And finally, are the earth’s resources the absolute limit on economic growth? Yesterday we asked this question and promised to answer it today: What if the end of the credit boom means the tide of credit recedes from global markets and demand for finished goods and commodities goes back to something…less over-stimulated?
We now regret asking the question. But it’s an important one. So we’ll fulfil our promise and take a stab at it.
Credit booms are so disastrous—in real life—because they accelerate the inefficient use of resources. When you have a bogus price for money, people make bogus decisions with money. They waste it on projects that don’t produce any wealth for anyone.
Think of the massive over-hang of housing inventory in America. It all started with easy credit. That flood of cash to new borrowers conveyed bad information to home builders. They assumed, quite wrongly, that the demand for their product was in a long-term, irreversible upswing. So they built a huge armada of McMansions from the mountains, to the valleys, to the oceans, white with foam.
But the demand was bogus. When the cost of money was jacked up by the Fed, demand suddenly constricted. Prices are falling. And the home builders are left with massive inventory.
Houses are not widgets though. They have wood in them. And copper. And plastic and carpet and furniture and entertainment consoles and concrete for the foundation and the list goes on. Do you see what’s, happened then?
An enormous amount of real resources have been tied up an investment that’s neither generating income nor rising in value. You would call this a massive “misallocation of capital” in economic terms. And though the houses may some day be occupied, the capital that went into building them is essentially idle until then, sitting on its lazy butt doing nothing.
You could make the argument, then, that the entire boom of the last ten years was born of cheap money. The world has too much productive capacity already. Too many things. This is not a metaphysical argument about whether material goods make us happy. It just means the world may have over-invested in productive capacity based on bad price signals that began when the Fed started fiddling around with the price of money.
And based on this credit boom, we have been using up the earth’s resources at a much faster rate than we otherwise would have. Credit accelerates the use of natural resources. Too much credit leads inevitably to inefficient use of resources. That’s where we are today.
Where do we go from here? To eat breakfast! But we’ll leave you with this thought. In the last 100 years, the price of labour and raw materials has gone down, in real terms. This makes goods cheaper for consumers. The one major economic input that could get cheaper still is energy.
Energy HAS been pretty cheap for a long time. But its cost—measured not just in the price of oil but in geopolitical and environmental terms—is rising. Our guess is that for the industrial revolution to continue in China and India, the energy revolution will have to move from hydrocarbon power to solar power.
The earth is not a closed system, in energy terms. It gets free, unlimited energy every day from the sun. We just haven’t figured out how to put that in a gas tank or turn it into base load power for the electric grid...yet.
Dan Denning
The Daily Reckoning Australia
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About the Author
Dan Denning is the author of 2005's best-selling The Bull Hunter (John Wiley & Sons). He began his financial publishing career in 1997 and has covered financial markets form Baltimore, Paris, London and, beginning in 2005 Melbourne. He’s the editor of The Daily Reckoning Australia and the Publisher of Port Phillip Publishing.
Comment by novosonic on 19 December 2007:
yes & no. 2 counts.
i've posted about the katrina phenomena previously. one ought to read von mises HUMAN ACTION.
frankly i skipped 200 pages on finance crapitalism.....
as to solar energy, the technology is locked up in expensive silicon wafers. there are many alternatives in 'free' energy which in time will make coal, oil, and gas "yesteryear"
Comment by Roberteconomist on 19 December 2007:
Moved from Washington D.C. to Adelaide. People are buying up expensive real estate in South Australia despite what has happened in U.S. Uk and now the Eastern states. This sure is going to get ugly. Its gotten crazy--politicans upset that 24 year olds can't buy a house. It will get uglier--shame most here are nice people unlike say people in Florida U.S.A.....
Comment by beyondtool on 20 December 2007:
One of the largest problems with solar is that current generation solar technology is highly dependant on cheap oil to produce and transport, it is intrinsically built into the cost of solar (which is just beginning to become competitive with government rebates).
You could look at any alternative energy source and nothing is going to come close to the price point of cheap oil, at least not in the coming decades. Fundamentally it is basic chemistry, you have energy inputs and outputs and fossil fuels provide an incredibly rich and abundant (for how much longer?) source of concentrated energy.
Professor Ian Lowe ("A big fix") talks about the weak links in the industrial chain of modern economies being entirely dependant on cheap oil, and he predicts that industrial production will collapse without it.
We have multiple problems on multiple fronts. Overstretched credit is runnning out of steam and causing an economic slowdown, but there are signs that the resources we depend on (food, oil, mineral) are in more demand than the market can supply. The rise of the cost of wheat is a serious danger signal and reflects the changing nature of the the global food economy. We are headed for a double whammy in 2008 high cost of living, and a credit crunch. Position yourself well to avoid the fallout.
Comment by novosonic on 20 December 2007:
i've just pulled SEIKE'S; "THEORY OF ULTRA-RELATIVITY" off my bookshelf.
this free energy principle is at least 30 years old.....
the problem is if you have been hypnotized by the system it would make no sense.