A good piece but I think one item you did not cover was demand shocks, specifically:
"I’m gonna come back to this in a bit, but the US had a highly stimulative policy, spending on services collapsed because of COVID, and issues in Asia, plus uniquely American regulatory issues (tariffs, port zoning and automation, stuff like whatever the hell the Foreign Dredge Act is) meant that there suddenly was a lot less stuff to go around and a lot more money chasing it."
Well except not really. At least when everyone was at home there was a lot of stimulus but there wasn't a lot of spending. You could buy Netflix and get take out but during shutdown, you really couldn't spend much of your money.
And I think this is something a bit new. Monetary theory has dealt with supply side problems before. They could be a shock like an oil embargo in the 70's or they could be an economy that just isn't very dynamic because of super strong unions, regulations or gov't controlling major enterprises (think how the UK once owned the coal mines). But not really demand shocks. It's kind of assumed people will spend based on their income and you can whack down spending by a surge of unemployment but if people have money, they will spend it.
But model what happens if they don't spend it. Let's say producers supply 100 units every month and that is what is demanded. All is well except when pandemic hits, demand drops to 50 units each month. Now there is some supply side shock too, with people staying at home and all perhaps the company can only make 75 units, but that doesn't matter since demand is 50. If the producer happened to have had some safety inventory on the side, the problem is even worse.
Too many goods chasing too few dollars = deflation.
A Central Bank trying to follow a monetary policy would suddenly find the need to print money and print it fast!
After a while, people start thinking the pandemic has ended. Demand starts to slowly increase. The producer assumes it will go back to 100 but when? If demand increases, say, 10 units a month, it will take 5 months to get back to 100. That's fine, but what if they are wrong?
Say we get a 20 unit increase from 50 to 70. Since production was only planned for 60 units, there is a 10 unit shortfall. The producer could let there be a shortage of 10 units, or perhaps they could drastically raise prices to force demand down to 60.
Say the next month demand was supposed to have arrived at 70, but now the producer is scrambling, having assumed demand is now increasing by 20 units per month, they fear they need to make 80 units. There is a scramble to bring workers back sooner and while last month they may have let the shelves go empty, this month they try to get ahead by doing that price increase.
The pandemic was not a clean shutdown where everything stopped until the virus was gone. It was a shutdown with a re-opening, then a closure, then another re-opening and then geographical detachment as some places increased activity while others pulled back and then reversed as caseloads surged in one part of the country then moved to other parts.
The central bank here has a much more difficult problem. If they don't allow inflation, signals to the producers do not get through. Since demand is returning, you could get a whipshaw effect. One month producers raise prices expecting too much demand but then if demand falls, they may find prices have to drop. In my example I used a simple '100 units' but there's thousands of products. For example, lumber has already had several booms and busts in prices (remember it was surging back in 2021?). Not only do we have many demands for different things returning to 'normal', normal is now different with things like demand for office space less because quite a few workers suddenly have started working from home almost all the time now. Recreational air travel has increased but business air travel has remained low.
Long story short the snowglobe of the world has been shaken pretty badly and in the short run it's going to be a lot of little snowflakes milling around before they settle.
You wrote "million" instead of "billion" in the ARP breakdown paragraph.
A good piece but I think one item you did not cover was demand shocks, specifically:
"I’m gonna come back to this in a bit, but the US had a highly stimulative policy, spending on services collapsed because of COVID, and issues in Asia, plus uniquely American regulatory issues (tariffs, port zoning and automation, stuff like whatever the hell the Foreign Dredge Act is) meant that there suddenly was a lot less stuff to go around and a lot more money chasing it."
Well except not really. At least when everyone was at home there was a lot of stimulus but there wasn't a lot of spending. You could buy Netflix and get take out but during shutdown, you really couldn't spend much of your money.
And I think this is something a bit new. Monetary theory has dealt with supply side problems before. They could be a shock like an oil embargo in the 70's or they could be an economy that just isn't very dynamic because of super strong unions, regulations or gov't controlling major enterprises (think how the UK once owned the coal mines). But not really demand shocks. It's kind of assumed people will spend based on their income and you can whack down spending by a surge of unemployment but if people have money, they will spend it.
But model what happens if they don't spend it. Let's say producers supply 100 units every month and that is what is demanded. All is well except when pandemic hits, demand drops to 50 units each month. Now there is some supply side shock too, with people staying at home and all perhaps the company can only make 75 units, but that doesn't matter since demand is 50. If the producer happened to have had some safety inventory on the side, the problem is even worse.
Too many goods chasing too few dollars = deflation.
A Central Bank trying to follow a monetary policy would suddenly find the need to print money and print it fast!
After a while, people start thinking the pandemic has ended. Demand starts to slowly increase. The producer assumes it will go back to 100 but when? If demand increases, say, 10 units a month, it will take 5 months to get back to 100. That's fine, but what if they are wrong?
Say we get a 20 unit increase from 50 to 70. Since production was only planned for 60 units, there is a 10 unit shortfall. The producer could let there be a shortage of 10 units, or perhaps they could drastically raise prices to force demand down to 60.
Say the next month demand was supposed to have arrived at 70, but now the producer is scrambling, having assumed demand is now increasing by 20 units per month, they fear they need to make 80 units. There is a scramble to bring workers back sooner and while last month they may have let the shelves go empty, this month they try to get ahead by doing that price increase.
The pandemic was not a clean shutdown where everything stopped until the virus was gone. It was a shutdown with a re-opening, then a closure, then another re-opening and then geographical detachment as some places increased activity while others pulled back and then reversed as caseloads surged in one part of the country then moved to other parts.
The central bank here has a much more difficult problem. If they don't allow inflation, signals to the producers do not get through. Since demand is returning, you could get a whipshaw effect. One month producers raise prices expecting too much demand but then if demand falls, they may find prices have to drop. In my example I used a simple '100 units' but there's thousands of products. For example, lumber has already had several booms and busts in prices (remember it was surging back in 2021?). Not only do we have many demands for different things returning to 'normal', normal is now different with things like demand for office space less because quite a few workers suddenly have started working from home almost all the time now. Recreational air travel has increased but business air travel has remained low.
Long story short the snowglobe of the world has been shaken pretty badly and in the short run it's going to be a lot of little snowflakes milling around before they settle.