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.
Markets and Money