Why There Are Shortages Everywhere

Over the past weeks, shortages of fuel, many consumer products, and other goods have spawned mountains of news and commentary coverage. However, most of it seems to be fundamentally missing the point. While most people are, of course, correct that the problems are tied somehow to the pandemic, there are other forces at play in addition to the straightforward explanation of lockdowns and illnesses causing people to miss work and production capacities to drop. Most notably, monetary policy is invariably involved to a great extent. Once again, M. A. Rothschild’s infamous quote, “Give me control of a nation's money and I care not who makes the laws,” is being proven right.

While the most visible and drastic policy implemented by almost all governments in the wake of the oncoming pandemic in early 2020 was the unprecedented lockdowns, there was another, equally as drastic but much less visible reaction. Over the first few months of the pandemic, exorbitant amounts of new money were created by central banks. As I have written elsewhere:

“The growth of M2 money supply for the US dollar reached 27 percent year-on-year in February 2021. Alternatively, the same entry in terms of TMS money supply showed a growth rate upwards of 39%. When it comes to M2, this nice graph (best when set at 5Y) shows the enormous upwards jump in the first half of last year, when close to 15% of the entire money supply to date had been created in just four months (an annualised growth rate of 45%). M1 money supply for the US dollar grew by over 50% between February and August last year.”

Most countries went through a similar development. This is not surprising, as central banks around the world cooperate to a considerable extent on monetary policy decisions and direction. While the growth in the money supply is now not as colossal as it was last year, the consequences of the sudden increase are only now starting to show across the economy - with shortages being one of those effects.

The mission of most central banks is to oversee inflation and/or to promote growth, employment, and other economic indicators. They do it through a plethora of methods, but growing the money supply at various speeds is one of the preeminent tools at their disposal. When we hear about the central bank ‘supporting the economy’ or prodding it to ‘grow’, this usually means setting a faster rate of money creation. 

Central banks operate on the assumption of the following theory: monetary inflation causes people to ‘go out and spend more’ (because they have more money to spend), causing general consumption to rise, motivating a rise in production as a result. Both consumption and production rise, meaning the economy is larger, meaning everyone is richer.

But, unfortunately, while this story might be somewhat true, it is far from the whole truth. The economy is not an engine that can be set into faster motion by adding more fuel in the form of more money. It is a complex system in which any one feature affects almost everything else. Most importantly, no matter what anyone does, the basic rule always applies: there ain’t no such thing as a free lunch. If it seems like prosperity is magically created by central banks’ currency manipulations, it is probably because it is paid for by something or someone we’re choosing to ignore. In the example of monetary inflation, seeming prosperity in the present is being paid for by future poverty. To the extent that central bankers are aware of this fact, they are choosing to attempt to soften the blow of the lockdowns and the pandemic by making a pact with the devil about society’s future welfare.

There was something new, however, about the monetary inflation of last year. Usually, the increase in the money supply is somewhat steady, but what we have witnessed was a sudden explosion of new money. Where under steady inflation people’s incentives to spend are usually put into slight overdrive and an illusion of prosperity is created, the effects of an avalanche of new money are different. Money is simply tokens that can be exchanged for actual things we like to own or consume. If there are twice as many tokens, each token’s purchasing power, in terms of the things it can buy, will be halved. Creating more tokens doesn’t create more things. But economic processes happen over time, not instantly. Therefore, if the number of tokens increases steadily, people’s wages and overall prices are steadily increasing too. But when there is a sudden, unexpected spike in the number of tokens, there is a lag before prices adjust. And it is this lag that is causing the shortages.

Increasing one’s retail prices is unpopular with one’s customers and in a competitive market, firms generally try to avoid it one way or another as long as they can. Where this happens, this is called stickiness. Of course, prices do in fact increase over time, but usually only when there is no other option and raising one’s prices becomes an economic necessity. But what happens when a lot of new money is suddenly created? And what if it’s immediately dispersed among the population at large, ‘helicopter money’-style, as was the case in many countries during the lockdowns? In that case, people rush to spend this money while prices still haven’t adjusted to the increase. The result? Shortages.

In other words, what we are witnessing here is more tokens chasing the same amount of goods. As long as prices are unadjusted in line with the increase, goods will be sold out. In addition, this effect is strengthened from the supply side because, as many correctly point out, workers on lockdown don’t produce. Therefore, not only are more tokens suddenly chasing goods at largely unadjusted prices but the volume of goods being chased has declined as well.

To paraphrase the Czech economist Petr Bartoň, the situation can be explained in the following way: high prices and waiting lines are basically one and the same thing - an expression of scarcity. If you’re out of bread, you can either raise the price and people will buy less of it, or you can keep the price low and people will be queuing to get the same amount (though the first in the queue will get the bread and those behind them won’t get anything).

When US transport secretary Pete Buttigieg suggests that to address the present shortages and prevent other ones in the future, the US should make a “generational investment in [its] infrastructure,” he is doing nothing but politicking. It’s not like the US’ supply chain infrastructure was fine two years ago just to suddenly crumble to dust. Apart from the obvious fact that productivity and capacity of infrastructure can be significantly affected when the people employed in the sector are forced to stay home or to work under many restrictions, the current shortages have nothing to do with infrastructure.

Across the pond, UK PM Boris Johnson has been in damage control mode, claiming that shortages are a good thing because they will cause wages in the affected industries to rise. Again, though this might be, strictly speaking, true, it is not the complete picture. In fact, it almost goes the opposite way around. As I’ve already laid out above, the shortages are, in part, caused precisely by the increase in nominal incomes across the board, which is not yet reflected in the retail prices. While there has definitely been an uptick in official price inflation, this number is nowhere near close to the monetary inflation numbers cited at the start. We are in the middle of a re-adjustment process when the economy is ‘getting used to’ the new total sum of money in circulation. 

Eventually, all the things now up in the air will settle down and the ceteris paribus clause will be more meaningful in the real world than it is at the moment - when price inflation will end up more or less following monetary inflation. In the meantime, the disparity between the two tells us something. There are two options: either the economy is being exceptionally productive now, generating much more goods and services than before the pandemic - or the sudden monetary spike has caused retail prices to lag behind nominal incomes, producing shortages in the meantime. No one can seriously claim that the former is the case, when productive capacities, far from being in exceptional shape, have in many cases been hit hard by the Covid-related restrictions and adjustments. It is the latter scenario that is in fact happening. And if you don’t believe me, this is strongly corroborated by the fact that lately, politicians and central bankers seem to be busy repeating that we should be preparing for some continued serious price inflation in the near future.