People in the west are talking about riding bi-cycles. The affluent and the rising middle-class people of the east have been moving-up from the bi-cycle to the two-wheeler to the car.

The forgotten ‘have-nots’ of the world are aspiring for two square meals a day.

One important aspect of human psychology (as Jeeves would have said!) says we feel happier if we started with having nothing. Having something good, and then losing it, is more painful than not having it in the 1st place itself. At least that’s what happens in the short-term, immediately after we lose something. So having a home and losing it subsequently is painful. Having a great job with a greater pay-check and losing it (the salary, obviously!) is painful. Having oil at $2 a gallon or so, and then to pay more than double that amount hurts a society used to cars.

Blatant consumerism with easy credit money, and then cutting back on even useful expenses facing a credit crisis, are painful. For the have-nots, they were probably happy with the bare minimum two square meals a day. Rising food prices forced them to reduce even that intake. So they too crib about the current conditions, true seldom we do hear about them or discuss about that.

It can’t probably go on like this much longer, with oil rising seven times in probably as many years. Many other commodities had a similar run. Lately food prices joined the rally.

Makes me wonder, whether global capitalistic society someday can come up with innovative derivative products for air, water or say, human blood – as needed in times of emergency. However that’s a different topic altogether. 

The last structural change happened in the 1970s with the demise of the Bretton Woods system.

At the same time, many have said earlier that the imbalances, whatever those are behind present conditions, can’t go on for ever and still they go on, year after year. Economic challenges like this often visit us, leave a few nations, organizations or individuals bruised, and pass away.

The blame games are being played as usual. Can something indeed give in to bring back the much needed in-built balances that the Bretton Woods system had? Because the change is much more fundamental this time, as nearly two billion people from much of Asia have already entered or would be entering middle-class life styles over next couple of decades. That’s nearly three times the size of the combined population of Europe, North-America and Japan; the economic power-houses of the world so far.

Well, the figure of two billion people entering middle-class over last two decades and over the next three decades can be debated. It may even be a little optimistic. But that’s a distinct possibility, depending on the level of shift in consumption from China, India and other nations. True, the consumption level of this aspiring middle-class would still be a fraction of that of the west, but the number – in three times of Europe, US and Japan - has a deeper meaning in it.

The problem would have been a no-brainer, had it been with productivity or innovations alone. The problem this time is about natural resources, with few having it and others paying for it. And irrespective of the debate whether the supply can keep up with rising demand for the time being, over the longer term, supply is anyway limited. Economic advancement has been synonymous with more and more consumption of these resources. Forget about crude, iron ore now sales at much more price than at which steel used to sale, even couple of years ago. Or why take iron ore, coal itself now sales at twice the price at which steel was selling a decade back. Fertliser prices have sky-rocketed.

In-spite of all academic talks about innovations, productivity; they, in my opinion don’t offer much relief against availability of natural resources. Per-capita consumption of wood probably has not come down from the stone-ages to the present age, the utility has changed. More so, when OPEC has the control, meaning investments made now for alternate energy at $140 a barrel can be unproductive if OPEC wants it to be so. They have the ability to bring the price down to $70 a barrel or so, at least temporarily.

Money supply, on the other hand has been growing at nearly 20% or so, in many of the fast developing nations or in the leading economies. When all asset-class prices are falling (barring commodities and bonds in some nations), obvious question comes, where is this money going? This money, mostly categorized as smart money, won’t be satisfied with Japan’s low-single digit bond return or that the US offers now. Irrespective of what’s said about speculation in commodities, a very small fraction of this money supply is chasing commodities. Hedge funds are a different ball game altogether.

Personally I am not feeling much of this 20% or so growth of this money supply. I believe most don’t, all over the world. Smart money doesn’t follow Buffet, it hardly stays in cash, forget of being in cash for ever. And too much cash for ever also would signal low interest rates, however many countries are now witnessing the opposite. 

What can therefore give in that can lead to temporary or more longer-term solution to this problem? In order of likelihood, and effectiveness, from short-term to longer term, combinations of following may work:

  1. US influencing OPEC to wriggle out more supply/manipulating commodities markets through speculators: This was quite easy for the Fed. and other US-based policy-makers earlier. Goldbugs believe in it strongly. However, this time, it’s been quite a frustrating experience for these master manipulators. Is it indeed different then, this time? The answer isn’t easy, though seasoned economic experts would say, it’s no different; it’s just another cycle of boom-and-bust.
  2. Fed. tightening rates as Paul Volcker did in the 1980s (and Japan following same), and as often stated now-a-days in media. Historically, increase in interest rate reduced money supply. However, that relationship doesn’t hold sacrosanct now-a-days. There are nations with closed to double digit interest rates, and still money supply grows at 20% or so.  And with 2% interest rate in the US or 0.5% interest rate of Japan, we see similar growth in money supply in dollar or yen. Money supply is something to be focused on, and not interest rate! Global media focuses more in interest rates, and as individuals, we also can feel interest rates directly. Money supply isn’t one that an individual can sense, other than in the form of inflation (too much of it), or very high interest rates (too less of it). Increasingly the world sees both high inflation and high interest rates, barring the US and Japan. And the damage control attempted by other central banks are more than compensated by the Fed. and its follower, the Bank of Japan.

I seldom see any reference on how much of global money supply comes from dollar alone? Or dollar and yen combined? How much should it be, to have a resemblance of global balance? Ideally it should be closed to their share in global GDP – 30% or so, take little more as both are also used as global currencies of different degrees.

The actual figure may well be 50% or more. True, it’s my guess, and I will be glad if someone points out the right figure. And there lies the problem. The world’s two largest economies have a problem in them. In order to have growth at any cost, they supply the cheap money.

Points 1 & 2 above provide possibilities of solutions without addressing fundamental imbalances, a minor course correction at most and thereby again charting back on same old path with same parties.

Can the parties itself change? Can the petro-dollar linkage itself break? Would emerging powers like BRIC and OPEC try out something different? No one should expect that those arrangements would be full-proof from day 1. Those would stumble, face similar or worse crisis. However is it time to think about alternatives to have energy market in other currencies? Can we have much of global trade in currencies other than dollar or yen? No single currency can no longer act as a predominant global currency, in this age of globalization. Euro alone isn’t the solution. 

Experts would say not likely and not feasible in the foreseeable short term.

Right, however could anyone forecast oil at $140 or more even a year ago? Radical events bring radical changes.

So what’s going to give in…if not at $140 a barrel, then at what price for oil? Remember, many felt such a change may come after the Beijing olympics. I don’t know how or what would give in, however I would love to see that something does indeed give in.

Ranjit is an Associate Professor at Indian Institute of Foreign Trade, and is the author of the book Wondering Man, Money & Go(l)d.  

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