The world’s sub-prime credit squeeze came from nowhere, a fact that will please one seasoned observer of the way economies work, Don Stammer.
A one-time Reserve Bank and Deutsche Bank economist, Dr Stammer maintains that every year there is an x-factor that throws economic models in the bin.
Well, asks Briefcase, if sub-prime was the 2007 x-factor, what can we expect in 2008?
One answer is we don’t know, otherwise it wouldn’t be an x-factor.
Another, more courageous answer, is that we can already see the next event that will trip up global economic growth – it’s just that we don’t want to acknowledge it’s existence because there’s no obvious solution.
Food, or a shortage of certain dietary staples, is what will trip up the world in 2008 (or 2009). Food and the clash with countries which prefer to convert food into fuel.
The biofuels industry is the flash point staring us in the face as next year’s x-factor. The problem is, biofuels seem to be such a good idea that we all tend to believe in them.
• Governments like biofuels because they supplement scarce transport fuel.
• Consumers don’t mind biofuels because they keep their cars running.
• Farmers love biofuels because they have created an alternative market for their crops.
• Environmentalists like biofuels because they represent a new liquid fuel source and delay the inevitable spread of nuclear power.
But, biofuels are a potentially massive economic and political problem for the world. Let Briefcase explain.
In Mexico earlier this year, there were riots over the price of tortillas, those flour or corn based flat breads that are a staple of Mexican food.
In China last week, the rising price of noodles triggered a crackdown by the Chinese government, which reckons that certain noodle makers are conspiring to form a price alliance.
Officially, the noodle attack was part of a government push to hold down inflation, which threatens to hurt the country’s growth which, somewhat curiously, is also being hurt by rising wages because of a shortage of skilled workers – yes, even in China there is a skills shortage.
Sticking to the world of noodles, perhaps there is a secret noodle price-fixing mafia at work, just as perhaps Mexicans are addicted to cheap tortillas.
The reality is that the price of wheat and corn has hit record highs because we have invented a major new use for two of the world’s most basic (and important) forms of food.
In China, where the government currently finds it convenient to blame noodle makers, the facts are that: the price of palm oil (a key ingredient) has risen by 70 per cent over the past 12 months; and the price of wheat has doubled because of biofuels demand.
In time, even the government will be forced to admit that biofuels are the key issue, not greedy factory owners,
Now comes the crunch. What will happen next year when families in Mexico and China can’t afford to put food on their tables?
More riots? More official crackdowns? Or demands from governments with hungry populations that the US, and the rest of the Western world, stop burning food crops in gas-guzzling four-wheel drives.
The food versus fuel debate has just begun, and while Australian, Canadian, and US farmers are rejoicing in sky-high prices for their crops, people in other countries are starting to suffer because a large proportion of what should be food is being converted into fuel.
Governments do not like their people going hungry, because hungry people have a habit of overthrowing governments.
The seeds of 2008’s x-factor have been sown.
If noodles and tortillas don’t do it for you, how about China’s environment as a candidate for the game-changing event of 2008?
The Olympics, in less than a year, is already shaping as a flashpoint, with several countries delaying the arrival of their athletes because the air of Beijing is so polluted that breathing is a health hazard.
But further to the south there is an equally appalling example of how China’s high-speed economic growth has fouled its environment.
The Three Gorges Dam, hailed as a modern wonder of the world, is in trouble. Not the walls of the dam itself, but further upstream, where sections of the sides of the dam are starting to collapse because of the artificially raised water level.
Towns are being threatened by the possibility of landslides, and the water in the dam is being threatened with silting.
Briefcase suspects that the Chinese government will keep a lid on its environmental problems until after the Olympics. Communist governments love a good showpiece.
But, once the world has gone home, or once the world has seen what a mess China has become because of unbridled expansion into environmentally sensitive areas, then a classic Chinese-style crackdown can be expected.
And, just as in the mess over food versus fuel, there are no easy solutions – just problems.
On the one hand, China must continue to expand to create jobs for its 1.2 billion people. On the other, those same people are being forced to live in a heavily polluted environment that is slowly killing them.
On the question of a double-edged sword, which is what food versus fuel is all about, here’s another double-edged example of the capitalist world borrowing an old communist trick.
A decade, and more, ago it was a standing joke that if you saw a country named as a “people’s democratic republic” then you knew that it wasn’t.
East Germany, or the GDR (German Democratic Republic) was the classic. Laos is a lingering example – Lao PDR (Lao People’s Democratic Republic).
Well, in the capitalist world, as the tentacles of the sub-prime credit squeeze wind their way through the entire banking system, there is an equally bizarre name game.
Investment vehicles such as Fortress Investments have proved to be much less than a fortress, just as the Absolute Capital fund has also failed to live up to its name.
Then there is Yield Alpha Fund, which isn’t yielding anything except trouble, and Basis Capital, which is seeking bankruptcy protection for the Yield Alpha fund.
It’s the names that most amuse Briefcase. Fortress, Absolute, Basis, Alpha – they’re all designed to assure investors that they are rock solid, which they’re not, just as a country calling itself democratic invariably isn’t.
“The first myth of management is that it exists. The second myth of management is that success equals skill.” Robert Heller