Home 2022 Economy: “Inflation Not Due to Supply Chain, Price Gouging…”

Economy: “Inflation Not Due to Supply Chain, Price Gouging…”

by Paul Ebeling

#inflation #economy #US #demand #supply #Fed

Mr. Biden blames this high inflation on supply chain disruptions. Lately, he has put additional blame on businesses that he says are price gouging. The reality is that neither has much of an impact on inflation” — Michael Busler

Today’s high inflation is partially caused by energy price and wage inflation, which are driving up costs for business. But the inflation is mostly caused by excess demand created by huge federal government deficits and a shockingly irresponsible Federal Reserve expansionary monetary policy.

It is not difficult to see why those are the reasons for the extraordinary inflation. Let’s try an easy-to-understand explanation.

Simply put, prices rise when at the current price, the market is willing and able to purchase more goods than business is willing and able to produce. In other words, suppose at a price of $100, the market demand is for 10 units and the supply is 10 units, so the market is in balance.

Mr. Biden would say that because of the supply chain disruptions, only 8 units are produced. So, if the demand is for 10 and the supply for 8, business must decide which 8 people to sell the product to. They make that decision by raising the price until two people drop out of the market. Maybe the prices rises to $110.

He says that once the supply chain issues are resolved, business will make 10 units again, so the price will fall back to $100.

That assessment is incorrect because, in total, the economy is now producing about 2% more than was produced prior to the pandemic. That means while there may be shortages of some products, mostly imports and computer chips, there is no overall shortage of supply.

Since total supply now exceeds pre-pandemic levels, the price increase to $110 is because business is no longer willing to make 10 units and sell them for $100. That’s because their cost to produce has risen significantly due to the higher energy cost and higher labor costs. The company originally produced the product at a cost of $90 and sold it for $100. Now the cost has increased to $100, so the price has to remain $110.

Businesses do not “price gouge.” Rather, they simply seek the fair market price. After all, how else would they decide which 8 of the 10 consumers should be able to purchase a product,

In addition to the increased cost to produce, excess demand has caused market prices to rise. In the example, suppose at the original price of $100, the market demand was for 20 units. Business has produced only 10. Business raises prices until the market demand is cut from 20 down to 10.

Particularly in markets that are interest-rate sensitive, prices have risen very quickly. Last year, consumers used the free money that the federal government gave to every household as part of the stimulus packages, as a down payment for high-priced goods. That, coupled with historically low interest rates, caused a huge increase in demand in the housing and car markets, resulting in high

All of the excess market demand is a result of the current fiscal and monetary policies. The federal government has deficit spent nearly $6-T in the last 2 yrs. On a $23-T annual economy, that led to pure inflation.

Most surprising, and likely the largest contributor, is the Federal Reserve’s shockingly irresponsible monetary policy. For the last 4 decades, the Fed has always been ahead of inflation. This time, it is far behind.

Instead of ending its expansionary policy early last year when there were obvious signs of a severe inflation problem, it continued to vastly increase the money supply by purchasing $120 billion per month of government bonds—and it continued to keep interest rates near zero, as well.

The resulting easy and cheap credit led all sectors of the economy to borrow money to make purchases, thus creating excess demand.

That excess demand is the real cause of most of today’s inflation.

Businesses are not price gouging when they simply seek the market equilibrium price. It’s certainly not their actions that caused the market demand to far exceed their ability to supply.

Inflation is already too high and going much higher.

The Fed will end the bond buying program next month. Then, beginning in March or April, it may raise interest rates probably by 50 bts, but likely not at all depending on the data and world events.

Have a healthy, prosperous weekend, Keep the Faith!

You may also like


Your Trusted Source for Capital Markets & Related News

© 2024 LiveTradingNews.com – For The Traders, By The Traders – All Right Reserved.

The information contained on this website shall not be construed as (i) an offer to purchase or sell, or the solicitation of an offer to purchase or sell, any securities or services, (ii) investment, legal, business or tax advice or an offer to provide such advice, or (iii) a basis for making any investment decision. An offering may only be made upon a qualified investor’s receipt not via this website of formal materials from the Knightsbridge an offering memorandum and subscription documentation (“offering materials”). In the case of any inconsistency between the information on this website and any such offering materials, the offering materials shall control. Securities shall not be offered or sold in any jurisdiction in which such offer or sale would be unlawful unless the requirements of the applicable laws of such jurisdiction have been satisfied. Any decision to invest in securities must be based solely upon the information set forth in the applicable offering materials, which should be read carefully by qualified investors prior to investing. An investment with Knightsbridge is not suitable or desirable for all investors; investors may lose all or a portion of the capital invested. Investors may be required to bear the financial risks of an investment for an indefinite period of time. Qualified investors are urged to consult with their own legal, financial and tax advisors before making any investment. Knightsbridge is a private investment firm that offers investment services to Qualified Investors, Members and Institutions ONLY. Qualified Investors are defined as individuals who have met those Qualifications in the relevant jurisdictions. Members are defined as individuals who have been accepted into the Knightsbridge membership program. Institutions are defined as entities such as banks, pension funds, and hedge funds. If you are not a Qualified Investor, Member or Institution, you are not eligible to invest with Knightsbridge. All investments involve risk, and there is no guarantee of profit. You may lose some or all of your investment. Past performance is not indicative of future results. Knightsbridge is not a registered investment advisor, and this disclaimer should not be construed as investment advice. Please consult with a qualified financial advisor before making any investment decisions. By accessing this website, you agree to the terms of this disclaimer. Thank you for your interest in Knightsbridge.