stlouisfed.org/series/GFDEBTN/


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).


You may be right on the negative real yield. My thinking was that, ceteris paribus, if expected inflation is rising I would expect interest rates to rise as well. QE has likely been playing a large role in muting this effect.


The metric you want is the breakeven rate, the difference between nominal Treasury yields and TIPS yields (which are indeed very negative).

https://fred.stlouisfed.org/series/T10YIE

The Fed is artificially holding real yields negative on the short end for years at a time to enable money-losing ventures to "prosper" in order to "stimulate" the economy. It gets people working and society running but the long-term misallocation of capital can't be good. Real yields have been negative out to 30 years for some time now, meaning the real economy could well be full of stuff that destroys value over a 30-year horizon as a norm!


There is actually a parallel effect of QE that no-one really wrote about: it causes a shortage of risk-free assets, and makes it harder for savers to fund liabilities.

I can believe that QE had a positive portfolio effect in the early 2010s. But no-one really acknowledged the downsides (it took them most of the 2010s to work out why QE "worked").

So we have the amazing situation where you will get funding for a project, but only if you promise to lose money. Investment into real assets is extremely low, chemicals and O&G are trading on mid-single digit P/E ratios, and are furiously trying to return capital...whilst we have massive shortages...it is a very unusual situation. And, imo, the cause of this is the shortage of risk-free assets (because creating this shortage, due partly to regulatory restrictions, did not mean that investors suddenly started making investments into the real economy...most couldn't...they just had to buy more "risk-free" assets from corporates who already had too much money or PE funds that were playing the capital cycle...ofc, no central banker understands that some institutions are limited, the textbook doesn't teach that, they don't understand it).


I don't think it's that Jerome Powell doesn't understand. Rather the central bank only has a few tools (interest rates/QE) to nudge the economy in the right direction. It takes real policy (Congress and the White House) to direct the investment to the more sustainable long-term investments


Here is the problem: if Powell is too successful with monetary tools, what incentive does it leave the policy side to do anything at all? He isn't powerless to force policy action by holding the line, but understandably he's more interested in keeping his job.


> shortage of risk-free assets

Risk free assets don’t exist. So by definition, they are always in short (0) supply. Even treasuries are at currency, inflation, and interest rate risk. If you are using risk free as a synonym for us treasuries , that’s what qe has been pumping into the system. Are you saying you want even more qe ?


It's worth noting that the breakeven rate is measuring what market participants are expecting the "official" inflation rate to be, as measured by the CPI-U. That may differ meaningfully from changes in the cost of living as experienced by the average American.

> meaning the real economy could well be full of stuff that destroys value over a 30-year horizon as a norm!

This is probably somewhat hyperbolic since companies who borrow anywhere in the ballpark of the risk-free rate (i.e., large, responsible, and generally financially conservative organizations) typically have an internal hurdle rate that is well in excess of their cost of capital.

What is true is that the hurdle rate exceeds the cost of capital mainly as a risk mitigation mechanism; it is a margin of safety. IRR projections almost invariably depend on certain assumptions about future business conditions. So artificially depressing the cost of capital can result in "more marginal" projects getting the green light, and therefore can increase the potential for financial damage in a serious recession. You can think of it as "risk leverage".


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


It's a plausible theory, but it doesn't explain the long queues of container ships waiting to be unloaded.


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


That's not whats observed at the ports. Relative to before the pandemic in LA, container tonnage is down, container volume is down, cargo value down, the number of vessels serviced is down, as well as revenue all down. By all accounts the port just seems to be working at a reduced capacity than even before the pandemic, rather than moving a larger amount of goods than what was 'normal' and struggling to keep up with increased demand. Seems they just can't keep up the numbers seen under normal demand at least at the port of LA.

https://www.portoflosangeles.org/business/statistics/facts-a...


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.


From a cursory glance at I-5 traffic outside my window, besides for ~5 weeks in 2020, it does not seem like the economy was shut down.


Yeah not much of a shutdown, in LA seems like retail and restaurant workers were back working pretty fast, only a handful of places by me failed to pivot into takeout orders and shut down, I'd say 9/10 restaurants anecdotally are still open today which is about what I'd see with typical restaurant turnover over these two years anyhow even in the before times. The city only felt empty for like a month, then it was back to business as usual only with masks on. Traffic picked up again pretty quick. It was only bars and large events that suffered and even then, those have been back for a long time now (at least for bars, restaurant bars with outdoor dining even longer).


> Further, those who left the labor force during COVID don’t seem particularly likely to come back, as most say they don’t want a job, and many are over 65 and are likely permanently retired

Who was asked, and who did the asking to arrive at "most say"?


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


That's not the opposite.


GP quote suggests on-time retirement (65+) while OP suggests not just not-retirement-age but actually prime-earning-age. Those seem pretty opposite to me?

Anyways, raising a kid with two earners is too damn hard. That's what's really going on.


They're talking about two different things - one is about people leaving the labor force entirely, whilst the other is about people quitting their current jobs. Now, there might be some overlap but there doesn't necessarily have to be all that much because a bunch of people were made redundant earlier in the pandemic and some of them aren't going to return to working again.


Yep, it's a bit crazy how most Western school systems I'm aware of are still designed like it's the 80s and every household has a parent at home full-time.

E.g., school finishes early afternoon, large amounts of school holidays that dramatically exceed the annual leave entitlements of two parents combined, etc.


I did not read too deeply into the article, but there are some things that don't add up.

1) if it's only a demand shock and production of goods is sky high, why are all the goods missing? Apple missed its projections and blamed it on supply issues. Did e.g. TSMC crank the production up, but failed to deliver for Apple? Hard to imagine. So if there's enough goods it implies that e.g. Apple didn't sell as much as expected, but this goes against the argument that there is so much stimulus money.

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.

so which is it? supply or demand shock?


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.


That's fair. Their revenue is up, and the projections might have been just wishful thinking. But I see many examples like these, e.g. BMW ditching touchscreens on their cars because they can't find them etc.


Here's the content without the obnoxious modal:

https://archive.md/OTsRH


"governments transferred a massive amount of money to households".

This isn't true in the UK, yet the article mentions a lack of truck drivers here - that's more likely to be due to Brexit and then not wanting to come back after being treated badly last winter.


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.


WARNING: This site has an obscenely obnoxious terms & conditions blocking modal. I would prefer this link to be removed, it is so egregious.

Post something, or don't. Don't put up a blocking modal to force me to read some terms & conditions before reading the actual content.


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.


Incompetence on the part of a finance company is not the fault of the government. They pay the government to do what the finance company wants. Nice try, no sale.


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


Seems like all that free money and no one working has definitely caused a supply issue ... yet everyone has tons of money furthering pushing up demand yet supply to meet the demand has shrunk.

For those who push for a universal basic income where large groups of people do not work ... do not help produce the supply only push up the demand. Why do you think UBI is still a good idea and you are perfectly fine with how things are now vs. how they were?

*Please note i want workers to be paid more then fairly and when i go out i tip up to 30%, as well happily pay $60 to $100 for dinner at Applebees (or similar places) for a friend and or a date and myself.


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.


Hmmm but I didn't say anything about wages which I'm very happy to pay more and do now .. tipping more then 20 percent, tipping sub makers at Jersey mikes and happy to pay up to $30 for a burger fries and drink at five guys. Going out to eat with a friend or a date is now a $60 to $100 affair at Applebees or places like it with tip. All good to me!


not necessarily disagreeing with you, but odd that you think your tip at applebee's is an argument against a basic income


UBI aka welfare which is what we all had to be offered during covid .... the affects of it is per this article is that demand went way up and supply went down a lot cause of less people weren't working creating the goods and offering services we grew accustom to having readily available.

Until the robots take over to fulfill the supply to meet the demand I think based off what we are seeing now everyone should be working and pay everyone a solid to great wage for contributing to society!

I mentioned tipping and stuff because the OP's comment seem to think since Im not for UBI that I don't want people to receive a fair to great wage for low level jobs which isnt true.


Strange definition of good.


Paying workers a higher hourly wage to tipping them a lot more I believe is the good, fair and right thing to do. Reward those who are out there working the low level jobs most affected by the worker shortage.


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.


Sure but that's a possible future thing just like Zuckerberg's vision of the future of the Internet. Right now ramping up to that level automation that supposedly outstrips jobs is MANY years to decades to more away.


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.


The LA port issue is mentioned in the article and seems to be severely misunderstood. I work with one of the senior attorneys of the Port of Los Angeles in my side job. The primary problem there, and Long Beach and many other ports, isn't anything economically driven at all. It is lost space. Even more specifically it is vendors not retrieving their containers because its cheaper to leave the container on the dock and store it in their own warehouse.

So the moment a graduated price hike was introduced for container parking (just very recently) one of the major US vendors conveniently found warehouse space for 5000 of their containers sitting empty on the LA docks. Think about this like using airport parking for your car as opposed to metered parking on a street in front of your house (everyone's house) and until recently the airport parking was substantially less per day.

---

I would have loved for the article to focus more on housing, because I see that topic frequently come up on HN from people on the west specific, especially San Fransisco, and they always get this subject incredibly wrong to fit their localized price/inventory dynamics in way that falsely equates to buying candy bars or fuel.

Here is a deeper exploration of housing using data: https://news.ycombinator.com/item?id=28974793

In short, supply trails demand. In high growth markets, which is not San Fransisco, the frequency of demand for a fixed asset versus the speed of supply is almost solely responsible for shaping the product definition.


I can remember when a year ago everyone agreed they were happy with consuming less and spending time with the family. Looks like that didn't last long, everyone is out shopping again.


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


We can't afford not to import goods. The cost of manufacturing in the U.S. are too high relative to other parts of the world. Can't do anything about that on our end of the deal short of tarriffing ourselves into total economic isolation and being forced to produce everything nationally.


But you can't just import goods without exporting anything forever, at some point USA needs to start to deliver value back to the rest of the world. Note that the trade balance includes services like ads etc, that is the entire thing.


> at some point USA needs to start to deliver value back to the rest of the world

First they already receive something of value, which is our money.

No one forces them to sell their stuff for our money.

Nor does selling us $1 of goods entitle them to get anything above and beyond $1 of our money. They have already been paid with sufficient value.

Now they must spend that dollar in America somewhere. So they have a choice

a) buy some other good or service from America (trade is balanced)

b) buy some American asset like a bond, share of stock, etc. Then the trade deficit goes up by $1.

The world is choosing to do b). No one is forcing them to. The moment they stop doing b) and start doing a), the trade deficit will be balanced. The moment they sell their existing dollar investments and buy US goods, the trade deficit will reverse. It is their choice, not America's choice.

The input of the U.S. in influencing this choice is merely the setting of interest rates. By setting rates, they determine the overall returns obtained from option b). Thus they can make option b) more attractive by raising rates, and less attractive by lowering rates. But our rates are basically zero already. Does it appear to you that the U.S. is running high interest rates in order to attract foreign investment? No, we don't really take the trade deficit into account when setting rates, we focus on inflation.

Now we could take steps to change the regime and strongly discourage imports. This would be the equivalent of

a) taxing foreign investment, so that there is a wedge between the interest rate obtained by foreigners and our domestic policy rate for fighting inflation. At a high enough tax, the rest of the world will collectively want to pull their money out of America, sell their dollar assets, and then buy American goods to get out from under the tax.

b) Subsidizing domestic production. The problem here is that business will tend to pocket the money. Option A is the more efficient approach.

Option A also attacks our status as the global reserve currency - it's about time we stop being the gold standard for the rest of the world. All of these deficits are the result of us being burdened with reserve currency status, which on the one hand gives us a lot of power to punish other nations, but on the other hand destroys the domestic manufacturing base.

I look forward to the time when we are no longer the world's banker but merely any other nation that needs to run balanced trade. For that to happen, we need to make our assets unappealing to foreign purchasers.


> The moment they stop doing b) and start doing a), the trade deficit will be balanced.

And a rate of a trillion worth of goods per year will stop flowing into USA, that is the current trade deficit, you don't think that will cause some sort of crash?

Your explanation here is like saying "This isn't a bubble, people wanted to pay this much for stocks, if stocks don't deliver people will sell and prices goes down, that is how it should be!". That totally ignores the effect of the economy when that correction happens.

There is a lot of trickery you can do with economics, but other countries will protest sooner or later and stop sending things. I think the economy should take that into account or that crash will be horrible.


The thing to watch for is not the balance of trade, it's the balance of trade and investment. As long as investment balances out trade, and enough of that investment is going into productive assets, it's all good.

Many countries, including the US, have run trade deficits in the past for multiple decades and it's been fine. In those cases where it's not fine it's because the economy had nothing (or not enough) foreigners wanted, e.g. Russia in the late 90s.

Yes if your economy collapses for some reason you'll have a deficit problem, but in fact past deficits don't affect that. They don't matter because the deficit was already invested in domestic assets. Since those assets change in value as your economy changes, it nets out. The foreigners already invested their money in your economy and they suffer as you suffer. However the past deficit isn't going to cause any such collapse. There would have to be some other additional factor.

That's what history tells us actually happens, anyway.


> And a rate of a trillion worth of goods per year will stop flowing into USA

A 1% tax would not cause a trillion worth of goods per year to stop flowing into the USA. Honestly, I think you are reacting too emotionally. The nice thing about a tax is it can be gradually increased to reduce foreign investment. There are actually many that have discussed taxes on foreign capital inflows, it's not some random idea I just cooked up.

>Your explanation here is like saying [crazy stuff]

No, it's nothing like that. If you have some substantive disagreement, let's here it over the doomsaying. Note, the real downside here is just somewhat higher equilibrium interest rates, which is why now is a great time to do this.

> crash will be horrible.

See above.


But the current inflow of goods has nothing to do with foreign investments, it has to do with the US government printing a ton of money and ultimately that money gets used to buy goods from other countries.

And no matter what finance trickery you do, fact is that USA will need to stop consuming so much. Your solution would lead to the same decrease in consumption, just with different means. And when that happens it will no longer be able to attract foreign workers as easily since American consumption is no longer privileged. And when that happens the domino effect will cause issues all over the economy.


Look, there are some table stakes before diving in with strong opinions, so the first thing to understand is the balance of payments identity, namely current account + changes in capital account = 0

http://www.econ.yale.edu/~ka265/teaching/UndergradFinance/Sp...

Now if there was zero foreign investment, then the U.S. deficit spending a lot (please don't use the word "printing money") would cause demand for foreign goods to rise. You are right about that!

But - does that mean that we buy more foreign goods or that the value of the dollar falls so that the money spent on foreign goods (in dollar terms) is the same as the money spent by foreigners on our goods?

You see, there is another degree of freedom, namely the exchange rate! The exchange rate is all that is needed to clear exports and imports so that there is no trade deficit, and that is true regardless of how much "money printing" happens.

So whether or not you get a (net) trade deficit is going to be determined by (net) foreign investment, which raises the dollar and prevents it from falling enough to equalize imports with exports. The residual is the trade deficit.

Viewed a different way, the demand for the dollar is the demand for american goods + the demand for american assets.

If the demand for assets is zero, then the price of dollars is whatever it needs to be so that our deflated dollar makes our goods sufficiently cheap and foreign goods sufficiently expensive so that the stimulus spending does not cause a trade deficit.

Trade deficits are always and everywhere determined by net capital inflows. That is what the Balance of Payments identity is telling you. They are not caused by deficit spending, declines in productivity, failures of our educational system, etc. It really is just capital inflows.

All the other stuff is important, as it effects the exchange rate, but it's not important for determining trade deficits.


> If the demand for assets is zero, then the price of dollars is whatever it needs to be so that our deflated dollar makes our goods sufficiently cheap and foreign goods sufficiently expensive so that the stimulus spending does not cause a trade deficit.

This ignores the fact that dollar is used as a reserve currency. Since the dollar is a reserve currency people will want to keep it stable, so even though USA abuses its position as a keeper of this reserve currency by printing a lot of dollars other players still plays along and keeps sending goods to keep the value of the dollar high. But what do you think happens when they stop putting up with how USA abuses them? Well, they stop buying dollars, the dollar crashes, Americans can no longer buy Chinese goods and the American economic dominance ends overnight. Of course this would affect the rest of the world as well so they wont do it that quickly, but even if it happens slower it will still cause a massive crash.

I just don't understand why USA keeps digging their hole ever deeper, the more they dig the worse it will get, since right now they are building their economy on top of of a bubble that can be popped by China whenever China wants.


> This ignores the fact that dollar is used as a reserve currency.

No, it's my whole damn point. Please re-read and stop it with the US "abusing" China by forcing them to run huge surpluses against us. These discussions are not helped with such emotional outbursts -- we are talking about currency markets, not your kids' tuba recital.

>Well, they stop buying dollars, the dollar crashes,

Yes, the whole point is to get them to stop buying dollars. That's the goal. And no, the dollar doesn't "crash", the dollar falls to its true value, the one in which exports = imports. That is the only possible sustainable value of the dollar.

> USA keeps digging their hole ever deeper

The only "hole" the U.S. is digging is allowing China to purchase an unlimited amount of dollars. You think China allows the U.S. to do that? It is capital inflows into the US that need to be reigned in, just as China does not allow unrestricted capital inflows into its capital markets.


> The only "hole" the U.S. is digging is allowing China to purchase an unlimited amount of dollars. You think China allows the U.S. to do that? It is capital inflows into the US that need to be reigned in, just as China does not allow unrestricted capital inflows into its capital markets.

What if the us pressured China and India to allow capital to flow to them instead ?

Does this make any sense ?: https://twn.my/title/mai1-cn.htm


We export plenty of things. We import tomatoes out of season from south america and sell them american milk.


That would be terrible. /s


It really would be. There would probably be famines since this globalized race to the bottom has affected our food crops as well as manufacturing. Just within the last 10 years, a lot more of our food is imported.


What sort of correction?


On average countries has a trade balance of 0, it means that a country buys as much goods and services as it sells. USA is buying more and more goods and services without selling more, as you can see in that graph, and that has been going on for 50 years now. The correction would be that USA no longer can import goods without paying anything back, stopping all the shipment problems you have now since people no longer want to ship goods to USA. That would be a trillion worth less of raw imports per year according to the current deficit.


Everyone??

Are you just making stuff up to argue about??


Warning: The site withholds the content unless you agree to terms.


It sorts of make sense. The big mystery was how we created so little inflation with previous QE. In fact we probably did, but because it was injected in the financial system, it created an inflation of financial assets.

But the minute the government distributes this newly printed money directly to the general public (through covid subsidies), inflation in ordinary goods follows.

I know the Fed pretends it doesn’t finance directly the budget deficit but in practice it does, and the amount of QE pretty much tracks the deficits during covid.


Addressing a few different comments because it may not be known: Bridgewater is a hedge fund. One of the bigger ones, and most successful. Kind of old school. But because of this, any content that they disseminate must be very clearly be labeled at opinion/research and not investment advice. This is the reason for the obnoxious modal. This one can't be avoided.

The email newsletter upsell, however...


Isn't a big part of the current problem that transport/delivery/shipping vessels and/or their portable containers have been forced to become part of the storage capacity?

Does it really require much more than that to break the whole system down? You could have what was once a highly parallel system with tons of transport bandwidth brought to its knees and effectively serialized if not completely deadlocked by just overflowing your storage capacity enough to fill all the transport stuck in queues and other forms of holding patterns.

Thought exercise:

You have two warehouses surrounded with tons of loading/unloading docks, plenty of bandwidth capacity, but they're both full inside. You have 20 trucks available, and they too are all full of goods, 10 parked at the docks of one warehouse, the other 10 parked at the other warehouse. But nothing is happening, because all the trucks are full and waiting to unload, and all the warehouses are full.

So you introduce a 21st truck that's empty, and it shows up at one warehouse, loads up, and moves the stuff to the other where it needs to go. What happens? Did you fix the problem? Barely; you've opened up 1 truck worth of transport capacity. Despite having all this potential parallelism and idling trucks at concurrent docks, you will still be stuck with just a single truck moving around making glacial progress at any given moment. At least until enough goods exit this closed system where only the warehouses are storing and the trucks are all transporting again, which requires preserving sufficient headroom at the warehouses to ensure any docked, fully loaded truck can unload immediately.

It's a vastly simplified example, but I wouldn't be surprised if something along those lines has occurred where the transport has become storage because there's been too much stuff pumped into the system for the available holding capacity.

It's like trying to rearrange your overfull apartment when there's zero floor space available, you can't move the bed because it's wedged between the couch and the table. You need to take stuff out of the space so you can actually move things around.


The article doesn't answer the obvious question though: what next? The various pandemic subsidy packages are by and large being wound down, which implies that demand should start dropping quite soon as well.


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.


That was my thesis all summer long, but bond yields have remained stubbornly low and the stock market just had a blowout October even as inflationary pressures picked up amidst the Evergrande crisis and the debt-ceiling crisis. I’ve given up thinking that there is anything that can bring down this market and will no longer fight the trend.


I think you may be slightly misunderstanding his take. I don't think he would argue this bubble is going to pop. Maybe increased volatility with a couple "events" but not a nominal pop. The bubble will pop through sustained inflation. The S&p will be up 100% while the dollar will have lost 60% of it's value over 5 years. From a metrics perspective the bubble is gone at that point.

So yeah, after 10 years of thinking bubbles were about to pop I'm finally on the "this is the exception" this market is never coming down team. It really is politically infeasible for it to move in any other direction while it's totally politically feasible to print money and maintain high nominal values.


well, maybe the capitulation of the bears could bring it down...


Where are they investing then?


If I had to channel Ray Dalio he would say:

- Keep your Beta as high as possible, you want to be as diversified as possible heading into a difficult environment

- Cash is trash

- Value will accrue to real assets and hard money. Real estate, equities with consistent cash flows and strong books, commodities, crypto, land, natural resources. These kinds of things

There are plenty of videos of him on youtube going deeper on all of these topics


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


Never have I seen so many words used to describe inflation without using the word inflation.

Tight labor market; demand for goods outstripping supply, driving up prices; too much money chasing too few goods: it's all there.


Krugman thinks it is a combination of supply chain issues, shift in demand and out of control energy prices:

https://archive.md/fjwyl


The "shock" is actually a bit more subtle than that:

> Here's 10 years of the relationship between our consumption of goods and our consumption of services. It explains a lot about why we're experiencing bottlenecks and disruptions. We were simply not prepared for the massive uptick in goods consumption.

* https://twitter.com/TBPInvictus/status/1456683999657615364

When people couldn't go out and do stuff (services) they started buying stuff (goods), and the supply chain couldn't handle the sudden surge… so now we have supply problems.

The supply problems are often 'subtle' as well. For example, a few months ago softwood lumber in the US hit a peak of $1733/lot, and now it's down to 'only' about $600—which is still 50% higher than it historically ever was before.

However there is a 'glut' in the supply chain because current inventories can't be shipped because… there is a shortage of truss plates:

* https://en.wikipedia.org/wiki/Truss_connector_plate

Floor trusses can't be built, so even though you've built the first floor walls you can't go to the second because the floor framing—built using trusses—can't be laid down, so houses can't be finished. Further details about the current (Nov 2021) lumber situation on the most recent Odd Lots podcast:

* https://player.fm/series/series-1504378/stinson-dean-on-the-...

* https://www.bloomberg.com/news/articles/2021-11-08/transcrip...

* https://www.bloomberg.com/news/articles/2021-11-08/how-a-2-m...

Similarly even if you built most of the house, you can't legally occupy it unless there's running water—and there's a shortage of faucets:

* https://player.fm/series/series-1504378/the-bathtub-episode-...

So the demand and supply shocks dovetail 'nicely'.

Worth checking out Bloomberg's Odd Lots podcast as they've done a number of episodes on the supply chain over the last year. There are ones specifically focusing on (US) ports, rail roads, and trucking.


It would be great if we could somehow turn the growth in discretionary income made possible by these economic policies into greater giving to public serving institutions (libraries, parks, etc) and other charitable contributions.

COVID's impacts have not been proportional across the socio-economic spectrum, nor has the benefit of the economic stimulus.


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.


A family of 5 making $50k per year is one lost job away from poverty in much of the US, which was much more likely during the pandemic without assistance. They remain economically vulnerable, probably chronically. A family of the same side making $200k per year is not on the border of poverty anywhere in the US.

Meanwhile, the public facilities used by both families such as parks were underfunded with the loss of tax revenue during the pandemic (and often before). Charitable giving is an opportunity to improve them without raising taxes. Without those inclusive civic institutions, those with means can go to private or for profit recreation and cultural options. Those who don't have nothing.

It is disheartening to hear that emergency public assistance would be used as a rationale to "obviate the need charitable contributions".


We are doing double or triple ordering of goods not because of end-customer demand but because we fear our suppliers are not able to deliver.

Our competitors are doing the same.

At aggregate it may look like a “demand shock” due to too loose monetary policies but maybe it is not really what is going on.


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 call for a massive increase in investment in productivity. What might that look like?


This post really should have defined MP3 earlier! If you are like me and spent way too long scratching your head, googling to no avail until you got to the second half of and it was defined, MP3 stands for Monetary Policy 3


Are there any pre-COVID models predicting this occurrence? Do you think China started predicting an increase in demand before anyone else or do you they were surprised too?


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.


I won't take the time read, and I certainly won't click on, a long "disclaimer and agreement" before being allowed to read the article - eff that.


Popup modal redirects to the home page. Wtf can these guys possible give advice about when they can't accomplish HTML and javascript?


This just in, investment firm thinks there should be more investment into the economy. More on this story and other, at 6PM pacific time.


"Household balance sheets are now in a materially better state than they were pre-pandemic".

I think this is completely of touch with the realities faced by different slices of society.

I am a web developer who was working from home for many years before the pandemic. My experience is not even remotely similar to most people in the US.

Edit: this article is written by a hedge fund. So they definitely live in their own little world too.


"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.


Likewise. I mean I do seem to have more money than before but almost none of it came via government transfers. I think we got $800 for our kids because they were schooled from home for a year or whatever. The rest is just not having things to spend it on, primarily eating out and travel. I certainly agree that huge numbers of people here in Canada benefited from government money to replace lost wages but they were mainly people in service industries who are hardly “wealthy”. So for real, what does this mean? Obviously in aggregate when you write a cheque to every person for $X it adds up, which is what I think happened in the US, but does it create wealthy households?


Wealthy? No. Flush with rapidly devaluing cash? Yes. A family of 5 with with 2 parents and 3 kids under 6 years old got a total of $19,300 (counting the monthly child credit payments), provided they didn't go over any of the arbitrary income thresholds.


I stil don't get it - what is different now compared to 2019 that we have a labour shortage?


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.


Boomers are retiring and their spending drops off a cliff. That’s why the velocity of money has been dropping.


It’s a “people don’t like paranoid hypochondriac fascism” shock, and you know it.


Find it bizarre that people need to come up with new explanations (in other comments) for something that is straightforward, well understood, and has been so for a century.

Money supply goes up. Provided that gets into consumer’s hands, demand goes up. Depending on the velocity of money, the slack in the economy is quickly eaten up. In a recession there’s more slack. Slack is things like unemployed workers, warehouse stocks, easily accessible resources.

Once the slack is gone, this causes prices to rise.

None of this requires consumers to change their habits. It’s just a slight marginal increase in spending by _a vast number of people_, which has transitive spending effects. This is Keynesian economics 101. The only thing that is surprising is the speed at which this has happened.

The proximate cause is printing money. A more interesting point: during the Obama administration there was a collective feeling that they had not printed enough cash during the 2008 crisis. I think what we’re seeing is an over-correction for that now in the size of stimulus packages. Very much a product of Biden being there in 2008 and now. It’s well intentioned but the mistake is to equate the two events; there was little risk in 2008 of over stimulating the economy, because the recession damped velocity and capital accounts and liquidity requirements ate up the new money supply.

World leaders have made a basic error and high inflation is the inevitable consequence. I’m not knowledgable enough to know what the level of inflation we can expect will be, but 5% feels nowhere near the peak. The real danger now is that we get into a wage-price inflationary spiral, which we’re beginning to see signs of. That spiral is incredibly difficult to stop, as the U.K. discovered in the 80s when Thatcher and Lawson threw the kitchen sink at it and it still took years to have any effect.


I smell BS. I'm buying a lot less stuff now even though I'm financially very comfortable. Not to mention I rarely go out, as well. People who are struggling financially are now buying a lot less in real terms because of inflation and pandemic-related unemployment and under-employment. We're looking at 75 dollar turkeys this Thanksgiving, folks. A lot of people will not be able to afford the whole thing and gasoline at the same time.

This to me sounds like DNC talking points aimed at absolving the administration from the clusterfuck it single handedly created. _And_ they're thinking of shutting down _another_ pipeline [1]. Guess what that will do to cost of goods, consumer confidence, and purchase volume, and who will absorb the increased costs?

The situation with ports is what happens when you appoint a mayor of a town nobody ever heard of with no experience as a transportation secretary.

[1] https://nypost.com/2021/11/08/biden-might-close-michigan-pip...


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.


I've heard it expressed as, "This is not a supply chain, it's a supply line." meaning the US is not receiving components to build with or assemble, but finished goods to consume.

It's a sign of weakness.


This is 100% a supply shock. I have colleagues in the import business and containers are impossible to get and when they do you’re looking at 2x pre covid prices.


So here's a thing. Covid can cause neurological damage to the brain's frontal lobe, beyond that implicated by the loss of taste and smell.

Damage to the frontal lobe causes what Neal Stephenson referred to as "poor impulse control". I think the rise in violent incidents on airplanes is linked to this.

Additionally, poor impulse control leads to impulsive spending and purchasing behavior. Compounded by lockdowns and government checks, the situation is that consumers have upped their consumption way beyond their means; but some of this I suspect is neurological as opposed to psychological.

I think wild consumer demand just happens to be right now the most visible part of an iceberg of long lasting brain damage caused by covid, that our society is about to crash into.




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