Broker Check
Commodities and Contraction

Commodities and Contraction

| June 21, 2022

On May 28 of last year, I was concerned about $5 a gallon of gas by May of this year. I was off by a month. My apologies. Then my biggest concern was inflation. It’s here and now I wonder how the economy will navigate out of it.

The question that first question is, how do we print ourselves out of a commodity crisis? This question is a loaded one for sure and assumes a few things a priori.

First, it assumes that all we do is print ourselves out of every financial hardship we stumble into. Perhaps my recency bias comes from the housing crisis that led to the 2008 super recession. We began Quantitative Easing. This is a big word for printing money. And it worked. Sort of. The second time we printed en masse was in 2020 in response to the global coronavirus pandemic. In fact, some say 80% of all US Dollars in existence were printed between January of 2020 and December of 2021.

The second assumption is that we are in a commodity crisis. I haven’t heard people talk about that term or phrase. It just seems obvious to me that gas and food and lumber and energy are far too scarce. This isn’t just a function of too much money. It’s also a function of too few goods. In other words, the pandemic shut down supply chains and disrupted logistics. This causes a slow delivery process of many commodities. But we simultaneously are not pumping as much gas as we should. There have been dozens of fires at food processing plants and cows dying of heat exhaustion.

I recently saw this tweet from Chartered Market Technician, Charlie Billelo, which illustrates the point.

In the pandemic and the housing crisis we could simply paper over the problem by printing more money. If banks insolvent, we just gave them money. If businesses couldn’t make payroll we gave them forgivable PPP loans. But if you want the price of gas more affordable you can’t give people more money to buy expensive gas. The price of gas will simply go up as demand increases beyond supply. The way out of a commodity crisis is to get to work and make more.

For some reason, be it political or philosophical, we aren’t doing that. Instead we are raising interest rates to contract the money supply. This means inflation will be tamed, but it’s going to be painful. The joy of free money then is the pain of money supply contraction now.