What Happens in a Simultaneous Supply and Demand Shock?

The COVID-19 pandemic has created a unique situation on the world economy Manufacturing all over has shutdown. Global supply chains have virtually collapsed. The pandemic has smashed the world capacity to produce. But the virus has also forced entire nations to institute lockdowns and stay at home orders that prevents people from buying stuff. Other than going out for essentials, like food and other essential consumer staples, people simply stay at home and watch TV or cruise the Internet, or become reunited with their family.

Even the precious metals markets are reeling, everyone complains they can’t get any Gold or Silver, it’s no where to be found. Many of the primary precious metals mines are shutting down, about 20% of worldwide production in Gold mines and nearly 50% of the Silver mines have simply stopped. And there’s worry that it won’t be easy to start them all up again when the sickness evaporates.

On the flip side, demand has dried up too, few people are trying to buy Gold and Silver, except for some dealers and pundits who make a living sounding off about the shortage of precious metals.

You can’t leave your house in most places indiscriminately, social distancing is taking on almost cult status, where if you break the new social norm you subject yourself to shaming, maybe even a fine or jail time.

That list of what is essential seems to be getting shorter too, and starting to raise the concern of freedom loving people who see their civil liberties being stripped away. The situation is getting worse. Sections of stores are being shutdown in the name of social distancing, parks are being closed, people can’t even congregate in their cars in a church parking lot, or run on a lonely beach.

Nothing to Compare

The global financial crisis of 2008/9 provides case studies where the world plunged into recession and both supply and demand were affected. During that time there were large order cancellations, and consumer demand shifted towards lower-cost products, which cause suppliers to delay production and retool and more closely manage just in time operations. A growing number of supplier bankruptcies cut long-held relationships with manufactures and distributers.

This is what is happening now, but it’s much worse.Instead of building over months and years, giving at least some time to adjust, the pandemic has caused an abrupt stop. The supply chain relationships, particularly global ones, were put on hold for a bit, but now it’s clear those chains are simply gone. Plants are shutting down and bankruptcies are a threat across the board. Except that everyone is in the same boat at the same time. It’s like suspended animation, no one has a plan, or an idea of what to expect, because this situation has never happened before.

Many local and domestic supply chains remain alive. And the longer these chains supply our supermarkets and consumer staple stores, the stronger those chains will become. At some point we will return to work, and the demand for everything will explode, but will we just open those global chains up again like nothing happened, as if the risk of future contagions is gone?

A New World

A general distrust of China is developing. And that distrust will grow as our pain grows in a broken and deflated economy. We will need to find ways to inflate the economy, and reopening the global chains seems anti-productive and risky. By developing local and domestic supply chains, we will lose the efficiencies of global chains, which means things will cost more. This is how we combat deflation.

More people will insist on American-made, which means higher wages and higher costs. I think people will be willing to pay more, knowing they are not supporting China and other repressive and dangerous regimes, this will certainly pave the way towards inflating and strengthening our economy. Perhaps this is the start of a new nationalism that everyone can get behind.

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