The Expert Podcast

So what is demand destruction and how is it related to inflation and also the economy. Maybe hearing this term more frequently in the news you may hear it related to inflation and gas prices. What demand destruction means is at some point Increased prices for any item whether it's gasoline vehicles real estate Insurance groceries starts to have people purchasing less of the product. So for example If you are a motorist a driver you have a vehicle And normally you would drive let's say
1500 miles a month going back and forth to work Going away on weekends And the gas price is $3 and $4 and $5 for some period of time You will continue to drive 1,500 miles a month
And your fuel cost per month Is kind of go up for example if have a vehicle that gets 30 miles per gallon And you drive 1,500 miles per month You use 50 gallons per month So if the gas price is $3 times $50 you spend 150 a month on gas And then it goes up to $4 Times 50 gallons Now you're spending $200 a month on gas Well it's $50 more And then it goes up to $5 per gallon Now you're spending two 50 a month on gas at some point Your monthly gas bill that you put money in the tank is going to get to be where you're going to start taking less trips You're going to start driving less. You may still have to go back and forth to work You may still have to go to appointments However you may decide on the weekend Maybe we won't drive to the mountains Maybe we won't take that trip to the beach.
And you'll start to consume less It doesn't happen right away with pricing Same thing with groceries You may Go to the grocery store and have the same shopping list every week And your grocery bill might be 200 bucks 250 bucks And then the next Month it's maybe two 60 And then two 80 And at some point you'll notice that the prices have items have gone up To where you're going to purchase less of them. Again it doesn't happen right away Most of the time people will continue to buy the same items they purchased or maybe a lower priced version of it That's not demand destruction That is Modification of buying that is switching products.
Demand destruction happens when consumers start to purchase less overall. They buy less products gasoline. And this Is what is beginning to happen now So what does demand destruction do for the economy Well it makes it worse Here's why If for example a grocery store Cells 50 sirloin steaks every day And as demand destruction sounds exactly what what it is It's destruction of the demand Starts to erode the volume of steaks The next day maybe they sell 40 And maybe it drops down to 30 So at some point their volume of steaks that they sell drops down to maybe half of what it was What that means is they're going to order less of that product and the same can hold true for paper towels or cans of beans or any product for that matter
So The manufacturers of that product will start to produce less As they see the demand go down This does not happen right away It may take weeks months sometimes a year For people to adjust their buying habits At first they're just going to spend the extra money Take it from their budget especially in 2021 There was trillions of dollars It's estimated that $10 trillion of stimulus money Went into the economy 5 trillion went directly to stimulus and enhanced unemployment Another 5 trillion was form the fed putting money into the financing Vehicles the financing capacity So $10 trillion went into the economy That money is now being absorbed being soaked up So demand destruction doesn't happen right away because people have the extra money Once that extra wealth that extra money goes away People start to spend less What'll happen Next is the manufacturers of these products The retailers of these products will have to cut back On their business the grocery store Might need less staff They might need to purchase less product They might need to buy less shopping carts to replace old ones Each level of that Economic reduction will be like a domino effect The grocery store maybe He has 30 employees Now they cut it down to 28 And Their shopping carts don't wear out as fast so they don't buy new carts And the cart company has to lay off employees and that's where a recession comes in and maybe even a depression
Because now you have two more unemployed people They're certainly going to have demand destruction in their life And it becomes a deepening spiral To where These Products Go down in volume Now it may not reduce the price That's one of the things that's happening now in the economy normally supply and demand Affects pricing
But when you're at A fully incentivized economy where the government Has adjusted interest rates and putting stimulus in the economy Even if you Sell less you can't reduce your price anymore
Because the grocery store is already operating on a small margin The Meat factory that You know cuts up cows and puts it into sirloin steaks They can't sell the stakes for any less because their costs are at the Maximum they can be to still sell it for the same price Normally demand would lower prices but demand destruction
In an inflationary environment Means that the prices have to stay high So it's not going to lower the prices In fact Some manufacturers or wholesalers or retailers might have to raise prices Because if they're not selling as many items They have to charge more for each item Remember that old saying We Sell cheap but we make it up in volume Right The high volume car dealership furniture store They say they can sell cheap because they sell so many They only need to make a little bit On each thing they sell Well if you're now a store that your volume is going down you can't just make a little bit on each item You have to make more On each thing you sell to pay your bills your rent your electricity your mortgage whatever your fixed costs are If you sell less stakes at a
grocery store Your mortgage doesn't go down You may be able to cut back on employees You may be able to maybe have less electricity because You know you don't have as many things in the cooler I don't know but your rent doesn't go down Your mortgage does not go down Your insurance does not go down So you might actually have to raise prices In order to keep your fixed expenses paid So demand destruction Is an insidious factor in the economy which could lead to the exact opposite of what most people would expect And that is lower prices When there's less volume of sales let us know what you think in the comments Are you seeing this In your own life are you buying less things Are you buying less gasoline yet Even though gas has gone from maybe $3 to $5 in your area Are you still putting the same amount of gas in your car or are you starting to cut back on trips Are you starting to drive less Carpool Are you buying less things at the supermarket Tell us what you think we'll see you in the next video