Demand & Supply are Intertwined

If you choke demand, supply will certainly follow to accommodate the lower demand. Supply is not a new problem. It´s derived!

But that´s hard to grasp:

For most of the past six years, the U.S. economy faced a demand problem as tight credit, economic pessimism and a fixation on reducing debt discouraged consumers, businesses and government from spending.

Demand finally looks healthy again(!). Business is hiring at the fastest pace since 2000, consumer confidence is at prerecession levels and government austerity has come to an end.

Yet as demand heals(!), there are growing signs that the economy has a problem with supply, or the ability of the economy to produce goods and services using all available labor, capital and know-how…

………………………………………………………………….

Diminished supply poses big challenges to policy makers. Ordinarily, it would pressure the Fed to quickly raise interest rates so that inflation doesn’t rear up; but with inflation well below 2%, it can afford to wait. Having demand exceed supply might help get inflation back to its 2% target…

Demand certainly does not look “healthy again” and is certainly not “healing”. What has happened is that the economy´s “heartbeat” (demand) has been slowed and so it needs less “oxygen” (supply) to go on living a (new) normal life!

One thought on “Demand & Supply are Intertwined

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