By Michael Every of Rabobank
As the market goes through another inflation/deflation/stagflation spasm, this time reflected in some commodity prices tumbling from sky-high peaks, and some going yet higher, and gold up as crypto is down, it’s time to underline that all the elements are in place for things to get truly heated ahead.
After the US CPI report, I talked about the price of second-hand cars and how the lack of any new vehicles, because of the global lack of semiconductors, meant people were having to bid up whatever there was available to drive around in. Yet don’t think there aren’t silicon chips in *everything* nowadays: phones and computers, sure; but even fridges and toasters use them. And so does farming equipment – at a time when there is huge, underlying, upwards pressure on food prices for many other reasons. Indeed, a report from Hoosier Ag Today says:
“The biggest factor impacting the ability of US farmers to produce the food we need has nothing to do with the weather, the markets, trade, regulations, or disease. The worldwide shortage of computer chips will impact all aspects of agriculture for the next two years and beyond…farm equipment manufacturers have halted shipments to dealers because they don’t have the chips to put in the equipment…not only have combine, planter, tillage, and tractor sales been impacted, but even ATV supplies are limited. Parts, even non-electric parts, are also in short supply because the manufacturers of those parts use the chips in the manufacturing process. As farmers integrate technology into all aspects of the farming process, these highly sophisticated semi-conductors have become the backbone of almost every farming operation.”
So let’s just underline again that we built a technological wonder of a global economy based on just-in-time supplies of a few key inputs from only a few locations; and then demand surged due a virus that ran rampant through said global economy; and supply chains got snarled for that, and other reasons; and now a lack of silicon chips even impacts on the price of potato chips (in the US) and chips (in the UK). And this is before global supply-chain issues get any worse due to increasingly-strained geopolitics, physically and/or legally.
As the Hoosier Ag Today concludes in op-ed rather than straight news fashion: “While free and fair world trade is important, there is value in having adequate domestic production of vital things like computer chips, energy, vaccines, and, of course, food. This is something our leaders need to be thinking about before the next shortage reaches crisis proportions.” Lots of leaders are: but more in some sectors, and some countries, than others.
From those not on that Talebian “where is the fat tail risk?” list, what we get instead is a continuation of the verbal and intellectual trend that inserted silicon chips into toasters. In this regard, it reminds me of the AI-driven Talkie Toaster from UK sci-fi comedy ‘Red Dwarf’. Bought for $£19.99 (DollarPounds) plus tax, to quote from a fan Wiki: “Despite being more intelligent than the Red Dwarf computer Holly, the novelty kitchen appliance was, on top of being defective, only designed to provide light conversation at breakfast time, and as such it was totally single-minded and tried to steer every conversation to the subject of toast.” In one episode, we get this exchange, for example:
Lister: Look, I don’t want any toast, and he doesn’t want any toast. In fact, no-one around ‘ere wants any toast!
Talkie Toaster: How ’bout a muffin?
Lister: Or muffins, we don’t like muffins round ‘ere! We don’t want muffins, no toast, buns, baps, baguettes or bagels, no croissants, no crumpets, no teacakes, no potato cakes and no hot cross buns! And definitely no flapjacks!
Talkie Toaster (after a very brief pause): Ah, so you’re a waffle man!
Of course, Talkie Toaster is highly intelligent: but any subject will be steered round to toasting, which is the raison d’être and sine qua non of existence. In another episode we get this:
Talkie Toaster: I have a question. A sensible question. A question that will test the limits of your new IQ and stretch the sinews of your knowledge to bursting point!
Holly: This is gonna be about waffles, isn’t it?
Talkie Toaster (sounding hurt, as it’s been caught out): Certainly not. And I resent the implication that I’m a one-dimensional bread-obsessed electrical appliance!
Holly: I apologise, Toaster, what’s the question?
Talkie Toaster: The question is this: given that God is infinite, and that the Universe is also infinite…would you like a toasted teacake?
Substitute iterations of neoliberalism for toasting and see the parallel. If you don’t want globalization, how about free-trade? No? So you must want efficient market mechanisms operating across borders? No? Then how about balancing existing global demand and supply? If not, then how about out-sourcing to boost productivity, or maximizing returns on equity? For every global Lister saying he doesn’t want the economic equivalent of pancakes or pikelets, there are still those chirping out cheerily that in that case they must want a pita pocket “because markets”. And meanwhile, the *actual* global economy is being severely disrupted, with the tail risk of even more to come, from cotton to solar panels to who knows what or where next.
Frankly, sometimes you need to feed your brain with bacon and eggs instead; or oatmeal; or steamed buns. Indeed, without wishing to be as normative as the Hoosier Ag Today, if one thinks like an AI toaster, then one is likely to be toast in the long run: and consumers expecting low, low prices forever “because markets” are already getting burned.
Whether that inflation now means stagflation or deflation later requires more space than available here. And some toast inside me.