What we think the economy is doing

Shortages, bubbles, austerity, and what might be coming next

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Nobody really knows what is going on with the economy right now, but this has not stopped “experts” from making suspiciously precise forecasts. Their basic theme: they’ve got everything under control, and things will keep getting better as long as we keep them in charge. 

We here at Contention have a different set of motives: we want to help you change the world. Because of that, we think we might have some clarity the experts don’t, all rooted in looking at things in ways they can’t. 

What we’re taught about downturns

Conventional economic opinion blames downturns on a withdrawal of demand -- demand is the primary force in the economy. This has political implications: if the economy is the product of demand, then it reflects our collective desires and we really have only ourselves to blame if we don’t like it.

But businesses only incidentally exist to satisfy unmet demand: their primary purpose is to make money. Teeming homeless camps reflect unmet, unprofitable demand for housing. Landfills are full of unnecessary but nonetheless profitable production. 

How downturns actually happen

Economic crises arise from falling rates of profit, which the internal dynamics of our economy can’t help but create. When the rate of profit drops far enough, investors withdraw their capital, which means reduced output. 

Reproducing the system of production generates the most important demand in the economy, so this capital withdrawal is when the downturn really begins. 

Investors withdraw their capital into “risk-off” assets like cash and bonds, lowering yields and making speculation more tempting. When this chase for yield blows up, observers blame the resulting financial crisis for the downturn. But if those investors could have found sufficient returns in productive enterprise, the crisis never would have happened. It’s the falling rate of profit that causes the downturn.

How this downturn was different

Last year’s extremely rapid and complete shut-in of production arose not from a normal withdrawal of investment, but from emergency state intervention to slow the spread of the coronavirus. 

Following this, wealthy nation governments intervened again to support aggregate demand with extraordinary monetary and fiscal support. So not only did capital not withdraw, but central banks made investment more lucrative than ever. Demand did not fall off, it surged. Experts used models based on normal conditions to predict ongoing malaise last summer, but the market stunned them with surging growth.

This combination of production cuts with induced consumption created an exceptionally strong “bullwhip effect” -- a cascade of excess demand rolling through supply chains like the wave motion of a whip. Another unique characteristic of this downturn only amplified the problem: “just in time” outsourcing at its peak.

Falling rates of profit encourage outsourcing. Economies of scale mean that a new firm can aggregate a common production task from across multiple businesses, providing it as a service to each of them cheaper than the businesses could do the task for themselves. Over time, production gets sliced up across many more enterprises, and low-wage conditions in the Global South make the margins even better. Those thinly-stretched supply chains snapped from last year’s bullwhip.  

Why we have a labor shortage

The same fiscal and monetary supports that kept demand online for output have, naturally, boosted demand for labor as well. That demand is meeting a labor supply stunted in at least four ways:

  • Death: aside from healthcare workers, the professions most likely to die from COVID included those most in demand right now -- transportation, food services, and production. 

  • Long-term attenuation: labor force participation continues to drop. If workers believe their labor power will decline in value long-term, it is rational to withhold investing their time and energy into it. Inflation is still rising faster than wages, eroding real returns for workers over time.

  • Misallocation: lockdowns shuttered service businesses -- the largest employment sector -- and the bullwhip meant demand for production workers. Now inflation is blunting demand for produced goods while reopening is bringing back service positions… all at once. Skill needs are whipping back and forth while employers all compete for the same labor pools at the same time. 

  • Forbearance uncertainty: At least 11 million renters are behind on their rent, and two million homeowners are in mortgage forbearance. These families don’t know where they will live in a matter of weeks -- if anywhere. Most workers hesitate to take on jobs if they don’t know whether or not they’ll be able to keep it in short order. 

This reduced supply running into growing demand means rising prices, or in this case, wages. Rational actors will hold off on selling an asset if they see its price going up. Workers in the United States have the rare opportunity to wait and see if they can get a better deal, now quitting their current jobs at record rates. This keeps labor supplies tight, reinforcing the conditions that created the labor sellers’ market in the first place. 

Where might this go from here

The last 15 months should have taught us all a new hesitancy in making confident predictions, but Wall Street never learns. On a basic level, the obvious solution to excess demand causing unsustainable price increases is to withdraw demand. This is already happening in the construction sector where housing starts have crashed and lumber prices are down 41% since early May. 

For the labor market, this would mean a rapid reversal of currently rosy economic forecasts. We also know that business has few skills better honed than forcing workers back on the job at any price they can get. New austerity, tightening monetary policy, an aggressive end to forbearance programs -- the possibilities are many, but the theme would be escalating hostility against working people. 

One final hunch: these are the very same steps -- especially on the monetary front -- that could burst the current speculative bubble boosting crypto, meme stocks, and the rest. That financial crisis will get the blame for the downturn that follows, but you’ll know the truth: a system that depends on keeping its people desperate will have corrected itself yet again. 


Our only investment advice: Join the Air Force.

Contact us with questions, feedback, or anything we might have missed.