What to do while you’re living under two nations, in isolation?
What about….blogging? We’re about at the time in the media life-cycle when you should expect takes arguing that panic-buying is actually good to appear, and indeed I see someone’s trying to rebrand it as “resilience buying”. Never mind.
A lot of people think it’s down to just-in-time logistics. The basic intuition here is that if the supermarkets held more bog roll at the stores, then they wouldn’t run out, and because they try to get deliveries more often and hold less inventory in general, that’s the problem. (This German supermarketing blog says the typical drumbeat for nonperishables is 2 or 3 drops a week, so it’s not *all* that JIT.) This is, I think, trying to solve the wrong problem. The problem isn’t that bog rolls aren’t being manufactured, or that the logistics network isn’t delivering them to the shops. The system has in fact delivered a lot more rolls than it usually does. Supermarkets have been hiring a lot more shelf stackers, and closing early to have more time to fill the shelves, which suggests the rate-limiting link in the supply chain is the one from the back of the shop to the front. Obviously, holding more stock can’t help here.
More broadly, the JIT hatin’ has an implicit model of bog roll panic that doesn’t seem to fit the facts. “More stock” would only help if the bog roll panickers had a target in mind, and would stop buying more bog roll when they felt they had enough bog roll. If the extra buffer was enough to cover this, everything would be fine, as long of course as you could fill the shelves quickly enough. But what if they kept up buying more, for weeks on end? More inventory isn’t going to save you now.
As the vicar used to say where I grew up: and I thought, that’s like Jesus. Being me, though, it’s Keynes. What do the principles of Keynesian economics have to tell us about where the bog rolls are going?
Quite a bit. The principle I’m interested in is the Keynesian view of the demand for money. One of the reasons economists are weird is that they insist on talking about “money” (doesn’t everyone want it?) when what they mean is more like “cash”. In this case, we’re talking about the demand for cash as opposed to investments of whatever kind. The classical take was pretty simple – interest rates are the reward for tying up your cash in financial investments, so if they’re higher, people will draw down less cash. If they’re lower, financial investments are less interesting than cash. It all gets intermediated through the banking sector, so if there’s masses of idle cash in people’s bank accounts, banks eventually lend it out. If anything goes wrong – for example, if everyone wants cash all at once – the central bank can probably fix it by lending the banks more cash, or if you’re desperate, printing more of it.
As it turned out, this breaks down in major recessions and the interest rate can hit zero, so there’s no reason to part with your cash, and we can just sit there being poor indefinitely. In the General Theory, Keynes completely rethought this. He argued there were three reasons to hold cash rather than invest it – the transactions, speculative, and precautionary motives. Transactions is just spending on goods and services. The speculative demand was the cash people needed to draw in order to buy other investments. The precautionary motive turned out to be the interesting one – it’s the desire to hoard cash in case something bad happens. This isn’t driven by the interest rate or really any other economic variable, but rather by fear and uncertainty. As a result, it can go arbitrarily high no matter what the interest rate is. Even at zero, or negative, rates, people might just want liquidity – cash – more than anything else.
And because it’s a precautionary demand, there’s no reason to think it will get intermediated into bank loans on the other side of the book; if you’re desperately hoarding cash, the only reason you’d have to take out a loan of all things would be if you wanted to draw down a line of credit your bank had already signed for, like a credit card, in case they take it away. The other week we saw a whole line-up of huge companies do just that. Instead, however much cash the central bank might put into the system, it might just end up as cash on deposit, or even stuffed in suitcases.
The analogy with the bog rolls ought to be getting clearer now. There’s obviously a baseline demand for rolls driven by wiping your backside. I’ve heard of people selling supermarket rolls to corner shops from a van, but I reckon the speculative demand is probably trivial in size. That leaves the precautionary demand. If you’re worried about them, or feel the need to show how worried you are, or whatever, well…you can buy bog rolls. They’re cheap enough that most shoppers can buy any amount they can physically cart away. They keep. In the plastic wrapping they can probably be left outside in the back garden.
According to Keynes, the thing about the precautionary demand is that it can be infinite for practical purposes. All that will satisfy is action by the state to convince everyone they can plan for a future again. And you know? That’s like…bog rolls.