Skip to content

Supply v Demand – Does It Always Work?

Spread the love

Dominoes cause_and_effect_800_clr_4361

QUESTION: Mr. Armstrong, You say that wheat fell during the Great Depression during the Dust Bowl when supply would have declined. This makes no sense. Would you address that question?

KL

ANSWER: Your problem is typical in analysis. It appears that 99% of the people always try to reduce some event to a single cause and effect. Everything is connected like a line of dominoes. You are not just pushing over a single one. The action has a ripple effect that moves through the entire world economy and is not even restricted to a single nation.

WHCBT W 1931 Sovereign Debt Crisis

I do not make stuff up to try to prove a point. I have been curious to discover how things really work. When I say we have the largest database in the world, I am not joking. Just as I have been a collector of various things, that includes data. It is easy to find a yearly chart of wheat, but not daily or weekly during that period. Here is how wheat responded during the Great Depression on a weekly basis. Note that it peaked about 4 weeks before the stock market. Then you see a huge gap down in 1931.

1931_GB Abandons Gold 1

This was caused by the wholesale defaults of just about every nation. Some went into a moratorium and suspended payments on their debt like Britain. But most outright defaulted and you can buy their bonds usually on eBay.

19002140

 

Here is the impact of the 1931 Sovereign Debt Crisis. The dollar soared on our index from roughly the 112 level to nearly 160. That was a high which exceeded even World War I levels. That illustrates just how high the dollar rallied. Because wheat was priced in dollars, it fell in terms of dollars while rising in terms of other currencies because of their defaults.

Fed Raises Rates 1931

The Federal Reserve raised rates in 1931 during the Depression because they feared that the dollar would collapse because confidence in government globally collapsed as nation after nation defaulted on their debt.

Unemployment 1900 1940 Deatailed

Now, look at the unemployment. It soared as well. Because people lost their jobs, demand declined with supply. So you see, this is a far more complex issue than meets the eye. It is also why I say governments should NEVER be allowed to manipulate the economy. They always focus on a single cause and effect and never look at the whole.

soup kitchens LA 1929

Consequently, while supply contracts, your assumption that price should rise is predicated upon demand remaining the same or rising. Therein lies your answer. That is simply a false assumption. As the Great Depression unfolded, demand dropped sharply as people lacked the money to even buy food – hence soup kitchens. BTW, food shortages appeared in the USA as well as around the world. There were lines for free food in the USA and even in places like Thailand that went for miles thanks to COVID.