January 23, 2008

Forget the economy - it's about resources, stupid

Posted in International Economy · 12 comments ·

The collapse of the global housing bubble, leading to a banking crisis was so well flagged that to suggest we have been taken by surprise by the huge falls in stock markets is simply not credible.

Anyone with a jot of knowledge about financial market history or, more fundamentally, with an iota of common sense could have seen that the inflated markets of the past few years were an aberration.

So whether it was holiday homes in Bulgaria, bank shares in New York or hotel sites in Dublin 4, each decision was clouded by the irrationality of cheap credit. The assets were not worth a fraction of what was paid for them. Try to sell an apartment overlooking the Black Sea today and see what you’ll get for it.

However, the global markets meltdown allows us all to think where do we go from here? It’s not the end of the world, but what is necessary now is clear thinking.

We in Ireland need to accept that the past few years will not be repeated and the State has to come up with a big Plan B.

If the paper wealth associated with the banking and property sectors is a mirage which has inflated and deflated rapidly in a period of five years, what can Ireland do to build something sustainable in the future?

Sometimes these stock market crashes are interesting because they focus the mind. Just think ahead.

The big issues for the world are essentially Malthusian. I realise that he’s not a popular thinker, being associated with failing to appreciate how technology can make huge population growth possible. However, his core hypothesis is sound.

He argued that food would run out as the population grew and that ultimately, great famines would become normal.

Obviously, this didn’t happen because of great advances in agricultural productivity, but the idea that resources do run out and when they do, people suffer, seems pretty sound.

This is particularly the case now, at a time when the world’s population has never been higher. An estimated five to 10pc of humans who have ever lived in all our history are alive today!

How is this challenge affecting us? Think of what you heard yesterday morning on the radio. We heard reports from the stock markets of India and China.

But what exactly are these telling us? How do we make sense of it all?

One way of looking at the global nature of this financial market meltdown is to appreciate that the world stock markets are just a barometer of the westernisation of major parts of the globe which, up to recently, were cut off from the rest of us.

The world economy has just experienced a Malthusian shock with the opening up of China and India.

Any visitor to either of these countries can feel the palpable desire on the part of the average person to acquire a Western lifestyle (This is well captured at the moment by George Lee’s excellent RTE1 documentary.)

Whether that is a good or a bad development is a value judgement but we are where we are; and in Shanghai, people want cars, cosmetics, iPods, Starbucks, mobile phones and satellite TVs just as much as they do in Shankill.

This is a huge drain of the world’s finite resources. Think about how this change in lifestyle habits and the enormous growth in global population will impact on the world.

Over the past two decades, the world’s population has increased by 34pc to 6.7 billion from five billion. However, land available to each individual has shrunk from close to 20 acres in 1900 to five acres in 2007 due to environmental degradation. (United Nations Report on Climate Change 2007.)

Resources are the real issue, not the tittle tattle in the financial markets. History reveals that wars over resources are a recurring fact, so, whether that resource is water, oil or food, the battle is on.

People have been told this so many times now that there is really no excuse for anyone to claim to have been taken by surprise by the increases in the price of agricultural commodities or petrol that we have seen in the past few years.

The bleating from the financial markets is a different thing altogether. The financial markets have decoupled from these real issues in recent years, becoming a casino for a parallel global economy which could be termed the paper economy.

The basis of the paper economy — where people bought and sold assets to each other in return for paper money — was/is a great illusion where the key is not to question the value of things.

So Irish “investors” bought apartments from other Irish investors in Bulgaria for €150,000 — a country where the average wage is €350 a month.

This is obviously silly and the price put on the asset by the Irish investor bore no relation to the value of the property based on proper benchmarks such as local wages/land prices or rents.

The nub of the issue is that there is simply too much cash and debt around because the global banking system was prepared to use all sorts of makey uppey derivatives as collateral in order to lend money.

So all we have in the financial markets is a huge system of IOUs where the value of the IOUs is dependent on confidence in the system.

Because the banks tried to hide their losses initially, no one believes anyone anymore and all integrity of the system is now shot.

No-one has any reason to believe anything that anyone promises so the key is to get out of the IOU game and get back into money and if you can get out of paper money and put it into something that has a logical reason to be valuable.

The only assets that are now logically valuable are the resources we mentioned earlier or technologies which might postpone a Malthusian shock for some time.

And these are old-fashioned things like gold, oil, commodities and, most notably, uranium — the key to the world’s only viable energy option, nuclear power.

Also, technologies which affect human health are bound to boom as people who are alive want to stay alive. So brain power, research and development opportunities will also become more valuable.

Notwithstanding turbulence from the fallout of the paper economy, these are the areas that Ireland should focus on.

The paper economy will recover in time, but people who invested in inflated assets like property will be so burned that they will be shy next time out.

The liquidity crunch might cause a recession here — it is now quite likely simply because we turned ourselves into an economic Tir na nOg, embellished by the very cheap credit which is now evaporating.

This will be painful but will give us time to really plan for the future. And the future patterns are becoming clear. It’s not “the economy, stupid”. It’s “the resources, stupid”.

So forget all the noise of the past few weeks in the stock markets and look to real global trends. This is where the action will be.

  1. Larry C

    With the recent bailouts by central banks, rate cuts and US “stimulus” package it would appear we are on the road to hyper-inflation. Does this insane approach suggest that the global financial system is facing a collapse?.
    First it was the subprime crisis, then it was the SIVs, and now it is the bond insurers that are the problem….will be interesting to see announcements in comming weeks…..

    Also, does anyone really believe that a lone trader managed to cause Societe Generale bank to lose 4.9 billion euros yesterday?

    Ahh… feel better now.

  2. walnut

    On the contrary, I believe global deflation and a renewed, more aggresive credit crunch will soon be upon us. The only place to store one’s wealth will be gold, cash and longer dated government bonds. Watch out…this is just the start of something we’ll be telling our grandchildren about! The perma-bulls will have you believe coordinated action by govenments and centrals banks will save the day. Not this time!

  3. Larry C

    Hey Walnut,
    I am actually still struggling on whether I think the outcome will be Hyperinflation or Deflation, but agree on the extent of the problem.

    Due to the crashing of humongous equity bubbles that were generated by the Fed’s abusive expansion of credit and the unprecedented spread of non-transparent structured-debt instruments we could see it triggering a round of hyperinflation which is already evident in soaring food, energy and health care costs. These prices are bound to increase substantially as the Fed continues to cut rates and further undermine the dollar.
    But on the other side is the loss of market capitalization, the growing insolvency of maxed-out consumers, and the inability of the banks to freely extend credit to responsible loan applicants. These three things are likely to drag down all asset-classes, slow business activity to a crawl, and compel consumers to hoard rather than spend. i.e. deflation.

    Sad to see most european politicians beliving our ecomonies are somehow decoupled from the US, as if this is only a US problem…….

  4. Ed

    Indeed there’re some challenging times ahead. The housing bubble has at last been accepted for what it was and it’s now time to move on. Housing is a nice side order, but it should never be a main course. You can’t export housing, apart from wooden prefabs and even building technology doesn’t have a big export potential for us – unfortunately, houses are not like cars with a life of about ten years – they’re too expensive and they last too long.
    It’s now time to look around us and to realise that we don’t have many resources other than our ingenuity and hard work. Almost everything that we use in our daily lives has to be imported, so without the multinational’s exports to balance this, we’d be in big trouble. It’s incredible how our government allowed costs to rise to such a high level in view of our vulnerability – the premise that nobody has the right to do wrong should equally apply to governments as it does to its citizens.
    Some said recently that there are one hundred million new consumers coming onto the world market each year – this is both frightening and exciting. The big question for us is, will be able to get a slice of the action or will we retreat back into ourselves and go into decline – that is the question?

  5. John Q. Public

    Our own human resources should be our top priority. Manufacturing labour is too expensive, job losses on a regular basis and the laid off have difficulty getting a new job with so many foreign nationals living here to compete with. Does anybody think that the foreign workforce here is to large?
    If we do have a recession, emmigration will increase and foreign workers will continue to trickle in here and work for less than the Irish. As it is there are reports of foreigners being hired here instead of our own.

  6. AndrewGMooney

    After the events of the last week, is the World Economy, like Amy Winehouse, finally accepting: It’s time to go to Rehab? Or is the ‘model of grief’ outlined by Elizabeth Kubler Ross a more useful analytical tool?

    Denial. Anger. Bargaining. Depression. Acceptance. In my view, most people I meet are firmly entrenched in denial.


    Within the ‘Axis of Credit Junkie Nations’ I doubt the general reaction will be quite as sanguine as you suggest David. Despite the best efforts of economists to understand human behaviour: Distressed gentlefolk rarely act in rational ways.

    I spent last week in London Town, mainly in the bar of ‘The Boston Arms’ in Tufnell Park, an old stomping ground. I had plenty of time to chew the fat with some ‘seniors’ who, like my parents, left Ireland for a better life in England in the 1950’s. Their comments on the ‘Tir-Na-Nog’ generations they begat were illuminating and sobering. Accusing their offspring of a get-rich-quick mentality, of having partied like it’s 1999, since, er…1999, of harbouring a disdain for honest slog and, above all else: An inflated view of their own invincibility.

    This was the lament I heard about the Lost Sons and Daughters of the London Irish, now so intoxicated by consumer baubles, that many have ‘somehow’ forgotten to have families along the way. Is Ireland the next demographic disaster formerly known as Italy? And yet: That’s progress. That’s ’wealth’. Or it was, until this week’s ‘interruptions’.

    When I mentioned ‘Bertie and the Boyz‘, the responses ranged from a shrug and a sneer of ‘Politicians!’ to apoplectic fury. Still, when it’s 1:00am and everyone’s had a skinful, getting a reasoned debate is less likely than getting a dodgy kebab on the Archway Road.

    In my view, it will take months for these events to actually become comprehensible to most people. Probably only when they get their pink slip/P45’s will they realise it’s not just ‘a financial thing‘. Or ‘a construction thing‘. It’s both and more. Above all: It’s a political thing.

    A massive, catastrophic failure of the political will of The Nation State (UK/USA/motley EU crew) to challenge, control and supervise the Corporation, the Hedge Fund, the Big Swinging Dicks who now are revealed as childishly impotent and emasculated. Hoist by their own appendages in Davos. It will be interesting to see how much Faith is left in the ability of the State to come up with a ‘big Plan B‘.

    If the State is responsible for the failure of Plan A (the current mess) why would anyone give them the benefit of the doubt again? I won’t.

    I’m not a Malthusian. Metaphysically: I’m a Dystopian Cornucopian sceptical Catholic, if such a concoction is possible. I do not believe any shortage or lack or want is possible in this manifested Universe. Only Human Ignorance makes it appears otherwise. And from Ignorance comes Dislocation, Death, Disease and any other number of Apocalyptic Scenarios. But it’s (in)Humanity that cause all our problems. Us alone.

    Anyone out there want to step into the ring? Argue the toss? OK: Refute the following three ‘resource issues’ identified by David in his article and hereby comprehensively debunked by me:

    “Resources are the real issue, not the tittle tattle in the financial markets. History reveals that wars over resources are a recurring fact, so, whether that resource is water, oil or food, the battle is on.”

    Round 1. Water. There is no shortage of water. Certainly not in Ireland! Or anywhere in the Brit-Irish Isles. Some pertinent facts on this page Googled at random relating to London.


    No shortage. Just Waste. Extravagance. Ignorance. Hubris. Nothing else. Ditto The Jordan River. The Aswan Dam. The Yangtze Dam. And on and on.

    So, what strategic R&D/industries could Ireland develop around Water? How could that expertise become a profitable and sustainable niche knowledge industry to export to emerging economies? In all the new housing development in Ireland water conservation and sustainability has been scrupulously mandated by Bertie and The State. Hasn‘t it? As part of Plan A? Oh, I see, that needs to be part of Plan B…… Never mind. Plenty of time to sort things out.

    What can the modern Irish nation do that’s equivalent to what The Huarpe did in the Andes?


    Round 2. Oil. Again – there is no shortage whatsoever. There is just waste. Greed and hubristic extravagance. Your S.U.V doesn’t impress me, you little corporate prison bitch. Hybrid fuel cars. Insulated roofspaces. It’s not rocket science. Double the efficiency of the boiler/car engine you immediately double the reserves available. We can put people on the Moon, I assure you human ingenuity can stretch fossil fuels for another 100 years. Those Canadian tar shales will become ‘economic’ when the waste is too profligate. Nuclear will be a no-go no-no once Osama manages to buy one of those Suitcase Nukes. And he will. He will.

    Round 3. Food. Only Kings and Popes used to live on flesh meats every day of the week. The ‘peasants’ ate potatoes, pasta or polenta. Now you can pay £15 for such heritage retro-prole cuisine in fashionable London, Dublin and Brum restaurants, if you’re rich and gullible.

    Ireland, surely, could become a Niche-to-Mass Purveyor of top quality food to European gourmands? But agricultural work is ‘unfashionable’ and planning a yield of scallions isn’t half as much fun as wearing Sunglasses in Sofia, getting a b/j whilst yakking on the mobile to sell Paddy Last some dump on ‘Sunny Beach‘.


    If every Indian and Chinese family insists on a Big Mac or a supermarket Chicken Korma every night of the week, like their ‘wealthier’ Western counterparts, we are storing up all manner of catastrophes. It doesn’t take a huge brain to make the connection between Bird-Flu and 7 billion battery chickens in China and Thailand. Or does it?

    In a week where the British Government is resorting to bribing it’s citizens into dieting (!) I find it hard to see shortages anywhere where there is a Functioning State and the Rule of Law.


    Implicit in most of our thinking on these topics is the assumption that ‘We Are The Future’ in the same way that, as ’victors’: ‘We Were The Past’. There is no real reason to believe that Chinese and Indian culture and capitalism will remain in hock to The West. The answers may not come from The West. As one of the few Non-Imperialist nations of the historic West, I’d have thought Ireland was uniquely placed to build bridges between the old West and the new East. Maybe?

    Let’s see what else I can demolish before teatime….How about Landfill as a ‘problem’? No: It’s not. It’s an opportunity on a unique scale. Within a few years, all the ‘wasted resources’ buried in toxic dumps will be re-harvested by technological marvels we would regard as science-fiction today. Just as the Ipod would have appeared to me when I was a child. Will Irish post-industrial ad-Venture Capital get there first? Or will it be Finland. Again. How much money is the Irish State allocating to Nanotechnology as part of ‘a big Plan B‘?


    David says: “technologies which affect human health are bound to boom as people who are alive want to stay alive”? A really good name for a company starting up in this field might be ‘Tir-Na-Nog Inc’! The land of Eternal Youth? Will it be a pill, injection, or a face-pack? Answers on a post-card to the usual address.

    “So brain power, research and development opportunities will also become more valuable.
    Notwithstanding turbulence from the fallout of the paper economy, these are the areas that Ireland should focus on.”

    In a few weeks I’ll get the opportunity to study The Irish ‘Movers and Shakers’ at Cheltenham. I’ll see if I can discern evidence of this sobriety and renaissance amidst the usual lake of piss, vomit and betting slips. I have a feeling the ‘craic’ will be even more deranged this year, as some continue to ‘party like it will always be 1999‘.

    Sorry folks, the party is over. Someone just blew out the candles. Remember that Pledge Pin you used to wear inside your lapel on a Saturday night, only to show it off on Sunday morning? Well, Monsignor Mooney hasn’t been taken in one bit by your shenanigans.

    Finally, it you don’t like this, do you think I give a rat’s ass? Just get David to ban my IP Address like everyone else does. I’ll easily find somewhere else to let off steam, vent my spleen. It’s my job. Didn’t you all get the memo?

    Every sibilant syllable: Copyrighted. And so is the steam off my piss. AndrewGMooney. 11.09.1960. Brum. Eng-Eire-Land

  7. liam holohan

    More on resources: The earth cannot sustain it’s entire population with western living standards. That’s the simple fact at present. India/China rush to increase standards of living will of course apply huge pressure for world’s resources. Who can blame the developing world to try and crawl out of grinding poverty. Read Jared Diamond’s collapse to see a good analysis on resource utilisation (especially the later chapters)

    Technology or wonder breakthroughs may stay the enivatable fundamental lack of resources but will reassert itself.

    As for fuel efficency (round 2) see the “end of oil” http://the-end-of-oil.com/ any savings due to efficency in cars in the past seem to have been wasted by adding more power. Car engines are getting more and more efficient but also bigger and bigger so we piss away any gains. The car industry reaction to fule efficency directives is particularly disgusting.

    The developed world cannot afford to have efficient power generation so their headlong rush to raise living standards is based on cheap & dirty (coal) power stations and old (dirty/innefficient) 10 year old car models..

  8. John Green

    I read your article about resources with interest. Much talk of the state of Ireland’s economy and of that globally
    and indeed what Ireland can do in the future to grow home business and increase exports.

    It is rarely mentioned and quickly forgotten in mainstream current affairs/politics that as an island, Ireland has the largest stocks of fish in the EU bar none. Not to mention the longest coastline in Europe etc.etc.

    These fish stocks are being actively plundered by France, Spain, Netherlands et al, whilst Irish Fisherman have to stand by and watch, their boats tied up with miniscule quotas.
    There are many sub-issues here – such as overfishing and illegally small mesh sizes used by foreign boats to target juvenile fish – delicacies in French, Spanish diets.
    Right now – there are approximately 2000 foreign fishing vessels – with factory ships in attendance, fishing between 50-100 miles off the west coast of Ireland from Mizen to Malin. Imagine if that amount of fish could be landed every week in Ireland, most for export. The jobs & revenue it would create, the shipbuilding it would generate and the expertise that would be developed into further managing and developing our marine resources.

    The real issue here is that this fish resource is so enormous and the established market so voracious – the wealth, proposperity and industry being lost is staggering. Ireland has no real benefits from its own fish stocks and the fishing industry here struggles to be heard at a political level

    Compare Norway – similar population, coastline and fish stocks. Managed its fish stocks, ran out the foreign boats. Became wealthy from fish, developed sustainable shipbuilding industry with technology transfer into Oil & Gas industry which made Norway even wealthier.

    The long term answer to making Ireland sustainably prosperous – lies in the holds of those foreign fishing vessels and the giant factory ships that are hoovering up Irish fish.

    Time for Ireland to wake up and take control of its resources – we dont have to like fish but I am sure we would like the money !!

    yours etc.


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