Wednesday, April 8, 2009

The story of supply in our current situation

At ZH, we have been focusing a lot on aggregate demand and production numbers in our recent macro posts. Paul Swartz released some great data on Monday to put the current recession/depression/D-process in perspective to other historical down cycles in the economy.

What's interesting is the data paints a picture that supply has been slow to react to the crisis and only now are the inventories starting to get cleared out. See the indicators below for Industrial Production, ISM and Oil prices in relation to other economic downturns.









































In a sad state of affairs, the only thing really stopping wholesale deflation (especially with such a horrible credit outlook, employment, GDP and wage growth) is the falling supply. If supply continues to lag the demand side out of this depression (which is looking more and more likely), this is likely to be a much bigger driver of the predicted inflation wave than any of the QE or commodity bubbles theories that are currently in vogue. 

The fall in trade in relation to other depressions is another story worth commenting on. The implications of such a drastic fall on both sides of the current account balance don't bode well for a quick recovery to trade flows. More importantly, it castrates many of the proposals currently in the works by many central banks to devalue their way out of this mess. Hopefully they will realize this sooner rather than later.

Trade data from a historical perspective:

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11 comments:

Anonymous said...

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Hey Cornelius,

What's going on with Cu? I thought this would break to the downside by now?

Anonymous said...

Cu: China -

SRB has been buying for strategic stockpiling, the commercials have been restocking for the potential spring revival in demand, and local output has been curbed due to lower revenue from sulphuric acid and the shortage of scrap.

Anonymous said...

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Thanks Anonymous.

Also Cornelius, could you please fix the hyperlink on the images in this article.

sir y. leftfield said...

re: charts -- it's hard to gauge w/o seeing the baddest bear of them all no?

re: Cu -- anyone trading this should keep this in the back of their mind: alchemists throughout the centuries have consider copper to be a magic metal. some have said it has even more potency than silver or gold.

here's a potential resolution from deep leftfield:

inflate the USD 10:1 with an all new currency, based on a copper/nickel/silver standard.

make pure copper abe's a dime.
enlarged nickel jeffies fittycent.
and silver ike's a $1.
paper georgie's become the C note.
and paper bennie's become a K.

$8T becomes $800B in an instant.

pre-2009 bills redeemable as a floating % on the new currency. or you can collect them as 'collector's item' and hope they're worth something like silver eagles one day.

added bonus: illuminati end around the goldbugs, annoying gadflies that they are.

double added bonus: instant appreciation of RE as your piping literally becomes worth $.

that is...if you're willing to install a brand new plumbing & compostible graywater retention system made from recycled plastic.

paid for by the US Mint, who also supplies the contractors and construction workers (all legal aliens of course).

sheet, if obamawon okikedocki plays this right, his grandchildren may see his face on a $10K note in their day...

of course, this will only *really* work if mining companies were subject to a 90% tax, payable to the IMF in order to bail out those foolish Hunt Bros/bankster/AIG/nationstate/ponzi schemes who eventually try to corner the copper/nickel/silver market and fall flat on their face, so they don't take the rest of us with them next time.

just a couple copper pennies to rub between the fingers...

the green monster said...

actually it should most realistically be a pre-2012 bill, as, on second thought, the idea seems much better for an election gambit (pre or post).

plus, it connects us better with our mayan brethren and all...and just in time for the winter solstice...

Anonymous said...

Why don't we just take the opportunity to give the Austrian school a shot? Keynesianism is a tried and tired hedonistic dead end. Monetarism is just another foot in the door for the inflators. Why not cramdown via hard money reset and abolish the fractional reserve for a change. There's still plenty of commodities for maximum medium of exchange competition, and banks can go back to being paid for storing and lending on honest time horizons. And of course a repudiation of all the other forms of interference by the well-connected govt/credit/industrial complex. Seriously, why not?

Some form of repudiation seems inevitable, and a look at the FED's toxic balance sheet convinces me of that. Resetting it on the same terms is going to guarantee only one thing: That it all happens again, someday. I don't want that for my kids, and not for yours either. I'd rather say we learned our lessons of sky high rhetoric and returned to a grounded culture of sustainable planning and maximum freedom for clever entrepeneurs. Frugality is back, and with it a return to an appreciation of the handmade and the homemade; the resurgence of the artisan. The information age isn't going away, we'll still be as or better connected than ever, and we just might be able to stretch out and enjoy the little things a bit more.

Anonymous said...

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The Barter system is the only thing that will work.

Here is a perfect example:

http://news.bbc.co.uk/2/hi/science/nature/7988169.stm

don said...

If I understand you correctly, you are saying that with the dramatic though recent fall of inventories, reduced production will over reach and fall short of even reduced demand, thus preventing further deflation and resulting in eventually price inflation. I have considered and read others who postulate on such a development.

On the other hand, could it be that the recent but dramatic reduction in supply is the result of reduced back orders/cancelations of those orders, reflecting future and anticipated decline in demand, itself due to overproduction and over capacity?

Or . . . does the dramatic recent drop in inventories indicate cost costing that has out stripped - has been over done - and thus there will be a need to catch up to future demand, even if decreased demand? If this is the case, then would we not see an increase in production which would reflect economic expansion, at least for a time?

UrbaneGorilla said...

Thanks. Good article. I like your thinking on inflation and the issues surrounding reduction of inventory. i also like all of anaonymous' posts on copper. (That anonymous guy sure gets around.) Truly an issue that seems to have escaped the 'China will save us' crowd. Thanks again!

OSR said...

I work in an industry that provides a primary raw material used in most US durable goods manufacturing (vague enough?) and I can confirm your statement about inventories being excessive since November. If one were to look at the relationship between inventory levels and short-term credit facility terms... well I'm sure you know the rest.

Anonymous said...

Devaluing your currency only makes sense if you have something to export AND someone willing to buy it. There are two *gigantic* pre-conditions for devaluation and too many economists just take them for granted. Especially in the case of Eastern Europe, where "experts" recommend devaluation, incl. in countries with massive debts in EUR.