I give you, the Consumer Price Index
This image paints a picture. Prices dropped by the greatest 1 month percentage change since before the start of the graph (1998). However, they are already beginning to rise as sharply. I think this is the beginning of a story. The end of the story will probably be a change of similar magnitude in the opposite direction, followed by a short drop, and then a stabilized rate of increase above the historical level (increased inflation, see earlier posts on the matter).
Let's check out the
Import / Export Price Index
What does this interesting graph tell us? Simply that the entire integrated globalized supply chain is encountering the exact same but perhaps even more severely than we are. This is a lot like stretching a rubber band too far, and then watching it snap back and hit you in the face. As distributors dump inventory in response to reduced consumer spending, they are also suspending their orders up the chain to the manufacturers. If anything, they are probably doing so even more "severely" than they are liquidating inventory (if you're getting crushed under debt created by inventory that you can't sell, the only thing you'll be more passionate about than getting rid of said inventory is avoiding purchasing any more until you know that you'll actually survive long enough to take delivery). Manufacturers can take the hint, and cut production. This is why people are getting laid off from plants. While there are certainly a lot of Americans losing their jobs at factories here that are cutting back, factories on the other side of the world are simply closing their doors; permanently. In addition to the tragically skyrocketing Chinese unemployment rate there is also the danger of an upcoming goods shortage and the terrifying specters of high inflation and protectionism.
Many of these goods are not things that people truly don't need, just things that they cannot afford right now. Think of all the durable or semi-durable goods that you may have been considering replacing in the next few months, but will now endure without. These are not only your washing machines, but also your computers, your personal electronics, and even some more consumable consumer goods such as paint. I'm just leaving the PPI out of this mess right now because there is enough data here already, but I assure you the same phonomenon is going on there as well, and upstream manufacturers will suffer the exact same way that consumers will. But why will we suffer? These goods are not being produced at the rate that we would normally consume them. Some of them are simply not being produced at all. What happens when the supply chain is purged, an eighth of the distributors have gone out of business, the factory is running at half capacity, and we suddenly actually need these things? The prices will be high. Higher than they were when we decided that we couldnt afford them.
What is the message? This is not a recession, this is not a simple slip in people's confidence, it's not a bump in the road. This is a cyclical downturn that is not ony putting the breaks on the economy, it's filling the gas tank with sugar and ripping out a few of the spark plugs. We may even be in the process of slashing our own tires here because we can't afford to fill them up with air. What have we done in response? We have given a lot of money to a lot of people who will spend it on the goods that create the least value, probably just goods that are stuck in the chain and wont move. We will use our "stimulus" package to purge the system and prime the pumps to fill our world with goods shortages, greater unemployment, further failures, and God help us, real inflation.
What does this interesting graph tell us? Simply that the entire integrated globalized supply chain is encountering the exact same but perhaps even more severely than we are. This is a lot like stretching a rubber band too far, and then watching it snap back and hit you in the face. As distributors dump inventory in response to reduced consumer spending, they are also suspending their orders up the chain to the manufacturers. If anything, they are probably doing so even more "severely" than they are liquidating inventory (if you're getting crushed under debt created by inventory that you can't sell, the only thing you'll be more passionate about than getting rid of said inventory is avoiding purchasing any more until you know that you'll actually survive long enough to take delivery). Manufacturers can take the hint, and cut production. This is why people are getting laid off from plants. While there are certainly a lot of Americans losing their jobs at factories here that are cutting back, factories on the other side of the world are simply closing their doors; permanently. In addition to the tragically skyrocketing Chinese unemployment rate there is also the danger of an upcoming goods shortage and the terrifying specters of high inflation and protectionism.
Many of these goods are not things that people truly don't need, just things that they cannot afford right now. Think of all the durable or semi-durable goods that you may have been considering replacing in the next few months, but will now endure without. These are not only your washing machines, but also your computers, your personal electronics, and even some more consumable consumer goods such as paint. I'm just leaving the PPI out of this mess right now because there is enough data here already, but I assure you the same phonomenon is going on there as well, and upstream manufacturers will suffer the exact same way that consumers will. But why will we suffer? These goods are not being produced at the rate that we would normally consume them. Some of them are simply not being produced at all. What happens when the supply chain is purged, an eighth of the distributors have gone out of business, the factory is running at half capacity, and we suddenly actually need these things? The prices will be high. Higher than they were when we decided that we couldnt afford them.
What is the message? This is not a recession, this is not a simple slip in people's confidence, it's not a bump in the road. This is a cyclical downturn that is not ony putting the breaks on the economy, it's filling the gas tank with sugar and ripping out a few of the spark plugs. We may even be in the process of slashing our own tires here because we can't afford to fill them up with air. What have we done in response? We have given a lot of money to a lot of people who will spend it on the goods that create the least value, probably just goods that are stuck in the chain and wont move. We will use our "stimulus" package to purge the system and prime the pumps to fill our world with goods shortages, greater unemployment, further failures, and God help us, real inflation.
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