The Broken Supply Chain is Just a Scapegoat for the Real Problem
Prices are rising, goods are harder to find, and it won't magically reverse course. But it's not the truck drivers fault.
Happy Friday everyone. Hope you all have an excellent weekend. I remind my family almost daily to go buy Bitcoin, this is me doing the same for you. With that, let’s get right into it.
Here’s a few headlines from the news that I’ve come across in the last few days.
“Inside America’s Broken Supply Chain” - The Washington Post, 9/30/2021
“The World’s Top Central Bankers See Supply Chain Problems Prolonging Inflation” - The New York Times, 9/29/2021
“The Global Supply Chain is Still A Mess. When Will It Get Better?” - NPR, 9/28/2021
“The Return of Empty Shelves and Panic Buying” - Bloomberg, 9/24/2021
Maybe you’ve been to a CVS or Target and seen the shelves empty. Or maybe you heard that Dollar General is now going to start charging more than a dollar for goods, signaling the end of yet another Post WW2 American staple.
If you read my last article, you know that the reason for all of this is inflation is courtesy of the Federal Reserve printing 40% of all the US Dollars that have ever existed in the last 24 months. That number still is crazy to me.
Here’s a few more items that I think the majority (if not all) of people reading this right now purchase on a regular basis.
Yikes.
Prices and supply are of course linked, and always have been. It’s simple supply and demand economics.
This is what the articles at the top say is happening in our world today. Namely, that prices are increasing because of a decrease in supply. This is true, but it is not the full story.
What the articles completely fail to mention is that prices are artificially rising due to rampant inflation, caused by excess QE (or money printing) combined with shift in consumer preferences towards buying stuff - Resulting in the gears of globalization grinding to a halt.
The supply chain is being blamed for a feature that it innately possesses. Supply chains slow down when prices are resetting. Expect “supply chain” problems to persist or likely degrade further for the foreseeable future. Maybe a year or two. Maybe more… Who knows.
Why Are Supply Chains Slowing & Prices Resetting?
In order to understand where we are now, it is vital we look back into the past.
The economy of the United States of America was built on industry and manufacturing. It outgunned Nazi Germany in WW2, it helped rebuild Europe afterwards, and it gave the country the strength to survive the Cold War while still providing the American people with what they needed.
A true feat. From this era a number of companies that are synonymous with America were born. Think Ford, Boeing, General Motors, Levi’s, and more.
American manufacturing was quality. You didn’t have to buy a new fridge every couple of years because the old one broke. And from this quality manufacturing the American Middle Class was born.
American consumers didn’t need to buy goods from other countries because they were all produced here, on American soil by American workers. In fact, the trade deficit was even positive in the mid 1970s, meaning the US was actually exporting more goods than it imported, something that is unfathomable now in the age of “Made in China” being stamped into the back of everything.
In 1965, manufacturing accounted for roughly 53% of the US GDP (Gross Domestic Product). This figure slid to 39% by 1988, and in 2018 dropped to just 11.39%, while employing just 8.51% of the American workforce. Source.
This is the United States Balance of Trade. Source. In other words, are we sending money out of the country for goods? Or is it flowing in?
No economics degree needed to understand this one. Currently the deficit in August 2021 stood at around $-70 Billion dollars. That’s $70,000,000,000 flowing out of our borders for… stuff.
I realize I haven’t answered the question of why this is happening, but let me zoom out for a moment as we circle around the root cause of the problem itself.
Why Does The Trade Deficit Matter?
This is the Freightos Baltic Index (FBX): Global Container Index. Or in other words, how much it costs to get a shipping container sent around the globe. What do you notice?
The first thing I see is that it is 20x more expensive to get a container to go from China/East Asia to America than it is to send one from America to China/East Asia.
Sheesh.
Think that has anything to do with how little we produce compared to how much we consume here?
This chart below shows the astronomical rise in prices to send a good from China/East Asia to the West Coast of North America.
This is what happens when you have a massive trade deficit. Physical trade becomes a one way street, since paying for the goods is as simple as clicking a few buttons. As soon as the system begins to slow down, the entire thing can grind to a halt.
Compared to this same time last year, it is nearly 5 times more expensive to ship goods from Asia to California.
So simply put, it costs exponentially more to get the same goods into American consumers hands than it did last year, or even a few months ago. This means American businesses must raise prices exponentially to make ends meet.
Which means consumers must pay exponentially more for goods. It just so happens that the Fed is also printing money to keep the charade going at a rate of 10x what was being printed in 2010, after the Global Financial Crisis of 2008.
This means cost of goods rising plus huge inflation. And the longer the bottleneck persists, the worse it gets. Exponentially. Creating a positive feedback loop. Or if we use the technical term it’s a snowball rolling downhill… or something like that.
This is also what happens when globalization turns into centralization.
You may remember in an economics class learning about competitive advantage. Meaning, if a certain area, region, domain, or company has an attribute that allows it to produce goods or services that are better (or cheaper) than the competition, then that area/region/domain/company should produce those goods or services.
Makes sense to me.
But it has a fatal flaw that can only exist with mature globalization. Namely, centralization. When production of goods or services is consolidated into one (in this case) region, you are subject to supply shocks felt around the world, simply because of an event in said region.
Even more simply put, you have a single point of failure.
For example…
“iPhone 13 Deliveries Delayed Due to Supply Chain Woes” - Reuters, 9/21/2021
An iPhone has components from 43 countries and 6 continents (no, globalization has not put the Antarctic penguins to work yet). Think of the vast network of coordination required to produce just one iPhone, and yet they produce millions every year! The system must work perfectly for that iPhone to get to your doorstep without interruption.
A COVID outbreak in Vietnam resulting in a nationwide lockdown recently has delayed the production of the iPhones new image stabilization camera feature - something the new iPhone cannot survive without.
“China rocked by power crunch as Apple and Tesla suppliers suspend work” - The New York Post, 9/27/2021
Chinese officials have passed down strict orders to cut emissions as surging coal and gas prices coincide with growing demands for electricity across the country, forcing manufacturing plants offline.
What is the takeaway here? Efficiency and globalization have centralized production of key elements off to numerous far corners of the world, where they are subject to any and every kind of event, resulting in supply shocks.
This is a single point of failure. And when your product comes from 43 different countries, there are 43 times as many single points of failure.
The key element to understand here is that everything is connected. An outbreak in Vietnam or a power mandate in China now affects you directly.
In a decentralized world, production would not be centralized in one geographic region, rather, it would take a page from Bitcoin’s playbook. Allowing complete production of the entire device in multiple regions, time zones, climates, and continents. Otherwise known as localization.
Running factories that produce the same goods in different places would require investment that is not strictly maximizing shareholder profits. But it would create redundancy, and therefore, resiliency. It would allow us to mitigate the effects of supply shocks and price hikes that we have seen, and those that are still to come.
There’s nothing the Decentralized Way mindset dislikes more than single points of failure. Complete centralization leads to a lack of competition, a lack of resiliency, and a consolidation of power.
The Federal Reserve Bank of the United States is a completely centralized (and private) entity. It has faced no competition since the Dollar became the World Reserve Currency in 1944. Decisions to devalue the currency are made behind closed doors, by officials that are not elected or subject to public scrutiny.
The decisions made by those officials affect every single person on the planet that relies on the stability of the dollar and worldwide trade. That is a single point of failure. One that seems to be failing rather quickly.
In our modern society, we have a number of remarkable single points of failure that go unnoticed. In my opinion, maybe our largest single point of failure in our daily lives is the supermarket/grocery store.
Humor me and imagine the grocery store had no food, or they all simultaneously shut their doors. Now what do you do? How do you eat? Where do you find food?
“Every society is three meals away from chaos” - Vladimir Lenin
The rampant centralization in our world poses a threat to everyone that relies on it to live their daily lives. The more power is consolidated into fewer hands, the less oversight that exists for decision makers. I’m skeptical those decision makers have our best interest at heart, but you be the judge of the actions taken by those that face very few consequences.
Just like the regional Fed Chairs that got caught with their hand in the cookie jar (see: insider trading) - if you can dictate monetary policy that affects the entire globe for your own gain and you only have to “step down” from your post but yet you keep the money you made illegally… The question must be asked, how are there not further and immediate consequences? Or I guess the question is, who is going to enforce those consequences? Those with the ability to enforce consequences benefited from the decisions made, so they have no reason to be upset. Those that were hurt (see: 45% of Americans that own zero equities) have no way to hold an unelected official accountable.
Keep your eyes open and pay attention. Those with power do not want to relinquish it, and the world is changing before our very eyes.
Have a great weekend everyone.
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