Scarcity is Coming to America

Our fragile system creates risk and, ultimately, opportunity

The only thing in short supply in American stores is scarcity. Or at least it was until recently.

Compared to much of the world, things in America “just worked”. Stores were always full. Variety was abundant. Prices were low.

But, that’s starting to change and are likely to get worse in unexpected ways as the coronavirus and its nth order effects reveal how fragile our just-in-time economy is.

Too Much And Too Little

In some areas of the economy we’ll have way too much - like oil. We’re the world’s largest producer and the world doesn’t need it. Prices have fallen and that could lead to bankruptcies of American companies and the loss of many good jobs.

In other areas, we’ll have to little - from the strange and temporary shortages of toilet paper to potential shortages of antibiotics and food.

Why I’m Paying Attention Now

Before the coronavirus hit, I rarely gave a second thought to supply chains. I’m paying attention now. It’s clear that they can’t be taken for granted. The fragility of supply chains will impact my life and yours.

  • As a consumer, it’s become clear that these systems are not robust and the downstream consequences will have consequences for my family and yours.

  • As an investor, big and unexpected dislocations made worse by the fragile supply chain creates both dangers and opportunities.

  • As an entrepreneur, the revealed fragility of these complex systems will drive a societal shift from globalism to localism. And this shift represents the greatest broad-based, entrepreneurial opportunity America has seen in my lifetime.


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I’ll be writing more about each of these areas in the future. But, for now, let me share an example to illustrate how complex, interconnected supply chains can lead to big dislocations in areas most of us would assume are unrelated.

Too much gasoline can lead to shortages of beef in your local supermarket.

You might think that lower fuel costs could lead to lower food costs since it’ll be less expensive to transport goods to market. But, in fact, the opposite is more likely.

The drop in demand for gasoline could lead to shortages of beef, poultry and pork.

How?

Meat processing plants are heavily reliant on CO2 for refrigeration. And, all of a sudden, they’re having trouble getting their hands on CO2.

What does that have to do with gasoline demand?

  • With less demand for gasoline, there’s less demand for the ethanol we use as a gasoline additive

  • Carbon Dioxide (CO2) is a byproduct of Ethanol production

  • 29 of the 45 US ethanol plants that sell CO2 have idled or cut production

  • 40% of the CO2 used by the US meat industry as a refrigerant comes from these ethanol plants.

Will meatpackers find an alternative source of CO2 before it slows production?

If this were the only risk to the supply chain, I suspect they’d figure it out before consumers would be hurt. But, unfortunately, CO2 isn’t the only problem food producers must contend with.

As just one more example of the dependencies inherent in our complex supply chains…

A demand shock for soybean oil could lead to a shortage of animal feed.

Soy Cake, the leftover from the production of soybean oil, is the second largest source of animal feed. And 90% of soybean oil goes to restaurants or is exported.

These same sort of dynamics are at work in every supply chain. From the production of televisions, to pharmaceuticals, to ground beef.


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How to Recognize A System Failure

Our just-in-time economy is complex and fragile. The shock to both demand and supply caused by the coronavirus will lead to disruptions and dislocations. As supply chains break, we’ll see headlines that shock us. And we’ll see strange contradictions.

For instance:

We have so much food that we throw it away, and yet…