The American consumer is back into gear, not least helped by the gargantuan relief stimulus that Joe Biden introduced right after his inauguration earlier in the year. However, the pandemic-induced bottlenecks, from uneven global economic recoveries to lingering logistics problems in transportation and shipping, have prevented capacity levels on the supply side to catch up with this sudden firestorm of demand.
Inflation has been the consequence, at an uncomfortable level that has had the majority of the punditry squeal. The top echelon of the Federal Reserve has so far dismissed price increases as a temporary phenomenon, and even Joe Biden felt the need to weigh in last week in a rather ill-conceived
attempt to declare inflation transitory. What the president meant to say was that supply will have to grow to catch up with demand, and that’s why Congress needs to play to his tunes regarding the infrastructure package.
This sounds all good and logical, and Biden is probably trying to invoke more of a New Deal analogy when in the early 1930 Franklin D. Roosevelt managed to bring up the capacity level to match the created demand rather quickly. But these are not the 1930s. We have long and far left behind the concept of closed economies. Due to a globalised trading system it no longer is as easy to incentivise domestic manufacturers to live up to politicians’ desires.
Two developments are testament to this notion. One, US business investments may be on the rise, but industrial Capex is lagging, as are investments in transportation. Biden has a point to push his trillion-dollar infrastructure stimulus, and it might relieve some of the pressures caused by the demand-supply gap. But it will certainly not mitigate the hesitancy in the private sector, which is now amplified as the cost of inputs is rising faster than the price of finished goods.
For the current sugar high to transition into a fully-fledged recovery, however, it will require US companies to go full force with their business investing. All the rallying cries by presidents Trump and Biden to bring manufacturing back onshore seem to be hollowing away largely unheard, though. It would take a gargantuan effort to bring sliding capital goods orders back and rebuild competitive domestic supply chains that have been eroding for decades.
Two, as long as the domestic capacity levels aren’t sufficient, the tsunami of consumer money will simply turn to suppliers abroad. It is not for no reason that America’s trade deficit with China has hit new record highs on an almost monthly basis this year, again a contrary development to the audibly propagated policies of Trump and Biden. And we probably ain’t seen nothing yet. Once the infra-package comes online, imagine the spike in capital goods imports from China and elsewhere.
You may think China is jubilating, but I wouldn’t be so sure. America has unleashed a fiscal and monetary monster and is in the process of creating irreversible imbalances in the global system. Current account deficits are theoretically evened out by positive capital accounts, but the jury is far out whether the surplus countries will gamble their hard-earned dollars away in a downward spiral of rising US budget deficits and debt mountains.
If they don’t come through to catch that falling knife by being the good vendor financier and mopping up all the newly issued Treasury bonds, then only a massively lower US dollar exchange rate can rebalance the system. Beijing for its part wouldn’t like that at all. The Chinese course is one of stability and not cowboy-style experimentation.
PS: After almost 20 years of posting thoughts on a daily basis this space will take a break and publish on a more intermittent basis for the remainder of the year. Thank you for your past and future readership.
