Balance is the key to economic operation. When abnormal fluctuations occur in one market after another, the economy is dangerously close to the brink of recession. Through prices, we can identify which markets are in trouble. A market economy like ours is always seeking a balance between supply and demand: when the supply of goods or services falls short of demand, prices will rise; ideally, more producers or suppliers will enter the market, driving prices back down.
Over the past year, we have witnessed a continuous rise in prices within the economic sector. In essence, the current economy is in a state of imbalance. This imbalance originated in the energy industry towards the end of last year. At that time, President Biden had just taken office and made replacing the existing energy system one of his primary objectives. It is important to note that for the market, the specific alternative system chosen by Biden is not significant; rather, the crucial aspect is that the energy output of these new systems is significantly lower than that of the old ones.
Yes, Mr Biden is pushing for a big transition — from fossil fuels to renewable energy. That may be a noble goal, but his approach is to shut down traditional sources of energy first: the Keystone pipeline, oil and gas leases on federal lands and now apparently offshore oil leases.
Let’s also look at the president’s move to cut off Russian natural gas supplies. He rashly took action before we had found sufficient alternative sources, suddenly cutting off 10% of the US’s natural gas supply. A more prudent approach would have been to replace this supply first – for example, by importing from Saudi Arabia or Venezuela – but he only started to do so afterwards. If Biden could have replaced Russian natural gas with other sources first, we would have been able to confidently say “no” to Russia, and we would not have fallen into the serious inflationary predicament we are in now.
I hope everyone can see clearly that these measures taken by the president have no connection with the economy itself. To maintain economic balance, it is necessary to match energy supply and demand, but Biden has failed to do so. The current severe shortage of energy supply due to reckless decisions is the root cause of the surge in energy prices.
Therefore, the energy market is the first area where inflation emerges, and it is also where we witness the first surge in inflation.
Nowadays, a similar trend has emerged in the food market. Yesterday, food inflation surpassed energy inflation for the first time, becoming the primary factor driving producer price inflation. As we have discussed before, inflation is contagious: a price increase in one industry can trigger a surge in prices in another. Of course, food and energy are intrinsically linked – agricultural machinery tills the soil, trucks and trains transport food, and oil is a crucial ingredient in the most widely used commercial fertilizers.
Adding to the current food inflation are factors beyond the control of the president or anyone else: weather, natural disasters, droughts, and those bizarre, mysterious fires at food processing plants. The recent Hurricane Ian is expected to wreak havoc on Florida’s crops, which are currently in the harvest season.
Even these “natural factors” alone may be enough to push food prices up more than fuel costs. But taken together, we are undoubtedly heading for one of the most dramatic periods of food price inflation in US history.
Once again, this is a supply issue, not a demand issue. During past periods of inflation, due to rapid population and economic growth, we faced demand-driven inflation – an expanding consumer base that exceeded the supply capacity of producers.
Today’s economy is growing at a modest pace against a backdrop of rapidly ageing populations. The current woes are not due to demand but to a lack of supply: not enough fuel, not enough food. By definition, this is a supply chain problem — a decline in production by overseas manufacturers, mainly in Asia and especially in China.
Our economic fate is now tied to this fragile supply. If we cannot solve the supply problems, we will sink deeper and deeper into the economic quagmire; if we can solve these supply problems, the economy will recover and prices will return to equilibrium.
Oh, yes, Ronald Reagan also had this quote:
“Economic recession refers to your neighbor losing his job.”.
The Great Depression refers to when you yourself lose your job.
And the recovery was when Jimmy Carter lost his job. ”
What is happening now is exactly such a situation.
