“Shortages” do not cause inflation. The creation of money is. – Mihai Macovei

For central bankers and mainstream analysts, the recent spike in inflation is just a transitory phenomenon that has little or nothing to do with the massive monetary and fiscal stimuli unleashed during the pandemic. Although the Fed recently admitted that price pressures persist longer than expected, the spike in inflation is believed to be due to supply bottlenecks caused by the pandemic. This superficial diagnosis serves as a convenient excuse for politicians to keep in place damaging growth stimuli and draconian public health measures.

Inflation is not due to a shortage of supply

Mainstream economists define inflation as an increase in consumer prices that occurs when money supply growth exceeds economic growth.1 In other words, too much money drives out too little goods. If the recent spike in inflation were due to a shortage of goods rather than an increase in the money supply, aggregate output would decline. But this is not the case, as the Organization for Economic Co-operation and Development predicts that global economic production will increase by 5.7% in 2021 after falling by 3.4% in 2020. This year, production lost during the pandemic is expected. recover in both advanced and emerging economies, including the United States (Chart 1). In fact, inflation accelerated this year at the same time as industrial production returned to pre-pandemic levels in both the United States and the EU (graph 2). The alleged shortage of supply at the aggregate level seems to be a myth.

Chart 1: Real GDP growth

Real GDP growth
Source: IMF, World Economic Outlook.

Chart 2: Inflation and industrial production

Inflation and industrial production
Source: FRED and Eurostat.

The alleged supply shortage is mainly based on anecdotal evidence regarding unmet demand and rising prices in specific economic sectors, such as semiconductors, cars, furniture and energy. But those who argue that supply is insufficient do not bother to analyze whether the compression of supply chains is due to a chronic shortage of production or to excess demand. Moreover, even if the supply was insufficient for certain goods due to production bottlenecks, changes in consumer schedules or environmental greening policies, an increase in the level of aggregate prices would not have if the money supply and aggregate demand remain broadly unchanged. The compression of some individual supply chains would be offset by a decrease in demand for other goods and services, and only relative prices would change in the economy.

Let’s take a closer look at specific cases of widely perceived bottlenecks. The shortage of shipping containers and logistical problems at several ports in the United States and Asian countries appear to be at the heart of many other supply chain bottlenecks. While shipping costs have skyrocketed, volumes shipped have also increased (Chart 3) 2. This does not indicate a lack of supply, but rather a sustained demand for international transport. Experts from major shipping groups report that major US ports, container groups and logistics companies can barely handle the boom in international trade. This is not surprising given that U.S. imports and its trade deficit grew more than 20% year-on-year in the first seven months of 2021, as consumers rushed to spend their stimulus checks. Experts from the United Nations Conference on Trade and Development say global demand for manufactured consumer goods has increased throughout the pandemic, increasing the demand for container transport and increasing transport costs. The surge in global demand not only reorganized international trade flows in favor of China and other Asian economies, but also pushed international trade volumes to new heights (Chart 4).

Figure 3: Global TEU shipping volume and price index

Global TEU shipping volume
Source: Container trade statistics.

Chart 4: World trade volume

Global volume of trade
Source: World Trade Organization.

The semiconductor shortage, which is affecting auto production, is also blamed on the inability of chipmakers to cope with an order book swollen by covid-19 and shipping disruptions. But the global semiconductor market grew by 7% in 2020 and is expected to grow another 20% this year (Chart 5) and almost double in size by 2028. So, again, the shortage is caused by a relatively rigid supply which cannot meet sustained demand. The latter has grown not only from the automotive sector, especially as electric vehicles use more chips, but also from manufacturers of computers and other consumer electronics, whose consumption has increased during the pandemic.

Figure 5: Global semiconductor market

Global Semiconductor Market
Source: Statista 2021.

The recent rally in energy prices, with European coal and gas reaching record levels and crude oil exceeding $ 80 a barrel, is also attributed to limited supply and seen as a threat to economic recovery. But the world supply has not diminished; on the contrary, world energy production follows a constant upward trend (Chart 6). After increasing by around 2.4% per year for the past three years, energy production fell 3.5% in 2020 due to lockdowns, but is expected to rebound 4.1% in 2021.

Graph 6: World energy production

Global energy production
Source: Enerdata.

Global energy supply would have been much higher and better balanced between sources and between regions without the government mandated green policies and carbon emissions targets. In Europe, coal-fired power stations have been phased out, as have nuclear power stations in Germany. They have been replaced by wind turbines and other renewable energy sources which have recently underperformed due to inclement weather conditions. Combined with the drop in gas deliveries from Russia, this has created a perfect storm in the European energy market. At the same time, China’s strict emissions targets and rising coal prices have also created a power shortage, disrupting factory activity.

In the same way that green government policies have undermined energy production, lockdowns and stimulus checks generously distributed during the pandemic have created an artificial labor shortage that is likely to exacerbate further inflationary pressures. . Due to forced business closures, the US economy lost about 20 million jobs in April of last year. Despite the economic recovery, some 5 million jobs have yet to be filled as millions of Americans have been paid to stay at home or have left the workforce altogether. In Europe, unions are already calling for wage increases as surveys show inflation expectations are on the rise.

Stimulating excessive demand and creating money are the real culprits

The growth stimuli applied during the pandemic were truly unprecedented in size and scope. Massive government support and budget deficits monetized by central banks have been poured into economies weakened by recurring lockdowns. Despite the loss of jobs and market income, the wealth of U.S. households has increased by $ 32 trillion since the start of the pandemic, fueling consumer spending and aggregate demand. Combined with an increase in the broad money supply of more than a third over the same period (Chart 7), this indicates that inflation is in fact driven by too much money rather than too few goods.

Graph 7: Money supply

Money income
Source: FRED.

Rapidly rising inflation also raises inflation expectations3. Inflation does not only depend on the mechanical result of changes in the supply of money and goods, but also on the demand for money. If the public realizes that their cash is being eaten away by large price hikes, they will move away from cash. In this case, inflation would accelerate beyond the pace of money creation, which is obviously the nightmare of all central bankers.


The current surge in inflation is neither due to a shortage of supply nor transitory, as central banks want us to believe. It is mainly due to the surge in consumer demand fueled by excessive incentives for growth and money creation. Government-imposed lockdowns and clean energy policies limiting production have exacerbated price increases. We are witnessing a consumer boom and persistent distortions in the structure of production, all strikingly resembling the boom that preceded the Great Recession.

  • 1. This definition is contested by Austrian economists because price inflation combines monetary and non-monetary causal factors, which have different consequences on the structure of production, income and individual wealth. Therefore, Austrian economists define inflation as an increase in the supply of money beyond an increase in cash, i.e. commodity money such as gold or silver. .
  • 2. According to the Financial Time, it costs more than $ 20,000 today to ship a standard container from China to the east coast of the United States, compared to less than $ 3,000 two years ago.
  • 3. In the United States, consumer price index inflation rose 5.3% in August, house prices rose nearly 20% year-on-year from July and the S&P 500 index rose nearly 29% year-on-year at the end of September. .


About Ruben V. Albin

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