A thoughtful theory, and one that I agree with up to a point. Where I differ is on commodity deflation going forward. No one can deny we are in it and have been for some time, however IMO we are witnessing the final liquidation phase of it. This also is tied to the financial asset bubble of the late 90's. The bubble created a sort of "wildcat capitalism" that massively misallocated capital into certain sectors (TNT: tech, internet, telecom) of the economy at the expense of what is commonly called (and at the height of the mania, derisively) the old economy.
I define the old economy roughly as that which produces and uses raw materials and commodities. The last time the old economy had a real capital boom was 20-25 years ago. All strong periods since have been brief and not sustained. As a result, a great deal of the "seed corn" from that period has now been used up and fresh capital has been poorly supplied (I've called it the "slumlord analogy") to replace it. As an example, pull up a web site of any major offshore driller, and you will find an inventory of once very expensive equipment, and usually an in service date. The vast majority will indicate 1975-1982. This can be repeated all up and down the metals, energy, lumber, water, and agricultural complexes: used up equipment, mines, shipping, refineries, depleting deposits and fields (in energy, many state run), and operations that are not adequately replacing their capital or cover the cost of their capital (impossible at today's commodity prices).
So now overlaid on this, we have a free fall in economic activity (from the deflating asset bubble) that is the final death knell to whole industries in the raw goods sector. Many were so capital starved and weak before this latest collapse in demand, that the end will come swiftly. In fact, if you follow mining it was happening BEFORE 911. Energy was given a brief reprieve from this with a vicious fakeout (caused in turn by worn links in the undercapitalized energy infrastructure) of last year. That must have done wonders to energy company corporate planning? Go out and aggressively develop (for all of about three quarters), and then get the rug pulled out. Will they do it again? Gun shyness will contribute even more to the emerging supply trap for commodities.
Even if economic demand shrinks down to metabolic rates on the global level (unlikely in my view)we are still going to wake up in the midst (2002-2005) of shortage and supply shocks for any commodity that requires significant capital/reinvestment to explore for, mine, drill, transport or grow at any real level of complexity. Your apple tree in the backyard will do fine, but few survivors will be on hand to attack and redeploy to meet the real economic opportunities in commodities without a major crisis first.
I viewed a TV program last night about the development of the Ertsberg and Grasberg copper/gold mine in New Guinea. A tremendous and complex effort was involved (again mostly in the early 80's) This can not and will not be replicated in this environment, or for a long time to come.
Alea iacta est: the die is cast. |
