Delta the Demand Deferrer

America appears to be in a mess. The anti-Vax résistants are succumbing to the Delta variant in droves, which would be acceptable – freedom includes the right to make bad choices – were it not for the fact that they are over-loading hospitals and making it impossible for non-Covid patients to receive treatment for their cancers and other ailments.

President Biden has bungled his handling of the Afghanistan evacuation, been unable to stem the flow of illegal immigrants across our southern border, and announced the general availability of booster shots only to be shot down by his regulators, still processing on their abacuses data that their British and Israeli counterparts had long ago run through their computers.

Then there is the small problem of shortages. My quick shopping tour found supermarket shelves bare of many items, including popular brands of bottled water, a local cutlery shop dealing in made-in-America items facing a 15-month backorder period, another retailer out of popular brands of ink cartridges, still another of materials for picture frames. Not as serious as the shortages of crutches, IV poles and exam tables as manufacturers wait for parts from overseas and a flotilla of 73 vessels, almost double last month’s number, lolls offshore Los Angeles and Long Beach, unable to unload goods bound for medical supply houses.

The prices of just about everything are rising. Politically sensitive gasoline prices have jumped 40 per cent this year, house prices are up 15 percent since last year as building is constrained by builders’ inability to find workers and materials. “Transitory” inflation refuses to transition from around 4 per cent to the Fed’s long-term average target of half that.

Things are likely to get worse by year-end. A shortage of artificial Christmas trees (prices up 25 per cent) might force green-minded citizens to chop down some CO2 – eaters, and a shortage of turkeys might leave home chefs scrambling for festive substitutes. The doubling of natural gas prices this year means many Christmas photos will show sweater-clad family members picking away with cold fingers at whatever turkey substitute their hosts can conjure.

 Here’s the strange part. This practitioner of what Thomas Carlyle famously labelled “the dismal science” is reminded of Bobby McFerrin’s interdiction, “Don’t worry, be happy, in every life we have some trouble…”. The ills we are now experiencing contain the seeds of a better 2022, in part thanks to Delta, the demand deferrer.

Start with the political. Biden’s travails make it less likely that he will wring from congress the full $4-5 trillion he wants to spend, or impose all of the crippling tax increases Bernie Sanders needs to fund the largest expansion of the welfare state since Lyndon Johnson’s Great Society. Infrastructure does need repair, the tax system needs reform to reduce inequality, and the safety net needs mending. But on a scale consistent with America’s fiscal circumstances.

On to the economy. Which means on to the Delta variant. With first-time shots soaring from 10 million in July to 14 million in August and still rising as the unvaccinated choose between getting a shot and losing a job, by next year a much larger number of Americans will have been vaccinated. The most vulnerable of the vaccinated will have received boosters despite cries of “scandalous injury to global solidarity and vaccine equity” from China’s running dogs in the World Health Organisation. Many anti-Vaxxers who contracted the virus will either have shuffled off this mortal coil, or acquired sufficient immunity to stop clogging up hospital facilities.

Perhaps most important, this year’s shortages are next year’s pent-up demand, as the OECD points out. Consumers still have huge piles of savings and unused credit and, if bottlenecks have been eased, will boost purchases of cars, homes and other items currently in short supply. Add inventory restocking and growth of around 4 per cent next year seems a reasonable guess.

It is also reasonable to expect that the readjustment of the labor market to post-pandemic realities will be further along. From Amazon to McDonald’s to Walmart,  benefit packages, pay, and working conditions will have been adjusted to make the hundreds of thousands jobs on offer more attractive, especially to workers whose unemployment benefits have run out. Schools will fully re-open, and stay open if regulators get around to approving the Pfizer and other child-tailored doses. Open schools mean more parents free to return to or join a worker-short labour market.

Finally, Fed chairman Jay Powell and his monetary policy gurus anticipate inflation running this year at a rate of 4.2 per cent, twice their long-term average goal, and not before time have come to believe tapering of the Bank’s asset purchases “may soon be warranted”. But “tapering” merely means buying less than $120 billion of assets each month, not ending purchases, at least until the middle of next year. Most important, the Fed will not soon be raising interest rates. Easing up on the gas pedal rather than tromping down on the brakes.

So be happy, or at least don’t worry too much. It is more rather than less likely that Goldman Sachs’ Investment Strategy Group has it right, “The fundamental underpinnings of the US expansion remain in place…”.