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> supply is constrained and money is not constrained. What could go wrong?

by adolph 5y ago

taylodl 5y ago
Inflation should take care of demand. A constrained supply is going to move the demand curve to higher prices - which we're seeing. The higher prices will bring demand in alignment with supply. Traditionally, to deal with the problem of constrained supply you would lower rates to make more capital available in order to create more supply-producing assets. I don't think the Fed should lower rates in this situation because we all know that building more factories won't solve the supply chain issues due to the pandemic. However, we need to balance that against investing more in automation since having fewer workers due to the pandemic. They're in quite the pickle!
- adolph 5y ago
  > Inflation should take care of demand. Indeed, may as well buy now (if you can) since you'll get less for the same money in the future. > The higher prices will bring demand in alignment with supply. Unless the stimulus cash injection policy allows people to continue to buy now (see above).
  - taylodl 5y ago
    With everything opening back up and experiencing a labor shortage it would be very difficult to justify any further stimulus monies. I don't think we have to worry about that. Economists expected a rise in inflation due to stimulus spending in 2020 - that had already been factored in to their forecasts. What has surprised them is the rate of inflation is higher than expected. I'm arguing the reason they're surprised is they were only considering financial policy and not also including the effects of constrained supply - which is also why they also missed forecasting a shrinking economy.
    - adolph 5y ago
      Hayek’s greatest contribution to economics was to show that society is far more complex than we realize, with little pieces of knowledge dispersed among millions of individuals. “The curious task of economics,” he famously wrote in “The Fatal Conceit,” which he published in 1988, “is to demonstrate to men how little they really know about what they imagine they can design.” https://www.washingtonpost.com/news/volokh-conspiracy/wp/2014/10/13/f-a-hayek-and-the-pretense-of-knowledge/ https://www.washingtonpost.com/news/volokh-conspiracy/wp/201...
- godshatter 5y ago
  > ...because we all know that building more factories won't solve the supply chain issues due to the pandemic. Wouldn't it be wise to start building more factories so that a supply chain disruption in one area doesn't cause such painful shortfalls in supply on a global scale? It seems like a China-free supply chain would be making bank right now. I guess you'd have to weigh the time to ramp that up versus the odds of China locking down severely again. Still, I would hope that a lasting consequence of this would be a diversification of supply chains to mitigate this kind of problem in the future.

> supply is constrained and money is not constrained. What could go wrong?

by adolph 5y ago

> supply is constrained and money is not constrained. What could go wrong?

Inflation should take care of demand. A constrained supply is going to move the demand curve to higher prices - which we're seeing. The higher prices will bring demand in alignment with supply. Traditionally, to deal with the problem of constrained supply you would lower rates to make more capital available in order to create more supply-producing assets. I don't think the Fed should lower rates in this situation because we all know that building more factories won't solve the supply chain issues due to the pandemic. However, we need to balance that against investing more in automation since having fewer workers due to the pandemic. They're in quite the pickle!

adolph 5y ago
> Inflation should take care of demand. Indeed, may as well buy now (if you can) since you'll get less for the same money in the future. > The higher prices will bring demand in alignment with supply. Unless the stimulus cash injection policy allows people to continue to buy now (see above).
- taylodl 5y ago
  With everything opening back up and experiencing a labor shortage it would be very difficult to justify any further stimulus monies. I don't think we have to worry about that. Economists expected a rise in inflation due to stimulus spending in 2020 - that had already been factored in to their forecasts. What has surprised them is the rate of inflation is higher than expected. I'm arguing the reason they're surprised is they were only considering financial policy and not also including the effects of constrained supply - which is also why they also missed forecasting a shrinking economy.
  - adolph 5y ago
    Hayek’s greatest contribution to economics was to show that society is far more complex than we realize, with little pieces of knowledge dispersed among millions of individuals. “The curious task of economics,” he famously wrote in “The Fatal Conceit,” which he published in 1988, “is to demonstrate to men how little they really know about what they imagine they can design.” https://www.washingtonpost.com/news/volokh-conspiracy/wp/2014/10/13/f-a-hayek-and-the-pretense-of-knowledge/ https://www.washingtonpost.com/news/volokh-conspiracy/wp/201...
godshatter 5y ago
> ...because we all know that building more factories won't solve the supply chain issues due to the pandemic. Wouldn't it be wise to start building more factories so that a supply chain disruption in one area doesn't cause such painful shortfalls in supply on a global scale? It seems like a China-free supply chain would be making bank right now. I guess you'd have to weigh the time to ramp that up versus the odds of China locking down severely again. Still, I would hope that a lasting consequence of this would be a diversification of supply chains to mitigate this kind of problem in the future.