Globalism, inflation, and the supply chain

It's instructive to watch professional economists and non-professional consumers quibble over the correct meaning of the term "inflation."  To the economist, the term denotes excessive money supply — to the consumers, escalating prices.  Thus, we can say there are two kinds of inflation: money supply inflation and price inflation.  But the fact that both the professionals and the amateurs endorse the standard formulas of "supply and demand" and "too much money chasing too few goods" tells us that price inflation can have two distinct causes: (1) money supply inflation and (2) decreased supply of products.

We know that money supply inflation can be attributed to the crazed federal spending binge that has seen the federal government print trillions of dollars, making each dollar worth a smaller fraction of the nation's total wealth.  But what about that "decreased supply of products"?  That's where it gets interesting.  It's easy enough to point to disruptions because of lockdowns and, of course, to all those ships sitting off the California coast.  Those are a visual representation of the obvious connection between price inflation and supply chain disruption.

However, supply chain expert, Charlie Grahn, has a fascinating article in the November 11 edition of the South China Morning Post regarding globalism's role in the supply chain crisis:

Know-it-alls eagerly claim to have identified "the" cause — the pandemic, oil prices, inflation, energy shortages in China, or any of the policies being debated in national legislatures. These explanations are all self-deceptions.

In a few short paragraphs (which I recommend to you) Grahn then reveals the true explanation for supply chain disruption.

Image: Container ships at Hamburg, Germany, by info2072.  CC BY-SA 3.0.

The upshot of it is that the unrelenting demand for cost efficiency from businesses and individuals that put profit ahead of everything (much like the Ferengi in the Star Trek series) leads inevitably to a global supply chain characterized by extreme complexity and breakdown risk.  Planning staff cannot totally foresee the complexity inherent in globalism, and the chain, therefore, remains vulnerable to the effect of Adam Smith's invisible hand.

Writes Grahn:

The result is extended supply chains that are global, efficient, and more perilously constituted than before.  Perhaps this is simply because we are human, and believe the good times will keep on rolling, although we have continued to add more risk to the system. This hubris has been our downfall.

Failures are now less avoidable and not easily managed, even if they are a management priority. Executives expect supply chains to be as reliable as daybreak but they seldom get attention until they are broken. Supply chain personnel know the system is unstable, but often management looks to them only for cost savings instead of risk management, which costs money.

(For those interested, a semi-humorous illustration of the complexity of the supply chain in trading can be seen in the Korean drama Incomplete Life, available online on both Kokowa and Rakuten Viki.  In it, the fictional trader One International constantly struggles against the invisible hand in its search for profits.)

The takeaway?  The remedy for supply chain disruption and price inflation is to eschew globalism: bring the jobs and production back home and our entire society, consumers and traders alike, will benefit.

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