Lacy Hunt has long noted how rising debt makes conventional monetary policy tools less effective. MP3’s key feature is closely coordinated monetary and fiscal policy. Ray Dalio and his researchers at Bridgewater have spent the last couple of years talking about “MP3.” No, not the music file format, but the third-generation monetary policy that now prevails worldwide. It matters to the inflation outlook… which affects everything. Today we’ll look at some recent analysis and try to see how all these moving parts fit together. Generally, though, I think the data shows demand growth is the bigger factor. Obviously, this varies for different products. Higher supply won’t stop prices from rising if supply still lags demand. Is it because we are demanding more, or because our trading partners are supplying less? Remember the relative change is what matters. This is important to understanding why inflation is up and ports are so clogged. They recede when demand falls faster than supply. Shortages appear when demand for a good rises faster than suppliers are able and/or willing to produce it.
Nevertheless, there’s no widget shortage if no one wants widgets. Hence the present shortages, higher prices, and growing inflation. That car you want needs a specific microchip or it’s worthless. And in an increasingly specialized world, substitution is no longer as easy as it once was. The real world doesn’t respond instantly, so we have these frustrating periods when producers have more widgets than they can give away, or consumers can’t get the widgets they need at any price. If you can’t get what you demand at that moment, you pay a higher price or you demand something else.īut that’s theory. Supply and demand for any particular good are always perfectly balanced in a given time and place. In some simplistic economic theories, shortages never happen.