Yesterday’s chart showing Australia’s fatal attraction to credit provoked some comments.
“The chart just goes to prove that we in the Western world are lucky enough to have the super affluent lifestyle is living on borrowed money and borrowed time. Sooner or later equilibrium will have to be met. In that I mean our standard of living will drop while the third world rises and we meet half way distributing wealth across the world more evenly. This will shatter many people’s dreams and aspirations in the first world. Many will not accept this and use force to maintain there lifestyle such as the Iraq war but in the end time always wins out.”
“Time doesn’t change anything. Doing things changes things,” says Dr. Gregory House. But the point is well-taken. Is accumulating wealth a zero sum game? Must others lose so that you win? Or, as this reader suggests, must you lose so that Chinese and Indian farmers can win?
Of course wealth is not a zero sum game. Only Marxists and materialists believe that there is a fixed quantity of wealth and that it must constantly be redistributed to make the world a fair place. Wealth can be created.
As George Bush once said while running for President in 2000, we can “make the pie higher”. What he meant, in his own way, is that growth creates wealth. Bill made this point in his speech in Melbourne last week, albeit in an indirect fashion.
He pointed out that in economies where prices are controlled and fixed (including the price of the money), you eventually end up with value subtracted instead of value added. In healthy, growing, rosy-cheeked, free-market economies, companies take raw materials (including ideas) and combine them in such a way that the whole is greater than the sum of the parts.
This, incidentally, is why raw materials prices have been declining for 200 years. As Charles Dumas at Lombard Street Research recently wrote, “The long-run real return on commodities is negative, except for oil, where it has been nil for one and a half centuries.” He’s saying a lot in this sentence, so it’s worth thinking over. It also puts yesterday’s move in a much larger, historical context.
Commodity bulls (of which we count ourselves one) have the burden of proof in the argument for rising resource prices. Improvements in technology have made it easier to locate and produce mineral and energy resources since the industrial revolution. The more we need stuff, the more stuff we seem to find. That’s why until 2003, the 200-year trend in commodity prices was downward.
The argument today, what Ambrose Evans Pritchard referred to in the Times of London as “the great doubling” is that the increase in the size of the world’s consumer class has finally put a limit on growth. Six billion people competing for the same corn, milk, pork, poultry and iron ore means a long-term (secular) bull market in tangible items.
But here’s the challenging thought: what if high commodity prices are just a symptom of the credit bubble? What if Alan Greenspan’s rate cutting campaign between 2001 and 2003 merely accelerated a huge over-consumption and over-production boom that goosed commodity prices while the boom lasted?
Alan “inflation must be contained” Greenspan wasn’t always so hawkish. Between January 2001 and June 2003, Greenspan’s Fed cut interest rates 13 times, from 6.5% to 1%. 500 basis points may not seem like a lot if you don’t think about interest rates much. But those 13 cuts unleashed the very credit boom that’s now going bust.
And here’s another question: 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? Today’s neo-capitalists don’t have an answer for that question. But we do. We’ll share it with you tomorrow.
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 TaxHaven on 18 December 2007:
Not sure I can agree with you, Dan, when you say that "wealth is not a zero-sum game". Western economies face not only the limits to resource consumption and production - peak oil, population increases, lack of easily accessible mineral deposits, limits to agricultural production, and POSSIBLE global warming climate changes, for starters - but also the constraints imposed by the money supply. By this I mean to say that not all economies and societies have equal purchasing power. Their (albeit fiat) currencies' valuations vis-a-vis each other reflect standards of living to some extent. Impoverished nations have much lower real incomes and buying power in comparison to nations whose currency is held in high esteem and is valued accordingly. (We've all taken vacations in SE Asia or Mexico and seen what a Euro or a Dollar can get you there...!) To put it bluntly, western standards of living MUST fall because the consumers needed to buy (high-priced) western products are few and far between: even middle-class Indonesians and Chinese can't afford to pay US$15 for a current legal copy pop music CD, whether or not the recording industry needs that price to sustain themselves in business. Arguably, the fall in western lifestyles began as early as about 1973 and this process of 'levelling' living standards is something you can rely on to continue for years to come. So position yourselves and your families accordingly...
Comment by Pete on 18 December 2007:
Tell us tomorrow?
How devious!
Comment by Beyondtool on 18 December 2007:
When you consider that all wealth is ultimately based on resources, (even intellectual property requires a functioning human being, a computer and a finite amount of time) there must be a finite limit of wealth on this planet (of course if we manage to plunder the universe this just creates a seemingly limitless amount of resources). Oil, population, food, ores, consumer crap all has a finite limit. The only resource that could be considered infinite on the earth would be the energy of the sun which allows resources to be created, consumed and recycled. (Too bad our economy is not based on the sun's energy).
The largest economic fallacy of capitalism is that infinite economic growth is feasible and desirable. The problems the global community faces are directly related to economic growth, and we are just beginning to see the of the club of rome's "limits to growth" hit home.
Comment by TaxHaven on 18 December 2007:
Was going to mention that myself, Beyondtool, but you've said it. Always puzzles me why most libertarians (and I consider myself one)are such adamant climate change deniers...
Comment by ruckrover on 18 December 2007:
Yes I like most of what libertarian stuff I read on the DR, which is why I come here. But with a scientific background I also know there is only so much resources in a finite planet.
Interesting and deeply troubling was the ABC Science Show on the weekend. Not only the item on CO2 acidifying the oceans so that coral will cease to be able to calicify and thus reefs will crumble once CO2 reaches 450ppm in the atmosphere (on track for that by 2040) and soon after lobsters, crabs, oysters, prawns, krill - all shell making marine creatures won't be able to make shells... but the other item that was research back into historical accounts of the oceans' marine life - to days when the North Sea heaved with schools of fish at every depth and crossing the english channel saw schools of porpoises and dolphins breaking the surface all the way to the horizon as they joined in the bounty of the overflowing rope nets.
Since the 10th century most fish stocks have plummeted by 98% to 99.999% and many are completely extinct. What we think are common species like Salmon are mere tiny populations compared to their forebears.
The Club of Rome got the "Limits to Growth" time schedule wrong - but the basic premise is sadly quite true.
That is unless we can create the mythic "sustainable economy".
Comment by novosonic on 19 December 2007:
me home alone
me up to # 4 12 0z. X 5.8%