@ Supply Chain Management


It’s inflation. No, it’s deflation. No, no, it’s hyperinflation.

No, it’s stagflation. Perhaps, not. Whatever it is, it is indignation to me. Not because we find ourselves in this pickle. It’s that all the bright minds in the world cannot tell whether it is pickle or jelly. Or something else. Well, whatever it is, it has rendered very many individuals rather immobile. And that’s all one can say about it.

Personally, I find little sense in talking about Demand or Supply and therefore Supply/Demand Chain Management when everything is just downright frozen, moving neither here nor there. Of course, where you might be, you might be seeing activity galore but from where I am it is quieter than the Western front. And there is a foreboding in it even though perhaps in hindsight, one might ask oneself, what the fuss was all about? There is, I think, in ignorance and obliviousness a kind of remedy that one would be warned to do well without but in curiosity a persistent malady of wrong turns and guesstimates that exacts a terrible price on the mind. In so far as much, you find yourself tired, buffeted and tossed, let me hope that is because of the latter and not the former.

First off, the oft quoted standard definitions (from Investopedia):


.a sustained increase in the general level of prices for goods and services.


.the general level of prices is falling. This is the opposite of inflation.


.unusually rapid inflation. In extreme cases, this can lead to the breakdown of a nation’s monetary system.


.the combination of high unemployment and economic stagnation with inflation.

But what about the causes? For brevity’s sake, I’ll delve into inflation and deflation as the other two are shades of inflation.

Two mainstream theories about the cause of inflation:

Demand-Pull Inflation

This theory can be summarized as "too much money chasing too few goods". In other words, if demand is growing faster than supply, prices will increase. This usually occurs in growing economies.

Cost-Push Inflation

When companies’ costs go up, they need to increase prices to maintain their profit margins. Increased costs can include things such as wages, taxes, or increased costs of imports.

And from the Austrians,

The idea here is that,

inflation is an increase in the money supply, rising prices are merely consequences.

And further,

This interpretation of inflation implies that inflation is always a distinct action taken by the central government or its central bank, which permits or allows an increase in the money supply. In addition to state-induced monetary expansion, the Austrian School also maintains that the effects of increasing the money supply are magnified by credit expansion, as a result of the fractional-reserve banking system employed in most economic and financial systems in the world.

On the other hand, what causes deflation?

The following causes are referred to depending on the school of thought that provide  them.

From Wikipedia,

In mainstream economics, deflation may be caused by a combination of the supply and demand for goods and the supply and demand for money, specifically the supply of money going down and the supply of goods going up.

From a monetarist perspective deflation is caused primarily by a reduction in the velocity of money and/or the amount of money supply per person.

And from the Austrians,

Growth Deflation

If supplies of certain goods in the economy increase due, for example, to increased saving and investment in additional capital goods or to technological progress, as is the usual case in the historical market economy, then, all other things equal, their producers will be induced by competition to offer more units of their product for a dollar. [Assuming a fixed supply of dollars].

Cash-building Deflation

[Cash] hoarding is nothing but an increase in what is called the “cash-balance” demand for money, that is, the average amount of money that the individual desires to keep on hand over a period of time.

Bank Credit Deflation

. a decline in the supply of money that results from a collapse or contraction of fractional-reserve banks that are called upon by their depositors en masse to redeem their notes and demand deposits in cash during financial crises.

Confiscatory Deflation

This form of deflation involves an outright confiscation of people’s cash balances by the political and bureaucratic elites.

So what’s happening right now? Staking an answer to this question with some timeframes is key to deciding how to orient oneself during this period. If you chose inflation (or its cousins), then you’re banking on some sort of a recovery in the next two or three quarters. Another open question here is whether such a recovery would be accompanied by an employment recovery. If you chose deflation, then you’re thinking that the situation might meander along for another quarter or so before worsening significantly as the unemployment situation worsens. The situation is really no different for firms either – the more astute managers will have a plan for any of the economic scenarios outlined above. The problem is that these scenarios unfold over multiples of quarters as we search out the way forward with a good dose of personal biases thrown in.

As for me, I’m biased towards deflation. Deflation has its vicious cycle that plays out in the following manner:

Falling Demand -> Falling prices -> Debt defaults -> Bankruptcies -> Layoffs and Wage Reductions which leads to further fall in demand and so on. Meanwhile, the signs of a second wave of destruction are beginning to emerge and I hope to write up a post on that. Also, as  I was traveling, I had some time to think about the rationale of the stimulus and how the debate and execution of economic stimulus parallels experiences in the manufacturing world. The idea here is that government stimulus is quite like push-based manufacturing unlike pull-based manufacturing.

Category: Supply Chain Management


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July 2009
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