There is a children’s game called Kerplunk that was first marketed in 1967. The game features a transparent plastic cylinder perforated with numerous holes through which thin plastic straws are laced. Then a handful of marbles are dumped in the top of the cylinder. The players take turns pulling the straws out until the marbles can no longer be supported and they all come tumbling down.
Aside from the under ten-set, Kerplunk wasn’t much of an amusement although it certainly seems like a fitting analogy for our times.
The marbles are the looming crises that threaten to beset us and most of them are touch each other. The straws are the safeguards, practices and conditions that have kept the marbles from dropping.
The Subprime Follies
Most of the World has not recovered from the ‘Great Recession’ triggered by the US Housing Bubble in 2008 and now another recession looms before us. While there is no consensus among economists as to what constitutes a depression rather than a recession; it would seem having a second recession before recovering from the first must come awfully close.
There is a terrifying assortment of marbles touching each other in a recession: Major increases in unemployment, shortages of credit for economic growth, shrinking industrial output, diminished trade, increased bankruptcy and so on. These are conditions that have almost become the new ‘normal’ since 2008 and may worsen; particularly if Greece and some other nations default on their debts.
What straws were pulled out of the Kerplunk Tower? According to the January 2011 findings of the US Financial Crisis Inquiry Commission:
“The crisis was avoidable and was caused by: widespread failures in financial regulation, including the Federal Reserve’s failure to stem the tide of toxic mortgages; dramatic breakdowns in corporate governance including too many financial firms acting recklessly and taking on too much risk; an explosive mix of excessive borrowing and risk by households and Wall Street that put the financial system on a collision course with crisis. Key policy makers were ill prepared for the crisis, lacking a full understanding of the financial system they oversaw; and there were systemic breaches in accountability and ethics at all levels.”
The findings are entirely accurate except that they may not be strong enough in their condemnation of the US government. Legislators slackened the reins on Wall Street in the late 1990s and failed to curb them despite repeated warnings between 1999 and 2008. Moreover, governments’ addictions to deficit spending have severely hampered all ability to cope with crisis and the recovery from it.
Quantitative Easing (the practice of some governments of summoning money out of thin air and using it to buy their own debt) was a short term solution in Europe and the US in 2008, but there is only one way that confidence in the money markets will be restored. Governments have to intelligently trim their spending. There is little sign of an appetite for that in the US and much of Europe.
There was another straw pulled out of the tower. The bankers and traders of Wall Street like most politicians, most bureaucrats and too many others had become an inclusive world of self-selected experts. Convinced of their own genius and stripped of concepts like modesty and obligation, they had taken to the absence of regulation like alcoholics in an unlocked distillery. Both the internal and external governors on their behaviour had vanished.
It is interesting to compare the relative integrity of Canada’s financial institutions with their American and Western European counterparts. The internal and external governors on the behaviour of Canadian banks have weakened in recent decades but not vanished. Canadian banks tend to follow the old Edinburgh system and most of their senior personnel know each other and consult with each other regularly on the industry’s practices.
There is an anecdote (related to the author by a senior official with one of the big banks) that when the first Wall Streeter came up with the new ‘financial instruments’ based on Sub-Prime Mortgages, he met with vice presidents from all of Canada’s main banks at the Canadian Bankers Association. They heard his sales pitch, looked at each other, and said something along the lines of ‘No thanks’. An anecdote to be sure but some prominent Canadian bankers like Ed Clark and John Cleghorn made no secret of their dislike for both the flim-flam dazzle and some of the products associated with the sub-prime mortgages such as CDOs (Collateral Debt Obligations).
Canadian governments have also opposed the greater deregulation of our banks and financial institutions. Whatever beefs one might have with the governments of Brian Mulroney, Jean Chretien, or Stephen Harper; successive finance ministers have kept a tighter rein than their counterparts elsewhere. This prudence might be characterized as some sort of Scottish Presbyterian hangover from the 19th Century but tighter regulation of our banks has given our national finances a greater stability. Let us remember this.
The mass of marbles in a Kerplunk tower all touch each other and this is likewise true of the analogy.
The Food Crisis
When Eugene Whelan, the longtime Liberal Minister of Agriculture, was President of the World Food Council and the Canadian Ambassador to the United Nations Food and Agricultural Organization (FAO), he often talked to friends and colleagues about the situation the world would face in the middle of the 21st Century. It was obvious that the world’s food production was not keeping pace with population growth and at some point a crisis would occur.
What Ambassador Whelan and many FAO officials did not expect were the following developments: Around the world, more liberalized trade and increasing economic freedom would lead to improved economic growth in many nations. More and more societies urbanized which meant that many women entered the work force and had better chances to become educated. In almost all cultures, this means they have fewer children. The predictions of a Global population of over 11 billion people by the middle of the 21st Century have fallen off; median predictions from the UN and the US now see a peak total population of around 9 billion by 2050, and some estimates anticipate that human numbers will peak at 7.3 billion in the late 2030s and slowly decline after that period.
However, what the FAO also forgot was that prosperous people want more on their dinner plates. Growing prosperity in much of what used to be called the Third World has accelerated the demand for food. Nowhere is this more obvious than in China and India. In China, before the economic reforms of the late 1980s, supermarkets, convenience stores and the like were virtually unheard of; this year such stores in China expect to sell $370 Billion worth of food-products to Chinese consumers.
Other nations, although smaller than China and India, are also starting to experience rapid and sustained economic growth. Brazil, Indonesia, Mexico, the Philippines, Poland, Thailand and Vietnam are among them. Some of these countries were net exporters of food, now they may evolve also into net importers as their economies develop and mature. As an aside, back when some of these countries were more socialistic (or were outright Communist), they were barely able to feed themselves. Adopting capitalism allowed growth – a point utterly lost on the ‘Occupy Wall Street’ types.
Set against this was a steady increase in food production as new strains and techniques constantly appeared. However, even with the growth in population slowing, crop yields have been slowing too – especially for wheat and rice. The fruits of the 1960s Green Revolution are tapering off, and the Global effects of higher input and labour costs are being felt by many farmers around the world, while getting a reasonable profit is harder to accomplish.
In the first five months of 2008 food prices reached unprecedented heights — essentially 115% higher than they had been in 2004 around the world. Particularly high demand on grains and cooking oils sparked food riots and violent protests in some 35 countries. This sparked a dramatic intervention by the US, UK and China (domestically) to stabilize prices which then dropped to a level about 40% above the 2004 benchmark.
During 2009 and 2010, prices climbed steadily back to where they were in the peak of 2008 and then continued to climb. In February 2011, prices were essentially double where they had been in the summer of 2010. This was the real cause of the unrest in the Middle East, beginning in Tunisia and then Egypt, followed by civil war in Libya, Syria, Yemen and elsewhere.
Troublesome nations like Iran are nervous about an even more unsettled citizenry than usual; and the standard reaction of other troubled Middle Eastern elites is to provoke confrontation with Israel as a distraction. The risk of a major war in the Middle East is climbing. This in turn keeps oil prices high and may drive them into the stratosphere still if a war actually manifests.
The main driving element for higher food prices is a combination of the globalized market, higher demand, and commodities speculation. As outlined in books such as Andrew Nikiforuk’s Pandemonium and Paul Roberts’ The End of Food; food production has become incredibly intricate with the stress on maximized production at the lowest cost. There is now little room for major error.
The commodities speculation that has done so much to drive up food and energy prices in the last few years is also a direct response to the Great Recession. With so much market uncertainty and the loss of so much investment capital, commodities speculation is one of the few reasonably safe activities for investors. Unfortunately, as it so often does, the threat of scarcity can drive prices up and induce shortages thanks to stockpiling.
The globalized market not only places a heavy stress on the most efficient possible production but the shipment of so much food so quickly has ushered in a virtually universal disease and pest environment. In 2001, illegal imported sausages from Mongolia caused a major outbreak of a new strain of Hoof and Mouth disease in Britain that resulted in the culling of 10 million animals and a loss of $16 Billion to the British economy. In 2007, an African fungus essentially wiped out most of the North American bee population; with catastrophic effects for many crops that depend upon bees for pollination. The rapid spread of UG99 Yellow Rust from Uganda throughout northern Africa, the Middle East and Central Asia in four years is another case in point of the effect of globalization on one small mutation in what had been a long vanquished problem.
Genetically modified foods are a partial solution, but there is also ample evidence that the diversity of crop types allows for much greater resilience. Optimum solutions require careful controls, something every farmer instinctively knows is not always achievable.
The other aspect of the globalized market is that financial analysts now pay close attention to every report of poor weather, parasites and pests, and every estimate of production around the world. This results in immediate speculative commodities transactions on trivial reports. Minor news items and speculation about weather patterns are sparking immediate Global price hikes.
In most years over the last two decades, Global consumption of food has outstripped production with the net effect that overall surpluses have been slowly diminishing. In the US, for example, stockpiles of corn, soybean and wheat are all slightly less than they were last year and demands in advance of the harvesting of this year’s crop are heavier than ever. Many nations are finding it harder to maintain a strategic grain reserve of 3-4 months’ supply; even the US strategic grain reserve shrank to 2.7 million tons of wheat (with no cheese, powdered milk or other critical stocks) in early 2008.
We have been taking food for granted for too long, and have been ignoring too much of the human and material capital necessary to feed ourselves. In a game like Kerplunk, all the marbles drop at once. Our lack of attention to the most fundamental industry of them all will have dire consequences.
The high price of food underlies the increased turmoil in the Middle East this year. The indirect risk for the agricultural sector also comes out of the effect the food crisis is having on energy costs. Unrest in the Middle East invariably means higher costs for oil and natural gas. Increases in fuel oil and natural gas (from which most fertilizers are derived) then drive up food costs yet again.
Modern farming techniques expend fuel for plowing, planting, spraying pesticide and fertilizers and for harvesting. The annual demand for fertilizer consumes about 4% of global production of natural gas. While economists have found direct correlations between the price of fuel and farm profitability, most farmers would wonder why anyone would ever need to research such a question when the connection is self-evident.
The matter of exact timing is still being debated but “Peak Oil” — that point where the Global discovery of new sources of oil is outstripped by production – was predicted to occur sometime between 2004 and 2015. Inevitably, while demand is not outpacing production because of the renewed recession, in a few years this will be the case. In any event, the days of cheap oil have long been over. Production costs for both oil and natural gas have nowhere to go but up.
Peak oil may be a misnomer, the real issue is cheap oil. We have plenty of oil available that is more expensive and environmentally risky to extract.
There are as yet untapped reserves of oil and fields that are far from being fully exploited. The bad news is that the easily available light sweet crude from the Middle East (which had the lowest refining costs) are not just in heavy demand but it is clear that some fields will soon be mostly depleted.
The newer sources of oil and natural gas are all more expensive to develop. These include deep water wells off the continental shelves (with well heads deeper than 200m). As was seen in the 2010 British Petroleum accident in the Gulf of Mexico, accidents this deep are very difficult to control and the environmental clean-up is very expensive.
In 2007, the world had 1,317 trillion barrels of conventional oil in existing reserves – 42 years’ worth of oil remaining at the 2007 consumption rate of 31.1 billion barrels of oil a year. The world also has between 2.8 and 3.3 trillion barrels locked up in shale oils (62% of which appear to be in the US); and more remains to be found. However, oil shale is very expensive to extract and refine.
Canada’s Tar Sands also constitute a reserve of 1.7 trillion barrels of oil; but only about 10-15% of it is economically recoverable with current prices and technologies. Like oil shales, oil from the tar sands is expensive to process and seems to carry a high environmental price although, as always, the environmental lobby oversells its case.
In 1996, crude oil was selling for $20 per barrel; the price reached $147.10 in 2008, dipped again to $40 in mid-2009, and is just coming off a high of $126.65 in early April 2011 and is hovering around $1.05 in late September. We should not expect to see oil prices stay much below $100 often or for very long anytime in the next few years.
The ethanol diversion may prove to be just that – an economic diversion. While Brazil’s experiment with sugar is proving economically successful (their ethanol plants can switch in seconds to making crystallized sugar for human consumption and then back again) American ethanol production is consuming 40% of its corn crop and only yielding 8% of its fuel requirements. This is thanks to massive subsidies and technological inefficiencies that may never be overcome. It is also driving up livestock feed prices around the world and contributing to the overall grain shortage.
Economists dread stagnant economic growth when combined with inflation; but despite all the rosy words and pasted on smiles of reassurance, this is precisely the situation we face. Food and oil costs are creating inflationary circumstances for consumers, even as our economies slow down still more. The risk of ‘stagflation’ is already being realized in some European countries.
Corn ethanol programs are another straw in our Global ‘Kerplunk’ tower except in this case it makes more sense to remove the straw than to keep it there. Other costly ‘green’ energy solutions to power generation make little sense at all if they also keep the cost of electricity too high. Windmills and such might be a part of any society’s power generation solutions but it may be folly in the long run to expect too much of them.
The problem is that logic and clear thinking has become scarce today.
If there is a better technique for shutting your eyes, sticking your fingers into your ears, and going ‘Nyah, nyah, nyah; I am not listening” than resorting to the inverted ethics that characterize political correctness, it has yet to be discovered. There is a whole class of bureaucrats, politicians and commentators that deserve to be given a paddling and sent to their rooms until they are ready to behave themselves.
George Orwell’s novel 1984 warned us about the dangers of the use of inverted ethics and the control of language by a political class to dominate society. As Orwell’s hapless characters in the novel would put it: Too Doubleplusungood for us to fail to imagine that an entire political culture would see the novel as a primer to guide their behavior rather than a warning about traps to avoid. (For those who do not understand the reference to ‘Doubleplusungood’ and think it so much ‘Duckspeak’ – read the book).
Postmodernist thought sets itself against classical liberalism, rejects the West’s value systems, thinks history is unimportant and dismisses all cultural relationships against the needs of the moment. Naturally, the last of the old Romantic-Era rebels who opposed Classical Liberalism and the tradition of the Enlightenment embraced Postmodernism. The Left took to it like a Junkie to cheap heroin and we’ve been living with the results ever since, particularly as the gestalt that resulted spread through all our institutions.
In the last 30 years, much of the old ‘Left’ and ‘Right’ distinction has become meaningless. American Democrats and Republicans debate by shouting slogans at each other and no debates of any real import occur anymore. Wall Street has abandoned prudence and given itself over to inventing new ‘financial instruments’ in unfettered greed. But who has been running Wall Street the last few decades but the products of the same self-selected ‘elite’ schools that send lawyers to Washington? The core of the America’s political parties and its financial institutions come from the same background and exclude all others from their select circles.
European bureaucrats and parliamentarians are little better. Ignoring the screams of outrage from the streets of their cities as waves of Islamic immigrants settle in as colonists, they dismiss and prosecute those who raise the alarm. One can almost imagine them saying ‘Well, this is the natural outcome of the post-colonial rejection of Western hegemonism and so we should be tolerant…’
Fundamentals like sound economic practices, security of food supply, and all those other tedious boring things are so unimportant compared to insuring that a new generation of youngsters do not have their minds cluttered up by old-fashioned Enlightenment thinking. Our past has become unimportant as it interferes with an exciting new future imagined by people who resent details.
Perhaps things are not so bad here in Canada as our Parliamentarians are not always mindlessly partisan and certainly have to be answerable to their constituents. Regardless, we have seen the future elsewhere and it does not look good.
‘Kerplunk’ and someday soon we’ll lose all our marbles… if we haven’t lost our own already.