Free Market News, June 20, 2006
The Most
Powerful Force on Earth
By Martin Weiss
When I was born, there were fewer than two
and a half billion people on the planet.
Now, barely 60 years later, there are
six and a half billion.
When my father first went to work on Wall
Street in 1926, it had taken 125 years
for the world's population to double in
size. When he passed away in 1997, it
had taken only 39 years.
If you're a baby boomer like me, you and
I have witnessed more people added to
the world's population in our lifetime
than all the people added in all the centuries
of history - and prehistory - that came
before us.
The population explosion is beyond control.
It has emerged as the single most powerful,
immutable force on Earth, driving geopolitical
change, stimulating economic growth and
generating global inflation.
Ultimately, it is the most persistent -
but least understood - factor underlying
virtually everything we've been warning
you about here in Money and Markets:
It is behind food prices, which are going
up despite rapid advances in agricultural
machinery ... despite the great strides
of the "green revolution" ...
despite the highest crop yields in history.
It is behind the cycle of debt. I'm talking
about the greatest credit inflation the
world has ever seen, including $41.7 billion
in US interest-bearing debts, $101.5 trillion
in derivative debts, tens of trillions
in US government commitments for Medicare
and Social Security, plus trillions more
in Europe, Asia, Latin America and Africa.
It is behind a new crisis in the Persian
Gulf. This is where Iraq's oil-rich region
of Basra is about to blow up, potentially
derailing the world's oil markets ...
sending the price of crude to brand new
highs ... and carrying most other commodity
prices along with it.
It is behind many of the pressures driving
up gold and interest rates, following
a pattern that, in many ways, parallels
the pattern we saw in the second half
of the 1970s. And ...
It is behind Peak Oil - the critical threshold
beyond which world oil production will
start to decline ... even with major improvements
in extraction technology, even with more
exploration, and even after a shift to
alternative sources of energy.
This is just a small sampling of the massive
scope - and overpowering momentum - of
the population explosion. And what we've
told you about in Money and Markets is
just a sneak preview of its consequences.
Naturally, there are many other valid ways
to explain inflation and many other formulas
for forecasting it. But every single one
can be traced back, directly or indirectly,
to the population explosion.
Ultimately, it's the population explosion
that drives economic expansion. And in
the final analysis, it's the population-driven
expansion that underlies government policies
designed to sustain it.
Sometimes you may wonder:
Why are nations so committed to economic
growth at nearly any cost?
Why do central banks continue to pump in
so much money long after they recognize
the inevitability of its inflationary
consequences?
Why has GDP growth become the supreme icon
of most governments, businesses and investors?
When debts and deficits run amuck, why
don't our leaders just slow down, take
a breather, and focus on finding a more
stable path?
Your answers may be varied. But if you
trace back through the chain of cause
and effect, you will always return to
one single, overriding factor: The population
explosion colliding with finite resources.
More mouths to feed. More demand. More
pressure to perpetuate growth. More inflation.
This is the inescapable reality of our
times.
It's why millions of immigrants are pouring
into Western Europe from Africa, and millions
more are streaming into the United States
from Latin America.
It's a key reason we're beginning to see
environmental destruction and uncontrollable
epidemics on an unprecedented scale.
And it's also why I think most observers
continue to underestimate the danger of
inflation.
The Vicious Cycle of Poverty and Inflation
The dilemma the world faces today is reminiscent
of the dilemma I personally witnessed
growing up in Brazil in the 1950s and
1960s.
In those days, Brazil was forever "the
land of the future" - a future that
never seemed to arrive.
The main reason: In response to demands
by a population desperately anxious for
a better life, politicians routinely sought
to create an artificial prosperity ...
by inflating the money supply.
But when they inflated the money supply,
they debased the currency ...
When they debased the currency, they destroyed
the purchasing power of salaried workers,
and ...
That destruction, in turn, added a whole
new layer to the impoverished classes,
bringing even more desperation and demands
for a better life.
In short, the zeal to escape from poverty
generated inflation; and the inflation
created still more poverty.
Hard Landings on the Ground
At the time, most economists didn't get
it. They theorized about inflation from
30,000 feet up. But they had little concept
of what was happening on the ground.
So when I was 23, I returned to Brazil,
camera and notebook in hand, to document
the vicious cycle of poverty and inflation.
Brazil's mandate to push for growth at
any and all costs had driven the cruzeiro
into the gutter. The country had suffered
the most massive inflation of any large
country since Germany after World War
I. And it was ongoing.
In rural areas I visited, this meant that
a family's earnings were so devalued -
and the cost of basics so inflated - every
family member had to work, and it was
impossible for parents to care for children
at home.
The children had to sit in the fields,
fending for themselves. Pre-teens cared
for 5-year-olds. 5-year-olds cared for
toddlers. Many were entirely on their
own.
In urban areas, the situation was equally
desperate. While the real value of wages
plunged, the price of food surged.
So any food that could be stored was stockpiled,
and most merchants hoarded the stockpiles
in anticipation of even higher prices.
In warehouses throughout the country, sacks
of rice and beans were piled high, while
traders waited for raging inflation to
drive their commodities up in value. Even
if a significant percentage of their inventories
rotted, they still held out for higher
prices. Acute shortages drove values up;
and higher values caused even more shortages.
Everywhere, inflation, scarcity and poverty
were intertwined.
Some Lessons for Today
That was nearly four decades ago, when
the world's population was roughly half
what it is now. And that was Brazil, which,
relatively speaking, was actually less
destitute than many other countries.
Now, we see a situation in other regions
of the world that's far worse, plus a
new cycle of poverty and inflation just
beginning to unfold.
In the Congo, for example, a relatively
unknown war that began roughly eight years
ago, has left 4 million dead - more than
the total fatalities suffered by both
American and Japanese troops during all
of World War II. The destruction of crops
is enormous; the relative cost of food,
outrageous.
In oil-rich Angola, a massive cholera epidemic
has erupted - almost entirely due to water
contamination on the grandest scale ever
witnessed in any region on the planet.
In most of sub-Saharan Africa, South America
and South Asia, we see similar scenarios
under way or in the making. These, in
turn, are what are driving the millions
of immigrants to Europe and North America.
It's a Malthusian nightmare, and it's starting
to occur right now.
The outlook is so obviously desperate that
even some of the richest and most famous
individuals on the planet - people who
in past eras might have turned a blind
eye - have decided they can't ignore it
any longer.
Rock singer Bono has sidetracked his career
to help restore some semblance of hope.
Bill Gates has just announced his departure
from Microsoft to dedicate the rest of
his life to his charitable foundation
with similar goals.
But unless the few turn into a multitude
- unless there is far-reaching cultural
and political change - even the efforts
of the richest on earth may be too little,
too late. According Dennis Meadows, author
of the recently-released "Limits
to Growth: The 30-Year Update," humanity
is no longer just in danger of colliding
against its limits; it's on the brink
of actually overshooting those limits,
with potentially disastrous consequences.
In other words, we are not only reaching
peaks in production of essential resources
such as energy and food, we may be on
the verge of permanently destroying our
ability to produce those resources.
Right now, this is extremely inflationary.
Every new phase of environmental destruction
or depletion, every new outbreak of war,
and every new epidemic of deadly disease
is part and parcel of a single, integrated
process: The vicious cycle of the population
explosion and inflation.
No Sign of Change in This Powerful Trend
If we could see at least some sign - even
preliminary or cursory - that population
growth is slowing, that government policy
is changing, or that the push for economic
growth at any cost is receding ... then,
maybe, we could start talking about the
end of inflation.
But right now, there is no such sign. Quite
to the contrary, the inflationary pressures
are growing.
Looking at the longest possible time horizon
in the past, we can see that the population
explosion has massive momentum - with
roots going back to the industrial revolution,
even back to the dawn of agriculture 100
centuries ago.
Looking at the present, we also see great
momentum: The rapid growth of China, India
and other emerging nations ... the reluctance
of the United States to reduce its deficits
... the intense desire of all countries
to keep their booms and bubbles going.
And focusing on the near future, we can
see, for the first time in over a millennium,
a global collision between demand and
supply.
Yes, there's talk of fighting the inflation.
But the reality is that, despite meek
attempts to raise interest rates in recent
months, the central banks of the world
have, so far, demonstrated neither the
political mandate nor the personal courage
to do much to stop it.
Can This Inflation Continue Forever?
Absolutely not.
At some point in the not-too-distant future,
this explosion - in population, consumption,
and the exhaustion of scarce resources
- will inevitably collide with limits
to growth.
Brazil, China, India, the United States
and most of the world's economies will
reach a breaking point beyond which further
acceleration is virtually impossible.
Prices will be so high, and incomes so
low, that the demand for goods will plunge.
Governments will fall. Economies will
collapse.
That's when you will see the other side
of the parabolic growth curve. That's
when you will see deflation.
But at this juncture, it's too soon to
base your plans or strategies on what
might come later. You need to focus on
what's already here:
More inflation ...
Higher interest rates, and ...
Big risks for investments vulnerable to
each.
Right now, even in its early stages, the
inflation and inflation fears are already
driving down the value of all kinds of
paper assets - bonds, stocks, and many
supposedly safer investments.
So as inflation accelerates, you can expect
even greater declines: Treasury bonds
plunging to multiyear lows and key stocks
falling toward their lowest levels of
the decade.
