NOTICE ARCHIVE - 15/03/2022Back in the 1970´s, the US was the richest and most powerful economy in the world. By consequence, the US was also a very expensive place to produce. US companies were on the lookout for inexpensive, foreign manufacturing hubs where they could cheaply produce their products and sell them back to the US market. China became that cheap manufacturing hub.
Eventually China was producing just about everything from T-shirts to antibiotics. And because the cost of production was so low in China, consumers around the world benefited. Combined with cheap oil, a functioning global supply chain, and relative peace and stability, cheap Chinese production helped keep prices low and constrain inflation for decades.
But these trends are rapidly coming to an end. China is now an economic superpower; many of its largest cities, in fact, have a per-capita GDP that exceeds the United States and Western Europe. Wages have increased dramatically in China over the years because of this increase in prosperity, which means that it’s no longer cheap to manufacture most lower-end products there.
A lot of manufacturing has already shifted to cheaper places like Vietnam, Bangladesh, Ethiopia etc. But even those countries are quickly becoming more expensive places to produce. And they don’t have nearly enough capacity to keep up with global manufacturing demand.
Some large companies are starting to bring their manufacturing back home. This is becoming more popular now as global stability wanes. New business and lessons learned during the COVID-19 lockdowns and the resulting global supply chain dysfunction is pointing out that manufacturing at home is more reliable. But manufacturing in a ‘rich’ country is also a lot more expensive. So, regardless of whether a business chooses to manufacture at home or abroad, they’re almost guaranteed to suffer higher production costs. And that means consumers will be paying more.
Historic shifts in the labor market will also be a major contributor to inflation. There have never been more retirees in the history of the world than there are right now. And their numbers are growing. Additional millions of people retired early during the first year of the pandemic. There will likely be more to come. Millions of other individuals, including young people, abandoned the idea of working altogether because of the pandemic.
Traditionally there’s a steady balance between the number of jobs in the economy, and the number of workers in the labor force. Now the converse has taken place: millions of workers have vanished, practically overnight. The result is that there are millions of unfilled jobs. In some countries, like USA, many people simply quit the labor force. They got paid anyway, so why bother about work. Younger workers aren’t interested in most traditional jobs. Countless teenagers aspire to be You-tubers, or to live-stream themselves playing video games for a living. They have little interest in construction, transportation, or manufacturing jobs.
So, in summary, former ‘low cost’ manufacturing hubs are becoming a lot more expensive and a constrained work force back home that limits production and pushes costs higher. This is all highly inflationary. There’s absolutely nothing a government or central bank can do about it. Most likely the politicians will make it much worse-- which is another key factor in future inflation.
In USA, politicians now say that inflation is solely Vladimir Putin’s fault. They insist that their multi-trillions dollar deficit spending is “reducing the national debt” and “not adding to inflation.”
The President of USA has blamed inflation on “greed”. The Federal Reserve insists that higher prices are a result of supply chain dysfunction. The US Congress, the White House, or the Federal Bank seems not capable of looking at their own actions. The Fed refuses to consider that inflation is due to their dizzying expansion of the US money supply. Congress refuses to consider that inflation is due to their insane deficit spending-- the largest ever in US history. And the White House refuses to consider that inflation is due to its fetish for anti-competitive regulations and constant attacks on capitalism. So, when those three key institutions, charged with keeping inflation in check, refuse to understand why there’s a problem, it’s hard to imagine they’re going to fix it.
So, conclusively, there are at least 5 reasons why prices will continue rise:
Increased manufacturing costs
Labor market demographic trends
Geopolitical conflict
COVID-19 related issues
Environmental fanaticism.
There’s an irrational hope that inflation will quickly revers and prices will return to “normal” levels just as soon as Putin leaves Ukraine. But this wishful thinking also includes that the global supply chain dysfunction will work itself out. But how ? These issues cannot be magically fixed by politicians or central bankers. In essence, policymakers are completely powerless to do anything about inflation. Better the politicians stay away, they may make the things much worse.
This may sound negative and depressive, but it is better to know the real situation so you at least concentrate you on your nearest circle of friends, colleagues and relatives and try to figure out solid solutions in a small scale, knowing that the less possible interference by government and public institutions is the best.
