This Is Not Just A Supply Chain Collapse – Jim Rickards

Day after day, we hear more news reporting the collapse of our supply chain. From lockdowns disrupting the flow of goods across the globe to skyrocketing freight rates and a persistent shortage of shipping containers. From severe congestion at our key ports to a lack of enough dockworkers, warehouse staff, and truck drivers to make all of those goods reach your local stores. In recent weeks, Americans have been resorting to social media to complain about increasingly barer shelves as the latest surge of infections leaves the already-tight labor market even tighter. The truth is that our supply chain is the perfect representation of our economy — because the supply chain is essentially the economy. Every single step in the production, processing, and distribution of a product requires resources, personnel, and logistics. And when the supply chain starts to break down, so does the economy. That’s what the economist, financial strategist, and commentator James Rickards has detailed in a recent analysis published in The Daily Reckoning. The term “supply chain” comprehends an intricate system of manufacturing, processing, transportation, packaging, marketing, advertising, customer relations, vendor and supplier relations, and, of course, capital – the main element that provides support to the relation between the supply and demand of every single every physical, digital, intellectual or artistic artifact on the entire world. The supply chain is everywhere, as explains Rickards. To illustrate the complexity and extensiveness of supply chains, the analyst cites an experiment suggested by MIT scholar Yossi Sheffi in his book The Resilient Enterprise, in which you consider yourself as a one-person supply chain to understand how rooted these dynamics are in our daily lives. Sheffi highlights that supply chain processes are hidden in every single thing we buy and consume. The collapse of global supply chains can be attributed to two different factors: efficiency and energy. The modern version of supply chain management began in the 1980s, as globalization and the growth in technology combined to make supply chains more complex and also offered tools to manage that complexity. That’s to say, for example, if you have a company and want to lower costs for your customers by reducing your trucking providers to the two that offer the lowest rates, you’re actually increasing your vulnerability to disruptions. If one of these providers suffers a strike or is hit by a natural disaster, you probably won’t get your deliveries in time. In other words, the hidden cost of efficiency is vulnerability, which leads us to the second issue: energy. Intricate and dynamic systems such as the supply chain require a huge amount of energy to function. The big problem is that the global energy input rises in relation to the scale of the system. In simple terms, this means that if you double the scale of a system, you’ll probably need a lot more energy to run, which includes electricity, capital, and labor. According to the analyst estimates, you’ll need 5 times more energy in such a scenario. So when profits from expanding the scale of the system are high and energy costs are low, these lopsided ratios of scaling functions may still be profitable on net. But when profits start to decline and energy prices surge, the consequences of higher energy input costs on an extremely stretched supply chain network are translated into major disruptions to the operation of the system as a whole. Other factors currently weighing on the supply chain are the health crisis and rising geopolitical tensions. Global superpowers such as Australia and China are trying to eradicate the virus even as the rest of the world faces a new outbreak. That seems quite impossible. It’s almost the same as pursuing a policy in which no one catches a cold. They want a utopia but the price to pay is very real. In America, our leaders’ policies have ended up creating even worse congestion at ports and led to painful fines for companies that weren’t able to move their containers due to a lack of workers. The worker shortage, however, can be attributed to our government’s lack of competence in creating a safe environment for workers to stay at their posts during the sanitary outbreak with fair pay. All of those increased costs are being passed on to consumers, who have been dealing with the sharpest inflation spike in almost four decades. Given today’s outlook, supply chains must be restructured. But as Rickards warned: ”reconfiguring the supply chain will take five to 10 years to accomplish. In the meantime, you should expect empty shelves, higher costs, and slower growth in companies most affected by the breakdown.”