It seems like every day we get some news of a new bank failure, or takeover or some revelation that reminds us that all is not well. And the markets keep sinking...

The U.S banking system lies in shambles, like the U.S. fleet at Pearl Harbor in '41. This is no garden-variety downturn, no little dip in the road to higher prices.

I've given a lot of thought to what might be a good spot to hide out - and even prosper - during this crisis. Precious metals immediately come to mind: Owning some gold or silver is a comforting thought. But what else?

I keep coming back to something really basic: farmland.

Recently, I spent a few days in an old chateau in the countryside of Normandy, France. There is a tiny town about a mile from the chateau, but otherwise, it is a picture of things pastoral - green meadows... cows cropping grass and taking in the sun... a Jacobin farmhouse... miles of farmland all around... Since I've been writing and talking about farmland, I had a deeper appreciation for just how useful such land is.

Really, I can think of no better asset to own during any kind of financial crisis. In some ways, farmland is even better than gold or silver. At least farmland is an intrinsically useful thing. It provides a tangible yield in the form of good things from the earth. We all have to eat. As consumers trim their sails, they'll give up a lot before they give up their calorie intake. In fact, worldwide, the per capita calorie intake is likely to rise, as I'll get into shortly.

The problem with farmland is that it's not an easy thing to invest in as an individual investor. But I've found a fund that invests directly in farmland in Canada. The name of firm running these funds is Agcapita, based in Calgary, Alberta.

I'll get to the details below, but first, I want to flesh out this idea of investing in farmland, specifically Canadian farmland. I think you'll be surprised to learn how cheap it is and how well it's performed in the past...

First, we're essentially talking about three provinces in Canada's grain belt - Alberta makes up the western bookend, Manitoba the eastern one and Saskatchewan is between the two. While Canadian farmland in general looks cheap, it's Saskatchewan that really stands out.

Hard to believe that Canadian farmland is so much cheaper than even Brazil's or Argentina's. It's not as if yields are uncompetitive. Canada's wheat yield (in metric tons per acre) is about 1.0, which compares with 0.6 in Brazil and 1.0 in Argentina. The infrastructure in Western Canada is also very good. The whole economy there is geared around agriculture. There are miles of railroad tracks and grain elevators across the prairies.

So why the price disparity? Here we get to a quirky driver unique to these Canadian markets. For the longest time, there were all kinds of restrictions on who could own farmland. In the last several years, these restrictions have gone away.

For instance, in 2003, Saskatchewan finally allowed unlimited ownership by all Canadians. At one time, you had to be a resident of Saskatchewan to own farmland. No longer. Similar restrictions existed in the other markets. The governments loosened these restrictions or have done away with them altogether.

No surprise, then, that farmland prices started to tick up noticeably as these restrictions fell away.

Suddenly, you've got a much larger potential pool of buyers in a market in which agricultural assets are still in demand. In Saskatchewan, in particular, after years of going nowhere to down, prices immediately began increasing year over year after 2003. In 2007, prices increased 11%!

I've written to you several times before about the boom in agricultural markets. The dynamics of this change are pretty simple, though we might lose sight of them during these crazy markets. As the wand of prosperity has touched China and India and the rest of the emerging markets, so have the diets of the people changed. They tend to eat better, which puts pressures on the grain markets.

So what we see is grain inventories falling to lows not seen in more than 40 years. So at some point, we should expect to see rising prices for grains - and for the farmland that produces them.

Meanwhile, the amount of arable land per person is falling. I wrote about this in my newsletter Capital & Crisis ("The Topsoil Crisis"). The gist of it is that we are losing quality topsoil faster than we are replacing it.

There is a growing scarcity of good farmland. And you see countries that import grains - such as Saudi Arabia and China and South Korea - trying to lock down farmland.

Agcapita points out that the per capita amount of arable land on the planet has dropped sharply over the last 50 years, and is likely to continue dropping. From 2.8 acres per person in 1960, the amount of arable land has dropped to slightly more than one acre today.

Now, we don't need 2.8 acres per person anymore, because of advances in agriculture over time. But gains in yield per acre are slowing. Over the last 40 years, we've increased the yield per acre by 2.1% per year. But the pace of those gains is slowing. Since 2000, the increase in yields per acre has averaged less than 1% per year.

We may see new innovations in seeds or other technology that we can scarcely imagine now. But it also seems that any solution would take some time and money to implement.

Meanwhile, the world's agriculture markets just get tighter and tighter...

Demand is strong. In 1974, cereal crop consumption was about 1,500 bushels per second. Today, it's 2,600 bushels per second. So we have a double effect here. We have increasing population and increasing consumption per person. Agcapita estimates that cereal crop consumption will double again over the next 20 years. The amount of pressure on the global food supply network is enormous. This, again, is a reflection of people eating better and eating more meat - which requires exponentially more grains to produce.

There is another wrinkle to the story: Most every oil-consuming country has put in place biofuel targets that will kick in over the next five years. These places include the U.S., the EU, Canada, Japan, Brazil, India and China. To meet their targets, according to work by Agcapita, we'll have to commit some 240 million acres to biofuel production. That represents about 50% of the arable land in North America and about 6% of all the arable land in the world.

As you can see, the biofuel craze puts further pressures on farmland demand.

So that's where we are in a nutshell. For these reasons, I'm bullish on agriculture assets in general, and farmland in particular.

The other appealing aspect of farmland is how well it did in the inflationary environment of the 1970s. I think we're headed to another 1970s-style inflation. Right now, we're in the midst of a (temporary) deflation wave sweeping over commodity-land. But the dollar, as we know, is not hard to reproduce.

Governments, particularly in times of crisis - like now - have a tendency to flood the system with money in an attempt to "goose" the economy. Mostly, such efforts have succeeded in destroying the value of the currency in question.

Anyway, if you believe that we will continue to feel the bane of inflation, then farmland's performance in the 1970s will give you some comfort.

So you see that while you lost half of your money in the S&P 500, your farmland kept its value nicely. Again, I think that's rooted in the fact that farmland is intrinsically useful. It produces useful and needed things.

Now imagine what farmland might do in today's climate, in which you have not only the likely prospect of inflation, but also a tightening supply of farmland and rising demand for crops. I imagine you'll do quite a bit better than the 1970s.

If you are interested in investing in farmland, contact Stephen Johnston directly at sjohnston@agcapita.com and tell him I sent you. Johnston's funds invest in farmland. As stated simply on Agcapita's Web site: "Agcapita provides investors with the operating and capital appreciation returns from owning Canadian farmland." Jim Rogers, of Investment Biker fame, has recently agreed to join Agcapita's advisory board.

At a recent event in Toronto, Rogers suggested to the assembled investment bankers that they "sell their houses in the city, move to Saskatchewan, buy tractors and farmland and start farming."

It's a true special situation, and it's not for everybody, but maybe it's for you.

Check in tomorrow for the third and final installment on investing in the North American agriculture boom...And this time, we'll suggest a publicly traded stock.

Chris Mayer
for The Daily Reckoning Australia

• Are Farm Prices Destined to Rise as More People Compete for Food?
• Topsoil Crisis: The Race to Secure Fertile Farmland
• Top Resource Prices in 2008: Food, Water, Energy & Metal
• Australian Dairy Prices Up Due to Grain Prices
• Americans Are Hoarding Food

Consider the statistics (12/31/07 vs. 12/31/08):

Housing - down 18% nationally, by the Case Shiller index, and 30% or more in most major metropolitan areas.

Domestic stocks? Nope. The Dow Jones Industrial Average - down 33%; Dow Utilities - down 30%; Dow Transports - down 21%. S&P 500 - down 38%. NASDAQ - down 40%. And if you were unfortunate enough to have invested in a financial-sector ETF, you lost at least 55%.

Foreign stocks? The Vanguard Emerging Markets Fund, a typical example, came in at minus 55%.

Bonds didn't fare well, either, with the yield on 10-year Treasuries dropping 42%, and 30-year T-Bonds off 38%.

Energy. Uh-oh. Crude oil - down 59%. Natural gas - down 37%.

Industrial metals took a whacking, with copper down 55%, nickel 56%, and aluminum 37%.

Food did a little better than most, which isn't saying a whole lot. Corn - down 17%; wheat - down 24%; live cattle - down 15%.

Enough. You get the idea. Every asset was mired firmly in the red in 2008, right?

Actually, no. The single exception was gold, which was up 5.6%. A modest gain in most times, but a phenomenal performance for a year where everything else tanked.

And if you managed to invest something other than U.S. dollars in the metal, you did even better. Gold rose 12% in euros, 32% in Canadian or Australian dollars, and a whopping 44% in British pounds.

Nor is this an isolated phenomenon. In 2008, gold posted its eighth straight yearly advance. Since the beginning of 2001, it has averaged a better than 16% annual gain vs. the U.S. dollar, 11% vs. the euro, and 17% vs. sterling.

Your financial advisor likely tells you to invest in the stock market and be patient, because over the long haul stocks will yield an average yearly return of 9-10%. Well, maybe so. But it sure depends on how generous your time frame is.

Over the past eight years, gold has added 215% (in U.S. dollars). During the same period, the S&P 500 lost 22%. The DJIA? Down 11%. In order to show a profit with a simple buy-and-hold strategy (ignoring all rallies and dips), you'd have to go back to early 1999 for the Dow, and 1997 for the S&P!

Where was your money in 2008? Or '07? Or...?

If you're a BIG GOLD subscriber, a significant portion of your portfolio was in physical gold and paper proxies tied to the gold price.

Yes, the gold-producing companies that we follow in BIG GOLD did poorly in 2008, as the frenzied stock sell-off spared neither market nor sector, across the globe. But we held on through the storm, and the miners have rebounded sharply in the past month. We expect that they will be stellar performers in 2009, as the coming inflation that's baked into the American economic cake begins to break out.

And despite the turmoil of '08, our readers always had something to cushion the blow. Gold. We advised buying it and taking it into their physical possession. When a severe shortage of coins and small bullion bars developed in the second half of the year and premiums skyrocketed, we showed subscribers where to buy at the lowest possible markup. For those with sufficient means, we provided detailed instructions for purchasing 100-oz. gold bars on the New York Comex.

2008 was a rough year, for everyone. But it's gone, and if you held gold and its proxies, you did better than most.

Doug Hornig
for The Daily Reckoning Australia

• Should You Put Gold Into Your IRA?
• The Price of Gold is Low – But It Won’t Stay There Forever!
• Price of Gold Today is About Where it Was 26 Years Ago
• S&P 500 Index Total Return Was Actually Negative
• Bear Market to Last at Least Five Years

This morning, oil is over $120...and the price of gold is pushing back up to $875.

That's good news, say the headlines. Oil is up because people think the United States will avoid a recession. "Oil tops $120 a barrel as U.S. optimism rises," says a headline in the Financial Times. And many think the Hillary/McCain summer gas tax holiday concept may be implemented - which would encourage people to use more gasoline!

John...Hillary...good thinking. Get people out on the road...using more fuel. Great idea. Even Thomas L. Friedman can see what vote-pandering imbeciles you are (more below...). Need we say more?

But say more we will...because, on page 1 of the Financial Times is a photo of a mob in Africa... What has stirred them to riot? The latest election result? Someone dissing their religion? No, high food prices!

It is the worst of times for people with big appetites and little money. Many of them will go hungry. And an empty belly is a dangerous thing. First, people develop a "lean and hungry look." Then, they stab you in back.

Ah yes...predictably...inevitably...the world's intellectuals, economists, yahoos, and pandering politicians are having trouble following the trail. They ought to look down at their feet. They would see the breadcrumbs...from the door of the Fed's headquarters in New York...through the deep woods of subprime and leveraged derivatives...and right up the hill of soaring commodity and gold prices. That's right...the Fed is trying to keep the money and credit moving. But it is going where it wasn't supposed to go - into commodities, food, oil and gold. Still, the experts can't see it. Instead, they read the polls, watch the TV, and come to the wrong conclusion. What is the cause of the rise in food prices, they ask? Speculators!

Another lead story today: "India targets food futures." India imagines that food prices are being driven up by greedy hedge fund managers. It is considering a "blanket ban on food futures trading," says the FT.

Why not? Nothing is too absurd or too counterproductive to escape the notice of the world improvers. Just look at John McCain's big idea - a "league of democracies." More about that coming up soon too... For now, let's stick with the financial news...

The big story seems to be the idea that, as our chief financial researcher in London, Theo Casey, put it: "doom and gloom has been overplayed."

Since the drama of Bear Stearns, no other major financial firm has failed. Quick action by the Fed and other central banks seems to have saved the world.

"Has the worst of the financial crisis passed?" asked Le Monde yesterday.

"Yes," said the world's richest man over the weekend. Warren Buffett told his shareholders that the "worst of the credit crisis on Wall Street is over."

Maybe he's right. But let's look at the numbers. In 2006, alone, nearly $7 trillion of new debt was issued worldwide. Maybe double that amount in the entire five-year period - 2002-2007. So far, says Bloomberg, since the beginning of 2007, less than $200 billion has been written off. You can do the math yourself, but Fred Y. Jones guesses that total losses so far probably don't exceed 1% of the debt sold in the last 5 years.

So far, so good, in other words. This is the best of times. The Fed has cut rates 7 times. And it now takes on its balance sheet - as collateral for loans - the very credits that are likely to go bad...credit card debt, student debt, and even car loans. It has only 200 basis points left, before it gets to zero, and there are approximately $10 trillion (just guessing) worth of credits that still could go bad. If just 5% of them went bust...the loss would be $500 billion. Maybe the doom and gloom is underplayed. Moving bad debt from the people who deserve it to the Bank of All the Americans - the Fed - doesn't turn the bad credits into good ones. It merely allows everyone to keep doing what they've been doing...that is, to keep pretending that everything is all right.

But everything isn't all right. Far from it. And budding out in our brain is a little idea about why the situation can't be fixed...and why a major breakdown may be on its way...more to come...about how democracy and modern, state-guided capitalism really work.

Interestingly, Buffett is famously pro-America. You bet against American business and you will go broke, he says. But over the last 10 years, betting against American business was the best thing you could do. The dollar sank...and foreign markets - particularly emerging markets - soared.

Buffett hasn't missed the point. He paid $4 billion for an Israel-based metalworking company in 2006. And now he's coming to Europe to scout for opportunities. He'll no doubt want to stop by The Daily Reckoning headquarters in London for our advice.

Warren, look for the building with the golden balls. We're waiting for you.

Bill Bonner
The Daily Reckoning Australia

• Warren Buffett is Buying Four Percent of Goldman Sachs
• Gold is Still the Refuge of Choice for Savvy Investors
• Gold $2,000… Anything Could Happen
• The Fed is Losing Control of Inflation
• Are Farm Prices Destined to Rise as More People Compete for Food?

"The World Bank met on Sunday faced with a mounting food price crisis that has sparked deadly unrest in developing countries, underscoring the urgency of fighting hunger and poverty," reports Channel News Asia.

How urgent, you ask? The Prime Minister of Haiti was sent packing this weekend by crowds protesting soaring food and fuel prices. We don't even know who the man is but reckon he won't be the last public official to be ridden out of town on a rail before this current crisis is over (and it may not be any time soon).

As usual, it's the people at the margin (whether lending or with food) that are affected first when surplus turns to scarcity. Despite all the daily signs of abundance here in Australia, let us not forget that there are about four and half billion people on the planet who have little margin for error in their daily lives. If food prices go up, many of these people go hungry.

World Bank President Robert Zoellick, doing his best impersonation of Franklin Delano Roosevelt, wants a "new deal" for global food programs. He's asked richer nations to contribute US$500 million immediately to help get food to poorer nations.

IMF President Dominique Strauss-Kahn was less pragmatic but more rhetorical. Wrapping up his organisation's annual spring meeting, he said that, "Food prices, if they go on like they are doing today ... the consequences will be terrible…Hundreds of thousands of people will be starving…As we know, learning from the past, those kinds of questions sometimes end in war."

People often talk about resource wars being a common feature of the coming century (or decade). But it's usually oil and energy they're talking about, not rice and wheat. Food is fuel for the body (we've been watching the Biggest Loser). If you don't have access to cheap calories, what good is cheap fuel?

It's our contention here at the Daily Reckoning that both food and fuel are getting more expensive. The scary thought is that artificially low interest rates and cheap energy have, for many years now, sent bogus signals to the world about how much and how fast the population can grow. Agricultural abundance is only a very recent (and perhaps temporary) historical phenomenon. It's no coincidence that it occurred alongside the energy boom from cheap oil.

Not that it's any consolation to starving people stranded in long petrol lines, but businesses in the agricultural sector are going to boom (provided they aren't nationalised). Farm equipment, fertilizer, and large producers should all see earnings rise this year. And next year. And the year after that.

The second "f" crisis is in finance. It's been with us so long now it doesn't seem like it's new. But some people are slow on the uptake. The nerve endings of large institutions like the IMF and World Bank are few and far removed from the tiny central brains that direct the movements of these mammoths. Brontosaurus Banks.

Like a bunch of dinosaurs standing under a meteor shower, the G-7 meeting this weekend produced lots of talk and no action. The ministers agreed that concrete steps need to be taken in the global financial system to improve transparency and the way the banks value certain assets. The G-7 statement also paid lip service to issue of credit ratings and how to make sure in the future that garbage debt doesn't get a Triple A investment grade rating.

Here's the trouble though…American policymakers are worried about recession and plunging house values. Everyone else-especially the increasingly sweaty Wayne Swan-is worried about inflation. Because of the different concerns, no one can agree on any policy solutions.

The conclusion? There is no one solution to the credit crisis. That is bad news for people who think of the economy like a machine. It's not just a matter of changing the oil or checking the fuel pump. The engine is sputtering, the drive train is wrecked, the tires are flat, and someone seems to have cut the brake lines. There are no air bags.

As they say in the used car business, it's not the years, it's the miles. You wonder if this globalisation jalopy is going to make it.

As for the dollar, Europe would like it to be stronger in order to revive its exports. Dollar-pegging countries in the Persian Gulf would like the dollar to be stronger too, so they don't import inflation and the political instability that goes with it. Even Japan and China would like the dollar to be stronger. Dollar strength maintains the basic economic model of the last 50 years: manufacture cheap and sell to America.

But the dollar is not strong. And the things that would make it stronger-a lower trade deficit, higher interest rates, lower government spending-are not going to happen. In fact, the opposite will happen. While officials talk up a "strong dollar," everything they actually do weakens the dollar.

This is why the day-to-day movements in the dollar index and in gold don't tell you much. The most important fact about the gold price is that that the official policy of the U.S. government is to cheapen its currency. Rates are being lowered. The government is spending money. It's also giving away money, hoping Americans can spend the country out of recession.

Do you know of any person or any nation that ever spent its way to prosperity? Neither do we.

The fuel crisis hasn't reached the same acute stage as global food markets. But in time, it will. There were two developments in the clean coal front this that caught our eye this week. First, "Australia is now investing $63 million in developing clean-coal technology in China, our biggest coal buyer," according to Dennis Shanahan in today's Australian.

Making the last stop in his first world tour, Aussie PM Kevin Rudd told reporters made the case for an Australian Chinese partnership on coal, "The fact that Australia is the world's largest coal-exporting country, and that China is the world's largest coal-consuming country, presents both of us with a fundamental responsibility to act in this area of critical technology," he said.

You say "responsibility" we say "opportunity." Now that we are moving into a world of energy "haves" and "have nots," coal is a realistic source of transportation fuels for oil-poor, coal-rich nations. What coal-rich nations lack is the technology and capital to turn coal into liquid transportation fuel. Australia has several public companies that can help them do it. That's the opportunity.

The trouble with above ground coal-to-liquids (CTL) technology is that it produces nearly double the carbon dioxide emissions that you get from burning coal to make electricity. In the U.S., green politicians have actually prohibited U.S. government agencies from buying coal-based fuel with tax payer money.

The U.S. has plenty of coal. The Air Force would like private enterprise to turn that coal into fuel for U.S. planes. But California Congressman Henry Waxman introduced a provision into last year's U.S. Energy bill (section 526) that prohibits government agencies from buying fuels from "unconventional" sources.

Those "unconventional" sources are oil shale (the Pieceance Basin in Colorado), coal (the Powder River Basin Wyoming), and heavy oil sands (found in Alberta in Canada). Two U.S. Congressman are looking to repeal Section 526 from last year's U.S. Energy Bill and unlock the future fuel from those unconventional hydrocarbons.

Will the section be repealed? It depends on what you think about global warming. We won't weigh in here. Our main interest is in how governments respond to the dueling crisis of Peak Oil and Global warming.

The old "real politik" answer is to use your domestic resources to achieve energy security. This way you don't exchange your currency reserves for oil and outsource your supply of a vital industrial commodity to foreign interests. If you have lots of coal but no oil, you turn your coal into fuel.

But hey, if the planet is warming and coal is the culprit, burning more coal doesn't exactly make things better, does it? What do you do? Go nuclear? Conserve? Go renewable?

All of these options are on the economic table and an intelligent and prompt response is becoming increasingly urgent. You can bet that the government will do something, and probably the wrong thing. Meanwhile, our money is on the firms doing something with coal, wind, waves, and solar.

These three crises-food, fuel, and finance-are a formidable triply whammy for the global economy. It's bad news for the indexes, which already have plenty of bad economic news to consider. But for a certain class of agricultural and alternative energy firms, this could be the bull market of a lifetime.

Dan Denning
The Daily Reckoning Australia

• Technology Is Pushing Down Farm Prices
• Rising Coal Prices to Increase Electric Bills in Australia
• Thorium as a Nuclear Fuel
• Increased Oil Production Won’t Solve the Energy Crisis
• Are Farm Prices Destined to Rise as More People Compete for Food?

But first, congratulations to Andrew Forrest! Ever since Lang Hancock and other pioneers opened up the Pilbara to the world in the 1950s, the region has been dominated by BHP Billiton (ASX: BHP) and Rio Tinto (ASX: RIO). Those two quarreling love birds have thus far owned all the rail and port infrastructure to export Australia's red iron ore to China, Japan, and Korea.

The duopoly has become a triopoly as of this weekend. Fortescue Metals (ASX: FMG) completed the rail line between its Cloudbreak mine and its new port facilities on the coast. Fortescue still hasn't actually shipped any iron ore yet. But the company can now get the iron ore from the mine to the sea. Its first shipment is scheduled for next month.

Don't expect Fortescue to produce iron ore in the same volume as the big boys. But then, it doesn't have to. The iron ore market has changed at the margin. Smaller steel makers in Asia are more than willing to enter into contract agreements with smaller ore producers in Australia.

This is a key feature (and opportunity) in the resource boom: the expansion of consumers has led to an expansion in producers. The marginal producers (some of them anyway) are now economically viable. The whole market is bigger, giving retail investors more to choose from in the share market.

Three billion people in the world eat rice as a staple of their daily diet. No wonder there are rice riots. Javier Blas of the Financial Times reports that, "Rice prices rose more than 10 per cent yesterday to a record high as African countries joined south-east Asian importers in the race to head off social unrest by securing supplies from the handful of exporters still selling the grain in the international market."

Rice farmers are sitting on huge profits. It's not complicated. There are more buyers than sellers. And the sellers are selling something pretty valuable: daily calories. This isn't your garden variety shortage in video game consoles or iPhones.

"The rise in prices - 50 per cent in two weeks - threatens upheaval and has resulted in riots and soldiers overseeing supplies in some emerging countries... The increase also risks stoking further inflation in emerging countries, which have been suffering the impact of record oil prices and the rise in price of other agricultural commodities - including wheat, maize and vegetable oil - in the past year."

"Bankruptcy filings jump 30%," reports the Los Angeles times. "More than 90,000 bankruptcy filings were made in March, the highest since insolvency laws became more restrictive in October 2005," the Times reports. "California led the nation with a 42% increase in bankruptcy filings at an annual pace in the first quarter, according to Jupiter ESources."

California is always at the leading edge of American economic trends. This is not a good sign. The bankruptcy laws passed in 2005 were a big fat wet legislative kiss to the credit card companies. They make it very hard for Americans to declare bankruptcy. The fact that so many have anyway tells you how grim the situation is.

Meanwhile, the big wigs at the International Monetary Fund put out the bat signal over the weekend, arguing for more intervention in the credit markets. Why is that? Could it be that the U.S. Federal Reserve's generous lending at the discount window to investment banks has failed to improve the quality of hundreds of billions if bad debt still sitting on investment bank and bank balance sheets?

"I really think that the need for public intervention is becoming more evident," says International Monetary Fund managing director Dominique Strauss-Kahn. He says that a "third line of defence" is necessary to reinforce monetary and fiscal policy. Those lines are not holding.

Inflation batters them in the food and energy markets while deflation in financial prices continues its relentless assault. "Effort has to be made on loan restructuring. With respect to the banks, if capital buffers cannot be repaired quickly enough by the private sector, use of public money can be examined."

Hmmn. Well, good luck with that. It is quite obvious that the post-war institutions designed to facilitate the expansion of global markets (the International Monetary Fund, the World Bank, the dollar standard itself) are under heavy stress (this makes sense when you realise the main tool of global expansion is credit... and we now have a bear market in credit). It is not at all obvious what will replace these institutions of expansion, or if anything can.

That's a scary but perfectly reasonable thought. Think of the global economy as a system of systems. Food, energy, credit, transportation, information... all these systems are interconnected and interdependent. Energy is what keeps them all connected.

As the price of energy grows, the connections become stressed and frayed. A world with more expensive energy is a less connected world. When you stop throwing cheap energy at an economy, its total growth slows down and the real growth becomes more isolated and selective.

Reserve Bank board member Roger Corbett warned Australians about the problem least week. He said that energy prices may go up by a factor of ten. "The impact of that energy becoming scarcer and the marketplace costing the real cost into energy, is going to create certainly an upward pressure on the cost of energy."

There is an embedded energy cost in everything you use (or eat) in the world. When goods start reflecting that increased cost of energy, they will get more expensive. "The only way to curb it and to fairly balance it is really the marketplace and the marketplace will cost energy much (higher). I don't think it's beyond the realms of possibility that it could go to five times the current level or even more. I think we're looking at the five to 10-year timeframe."

Is this good news for anyone? It's certainly not goods news for consumers. The oil producers? Here's a newsflash: the big, greedy, publicly traded oil companies don't control most of the world's oil reserves (making it hard for share market investors to profit from the increase in the underlying price.) National oil companies in Mexico, Venezuela, Russia, and the Middle East own the world's oil reserves. You can't buy a share in Vladimir Putin, Inc.

This is why we reckon the market for oil and gas alternatives is potentially lucrative. You can conserve your energy use. You can improve the efficiency of energy using appliances. But ultimately, the world is going to have to diversify its sources of energy, or face much leaner times ahead due to higher energy prices.

Yet lean times may be head even if we do get an explosion in energy innovation. For two hundred years food and energy prices have tended to go down. That's a pretty powerful long-term trend. But the world's population started the 20th century and about one and a half billion. It finished the century at six billion. Since 1961 alone the population has doubled.

Huge increases in the productivity of farmland (the Green Revolution) and the relative stability of a fiat money global dollar standard, plus a healthy supply of cheap energy, made this global expansion possible. Now, money and energy are both becoming more expensive. The shockwaves resulting from their increased cost are spreading. And one of the first sectors to get hit (as the rice story above demonstrates) is agriculture.

"The UN International Fund for Agriculture predicts food riots will become common on the world scene for at least a year. The World Bank says 33 countries face unrest from higher prices in both food and energy," reports today's Christian Science Monitor. "Egypt's government said police arrested more than 500 people across the country as it suppressed a one-day national strike to protest rising food prices," reports Bloomberg.

Last week, three small regional airlines in the United States went bankrupt and ceased operations. They all cited the rising cost of jet fuel as the main reason their economic model went belly up. An energy scarce world is a less mobile world, quite literally.

The Australian Petroleum Production and Exploration Association (APPEA) sees all this and says, "explore!" "Australia's oil explorers need to widen their search for discoveries in so-called frontier areas to avoid a $28 billion petroleum trade deficit within a decade," according to Angela Macdonald-Smith at Bloomberg.

"Australia has 50 sedimentary basins, of which just 12 are producing oil and gas, pointing to potential for drilling in little-explored areas," says APPEA CEO Belinda Robinson. If Australia doesn't find more domestic oil, it will be importing 80 of its refined petroleum products by 2015, according to Resources and Energy Minister Martin Ferguson.

And while we're on the subject of how complex civilisations collapse, let us pay tribute to the late great Charlton Heston. You may remember him as Moses, or Judah Ben-Hur (the chariot race in the Coliseum is one of the great scenes in film). But our favourite Heston film is easily Planet of the Apes.

Is there a better ending scene in the movies? Note, if you haven't seen the movie, don't let us spoil it here. If you have, read on. Heston's character, astronaut George Taylor, has escaped from his monkey captors on horseback with a gorgeous brunette.

It's a little like Adam and Even on horseback going up the beach into the future. But Taylor finds out that this planet is not some bright new future, but an awful past. Round the corner of the coast they run into a half buried Statue of Liberty.

"You maniacs," Taylor yells. "You blew it up. You finally did it. Damn you. Damn you all to hell," he yells.

That was in 1968, when it seemed like the world would end in nuclear holocaust. It didn't (thank goodness). But has anyone planned for a world that just kept growing? And is that lack of planning now showing up in higher food and energy prices? It sure looks like it. Now, we wonder what's next...

Dan Denning
The Daily Reckoning Australia

• An Abundance of Paper Money is Causing Food Prices to Soar
• The Global Financial System is Falling Apart and the World Economy is Slowing Down
• Energy Prices Are Going Higher
• Australian Dairy Prices Up Due to Grain Prices
• Soaring Food Prices Force the Poor to Literally Eat Mud