Tacks in the Road
(Continued from page 5)
down by 2.7% over the period. In contrast, prices were up only 18% in total over
the full 10 years from 2010 to 2020. Before the pandemic, we were living in what
economists were euphemistically calling a “Goldilocks” economy, not too hot and
not too cold, characterized by low inflation, low unemployment and low interest
rates. The core inflation rate (CPI minus food and energy) was ndver above 3%
from the mid- 1990s until 2020. In spite of 9/11 and the financial crisis of 2008,
the Goldilocks economy was supported by “right-to-work” laws; higher rates
of labor market participation, education and high productivity; lower inflation
expectations; low wage demands; tax cuts and regulatory reforms; automation;
the “fracking” revolution and lower energy prices; and globalization, international
competition and a strong dollar that allowed us to cash in on economies of scale,
specialization, comparative advantage, and just-in-time global supply chains.
So, what happened? In a nutshell, the pandemic upset the apple cart.
Shutdowns, layoffs, fear and panic had a profound and disruptive impact on global
supply chains, consumer and business confidence and demands for goods and
services. The pandemic exposed the risks of over-dependence on fragile, global
supply chains for basic necessities, medical equipment and supplies of strategic
materials. The immediate political response was an immediate imposition of trade
restrictions that only made matters worse. Large amounts of fiscal stimulus were
pumped into the global economy, while interest rates were held down to negative
values. Once things began to open up and fear and panic began to subside, pent-
np consumer demand outstripped the economy’s ability to produce and deliver
goods and services. Companies struggled to reopen mines and factories and
secure supplies of raw materials, parts and labor. Transportation bottlenecks
multiplied, and costs were raised by higher oil prices.
The global economy grew at a rate of 6% in 2021, raising inflationary pressures.
Shortages of labor were exacerbated by declining participation rates, fear of the
virus, early retirements and expanded unemployment benefits. Oil demand fell
by almost seven million barrels per day at the start of the pandemic, oil prices
actually turned negative at one point, companies laid off thousands of workers
and all exploration and development activity dried up. When demand bounced
back, inventories were already low, and the oil and natural gas price explosion that
followed quickly fed into inflationary pressures in all sectors of the economy.
Then Russia invaded Ukraine. Sanctions were announced, and supply lines
were further disrupted. Markets hate uncertainty, but events are slow to unwind
and there are no quick fixes. The war, sanctions and explosive demand created a
boom in commodity markets, with many items reaching new highs in the opening
months of 2022. Russia and Ukraine are important exporters of wheat, corn,
sunflower oil, crude oil, petroleum products, natural gas, nickel, pig iron, steel,
aluminum and other metals which are now disrupted by war. Coincidently, new
COVID outbreaks in China are causing total shutdowns of major cities and ports,
further disrupting supply chains.
So, where do we go from here? Nothing is inevitable in economics, and as
usual, there are opposing forces at work. On the one hand, rising prices are eating
into consumer confidence and impacting discretionary spending across the
board. Higher interest rates are starting to cool the housing market and business
investment. On the other hand, labor markets are still tight. The US alone has
about 12 million job openings for six million unemployed workers. The high
number of vacancies could initially act as a cushion if the economy slows down, as
employers would first stop filling vacancies before laying off workers, protecting
income to some extent. While prices adjust frequently to market conditions, wages
adjust less frequently and lag behind. Higher commodity prices for material inputs
will eventually be passed on to consumers, and supply chain issues are likely to
persist. Reversing 35 years of globalization and reshoring production of strategic
materials and goods can’t be accomplished overnight; reorganization of markets
may take years.
High oil prices are the cure for high oil prices, and there is growing evidence
that high prices are cutting into demand. US and OPEC production are on the
rise; and we are drawing down our Strategic Petroleum Reserves. Nevertheless, a
drastic turn in the war or a sudden end of the COVID lockdowns in China could
spur prices to new levels. Natural gas markets, especially in Europe, may take more
time to restructure. Housing demand is cooling off as rising mortgage rates and
prices are getting ahead of consumers’ ability to pay, but rents are likely to continue
to rise. Food prices are being driven by drought, loss of exports of grains and.
cooking oil from Ukraine and Russia, higher prices for feed and fertilizer, a bird flu
epidemic affecting chicken and eggs and higher costs for fuel and processing;
Higher consumer price inflation may be with us for the immediate future, and
there’s a possibility that it could become built into market expectations and give
rise to a wage-price spiral that might only be broken by a recession. History tells
us that both upward and downward wage and price spirals, driven as they are by
people’s expectations, tend to become self-fulfilling prophecy. How the conflicting
forces pulling the US and global economies in several directions at once work out
is far from certain, but the balance of risks seems to be on the downside. There’s a
lot of momentum and pent-up demand in the economy stemming from last year’s
fiscal and monetary policies, rising incomes, and comfortable levels of consumer
debt that may carry the economy for a while, but inflation is quickly taking its toll,
and it will persist. The course of the war and uncertain political developments at
home and abroad are casting long, ominous shadows. It may take a while, but a
turn for the worst seems likely.
If you would like to contact me on any issue, I can be reached at mayor@
townofpks.com or 252 622 2338 (cell). Thank you.
Vision and Mission Statement
Our vision is to provide a quality environment in which our citizens are
safe and secure, where individual talents flourish, and everyone enjoys the
natural resources of the area.
It is the mission of the Town of Pine Knoll Shores to provide for the
safety and well-being of all residents and visitors in an efficient and well-
organized manner; and develop and implement plans for the continuous
improvement of the town, its services, and its beach; and encourage the
participation of residents in service to the Town and community.
TIE
18 The Shoreline I May 2022