World approaching historic crossroad

05/11/2008 - 22:00

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WE do indeed live in a land of confusion. As the dust begins to settle, through the smoke and destruction of the great credit crunch of 2007/08, we can begin to observe the debris that unfettered and under-regulated consumer capitalism has wrought on th

World approaching historic crossroad



. WE do indeed live in a land of confusion.

As the dust begins to settle, through the smoke and destruction of the great credit crunch of 2007/08, we can begin to observe the debris that unfettered and under-regulated consumer capitalism has wrought on the world's economies.Briefcase believes that the world is approaching an historic crossroad in its history, involving a confluence of significant influences on human advancement.

Influences which Briefcase believes will change our world include peak oil production, which will see much higher prices for energy into the future once this current economic slowdown passes.

Higher oil prices, resulting from declining oil production post 2012 or even earlier, matched with rising demand from an exploding global population will lift the cost of food, taking a reasonable diet out of the reach of a large chunk of the 9 billion odd people who will be seeking food and shelter by the middle of this century.

In my lifetime, global population has almost tripled! It took all of human history to reach 2.2 billion people and in my lifetime, it has grown to nearly 6.8 billion. That is out of control in anyone's language and this population pressure, along with the accompanying competition for scarce resources, has already begun to cause massive instability globally.

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The graph shows US oil production peaked in 1970.Although there was a slight rise from the mid 1970s through into the mid 1980s as Alaskan oil hit the market, a downward trend is inevitable. The US now produces about half the number of barrels it delivered 38 years ago while its thirst remains unquenched.

This pattern of production is now being repeated in every oilfield, province and country and, ultimately, the world.

Many people say, relax, technology will come to our rescue as it always has. Well Briefcase is not so sure that keeping on with business as usual in the hope that some miracle technology will evolve in a timely way, is a sound policy to counter the potential problem. Tell that one to the folks from Easter Island!

Other major colliding influences include an increasing pace of destruction of our natural environment. This major and relatively new factor has now begun to reduce the quality of life for many people and is most likely to ultimately restrict food production and reduce life expectancy.

Environmental degradation goes hand in hand with an undoubted impact of human-influenced climate change through an increase in airborne pollution.

Today, these physical manifestations of change have come together with this year's financial Bonfire of the Vanities, which looks very much like a collapse of laissez faire economics in the western world.

What we have witnessed is that while the harsh realities of market driven capitalism is meant to be good for workers, when it comes to the crumbling Wall Street banks, they want government assistance to cover their ineptitude.

Consumer capitalism is all of a sudden, simultaneously on the nose and under the microscope, as is the economic globalisation of production. Maybe Naomi Klein's "No Logo" was right!

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Briefcase wonders if people living in highly globalised economies, such as Singapore and Hong Kong, will need to learn how to grow food, since the income they used to derive from banking and trade is sure to decline and may only recover slowly.

No wonder farmers in Japan and Sweden fight for subsidies to sustain their high cost operations and the communities they support.

Inherently, they know that they represent an insurance policy for a time when the going gets really tough and the population must be able to feed itself. The voice of youth is also making itself known, as we will see with the likely election of Barack Obama to the highest office in the US.

Looking back, the 20th century was a period of unprecedented growth, along with the advancement of human knowledge and wellbeing, made possible largely by the fruits of a capitalist system.

Advances in medicine and science over the past 150 years led to much-improved living conditions for a large chunk of the planet's population; but by contrast, the 20th century was also the deadliest in history, with more people slaughtered in wars or by politically induced starvation than during any other period of our history.

However, following recent global economic turmoil, men and women of insight and compassion are beginning to question whether going forward; a total reliance on 'the market' to set the price and depth of economic governance is the best model we can devise.

To this end, a meeting of the world's most powerful nations is planned in Washington to devise a better way of running our economies.

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Influential voices, including Nobel Peace Prize winner Mikhail Gorbachev, a former leader of the Soviet Union and President of the International Foundation for Socio-Economic and Political Studies, have called for a greater level of morality in business.

This harks back to Briefcase's analogy of animals taking over the farm, in which I said that too much economic leverage had been transferred to management at the expense of the owners of the means of production.

Gorbachev wonders how a world in which US investment banks can pay out US$38 billion in bonuses in one year can actually run in a way which promotes social stability and improves the welfare of its citizens.

It is apparent that the so called 'trickle down effect', which sees the creation of vast pools of wealth as being beneficial to society, since wealth is supposed to trickle down to create jobs for those in need, has come into question.

Using inverse logic, there appears to be no amount of compensation payable to these 'masters of the universe' which can account for the damage they have wrought.

America's outrageously expensive healthcare system, whose costs are boosted unreasonably by professional insurance, is a fine example of market failure.

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Selling more refrigerators and colour TVs may well signal a form of growth, but is it the measure we should be focusing on? Is it time to look at the measure of Gross National Happiness, rather than gross national product?

For a moment of solace, I have extracted a few lines of most prescient prose from British trio Genesis, called "Land of Confusion":

Too many people

Making too many problems

And not much love to go round

Can't you see

This is a land of confusion.

When everything's gone wrong

somehow

The men of steel, the men of

power

Are losing control by the hour.

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Meanwhile, back on the stock market, many smaller resource-based companies have found themselves trading at or below their cash asset backing. The market is in fact valuing many of these businesses at negative value.

Investors or speculators who might normally have noticed these anomalies remain on the sidelines, licking their wounds as they attempt to unwind debt levels.

Briefcase believes that we are about to see corporate Australia and China Inc open their collective wallets in a big way. Companies can afford to take a 10 to 20 year planning horizon and are not as influenced by short term, market driven concerns.

China maintains huge cash reserves and quite rightly feels that it was taken advantage of by suppliers during the boom. Steel smelters have built up stockpiles of iron ore and are now telling suppliers to withhold shipments. Industrial commodity prices have tumbled to levels well below their marginal cost of production.

Many emerging producers are cash strapped, either because their operating cash flows have shrunk, in response to lower metal prices, or because the banks have closed their doors and will not lend to new producers. In either case, China will emerge in a much stronger position and will take direct interest in Australia's resource industries.

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- Peter Strachan is the author of subscription-based analyst brief StockAnalysis. Information can be found at Stockanalysis.com.au.

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