Inflation Chain Gang: Many Weak Links

"Just In Time" inventory management hits wall with COVID politics

Mortal Fear is a powerful manipulator

Supply, Demand, & Monetary Dynamics all point to long lasting inflation

Inflation Chain Gang: Many Weak Links

October 6, 2021

“Care and consideration of the common man—I have no problem with that, but as so many forms of socialism and redistribution have already been tested and proven to be a failure alongside communism, have we so quickly forgotten the lessons of the past half century? There will be a price to pay, and everyone will pay it. And that is the nature of inflation.” — David McAlvany

Kevin: Welcome to the McAlvany Weekly Commentary. Now, I’m Kevin Orrick, along with David McAlvany. 

There used to be a commercial on, Dave. It was Doritos. And I remember they would say, “Munch all you want, we’ll make more.” And you think about what we’re hearing about supply chains these days. And there was a lot of confidence in just the phrase, “We’ll make more,” because what do you need? You need the corn, you need whatever they put on those Doritos, the chemicals that make them look like cheese, yeah. 

But there’s just this assumption that the farmer’s going to provide the corn. There’s the assumption that you’re going to be able to bake it and have all the parts to make the ovens work. So munch all you want, we’ll make more, is sort of like our whole system is built on demand. And we just assume that we’re going to have the supply coming in. So we’re hearing about inflation and it’s being blamed on supply chain dynamics right now, because what we’re finding out is Doritos and everybody else is going, “Can we make more? Can we get all the parts?”

David: Consumer expectations have shifted pretty radically in the age of Amazon, where not only can you buy immediately, but you can receive the product by tomorrow morning.

Kevin: Sometimes the same day.

David: I know.

Kevin: My mom, I’ll order her a book and two hours later, she’s got it. She’s in Phoenix.

David: It’s amazing. So there are multiple issues in play with supply chains. Certainly, one perfectly orchestrated piece that worked until it didn’t was that management style Just In Time Inventory Management.

Kevin: Munch all you, we’ll make more, just in time.

David: We think of the product development cycle and the consumer’s interest in purchasing a manufactured good. And there’s so many steps that precede the purchase. The process flow of anticipating seasonal demand and in many cases, continuing creation of a product available for the market on current real-time orders to replenish limited stocks, yet it relies heavily on the existing flows of commodity production, the reliability of delivery, the availability of component resources, the availability of manufacturing labor, the availability of a means of transport for the finished good. And even more labor involved in the final distribution delivery from a domestic hub. They say a chain is only as strong as its weakest link. And I think what Covid gave us was revelation that there’s multiple weak links.

Kevin: This weekend, we had some people over at the house. We had my mom and my wife’s mom over, and it’s just now starting to get cold at night. I realized when I turned my in-floor heat on, that the pilot light wasn’t keeping on. And I was just mentioning to them, we finally got it fixed, but I was looking at the complexity of the system of keeping my house warm. Okay. You’ve got to have electricity to keep the in-floor heat, the liquid flowing. I’ve got to have propane. And then I have to find a plumber when it doesn’t work. And so you talked about labor, but it takes labor and parts. If there would have been something actually that needed to be replaced other than cleaned, he told me there may be a very long delay. So you’re talking about labor. You’re talking about supply, parts.