Milton Friedman once used this analogy to explain the effects of Inflation. When you go on a drinking binge you get all the good feeling first, it’s later on all the bad stuff appears. I think the parties over and the hangover is starting to appear. Governmental fiscal policy since 2008 along with the pandemic and labor supply issues have created a situation that requires Leaders attention. What’s your plan to deal with these issues?
Leaders have a dual role, overseeing day to day operations and observing what’s occurring externally and its potential impact on their business. If you think about it, you have a significant number of people paying attention to day-to-day operations, it is what is happening outside your doors that requires your full attention. Recent events such as the collapse of two major banks, yes, they were both in the top 20, increasing inflation along with national debt and labor supply should move Leaders into the What If mode [The SMB Leader] .
The collapse of Silicon Valley Bank brings this to the forefront. There is more than one reason for SVB’s collapse but Federal fiscal policy (increasing interest rates) was the final nail in the coffin for SVB. We are also starting to find out that federal bank regulators were asleep at the wheel at this bank.
Post pandemic finds companies facing three major issues, increasing operating costs, labor demand supply curve, and continuing bad federal (and some states) fiscal policy. A look at each one identifies the issues. Historically, on average for every 10 unemployed people there were 7 vacant jobs. Pre-pandemic the labor participation people rate was historically low. Before COVID the participation rate was 15, today it’s 18. Along with labor shortages is the increasing skills gap on the supply side. We could have a long discussion on all the factors impacting this labor gap however the bottom line is the supply and skill set gap is projected to increase over the next 10 to 15 years. What’s your plan.
The pandemic for a significant number of companies increased their revenues dramatically. They couldn’t keep up with demand even without labor supply issues because there were raw material shortages. Post pandemic finds companies still facing raw material shortages and increased costs. The world-wide reordering of supply chains will continue to impact costs. What’s your plan?
We all know that inflation is caused by too much money chasing too few goods. Government fiscal policy controls the supply of money and when they increase it there is a two-year lag between an increase in the money supply and the inflationary effects of it. Think about the dramatic increases in the money supply starting with the 2008 financial meltdown and further acceleration since the start of the pandemic.
Politicians are responsible for the national debt and say they are trying to bring it down to the Federal Reserve target of 2%. But then again, they say a lot of things that aren’t true. They continually manipulate inflation and related inflation factors to paint the best possible picture for their administration. Both parties are guilty of this [NuWire]. The government has a perverse relationship with inflation. They increase the money supply, and the economy grows at a faster rate, salaries increase, therein tax revenues increase but so does inflation. They talk big but act small and blame everyone but themselves for the problems of inflation.
I am not sure many politicians really understand or care about the inflationary policies they institute, there only concern is elections. Like the drinking analogy, increasing the money supply makes constituents happy, then when prices increase, they can’t decrease the money supply to quickly for fear of slowing economic growth which will put people out of work. Historically if you look at inflation peaks and troughs, each inflationary cycle is higher than the proceeding one. A key factor of inflationary cycles is it takes time to really lower inflation. What’s your plan to deal with continued and more than likely increasing inflation?
What about federal debt’s relationship to inflation? The general public’s understanding of government debt goes like this; ‘it’s to high’ for others “it’s not that big a problem”. Most state governments by mandate are required to ‘balance’ their budget every year. However, very few really do, they just make funny with how they account for things. States on-going obligations for pensions and state funded programs drive up taxes and increases inflation. Another discussion for another time is government policies such as ‘green energy’ impending impact on the cost of doing business. I was amassed at how fast the conservation about gas stoves moved into state legislative moves to write bills regarding regulations on the use of gas stoves in the future.
What about the Federal debt? Why is its impact more relevant today than 10 years ago. Hopefully this is a Cliff Notes on Federal debt and its consequences for businesses will clarify that. How did we get here? In 2008 the Federal Reserve had about $800 B on their balance sheet to manage liquidity and interest rate changes. As a result of the recession, they started “printing” money to supply liquidity to the financial industry because there was fear of banks collapsing due to their inability to turn financial assets into cash (think SVB). Those concerns had pretty much been addressed by 2010 but the economy was still struggling so they decided a “boost” was needed which was the start of Quantitative Easing (QE). The effects of that QE in round numbers probably took the balance sheet beyond $2 or $3 trillion and continued until the time of the pandemic. Since the pandemic hit the QE went into overdrive and now the balance sheet totals about $8 trillion, an increase of over $7 trillion from before the 08 recession.
Basically, what happened with the explosion of the balance sheet (new printed money) is it allowed people to purchase in excess of $7 trillion in goods and services, with no corresponding production to backfill. So, in the simplest terms, consumers took $7 trillion off the shelf but did not produce anything to restock the shelf. The problem then becomes how do you make up that “borrowed” production to restock other than paying people to do it which in turn gives them more money to spend compounding the ‘too much money chasing too few goods’. The Federal general response is to reduce the money supply and raise interest rates while trying to not negatively impact economic growth.
The bottom line is, interest on the debt will continue to require more dollars while the cost of existing federal programs increase. This article from the Peterson Fountain identifies the short and long term impact debt’s will play [pgpf]. The Federal debt is putting us in a death spiral.
It would seem the challenge Leaders will have going forward is twofold. First, managing their efficiency to produce goods and services while controlling costs in a decreasing labor supply market along with a restructuring supply chain. Second is to maintain a strong enough balance sheet to withstand cyclical economic times which will probably affect cash flow and capital needs.
So, the primary question Leaders and their Board of Directors should be asking themselves is; What’s the plan?