Friday, February 27, 2009

The Other Problem with "Changing Momentum"

In supply chain, there is a phenomenon called the bullwhip effect. Basically, when a company is short on inventory, they order a whole bunch to make up for the shortage irrespective of the amount in route. When the previous order arrives and the new order also arrives, they will have more inventory than they have space for.

Now the company has mountains of inventory and they don't make any orders for a long time. Which means their suppliers have nothing to do for a while. Suddenly, the main company runs out of inventory and they have to place a huge order to their supplier who can't meet the order immediately.

That is the problem with having economic decisions made by political figures who only have a 2, 4, or 6 year time horizon. They make decisions that will help them get reelected, but that are not ideal for encouraging long-term prosperity.

In economics, there is an ideal rate of economic growth. For the US and other mature economies, that rate is about 2.5% to 3.5%. They call that range "Goldilocks" because it is not too hot and not too cold.

There may be some short term gains from all this massive government spending, but once the bullwhip effect reaches the money supply, there will be inflation, people's savings will be harmed, and massive tax hikes will be placed on the rich (who are the only ones who pay taxes anyways).

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