I see a lot of articles and posts these days talking about supply chain issues: whether it’s about how expensive it is to buy a shipping container, or that there isn’t enough space at shipping ports, or that there aren’t enough truckers, etc. etc.
However, these are all micro-level symptoms of a macro-level problem. Don’t miss the forest for the trees. Journalists need to write something new every day (or every hour it seems), even if there isn’t anything new to say. Which leads to a lot of noise that clouds your mind from making sense of what is really happening in the world.
In my view, the problem is clear: governments overdid it with stimulus. Unlike the 2008 Global Financial Crisis where policymakers did too little and acted too slow, this time around governments decided to err on the side of doing too much too quickly. If you look at consumer spending on FRED, it didn’t just fully recovery from the 2020 shock, it’s arguably on a stronger trajectory than it otherwise would be without the pandemic! At the same time, unemployment is still high and labor force participation is dreadfully low! The Fed created such a tremendous wealth effect, people are earning multiple years worth of stock market returns in the span of months. I’m not surprised many people are taking career breaks or retiring early. So why do we have red hot inflation? Because we’re printing more money and making less things, it’s that simple.
The inflation problem highlights how difficult it is to be a policymaker. On one hand, you don’t want to under spend and risk seeing long-term economic scarring, but if you stimulate too much, you risk fueling inflation as well as asset price bubbles. The other factor at play is the politicization of economic policy. You’re everyone’s favorite politician when you’re fueling spending, but it’s hard to get reelected when you advocate for cutbacks. Prudent policymaking requires spending when times are bad, and building reserves when times are good – politicians have forgot about the latter half of that equation.