The Price of Abundance

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–The world is booming and full of over-fed, over-credited morons. At least that’s the conclusion you’d reach walking through the airport here in Melbourne on a Sunday morning. The joint is packed. And everyone in the International terminal seems to be buying something…some beef jerky for Grandma…a watch for that nephew graduating from high school…or an expensive bottle of wine, the purchase of which instantly makes one feel both sophisticated and foolish.

–In some ways, airports are the best evidence of the abundance produced by the free market system. For less than $2,000, you can pretty much go anywhere in the world in less than 24 hours. And while you wait, you can stuff yourself with cheap calories in many different varieties and colours. You can shop for goods and toys from all over the world. And you can generally act like an idiot. More on idiots in a moment…

–We do have a serious point about airports. They are a great example of what cheap energy and cheap credit have done for the world. Air travel used to be a privilege, reserved only for the rich and the business class. But today, most airports resemble giant bus stations, filled with people getting ready for long-haul flights in designer track suits, listening to i-Pods on $300 headphones and reading $30 paperbacks.

–Cheap energy and cheap credit make goods and services more widely used and accessible than they might otherwise be, at least for a time. The dirty little secret of the airline industry is that it requires periodic bailouts from government to keep the big carriers from going bankrupt. This is a function of several factors….huge long-term capital costs in the form of airplanes….long-term contracts with multiple employee unions…fierce competition…and of course…the price of fuel.

–With Brent Crude at $125 in the futures market, you might expect more expensive jet fuel, higher ticket prices, and fewer travellers. But with the Aussie dollar bossing its way around the forex markets to higher highs, plenty of Aussies seem keen to go out and enjoy the fruits of the world’s darling currency (for the moment). Maybe there will be a day–say when oil hits $300–that airport terminals are deserted. But today isn’t that day.

–Your editor is on his way to Houston, Texas…the capital of America’s oil industry. We’re going to meet up with our old friend Byron King, editor of the U.S.-based Outstanding Investments. Byron tipped us off to a conference featuring companies involved in off-shore oil and gas exploration and production. There’s even a whole session of the conference dedicated to Australian companies and their key off-shore projects.

If you’re a reader of the Australian Wealth Gameplan, you’ll recognise where we’re going with this. The security of the world’s proven energy reserves has been thrown into doubt with the long civil war unfolding in the Arab world. This puts a premium on non-Middle East oil supplies. We’re on our way to Houston to think about it more and see how the industry sees things. It’s also always a pleasant shock to see how much cheaper the cost of living is in America compared to Australia. We’ll see if that’s still the case.

–It will also be interesting to see how many people are talking about gold…and how many people are actually buying it. Of course at north of US$1,500, gold isn’t dirt cheap anymore. Silver is the more accessible of the precious metals, which probably explains why it’s done so well lately. But don’t count out gold for being the best performer this year. Why?

Central banks are buying again. During the bogus period of low-inflation and low interest rates that Alan Greenspan called “The Great Moderation,” central banks either sold or leased their gold. Apparently they didn’t want all that money cluttering up the balance sheet or the bank vault. So they got rid of it. Australia’s own Peter Costello–though he’s not a central banker–supported the Reserve Bank of Australia’s decision to sell two-thirds of its bullion in 1997.

–Gold was $450 at the time, which is about $1,000 lower than it is today. Costello said at the time that, “Gold no longer plays a significant role in the international financial system.” And for what it’s worth, he was probably right at the time. The tech-boom had not really gone parabolic in 1997. And it wasn’t until after the Asian Crisis and the Tech Bust that Alan Greenspan began blowing a series of bubbles that raised asset values at first, but global debt levels relentlessly.

–Today, gold is being remonetised by central banks. It’s important to point out that the short period in which gold seemed not to be relevant to the financial system was, historically speaking, the exception. A 30-year boom in paper money, though, is not enough to displace thousands of years of monetary precedent. We are slowly reverting back to the mean economic conception of money. This is why the strong Aussie dollar is a bit of a boon for Aussie bullion buyers–it gives you a chance to buy gold on relative weakness.

–But don’t tell that to anyone here in the airport. From the looks of things, the MacBook Air (A$1,239) is a lot more popular than gold bullion. But you get that at airports. Airports are full of people who in a more Darwinian world would be food for lions. We mean that in the nicest way. But what do we mean? We mean that the price of abundance is self-centredness.

–Cheap money and cheap energy allow any economic system to expand at a faster rate than it would if it were constrained by naturally limited resources. This is why there are so many fat people in Australia and America who are not engaged in any productive enterprise. And most of them like to travel, apparently. Cheap money and cheap energy have the cumulative effect of widening society’s margin for error. Or at the very least, cheap money and cheap energy allow an economy to “carry” more unproductive people who produce very little and consume quite a bit.

–In a more resource-constrained world, everything must be fit for a purpose. For example, the guy in front of you at the airport who stops to dig through his bag every time the line stops, only to hold the line up as he digs around and forgets his surroundings, would probably be run over by a rhinoceros on the savannah had he been born at another time and place. And in an abstract sense, humanity would benefit from his getting bowled over. To the extent that certain behaviours or characteristics don’t promote survival, they are either dead weight or a liability.

–Of course, having packed on a few kilos over the winter, your editor is not arguing for a ruthless “survival of the not fattest” world. One of the great benefits of an economic system that produces abundance through free trade, the rule of law, sound money, low taxes and private property is that we have the resources to take care of people who cannot take care of themselves. It’s also probably true that empathy and sympathy–the ability to recognise someone’s suffering by putting yourself in their shoes–are emotions that promote the survival of the species. By caring for others, even for strangers, we ensure that somebody might someday care for us in our time of need.

–However the airport seems to be filled with people who are so self-cented that they care only for the burger in front of them and nothing for the person in the seat behind them. Time after time, maybe because people think they can get away with more around strangers, you see people say or do things to strangers they would never do or say if they knew they’d see those same strangers tomorrow. Maybe abundance creates apathy and a kind of laconic disdain for others.

–Or maybe your editor should shut up and board his flight! We’ll write to you from the oil conference in Houston. Until then!

Dan Denning
Daily Reckoning Australia

Dan Denning
Dan Denning examines the geopolitical and economic events that can affect your investments domestically. He raises the questions you need to answer, in order to survive financially in these turbulent times.
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Comments

  1. Survival of the Fittest / Fattest.

    As an underweight fella myself I recently came to the horrifying scientific realisation that my genetics predispose me to annihilation under an inconsistent food supply economy (ie. 1 Woolly Mammoth per month per tribe). Those more rotund have gene pools designed to store up the good times and survive through the lean.

    Pity we can’t eat credit cards really.

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  2. “…having packed on a few kilos over the winter, your editor is not arguing for a ruthless “survival of the not fattest” world…”

    HaHa, delightful, Dan. :D

    In the New World of Abuser Pays, you may have to fork out more for your seat(s)!~ ;)

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  3. “Of course, having packed on a few kilos over the winter”

    You mean the American winter? The Australian winter ended eight months ago.

    I liked the story though.

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  4. Dan,
    you must have had a really shocking weekend to be that ticked off with so many people at an airport

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  5. Yes, the first line certainly set the scene for self-reflection!~ :D

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  6. Highly enjoyable and entertaining.

    The one thing on Gold in Australia’s case is that we also have our reserves in the ground. And as per Ron Manner’s account of the local historical record our government can take ownership and name the price it will pay at any time of its choosing.

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  7. “you must have had a really shocking weekend to be that ticked off with so many people at an airport” – I’d be ticked off if I was looking down the barrel of a/nother 17 hour plus flight as well.

    “the local historical record our government can take ownership and name the price it will pay at any time” – Could be wrong here but I have vague recollection there was a time in Oz when the gold producers were exempt from paying tax? (If so, those days are gone forever!)

    And just a general one on encouraging consumption – I read a ‘good idea’ recently where it was suggested that money could have a use-by date put on it. But make inflation high enough and one gets the same effect anyway maybe?

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  8. “The world is booming and full of over-fed, over-credited morons”

    Onya Dan, spot-on.

    “The Baby Boomer generation has been the proverbial pig in a python working its way through the decades. By 1985, Boomers had entered the work force in full force with the entire generation between the ages of 25 and 42. It will be a great day when the python craps this pig of a generation out the other end.”

    “…….use one of their 15 credit cards at the Mall, be entertained by 600 cable TV stations, play with the latest iSomething, live in their McMansion for two years without making a mortgage payment and consume massive quantities of fast food, then any thoughts of future generations or civic duty are unnecessary.”

    http://www.marketoracle.co.uk/Article27780.html#comment104810

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  9. In Oz, gen X is an even bigger demographic by birth year than the boomers NV:

    http://www.abs.gov.au/websitedbs/d3310114.nsf/home/Population%20Pyramid%20-%20Australia

    “… use one of their 15 credit cards at the Mall, be entertained by 600 cable TV stations, play with the latest iSomething, live in their McMansion for two years without making a mortgage payment and consume massive quantities of fast food …” – Yep, that sounds a bit like Gen X in Oz to me? (Far more so than boomers anyway.) So, just maybe there is some truth in the old story that Oz is typically 10 to 15 years behind the US?

    “By 1985, Boomers had entered the work force in full force with the entire generation between the ages of 25 and 42” – Doesn’t that make Julia Gillard who was born in 1961 a gen X ??? If so, everything will obviously be all better soon! :)

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  10. glass stones throw houses.

    I’d be surprised if this gets through.

    BP – I’m starting to agree with you. All of a sudden after my snake-oil comments I am back on “Your comment is awaiting moderation”

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  11. Sometimes I’ve been lucky to get that, Prozak.*

    Occasionally, my stuff appears to be erased seconds
    after I see it _actually posted._

    A clever inoffensive witticism related to Osama Bin Laden, in response to
    one of Bill’s recent articles, disappeared before my very eyes!
    I laugh it off these daze… . :D

    * About 3% of my content vaporises into the ether.
    Surprisingly low all things considered. ;)

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  12. Well that’s cause your posts ain’t osamas all the others BP. They’s all bin laden with love for property ;)

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  13. None of our brilliant posts go up in lights on the side now either. Boy oh boy

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  14. Nevermind Lachlan; I enjoyed your comment re ‘osamas’ and ‘bin laden’ regardless. :)

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  15. Phew. Thanks Ned, it’s my needy ego ya know
    Seems to be less jousting in here now days. Whether that was the intention I dunno? I just came home one day and found it that way..no one was saying anything. Prozak and I started having a gold debate there a few weeks ago but the enthusiasm waned with the age of the thread.
    Smiles back at ya anyhow :) …lifes too short ya know

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  16. Lachlan: “Well that’s cause your posts ain’t osamas all the others BP. They’s all bin laden with love for property ;) ”

    HaHa…!~ Just saw this. Nice one, Lachlan.

    Funnily enough, both my most recently KO’d posts were resurrected OK
    soon after I made the comment above. Go figure… . :D

    One of them only reappeared after I posted a link irrefutably proving a claim I’d made in respect to NF’s silly prediction re $9K pa additional costs for landlords in 2011.

    Every dark cloud has a silver lining, mate!~ ;)

    Reply

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