söndag 7 augusti 2011

Supply Constraints and the Economy

The US has been de industrialized and has become a finance paper shuffling economy, as is the case for the UK. The US$ is soon about to lose its world currency reserve status as the currency gets depreciated to even lower levels.

The parallels are striking as to what happened with the British Empire and the Sterling after WW2.

Clearly emerging economies use of and need for base metals, and energy is quite significantly larger than the relative need for a developed OECD country. This is of course because an industrialized country is “already ready built” and all industrial capacity has been outsourced whereas an emerging economy has the need to build new from scratch. There are now 3 billion people in e.g. China, India, Russia, Brazil aiming to get the living standard we in the west have acheived and they are dead serious to get there.

Add to that phenomena the fact were facing real supply shortages relevant some base metals e.g. Zink, its estimated next coming years there will be supply deficits of some 20-25%, as well as for oil where we have reached already peak production according to IEA in 2006 and existing oil fields depleat some 6% annualy thus a real oil supply cruch can be seen already by 2013.

Teck sees start of 'structural deficit' for zinc
http://www.miningweekly.com/article/teck-sees-start-of-structural-deficit-for-zinc-2011-03-07

And yes emerging economies grow to an extent not comparable to an industrialized country. Their parabolic growth is yet to start in many cases, we have seen nothing yet. Meanwhile the oil consumtion as well as base metal consumtion trend has been downwards for years in the OECD economies.

From 2003 to 2010, China’s car sales have increased over 300%. In fact, car sales jumped 45% last year alone in China. This increase has made China the global leader in car sales.

China’s most recent Five-Year Plan calls for $50 billion to be spent on upgrading the country’s power grid and an another $110 billion on building 13,000 kilometers of high-speed railways. It takes a lot of base metals to expand a nation’s power grid, sewer system and transportation lines.

China to add 97 airports in 12 years
http://www.chinadaily.com.cn/bizchina/2008-03/25/content_6563240.htm

China has another advantage ove most OECD countries. Loads of cash reserves, significant savings and an already integrated bank and goverment sector. You know that socialistioc aspect of a "functioning" capitalistic market Mt Hank Paulson fought so hard to obtain via the bailouts? In addition private debt in most developed economies is a mere fraction of that of most OECD economies. So sure they have the need to grow as well as capacity to take on more debt.

This whilst the debt saturated OECD without almost any exeption is on the verge of a financial suicide of epic propotions.

Lastly I would argue it’s not in fact the economic macroeconomic environment that dictates market price. There are a number of occasions where the economy has been booming and base metals have been severely depressed and there have been very depressed economic environments when industry metal prices has been very high relatively speaking.

This as it is in fact the capacity of supply that dictates the market price not the general economic environment as such. And as you see we soon to enter in to many years of severe supply constraints.

Then why not listen to Peter Schiffs I land analogy:

“Some people that got stranded on an island, and I think it was 6 or 7 were Asians and there was one American and as soon as they were on the island they had to divide up the jobs.

One Asian was given the job of fishing, the other one was hunting, one of them got the job of gathering fire wood. So they all had jobs, and the American was assigned the job of eating. And so at the end of the day, they would all gather around and prepare this feast and the American would sit there and eat it.

But he wouldn’t eat it all, he´d just leave enough crumbs so he could give to the 6 Asians so they could go on and repeat it again tomorrow, spend all day preparing a meal for the American to eat.

Now, the way modern economists would look at it, they would say “Well, this American is vital to the whole island economy. Without him nobody would have to fish, nobody would have to hunt, nobody would have to gather fire wood. He is creating all this employment on the island”.

But the reality is, every Asian on that island, his lot in life would be dramatically improved if they kicked the American off the island because now they would have a lot more to eat or maybe they wouldn´t have to spend all day hunting and fishing and they can lay on the beach a little bit”.


Maybye were now just about to swap a saturated, mature, stagnant OECD part of the world to the new emerging, growing economies?

But before were able to get there the toxic, ready to blow up any minute derivatives absurdity has to not only be disarmed it also has to completely be erased. That in it self sure is a challenge as the derivatives market is estimated to be a $600 trillion market and the finance sector some 10 times larger than the real economy.

The imballances, missallocation, falce price mechanisems and distortions this causes the real economy simply can not be overestimated.

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