A Short-Term Problem or a Long-Term Catastrophe?

A Short-Term Problem or a Long-Term Catastrophe?

The supply chain difficulties will certainly grow worse. Even more troubling is the fact that the remedies will take years and sometimes decades to implement. The reasons for this have to do with long lead times in implementing onshoring.

For example, the US can cut its dependence on Asian semiconductor imports by building its own semiconductor fabrication plans (fabs). The problem is that these plants take from 3–5 years to build, and the scale needed is enormous.

There are impediments to supply chain recovery that are not directly related to particular supply chains that nonetheless hurt the process of adaptation and substitution.

There’s already a labour shortage in the US. The causes are complicated. There’s no literal shortage of potential workers, but many workers prefer to stay home because of some combination of government benefits, childcare responsibilities, or inadequate pay offered by employers (who can’t afford to pay more themselves because they’ll go out of business).

A lot of this labour shortage centres on lower-wage jobs such as waiters, store clerks, fast food staff, and office assistants. But there’ll be a labour shortage coming soon in more high-skilled areas such as engineers, pilots, machinists, and medical personnel. This shortage will not be due to low pay, but instead vaccine mandates.

How to worsen supply chain chaos

President Biden ordered that all federal contractors must be fully vaccinated by 8 December 2021. (That’s in addition to federal workers and the military who are already subject to vaccine mandates and have no choice.) This federal contractor mandate is different from the OSHA vaccine mandate that applies to all employers with 100 or more employees.

The vaccinated rate among federal contractors is actually lower than the country as a whole. The national vaccination rate is approaching 70%, while the federal contractor rate is closer to 60%. It’s even lower in some specialties such as avionics.

These workers know the vaccine is available, understand the risks (both ways, given the side effects), and have chosen not to be vaccinated. It’s almost impossible to change their minds at this point.

The Biden administration hasn’t backed off the mandate. The federal contractor workforce is huge — in the 10s of millions. This could cause a massive wave of resignations and terminations among highly skilled workers on 8 December. Professionals and high value-added blue-collar workers from Boeing to Textron, and hundreds of thousands of other firms, will be fired or quit that day.

The US economy is already weak. The supply chain is already in disarray. This mass termination of skilled contractors could put the economy into a recession.

Some analysts have even suggested that the global supply chain is being sabotaged by major participants, such as China, to hurt Western economies for geopolitical reasons. It’s difficult to tell if the supply chain is being intentionally sabotaged or whether it’s just collapsing under its own weight. Possibly both.

The supply chain crisis was inevitable

In a way, it doesn’t matter what caused the supply chain crisis, because anything as complex and as highly scaled as the global supply chain will always collapse. It’s just a question of when.

For 30 years, the goal of supply chain management has been efficiency (as noted above), usually defined as the elimination of redundancy, inventory, and latency. That’s fine in the short run, but it results in a system that is brittle and has no tolerance for even small perturbations.

It’s also the case that each participant in the supply chain achieves its own efficiencies, but no one is looking at the global system in terms of aggregate resilience. The nature of complex systems is that small causes have tremendous impacts, to the point of total collapse.

It’s possible that one or more parties chose to disrupt the system intentionally without realising how vulnerable the entire system really was. This combination of intentional acts and unintended consequences is a staple of history, including the outbreak of the First World War. The point is that once the implosion begins, there’s no way to stop it until you have devolved to a simpler but almost unrecognisable state.

For these and other reasons, our expectation is that the supply chain crisis will grow worse from here and persist for years to come.

The solution

In future editions of The Daily Reckoning Australia, we’ll look at potential remedies to the current shortages. These remedies include onshoring manufacturing and fabrication, shorter supply chains to reduce potential disruptions, redundancy in suppliers and commodity sources, improved communication among supply chain participants, more diverse delivery channels, and a greater willingness to carry inventories.

Of course, these changes may increase costs in the short run, but they can reduce disruptions in the long run, which can lower overall costs. Consumers may come to view slightly higher costs as a kind of insurance premium they pay to avoid having no goods at all. Investors may come to view important links in the supply chain as great opportunities to explore.

On the one hand, we take supply chains for granted. On the other hand, we can’t live without them. If supply chains are breaking down, the economy is breaking down. If the economy breaks down, the breakdown of social order isn’t far behind. The costs of social disorder are far higher than any possible savings from supposedly efficient supply chains.

Regards,

Jim Rickards Signature

Jim Rickards,
Strategist, The Daily Reckoning Australia

This content was originally published by Jim Rickards’ Strategic Intelligence Australia, a financial advisory newsletter designed to help you protect your wealth and potentially profit from unseen world events. Learn more here.