The Federal Reserve Can’t Fix the Supply Chain Problem…Or Can They?

Jonathan Garner
3 min readMay 23, 2022
Photo by Walter Martin on Unsplash

Supply chains have been in shambles for the past couple of years. A recent talking point is that the Federal Reserve tightening monetary policy can’t fix supply chains. A tight monetary policy can’t produce more oil or other stuff, as the argument goes. The argument then states that we have an issue of supply and not an issue of demand…so the issue is on the supply “side”, not with the demand “side”. What can the Fed do about the supply side? That’s what the arguer is asking.

I think this argument is a bit confused.

We don’t have an issue of demand in terms of demand being very weak, which was the case in 2009. We do have a demand problem in terms of very strong demand. That might not sound like a problem, but we have to remember that the demand was artificial; the demand came from fiscal and monetary stimulus.

Monetary inflation doesn’t show up right away in consumer prices–there’s a time lag. To think the opposite–that monetary inflation shows up in everyday prices instantaneously- is so absurdly cartoonish that I can’t even begin to address it. That would also explain why a lot of people can’t figure out that inflation is a monetary phenomenon (and are content with blaming everything else, whether it be Putin or corporate greed).

So what happens when you give people a bunch of cash? Of course, you are going to get shortages. In other words, you’re going to have a supply problem. That’s why we can’t separate supply and demand. People keep talking about “the demand side” and “the supply side”, but this makes it sound like they aren’t related or exist in different universes.

Source:https://www.britannica.com/topic/supply-and-demand

More importantly, nobody ever said that the Fed can print more oil or supply more food; therefore, the only sense in which this is an “argument” is in the sense of being a fallacious argument (i.e. strawman fallacy). The Fed can however remove all the artificial demand created over the past couple of years, and the Fed is the one responsible for that demand!

Inflation is a monetary phenomenon, and inflation creates shortages. Therefore, yes, the Fed and other central banks are ultimately responsible for the widespread shortages we are seeing. More money chasing fewer goods creates higher prices AND shortages. We do have an issue of weak supply, but that was caused by the reckless monetary policy; that reckless monetary policy is what induced artificial demand. The alternative would be that people would have consumed less. You only get a broad-based increase in prices/shortages if the money supply is increasing.

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Jonathan Garner

Finance/Investing/Economics/Philosophy/Religion blogger. I’m also a Philosophy of Religion blogger:https://jonathandavidgarner.wordpress.com/