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Kimberly Amadeo

Ammo Shortage Is a Lesson in Supply and Demand

By March 22, 2013

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Have you tried to buy a gun or ammo lately? The proposed gun control legislation has prompted an old-fashioned bank run, only this time it's at the gun stores. People are buying up anything they can get. First, it was fear that the proposed gun control legislation would prevent them from owning certain types of equipment. Then, as supplies started to diminish, people started hoarding all types of ammo, just so they would have it. As a result, many are wondering if this a secret government conspiracy to overturn the Second Amendment.

No, it's just the law of demand and supply at work. What you are seeing is an asset bubble in ammo, just like we saw in housing in 2005. There, the demand for housing drove prices to unsustainable levels. Prices are rising in ammo, but since it is much cheaper per unit than a house, demand is still creating shortages. However, some aspects are similar. During the housing bubble, buyers rushed to be first to place a bid. During the ammo bubble, buyers often line up in anticipation of the supply trucks.

What It Means to You

What's the likely outcome? At some point, the bubble will burst. Just like in the housing bubble, there will be some triggering event that stems the inflated demand. It will most likely happen when the gun control legislation is resolved. If it's passed, then gun owners will know what's been banned and what hasn't. If it's denied, then there's no longer a reason to hoard ammo.

If the accelerated demand continues long enough, then ammo manufacturers will find ways to increase supply to alleviate the shortage. In time, new suppliers will enter the market.

In either case, whether demand drops or supply catches up, there will be an excess of ammo supply. Ammo hoarders probably have enough on hand to last several years. Their demand will disappear. At that point you'll see discounts and sales as retailers and manufacturers try to maintain revenue and profit in the face of little demand. That's exactly what happened in the housing market, and it's the end of every asset bubble. It could take years, but even guns and ammo must abide by the laws of supply and demand.

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Comments

April 16, 2013 at 7:01 pm
(1) Larry Kropotkin says:

Thank you for a great column with excellent points. I beg you to abandon supply and demand as your explanation for the housing bubble and ammunition shortage. Please consider the thesis that misguided government intervention is responsible. The price of ammo and its raw materials have steadily increased since the start of President Obama’s first term in office. Supply and demand dictates that the seller of ammo has known since no later than 2008 that their products are in greater demand and will continue to be in greater demand for a duration long enough to make it cost effective to increase production. Yet the demand for their products remains unsatisfied. Returning to the housing bubble analogy, the housing bubble was a financing problem created by government policies that forced banks to made risky loans while suggesting that the government would guarantee those loans. It didn’t work precisely because supply and demand were prevented from fixing the problem. Uncle Sam requires ammo manufacturers to, upon request of the Dept. of Homeland Security, immediately divert their merchandise to government contracts. Regardless of the wisdom or motives of this intervention, it is a better explanation for the ammo shortage than calling the manufacturers “slow-pokes” and the consumers “hoarders”.

April 17, 2013 at 9:06 am
(2) Kimberly says:

Hi Larry,

Thanks for your thoughtful comment. Please don’t misunderstand me — I’m not saying that ammo makers are slow pokes. I’m sure they’ve been trying to catch up to demand as much as humanly possible. Of course, it takes time to build new factories, etc., so it would take time to expand supply. I’m also sure they wonder if it’s a good idea to spend the money to build new capacity when the bubble could burst at any time. Look at what happened to the home builders! This is true whether the demand is coming from consumers or Homeland Security.

Also, I’m not really referring to rises in ammo prices since 2008. I’m actually just talking about the bubble that’s occurred since last year. I’m betting that this time next year ammo will be widely available, if not on sale.

As to the housing bubble, the government intervention was only part of the problem. I agree that Fannie Mae and Freddie Mac should never have been put in the position they were — privately held companies with a government guarantee. The managers were forced to maintain earnings and stock prices knowing that Uncle Sam wouldn’t let them go bankrupt. This also forced them to make risky loans, because all the other private banks they competed with were making risky loans. Everyone thought it would be OK because they were protected by insurance in the form of credit default swaps. Of course, since it was unregulated, when it came time to pay off the insurance, the companies like AIG were in danger of going bankrupt. For more, see Role of Derivatives in Creating Mortgage Crisis.

Kimberly

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