Two bits of news circulating on the internet in the last week or so offer a useful glimpse at some of the currents of change that are setting the future into motion around us. One of them caused a modest flutter in the dovecotes of the internet and the mass media, and the other passed almost unnoticed. So far, though, the sweeping implications of both of these news items seem to have been missed by most observers.
The first bit of news was a report that the Chinese government is planning to ban the export of rare earth elements. Those of my readers who don’t track the latest fads in technology may not know that these have become crucial to many cutting edge technologies. Lanthanum, for example, is used in high-tech batteries, and neodymium goes into the permanent magnets used in electric motors and wind turbines. The innards of the Prius and other hybrids, to say nothing of the as-yet-imaginary electric cars being hyped by what’s left of the American auto industry, depend on rare earth elements, and China currently produces well over 90% of the world’s supply of most of them. The report thus sparked claims of an imminent shortage in these minerals and, predictably, a flurry of speculative interest in (and hype-ridden articles about) mines outside of China that can produce the same minerals
A couple of details of the proposed restrictions somehow failed to make it into most media and internet accounts, and they are by no means minor issues. The first is that there’s nothing that new about this news; in each of the last three years, the Chinese government has cut the export quotas for rare earth elements from China’s mines. More important is the fact that the Chinese are not preventing the export of products containing rare earth elements; they are simply moving to ban the export of the raw materials. In effect, what the Chinese are saying is that they are no longer willing to accept the Third World’s designated role as a source of raw materials and cheap labor to be exploited for the benefit of somebody else; if the future is going to run on technologies based on rare earth elements, those technologies are going to come out of Chinese factories, and the wealth produced by them is going to be concentrated in Chinese hands.
As this reality sinks in, we will doubtless hear more denunciations of “resource nationalism.” You’ll notice that nobody denounces “resource nationalism” when the United States imposes political controls on the control of its own strategic resources, as of course it does. The problem arises, as some wag or other put it, because a lot of our resources these days have unaccountably turned up underneath somebody else’s real estate.
Now to some extent the rise of “resource nationalism” is simply one of the consequences of the decline of America’s global empire. Page back a century or so to the time when Britain was the global superpower, with troops garrisoned around the globe, and the same debates took place in very nearly the same terms. Britain’s Parliament and press trumpeted the virtues of free trade, meaning by that comfortably vague phrase a system of unequal exchanges that concentrated the bulk of the world’s wealth in London, while other countries – among them, ironically, the United States – used politically imposed trade barriers and tariffs to nurture their emerging industrial economies at Britain’s expense. As the British Empire waned, so did the global economy of the late 19th century, until the First World War finally pushed it over the brink into oblivion.
We are arguably in a similar situation now, with America playing the role of declining empire and China, among other countries, imposing strategic trade barriers by political fiat as a means of building up its own industrial might at our expense. All other things being equal, we might reasonably expect a troubled transition lasting several decades and punctuated by a series of spectacular wars, not unlike the 1914-1945 transition period that saw Britain’s global empire replaced by America’s. Still, all other things are not equal, and the second bit of news I want to discuss here points up one of the differences.
This was the announcement a few days back that the world derivative market has now reached a total paper value in excess of one quadrillion dollars. The conventional wisdom has it that such sums are beyond the capacity of the human mind to grasp, and in this case, the conventional wisdom may well be right. (If you have the sort of fashionable lifestyle that costs you $2000 a day, for example, and you started spending it when multicellular life first evolved on Earth, you wouldn’t yet have spent one quadrillion dollars.) Still, it’s important to grapple with such figures if only to grasp the fantastic absurdities that have created them.
In thinking about this particular version of the unthinkable, two things should be obvious. The first is that there isn’t a quadrillion dollars worth of nonfinancial goods and services anywhere on our planet. The second, which derives necessarily from the first, is that those derivatives aren’t actually worth a quadrillion dollars in any meaningful sense, since it’s impossible to cash them in for anything other than more financial paper. In terms introduced in an earlier Archdruid Report post, derivatives exist solely in the tertiary economy, the economy of abstract numbers that started out as a representation of real wealth and has now gone spinning off into a hallucinatory Wonderland of its own.
As I am not sure how many of my readers understand derivatives, a few words on the subject might be useful. A derivative is essentially a bet regarding some asset, index, cash flow, or the like, which is called the “underlying.” In the early days of derivatives, cash changed hands when the bet was settled – for example, a derivatives contract might obligate me to buy a hundred carloads of steel next October at a price fixed in advance, and the price of steel when the contract came due determined who profited and who lost. More recently, though, derivative contracts themselves have become hot speculative properties, subject to all the usual vagaries of bubble economics. Since they can quite literally be conjured out of thin air when needed, with no cash down, they are in many ways the perfect speculative instrument.
It will be interesting to see just how long the current bubble in derivatives – for that is what it is, of course – can continue to run. Substantial gaps already exist between the speculative economy and that other, dowdier economy where nonfinancial goods and services are produced and consumed; nowadays the main connection between these two economies is credit, which is manufactured in the speculative economy but partly exported to the real economy. The late housing bubble and its aftermath offers a good demonstration of this; vast amounts of credit produced in the speculative economy flooded the real economy until 2007 or so, causing apparent prosperity; when the speculative economy crashed and all that credit dried up, so did the real economy’s prospects. Derivatives have less contact with the real economy than mortgage-backed securities did, and since nearly all the quadrillions of dollars in the derivatives bubble have been minted out of twinkle dust by processes even more arbitrary than those used by the US government to conjure the funds for its recent stimulus programs – and that is saying something – it’s not completely impossible that the bubble will go zooming off into a realm of pure abstraction full of quintillion-dollar deals as irrelevant to the real economy as the money traded in a game of Monopoly.
Yet there is another potential connection between the etherial realms of speculative finance and the gritty world of matter where goods and services are produced and consumed, and China’s tightening grip on its rare earth elements points toward that connection. Economics does not exist in a vacuum, and the power of high finance can find itself suddenly overmatched when it has to contend with the sort of power that grows out of the barrel of a gun.
This is the mostly unlearned lesson behind the collapse of Long Term Capital Management (LTCM), that poster child of 1990s speculative hubris. Founded by some of the brightest minds in the market, with two Nobel laureates on its staff, LTCM made money – for a while, lots of it – by a set of complex mathematical models that, according to one of its founders, could not fail within the lifetime of this universe or two more like it. The universe ended early; LTCM had been in business for all of five years when the Russian government unilaterally suspended payments on its foreign loans. LTCM had a lot of money in Russian loans, but the prospect of a default wasn’t included in the models, and by the time the rubble stopped bouncing LTCM was so deep in the red that a consortium of banks had to be strongarmed by US government officials into stumping up billions of dollars to prevent a run on securities markets.
The lesson the founders of LTCM learned the hard way is that politics trumps economics. It’s a lesson that has been repeated many times over the last century, but it’s one that very few people seem willing to notice. If I’m right, though, it may just be the key to understanding the next fifty years or so of history.
In previous posts here, I’ve suggested that the world is in the midst of a transformation between the kind of society and economy familiar to us over the last century or so, which I’ve called “abundance industrialism,” and a new kind that may as well be called “scarcity industrialism.” Where abundance industrialism was defined by the ready availability of cheap abundant natural resources, especially but not only fossil fuels, scarcity industrialism will be defined by the scarcity of such resources. One of the implications of this shift is that those nations and regions that control significant amounts of important resources will find those resources becoming a potent source of political leverage. The same sort of clout OPEC gained from its oil reserves in the Seventies, and may reclaim in the not too distant future, will become accessible to countries or cartels of countries with large amounts of any economically vital resource.
If this is correct, the Chinese are not just using trade barriers to build their industrial plant at America’s expense; they’re doing that, of course, but it’s not all they’re doing. They are also taking advantage of the opportunities opening up as the age of scarcity industrialism dawns. They may well have recognized that in a world that will increasingly be shaped by resource scarcities, those who act to secure their own resource bases can thrive while others falter. It’s a lesson that Russia has already learned – witness the successful efforts of the Russian government to seize Russia’s fossil fuel assets from the handful of American- and British-backed billionaires who walked off with them during the chaos and corruption of the Yeltsin years – and other nations are beginning to learn it as well.
The dawn of the age of scarcity industrialism thus promises to stand many of the assumptions of the recent past on their heads. It may not be out of place, therefore, to discuss some of the ways that societies might, if they were minded to do so, deal with some of these new realities, and next week’s post will try to peer ahead into this territory.
37 comments:
Here in the US, I think our future mines lie in the various landfills now operating as repositories.
9/2/09, 8:18 PM
mark said...
9/2/09, 8:53 PM
PRiZM said...
9/2/09, 10:31 PM
Elizabeth M Rimmer said...
9/3/09, 12:15 AM
Kevin said...
9/3/09, 1:14 AM
dnissley said...
9/3/09, 5:58 AM
Gavin said...
9/3/09, 6:21 AM
Berkshire said...
Futurists suggest that the salvage business is the US growth industry of the future. A relative has an interest in a small scrap yard and I surmise that nothing will be left for our kids to fight over. Asian middlemen are buying for cash every ounce of refined scrap metal that can be had and then shipping it by the boatload to the Far East. Think of the huge energy and cost advantage buying already refined metals in comparison with mining and processing it new. I believe the scrap exporting business might be one of the largest contributors to our export balance of trade. Good bye America.
9/3/09, 6:25 AM
John Bray said...
Though the USA doesn't have a right lot of mercury anyway.
9/3/09, 6:54 AM
John Bray said...
"The United States does not have a tantalum mining industry because resources are of low grade, and the United States must import all of its tantalum source materials for processing. Australia, Brazil, and Canada are the major producers of tantalum mineral concentrates."
U.S. Geological Survey, Mineral Commodity Summaries, January 2009
9/3/09, 6:59 AM
Dale Asberry said...
http://www.reuters.com/article/marketsNews/idUSPEK1183220090831?sp=true
9/3/09, 7:30 AM
John Michael Greer said...
Mark, it won't be grain for minerals, it'll be grain and other raw materials for manufactured goods -- the same trade we used to impose on the Third World. You'll notice who gets the short end of that stick.
Prizm and Elizabeth, thank you.
Kevin, every time somebody finds an oil well these days it gets trumpeted as the end of peak oil. You can practically smell the desperation in the media.
Dnissley, I expect major changes, quite possibly including a change in government. It won't slow them down for long.
Gavin, they're very modest finds by the standards of twenty years ago, and since they have to take up the slack for rapidly depleting supergiant fields such as Cantarell, they won't push back peak oil at all. One of the things many people don't realize is that peak oil theory has already factored in the discovery of new oilfields on the downslope.
Berkshire, we're well on our way to becoming a Third World nation -- that is, one that sells raw materials on the world market and imports pretty much all its manufactured goods.
John, thank you! A nice data point.
Dale, thank you for another useful data point. I bet the big financial firms keep on selling derivatives to Chinese state firms, and then run to our government for handouts when the Chinese default on them. It's as though the business news these days was being written and performed by the Three Stooges.
9/3/09, 7:49 AM
John Bray said...
A graphic from the UK Financial Times here puts the oil find in perspective rather well (no pun intended).
9/3/09, 8:00 AM
Curt Yost said...
-Extremely centralized, as we stripped away local farming.
-Extremely energy dependent (long supply lines, lots of machines, fertilizer, pesticides and the like).
-Unsustainably propped by massive amounts of irrigation, when our water tables are depleting.
In an environment of resource scarcity, our farmlands will be harmed more than many other elements of our economic system.
9/3/09, 8:09 AM
clif said...
Politically the unwinding of the way we have been living beyond our ability to sustain our lifestyles, is the most explosive issue we will face in the future. Given a large segment of our population seems to accept the non-negotiable position of the American lifestyle. Unfortunately for them the laws of physics, chemistry and geology do not have to negotiate with us, because they impose their "will" upon us each and every day without our permission.
Each empire likes to think they are unique, however history begs to differ. The British were seen as the preeminent world power until after WW2 even though by the beginnings of the great depression they were essentially broke. Sort of the situation we are currently in, big army but having to finance its ops with other people’s money.
Our military prowess can last a couple more decades, because of the longevity of weapons systems, and the technological advantages we currently have. However just like the British after WW2, when the state of the art moves beyond what we currently have, the super power status and the ability to police the planet for the benefit of Wall Street and large corporations is going to vanish.
Economically the Asian countries, China specifically seem to be next in line. Militarily, the next contender for world cop remains up in the air. However every economic power in the past has also been a military power to protect their economic empires.
China is building the rudimentary elements of a regional military, but if they want to protect the resources they are currently buying and the shipping lanes to transport those resources to China, like the US has had since the beginning of the 20th century, they better get busy. Because without a military to enforce the contracts the Chinese are signing, they are gonna wake up with broken promises, and no resources flowing to their shores.
9/3/09, 10:26 AM
porge said...
If these side bets are fashioned like futures or option contracts then that mind bending number is mis-leading.
With a futures contract for example......you may control 100k of the underlying but the amount at risk is only 2-3k.
So instead of 1000 trillion at risk it is probably only a few trillion......which is still a huge problem that won't get solved!!
9/3/09, 11:00 AM
ariel55 said...
9/3/09, 11:53 AM
Danby said...
China has been a net exporter of calories for many years now, since at least the early 1990s. They do have a trade deficit in foodstuffs, but that's due to their export of cheap commodities, mostly rice, soybeans and wheat, to south Asia and import of meats and exotic foreign food from the US and Europe.
The government keeps a very close watch on this particular statistic, as they view it as fundamental to political stability, that is to say, their continued hold on power. When the Chinese peasants decide the dynasty is no longer worth it's cost, the upper classes die in large numbers.
9/3/09, 6:33 PM
Don said...
How much lanthanum and neodymium would we need for the wind-and-battery powered economy vs. how much exists on the planet, not just in China? Is this even feasible, or are we talking about simply another depleting resource? What environmental and fossil energy costs are involved in extracting and refining these metals?
9/4/09, 4:46 AM
gaias daughter said...
“We have found that if we want to stand still–that is, continue producing 85 million barrels per day–for the next 22 years, we need new production of 45 million barrels per day to compensate for the decline. That means four Saudi Arabias. Add on a demand increase of the sort seen the past couple of decades–equivalent to another two Saudi Arabias–and the world will have to work that much harder to meet rising demand.”
And even if we miraculously find the equivalent of another six Saudi Arabias, that oil is not likely to be as easily pumped and transported as current sources, i.e., no longer *cheap* oil.
And Mark, grain for minerals (or manufactured goods, for that matter) assumes a surplus, not a shortfall, which, as Curt implies, is a huge assumption!
9/4/09, 8:54 AM
Joel said...
I guess, then, we'll be selling the steak, not the sisal.
9/4/09, 12:29 PM
nutty professor said...
Dismal science, indeed!
9/4/09, 1:17 PM
Wilson said...
Wilson
http://cardrawing.net
9/5/09, 6:07 AM
Andrew said...
9/5/09, 5:33 PM
William said...
I forgot to include my e-mail. It's [email protected].
Thanks,
Pierre
9/5/09, 6:17 PM
Vesper said...
9/6/09, 8:35 AM
Don said...
9/7/09, 6:39 AM
xhmko said...
Tantalum is mostly mined in two places, some place in Africa, and Greenbushes in South Western Australia. Just over the back fence from one of my best mates.
9/8/09, 6:30 PM
xhmko said...
9/8/09, 6:34 PM
xhmko said...
A little extra reading for you as though you could squeeze it in.
Jean Pain - Another kind of Garden
Actuall its written by his wife but details his methods of composting and self sufficiency. He's the real deal. Actually I'm sure you've heard of him anyway
9/8/09, 6:44 PM
Arabella said...
9/9/09, 8:30 AM
Andrew Butt said...
"Have you heard what Greer sang?
be courageous to build up the gifts now,
to give our children so they do not despair."
Thanks,
Andrew
9/11/09, 6:17 AM
secondera said...
Also, in response to Clif, who said that China will need a military to enforce those contracts, this is a 20th century mindset. In the age of nuclear weapons, the homeland is secure from invasion even without a military while economic contracts are secure through economic influence. When it comes to power projection, China has been a very smart player. They didn't get caught up in a nuclear arms race. They're taking their time on issues like Taiwan while committing to brutal violence mostly on the domestic front to avoid Eastern Block style political reform or secession on the Tibetan Plateau.
9/18/09, 10:30 PM
Dave Johnson said...
9/28/09, 9:17 AM
gaias daughter said...
I've lived in Europe, so I know how much more frugal Europeans are. No European would think to get in a car to drive three houses down (as my neighbors do). No European would air condition a three story house to keep their cat comfortable while they are on vacation (as my neighbors do). No European would consider throwing newspapers in a recycling can 'too much trouble' (as my neighbors do). So the question is not 'could we get by with less energy?' but 'how do we get people to voluntarily cut their energy usage?' Personally, I don't see that happening until TSHTF.
And the fact is that our economy is based upon growth. Should we all become energy sippers instead of guzzlers, should we buy only that which we really need instead of every cheap 'made in China' item that hits the shelves of Wally World, our economy would contract and contraction is death to a growth-based economy. So it's damned if you do and damned if you don't.
That said, your example is one it would behoove us all to follow . . . and the economy be damned!
9/29/09, 4:22 AM
Dave Johnson said...
9/29/09, 1:17 PM
Liesl said...
Thats a fairly typical US-centric worldview
It may not be feasible to ship food vast distances, given how much energy that consumes. However, Asian countries are already buying up vast tracts of arable land in Australia and Africa. Here in Aus we don't even know how much, all we know is that it is happening faster than we are keeping track of.
8/5/10, 7:49 PM