The Real Reason for Supply Shortages

It has nothing to do with container ships.

The Great Run on TP 2.0 (Photo by **Anna Shvets** from **Pexels**)

If you watch, read, or listen to any news source recently, you’ll find a story about major product shortages. According to most media outlets, the crux of the problem has been the real-time nightmare unfolding in the shipping and logistics industry.

They’ll point to things like the record 73 containers ships were waiting to be unloaded outside the ports of Los Angeles and Long Beach in Southern California to explain why Costco is putting a limit on toilet paper purchases, again.

While TP is necessary, it’s also a low cost item that most everyone can get if they need to. Just ask a neighbor.

What you can’t borrow is the several computer chips that go into that new car you’re thinking about purchasing. (Okay, maybe not you or me, but the rich person who wants to buy a new car so we can buy a used one.)

Again, they’ll say that logistics are the issue and that we just need to wait until things smooth out and go back to normal. There are two problems with this sentiment.

There is no going back to normal.
Shipping is not causing the shortages.

No Going Back

Somewhere along the line, most of us have been introduced to the concept of supply and demand.

As demand goes up, price and/or supply goes up.
As demand goes down, price and/or supply goes down.

Pretty simple. In theory.

The problem we’re going to see over the next few years is that companies are realizing just how limitless consumer demand is in the US. Prices have been heading higher for months now, which should push down demand.

But Americans have been in a buying frenzy as of late regardless of price. In other words, demand for just about everything is much more inelastic than previously thought.

Do you really think retailers will lower prices and make smaller profits if they don’t have to?

Neither do I.

Let’s take a look at the housing market. It’s been a tear recently, with the 14.9% YoY price increase in August 2021 seen as a “modest increase” compared to the 20%–30% increases from earlier this summer.

So, you might think that housing is a bubble, but it’s not a repeat of 2008/2009. There are no NINJA loans. Credit scores are significantly higher. the MBS/CDS/CDO machine isn’t running at full tilt.

What we see here is a classic supply and demand, where demand for housing spiked and pumped up prices much higher than we previously thought possible. Even now, when demand is sliding a little bit now that we’re out of the worst of the pandemic (at least for the vaccinated), prices aren’t just going to settle down to 2019 levels.

“The huge price gains that we have been observing in the first half of the year, those are over, and price trends are clearly moderating,” [Lawrence Yun, the National Association of Realtor’s chief economist] said, adding he expects the typical home bought last month will only appreciate about 5% a year from now.

Read that again.

The leaps and bounds are over. But prices will still be 5% higher next year.

The same thing is going to happen to vehicles one the computer chip disaster has finally run its course. Once the manufacturers have the data on just how much people are willing to pay for cars and trucks, they’ll never drop their prices again.

Oh sure, they’ll hide behind the inflation excuse, but it will just be good old price discovery that will keep prices higher.

The Shipping Boogeyman

This brings us to the real reason for prices spiking due to material shortages. Most people think it is the shipping catastrophe, but that’s just a symptom of the real illness.

The truth is that the US doesn’t make anything anymore, and we are too heavily dependent upon imports to slake our thirst for stuff.

Remember, consumer spending accounts for upwards of 70% of the entire US economy. We love to buy stuff. Bigly.

And we have kept on buying stuff throughout the pandemic.

The problem is that all this stuff is made somewhere else and has to be imported. When consumer spending spiked last year, it sent shock waves through the shipping industry that we are only just now dealing with.

And the ride isn’t over. Logistics problems will continue to pile up, with some analysts predicting that it will take the rest of 2022 to sort everything out.

The lack of domestic production was recently highlighted by Commerce Secretary Gina Raimondo.

“The reason we’re really in this mess is because for a long time, we haven’t invested,” said Raimondo, a former venture capitalist and governor of Rhode Island. “We took our eye off the ball. We used to lead the world in semiconductor manufacturing and now we don’t. We just disinvested.”

US chip manufacturing fell from 37% in 1990 to just 12% in 2020.

Those numbers are reflected across so many other industries.

Outsourcing to maximize profits due to the failed theory of shareholder supremacy has led us to this moment, and it should serve as a stark warning for every US citizen.

The Takeaway

I understand that the US is now a services and information society, but that doesn’t mean that we can’t make stuff here, too.

Manufacturing via the assembly line model, where humans perform the same repetitive tasks day in an day out, is as in vogue in the 21st century as leaded gasoline.

Modern manufacturing takes more skill and fewer people, but we finally need to pay the price to train up our current workforce to meet this need. Not paying that cost now leads us being overly dependent on everyone else, and that can (and does) have disastrous consequences.

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