Inflation in a Nutshell

If you have seen the news, you may have noticed that inflation in the United States is out of control. So, to explain why inflation is so out of control, we have to look deeper into supply chain problems and government spending. 

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When the pandemic started, stores and factories everywhere shut down, especially in China where the virus originated and where most factories that export to the US are located. Just as recently as 2019, nearly 100% of big companies had some part of their supply chain located in China. Clearly, due to factories closing all over the world, there is a shock with the supply that is available that can’t keep up with demand. Combine this with the long tail of regulations that exist in the west, such as shutting down the ports for a certain number of hours per day. One important thing to note is that manufacturing some products requires supplies from different countries, and if there are many speed bumps in the way slowing down this process, this adds to the supply chain problem. Usually when there is big demand and low supply, prices tend to go up and during the pandemic this was no different.

 If this was only a supply chain issue, then it would apply to Europe, but government spending is what differentiates the two. During the pandemic the US government spent more than any other nation. If a chart is drawn of the national debt of the United States a huge spike is evident during the pandemic years where the national debt skyrocketed in 2021. From 2020 to 2021, seven trillion dollars were added to the national debt. The idea was to keep the virus from spreading, so the government paid people to stay home which lasted for a long time. People benefited from the unemployment benefits, people were staying home and making money, and at the same time, mortgages and rents were suspended which only contributed to blowing up the spending. Many small businesses started filing for bankruptcy since there were no customers, this meant that there was much more money chasing much less product and that’s what creates inflation. 

“Inflation is as violent as a mugger, as frightening as an armed robber and as deadly as a hit man”. -Ronald Reagan

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