The US economy is in imminent danger of seizing up solid

 

I’ve always said that logistics are the true bellwether of many economic issues.  If logistics (a.k.a. the ability to provide enough supply to meet demand) are working, the economy is lubricated and runs smoothly.  If they’re not, the economy is in danger of seizing up like an engine running without adequate oil supply.  General Omar Bradley‘s famous observation is as true in economic disciplines as it is in military:  “Amateurs study tactics.  Professionals study logistics.”

Let me put the next paragraph in big, bold, black letters to emphasize how serious I am.

Right now, our logistics snarl-up is posing the real danger of seizing up our economy – and the danger is growing worse by the day.  The next two to three months are likely to prove absolutely critical.  If I were talking about the potential for military conflict, I’d call this article a WAR WARNING.  In economic terms, I suppose I’ll have to call it a COLLAPSE WARNING.

Yes, it is getting that bad – and it all boils down to logistics.  The problem is that there are too many goods seeking shipment, and not enough containers, vessels, vehicles and aircraft – not to mention people – available to move them.  If a container ship is anchored off a Chinese port for a month, waiting to load cargo, then sails across the Pacific to a US port, then anchors off one of our harbors for another month to await unloading, it’s occupied for three to four months with a single cargo.  Under normal circumstances, it’d carry three to four cargoes during that same period – but the clogged-up arteries of the world’s transport and logistics system simply can’t cope with that any more.

CNBC offers this overview of the problems being experienced by container ships.

The result of the clogged-up ocean shipping system is that, due to delays and waiting periods, literally hundreds of the biggest cargo ships in the world are forced to carry no more than a quarter of the cargo they’d normally transport during any given year.  All those manufacturers and countries that gleefully exported their manufacturing capacity to China or Asia in past years are now sitting with goods overseas that they can’t get to the customers who want them.  That’s the living definition of a logistics bottleneck, right there.  Some high-value, low-bulk items can be transferred to aircraft for shipment (at much greater expense), but that doesn’t apply to many heavier or bulkier manufactured goods.  They have to wait for a ship, or take the railroad from China across Siberia and Russia to Europe, and be distributed there or sent on by ship to the USA and elsewhere – but the ships to carry them are, as mentioned above, in drastically short supply.

Here in the USA, ships are waiting one to two months to get off-loaded;  then their containers are sitting in harbors, waiting for rail or road transport to their destinations.  However, land transportation is also backlogged, struggling to cope with the huge influx of containers and cargo.  It’s not just at the harbors, either.  Railroad companies have only so many freight cars, and road transport companies have only so many trucks that can carry containers.  They may want to order more, but the companies that make them often rely on raw materials and parts from – guess where? – CHINA, or other overseas manufacturers.  (For example, almost every rail car relies on computer chips to control its brakes, send signals to the engine if it has a problem, etc.  The chip shortage currently affecting motor vehicle manufacturers is affecting rail car manufacturers, too.)

Here’s a report of how rail congestion in and near Chicago is affecting one small business – and it’s far from alone.

It’s gotten to the point where goods are being delivered to stores in this country, and bought by anxious customers before they’re even put out on the shelves.  That happened to me just yesterday.  I wanted to buy a couple of 5-gallon cans of kerosene for our newly-purchased heater, but no store in the big city nearby had any in stock – just smaller plastic 1- and 2½-gallon containers.  Eventually, Tractor Supply’s national Web site said that its local store had the cans in stock, so I went straight there.  The assistants inside all said that no, they were out of stock:  but when I insisted, they went to the rear to check – and found that six cans had just been delivered that morning.  They brought back two for me, only to find another customer had just arrived, having checked online as I had, and also wanted two.  They ended up having only two out of six to put on the shelves, and I learned later those sold within the hour.  They don’t know when they’ll be getting more in;  they’re dependent on their regional office to send what they can, when they can, and they’re never sure what will arrive on that day’s truck.

These aren’t isolated incidents or rare examples.  This sort of thing is happening more and more often, all over the country.  The pipelines of supply are clogging up, so that most places can’t get enough of what they want, or know for sure what they’re getting and when they’re getting it.  I wrote about a number of examples in my recent articles on supply chain problems, and I’m hearing more and more complaints like that.

If the supply pipeline gets much more clogged – and it’s getting worse almost by the day – there will come a time when nothing can move.  The deadweight hanging over the system will squash it flat, and everything will come to a grinding halt.

Let me try to paint the broad picture as best I can by citing several articles that, taken together, provide enough flashing red lights and economic sirens to scare anybody.

MISES INSTITUTE:

Not only were people locked down [during the COVID-19 pandemic], but society and therefore practically the whole economy was forcefully paused. The problem here is that there is no “Pause button” for the economy. It may sound easy for politicians, who have no conception of how the real world works. But you cannot simply pause a business. You also cannot pause the supply chain. If you have ever run a business you know that being an entrepreneur is not a steady state but a changing process. It is a constant struggle to get money to come in so that you can cover costs that you’ve assumed long ago. That’s what entrepreneurs and businesses do. They assume costs and imagine they will be paid for their efforts later, and paid more than the cost they already assumed.

In other words, if you “pause,” a business, the costs remain but you get no revenue. How are you going to pay those bills when everything is on pause? You cannot. This is perhaps easy to understand … so easy that even some politicians grasp the concept. So many countries like the United States have offered relief in the form of loans to businesses. Of course, such schemes come with the usual cronyism and favoritism. The loans often do not end up in the hands of those intended. They also shift power and influence away from the market to the bureaucrats in government. Or to put it differently, businesses survive or go under as decided by bureaucrats, not by consumers.

There is more than simply money. Imagine food processing and the beef farmer when the politicians press Pause, which stops businesses from dealing with slaughtering, cutting, processing, and shipping meat. But it doesn’t stop the farming. The farmer’s animals will not stop growing and will not stop eating because the economy is paused. The farmer will go bankrupt because he needs to cover their food, water, and care without being able to sell any beef. Even if he has savings to cover the expense, the meat will lose quality and value as the cows grow older than their prime. At the same time, no meat is reaching the shelves in the stores. So while the farmer is stuck with costs he cannot cover because he cannot sell the meat he produces, consumers cannot find meat in stores. Consequently, we experience a shortage of food, while at the same time farmers and other producers have surpluses that they cannot afford to keep and are unable to sell. What a ludicrous situation.

The effect of this is of course that the farmer will not be able to rise again as the politicians press Play on the economy and beef processing is resumed. He will not have been able to make those continuous investments in his business in order to meet future demand for meat. After all, he was stuck with additional costs and no revenue. So pressing Play will not solve the food shortage.

The same story can be told for other types of businesses as well. You cannot stop the freighter that is on its way around the world. You cannot store logs of timber waiting for the sawmill. You cannot pause mines and smelting plants. And if one task can be paused, it affects the other task in the supply chain. The longer the lockdown, the more businesses would have failed and the supply chains lain in shambles. This is an enormous loss. While it can be rebuilt, it can only be so at an enormous expense. And it still requires that there are people with the know-how and willingness to start such businesses again. Can we rely on them to rise and try again, even after they have been crushed?

BLOOMBERG:  “Europe’s Energy Crisis is Coming for the Rest of the World, Too“

This winter, the world will be fighting over something that’s invisible, yet rarely so vital—and in alarmingly shorter supply.

Nations are more reliant than ever on natural gas to heat homes and power industries amid efforts to quit coal and increase the use of cleaner energy sources. But there isn’t enough gas to fuel the post-pandemic recovery and refill depleted stocks before the cold months. Countries are trying to outbid one another for supplies as exporters such as Russia move to keep more natural gas home. The crunch will get a lot worse when temperatures drop.

The crisis in Europe presages trouble for the rest of the planet as the continent’s energy shortage has governments warning of blackouts and factories being forced to shut.

. . .

American exporters are poised to ship more LNG than ever as new projects come online toward the end of the year. But as more gas goes abroad, less will be available at home. Even though gas prices have been notably lower in the U.S. than in Europe and Asia, they are trading near the highest level since 2014. Gas inventories are running below their five-year seasonal average, yet U.S. shale drillers are reluctant to boost production out of concern that would crimp their profitability and put off investors.

FINANCIAL SURVIVAL NETWORK:  “Get Ready for Non-Transitory Inflation: Ten Things About to Shoot Up in Price“

Transportation A large part of our personal budgets are consumed by getting from point a to point b. The cost of doing this has risen and will rise even higher. With gasoline prices up a whopping 85% in the past 12 months, commuters are already feeling the bite. Politicians often increase gasoline excise taxes when seeking more revenue. Same with liquor excise taxes. With electric vehicles expected to capture higher market share, these taxes will have to be raised to make up the difference. In addition, tolls will also increase, to pay higher operating and labor costs in running and maintaining highways, bridges and tunnels.

. . .

Food Expect food shortages, supply chain disruptions and weather issues to drive food prices much higher in the months and years to come. There’s a reason that the government excludes food prices from the consumer price index (cpi) and it’s not because they’re going down. Higher fuel costs will also result in higher food prices, as modern farming techniques are energy intensive, not to mention that virtually all food produced must be shipped to market. Fertilizers and pesticides will go right up along with oil and natural gas prices.

REDSTATE:  “Groups Warning of Imminent Global Supply Chain System Collapse“

Cargo ships anchored off California and New York, and in rail yards and on trucking routes, shipping consumer goods are incredibly backlogged  due to a lack of manpower and pandemic restrictions to unload the goods. And now, there are warnings that the supply chain may be on the brink of collapse.

Shipping ports which normally only had one or two ships in dock waiting to be unloaded prior to the pandemic now have dozens lined up, waiting to be unloaded for up to four weeks, slowing the whole chain. In Los Angeles and Long Beach, as many as 73 vessels were waiting to be unloaded last month. The bottlenecks at the ports are also impacting railways and trucking. In Chicago — that has one of the largest rail yards — it was at one point backed up for 25 miles.

WALL STREET JOURNAL:  “China’s Power Shortfalls Begin to Ripple Around the World“

The power crunch, on a scale unseen in more than a decade, highlights how some of Beijing’s changing policy priorities, including its effort to limit carbon emissions, can ripple through a global economy that has been reshaped by the pandemic.

“There’ll be a cascading effect,” said Mike Beckham, Oklahoma-based co-founder and CEO of Simple Modern, which makes products such as insulated water bottles and backpacks. “As we started to comprehend the ramifications of what’s happening, we realized that this is potentially bigger than anything we’ve seen in our business careers.”

Two weeks ago, one of Mr. Beckham’s main suppliers, based in Quzhou city in eastern China, was told by the local government that it could only operate four days a week, instead of the usual six. In addition, it must adhere to a power-usage cap, which cuts the capacity of the factory by about one-third as a result.

Mr. Beckham anticipates U.S. retail prices for many products could increase by as much as 15% next spring, as appetite from retailers stays strong.

. . .

Steve Cooke … said he relies on suppliers who source 80% of their products from China.

Already this year, rising freight costs and supply-chain bottlenecks have pushed up his costs and lengthened delivery times for his customers. He said he expects those pressures to intensify as the power crunch squeezes production.

“We rely so much on China, it’s incredible,” Mr. Cooke said.

CNN:  “The workers who keep global supply chains moving are warning of a ‘system collapse’ “

Seafarers, truck drivers and airline workers have endured quarantines, travel restrictions and complex Covid-19 vaccination and testing requirements to keep stretched supply chains moving during the pandemic.

But many are now reaching their breaking point, posing yet another threat to the badly tangled network of ports, container vessels and trucking companies that moves goods around the world.

YAHOO! FINANCE:  “China Orders Top Energy Firms to Secure Supplies at All Costs“

China’s central government officials ordered the country’s top state-owned energy companies — from coal to electricity and oil — to secure supplies for this winter at all costs … A severe energy crisis has gripped the country, and several regions have had to curtail power to the industrial sector, while some residential areas have even faced sudden blackouts. China’s power crunch is unleashing turmoil in the global commodities markets, fueling rallies in everything from fertilizer to silicon.

. . .

Volatility in the energy markets is poised to intensify on the order from the central government, said Bjarne Schieldrop, chief commodities analyst at SEB.

China’s statement “to me implies that we are in no way on a verge of a cool-off. Rather it looks like it is going get even more crazy,” he said. “They will bid whatever it takes to win a bidding war for a cargo of coal” or liquefied natural gas.

GCAPTAIN:  “Port Operator DP World Sees Lasting Supply Chain Disruptions: ‘Maybe in 2023’ “

Dubai’s DP World, one of the biggest global port operators, expects supply chain bottlenecks that have rattled global trade flows to continue at least for another two years … Global supply chains are struggling to keep pace with demand and overcome labor disruptions caused by Covid outbreaks. The world’s largest shipping line, A.P. Moller-Maersk, has also warned bottlenecks may last longer than expected.

CHARLES HUGH SMITH:  “The U.S. Economy In a Nutshell: When Critical Parts Are On “Indefinite Back Order,” the Machine Grinds to a Halt“

If the part that blew out is 0.1% of the entire machine, and the other 99.9% still works perfectly, the entire machine is still dead in the water without that critical component. That is a pretty good definition of systemic vulnerability and fragility, a fragility that becomes much, much worse if there are two or three components which are on indefinite back order.

This is the problem with shipping much of your supply chain overseas: you create extreme systemic vulnerability and fragility even as you rake in big profits from reducing costs.

. . .

The Federal Reserve can print trillions of dollars and the federal government can borrow and blow trillions of dollars, but neither can print or borrow supply chains, scarce skills, institutional depth or competence.

And, to sum up the effect on the “man (or woman) in the street”, Gun Free Zone notes:

The family went grocery shopping on Saturday.

Food was abundant, albeit more expensive than in the past, it was the other consumables that we had a hard time finding.  Things like shampoo, body wash, mouth wash, cleaning supplies, foot spray, OTC drugs, were low, especially the store brand generics.

Today I went to Walmart at lunch and it took was low on a lot of non-food supplies.

Some specialty food items like Gatorade/sports drinks have been low or empty for weeks.

I haven’t seen store shelves this picked clean since the early lockdown days of COVID over a year ago.

. . .

Manufacturing, transportation, and distribution should be back into near-full swing.  The economy should be recovering fast.

Instead, it looks like we’ve rolled the clock back 18 months and we’re about to get ****ed.

I think the bottom is about to out of the market and it’s going to be a disaster.

I wrote recently about steps I was taking to protect my family from the supply chain snarl-up.  I can only recommend most strongly that you check your own supplies, make a list of things you need to get through at least the next two to three months, and stock up on them right now, while they’re still to be found.  You may find some are already unavailable;  if so, look for substitutes, and don’t quibble about getting exactly the brand or variety you wanted.

Right now, we’re bracing for impact.  I don’t believe we’re going to make it to Christmas without things getting much, much worse.

Peter