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Gregor Macdonald

Why We Must Embrace Simplicity Now

by Gregor Macdonald, contributing editor

Executive Summary

What current gold demand is telling us about economic growth expectations
The dangerous conclusion from the famous Simon-Ehrlich wager
Simpler energy sources are becoming cost-competitive with complex ones
Why we will move towards greater simplicity, willingly or not
Why many of our leaders are blind to this trend and will spend the next decade futilely fighting it. Will you?

Part I: Returning to Simplicity (Whether We Want To or Not)

If you have not yet read Part I, available free to all readers, please click here to read it first.

Part II: Why We Must Embrace Simplicity Now

The English thinker Thomas Malthus argued in his famous essay on the principle of population that there was no longer sufficient land to feed the world’s rapidly growing population, threatening poverty and famine. But an agro-industrial revolution soon transformed the economies of Europe and North America, and his fears proved unfounded. More recently, conventional wisdom held that market forces would always come to the rescue. Until ten years ago, this hope was largely fulfilled. During most of the 20th century, resource prices—of food, water, energy, steel, for example—declined, despite strong growth in the world’s population and even stronger growth in GDP. Prices fell because of a combination of new low-cost sources of supply and technological innovation. But in the past ten years, demand from emerging markets, particularly in Asia, has erased all the price declines of the previous century.

– Resource Revolution, from McKinsey and Company

It’s taken ten years of relentless inflation in food and energy, with myriad data showing declines in the quality and availability of many natural resources, for it to appear that the global consultancy McKinsey finally “gets it!”

I take this as a potential sign that Kahneman’s Availability Heuristic is about to undergo a sea change with regards to the prospects of technology-driven progress. Two hundred years of history exert a powerful force over people’s outlook, but a solid ten-year reversal of those trends just might be enough to induce some folks to begin reconsidering their previously-unshakable confidence in previous trends.

Why We Must Embrace Simplicity Now

by Gregor Macdonald, contributing editor

Tuesday, January 17, 2012

Executive Summary

What current gold demand is telling us about economic growth expectations
The dangerous conclusion from the famous Simon-Ehrlich wager
Simpler energy sources are becoming cost-competitive with complex ones
Why we will move towards greater simplicity, willingly or not
Why many of our leaders are blind to this trend and will spend the next decade futilely fighting it. Will you?

Part I: Returning to Simplicity (Whether We Want To or Not)

If you have not yet read Part I, available free to all readers, please click here to read it first.

Part II: Why We Must Embrace Simplicity Now

The English thinker Thomas Malthus argued in his famous essay on the principle of population that there was no longer sufficient land to feed the world’s rapidly growing population, threatening poverty and famine. But an agro-industrial revolution soon transformed the economies of Europe and North America, and his fears proved unfounded. More recently, conventional wisdom held that market forces would always come to the rescue. Until ten years ago, this hope was largely fulfilled. During most of the 20th century, resource prices—of food, water, energy, steel, for example—declined, despite strong growth in the world’s population and even stronger growth in GDP. Prices fell because of a combination of new low-cost sources of supply and technological innovation. But in the past ten years, demand from emerging markets, particularly in Asia, has erased all the price declines of the previous century.

– Resource Revolution, from McKinsey and Company

Returning to Simplicity (Whether We Want To or Not)

photo: BP Oil Leak photo series via Boston Globe, Mark Ralston – AFP/Getty Images

Eventually the point is reached when all the energy and resources available to a society are required just to maintain its existing level of complexity.

– Joseph Tainter

The modern world depends on economic growth to function properly. And throughout the living memory of every human on earth today, technology has continually developed to extract more and more raw material from the environment to power that growth.

This has produced a faithful belief among the public that has helped to blur the lines between human innovation and limited natural resources. Technology does not create resources, though it does embody our ability to access resources. When the two are operating smoothly in tandem, society mistakes one for the other. This has created a new and very modern problem — a misplaced trust in technology to consistently fulfill our economic needs.

What happens once key resources become so dilute that technology, by itself, can no longer meet our growth needs?

Returning to Simplicity (Whether We Want To or Not)

photo: BP Oil Leak photo series via Boston Globe, Mark Ralston – AFP/Getty Images

Eventually the point is reached when all the energy and resources available to a society are required just to maintain its existing level of complexity.

– Joseph Tainter

What happens once key resources become so dilute that technology, by itself, can no longer meet our growth needs?

Preparing for Higher Food Prices

by Gregor Macdonald, contributing editor

Tuesday, January 3, 2012

Executive Summary

How urbanization is accelerating the loss of the world’s arable land
The three major trends that will impact global food prices and potentially create even more volatility in the next few years
How virtual water introduces a new threat of resource conflicts
Why our government’s actions to revive the economy translates into higher prices for food and other hard assets
Why greater volatility in food prices lies ahead
Defensive strategies against higher food prices

Part I: A Punch to the Mouth: Food Price Volatility Hits the World

If you have not yet read Part I, available free to all readers, please click here to read it first.

Part II: Preparing for Higher Food Prices

Close-up: The Loss of Arable Land Per Capita

Recent data from the World Bank shows that arable land per capita has been declining globally for 40 years. This has been true in most countries, especially the juggernauts of India and China. But we have compensated for that decline with fertilizer. As Julian Cribb points out in his book (page 72), it has been asserted that “over two billion people would not be alive today, were it not for the invention of the industrial process for making nitrogen fertilizer.”

Indeed, we know that 2008 was an important milestone in the history of humankind: That was the year that the majority of the world population, for the first time, lived in urban centers. The rapid urbanization — and therefore loss of farmland — in Non-OECD countries may have produced wonderful stock market returns for the past two decades as developed-nation capital hooked in to such rapid growth. However, it is not clear that this process has upgraded humanity’s overall quality of life. Energy inputs do upgrade diets. And energy inputs also can reduce the suffering of burdensome, human-powered labor. But the associated pollution and environmental destruction exacts a heavy price for such a transition.

Preparing for Higher Food Prices

by Gregor Macdonald, contributing editor

Tuesday, January 3, 2012

Executive Summary

How urbanization is accelerating the loss of the world’s arable land
The three major trends that will impact global food prices and potentially create even more volatility in the next few years
How virtual water introduces a new threat of resource conflicts
Why our government’s actions to revive the economy translates into higher prices for food and other hard assets
Why greater volatility in food prices lies ahead
Defensive strategies against higher food prices

Part I: A Punch to the Mouth: Food Price Volatility Hits the World

If you have not yet read Part I, available free to all readers, please click here to read it first.

Part II: Preparing for Higher Food Prices

Close-up: The Loss of Arable Land Per Capita

A Punch to the Mouth: Food Price Volatility Hits the World

Perfect Storms

2011 was an abysmal year for the global insurance industry, which had to cover yet another enormous increase in damages from natural disasters. Unknown to most casual observers is the fact that during the past few decades the frequency of weather-related disasters (floods, fires, storms) has been growing at a much faster pace than geological disasters (such as earthquakes). This spread between the two types of insurable losses has moved so strongly that it prompted Munich Re to note in a late 2010 letter that weather-related disasters due to wind have doubled and flooding events have tripled in frequency since 1980. The world now has to contend with a much higher degree of risk from weather and climate volatility, and this has broad-reaching implications.

And critically, it has a particular impact on food.

Many factors seen over the past decade have produced higher food prices: population growth, urbanization, the decline of arable land per person, and the upgrading of diets for example. But more damaging than food inflation has been the pushing of global food prices out of their long, quiet envelope of stability. From the recently released UN Report on the World Food Situation:

A Punch to the Mouth: Food Price Volatility Hits the World

Perfect Storms

And critically, it has a particular impact on food.

Why Oil Prices Are Killing the Economy

“Oh, that was easy,” says Man, and for an encore goes on to prove that black is white and gets himself killed on the next zebra crossing.” ― Douglas Adams, The Hitchhiker’s Guide to the Galaxy

Have rising oil prices just put the final coffin nail in the entire 2009-2011 economic recovery?

Given the slowdown in China, the new recession in Europe, and the rocky bottom in the US economy, it certainly seems that way.

Oil’s Relentless March Higher

Oil prices emerged from their spider hole over two and half years ago. Having fallen from the towering heights of $148 a barrel in the summer of 2008, the early months of 2009 saw a return to prices in the $30s. Interestingly, during that great oil crash, the price of West Texas Intermediate Crude Oil (WTIC) spent only 20 trading sessions below $40. That is the exact price that most analysts only three years prior believed oil could never sustain as the world would pump “like crazy” should prices ever reach such “impossibly high levels.”

Given the enormous debt troubles the West is currently facing and the fact that oil has averaged over $100 during several months this year, it does seem reasonable to suggest that, once again, the economy has been pushed off a ledge by oil. Let’s take a look at oil prices over the past several years.

Why Oil Prices Are Killing the Economy

“Oh, that was easy,” says Man, and for an encore goes on to prove that black is white and gets himself killed on the next zebra crossing.” ― Douglas Adams, The Hitchhiker’s Guide to the Galaxy

Have rising oil prices just put the final coffin nail in the entire 2009-2011 economic recovery?

Given the slowdown in China, the new recession in Europe, and the rocky bottom in the US economy, it certainly seems that way.

Oil’s Relentless March Higher

How the European Endgame Will Be the Death Knell For Modern Economics

by Gregor Macdonald, contributing editor

Monday, December 5, 2011

Executive Summary

Central banks are running out of options, leaving only increasingly desperate choices
Why Europe is most likely to begrudgingly print a whole lot more money soon
The harsh judgment day is approaching for mainstream economists
Why 2012 heralds the dawn of a new era of economic understanding

Part I: It’s Time To Give Up On Mainstream Economics

If you have not yet read Part I, available free to all readers, please click here to read it first.

Part II: How the European Endgame Will Be the Death Knell For Modern Central Banking

Central Banks Becoming Increasingly Desperate

Has Europe decided to print its way out of the crisis? The big-bang announcement last week among global central banks suggests as much. Unfortunately, the global US dollar swap solution only patches up the liquidity portion of Europe’s present dilemma and does nothing to address the solvency issue.

As readers know, I take the mildly heretical view that “money-printing” in our present debt deflation actually functions as a status-quo maintainer. It does not risk hyperinflation, but instead keeps social confidence intact — at low levels, of course — as the familiar institutions of Western economies are maintained. Hard defaults, on the other hand, especially hard defaults that appear out of the hands of either fiscal or monetary policy makers, risk a confidence collapse on a large scale.

In my view, hyperinflation typically begins with a broad rejection of a country’s sovereign debt. This is the initial threshold that is crossed on the path to currency rejection, as foreign holders exit first. Domestic institutions are more restricted, slower to react, often bound by investment mandates, and thus left “holding the bag,” as it were, on a country’s bonds. Eventually, domestic confidence in the currency itself is lost, as the public, having watched its institutions fail, rejects the currency.

In my view, Europe is still at very high risk for such a catastrophic outcome. No global central bank, including the European Central Bank (ECB), can change the fact that the debt of Greece, Portugal, Spain, and Italy cannot be supported realistically through economic growth. But there is still time for the ECB to change its charter and buy that debt. The coordinated central-bank actions this past week will have virtually no consequence unless the ECB conducts QE (quantitative easing) on a massive scale.

Probabilistically, I have to favor the idea that Europe was given the lifeline on the condition that the fiscal union discussed in Europe and the permission granted to the ECB to conduct QE are both forthcoming. For the sake of social stability, I hope this happens. But I am not naive. Much of the debt that the ECB would purchase under such a regime, just like much of the junk debt now on the Fed’s balance sheet, will never recover its par (full price) value. Certainly not in real (inflation-adjusted) terms. But if the ECB does not “print money,” then we will move directly to hard defaults. And the hyperinflation risk that is currently masked by the common currency to the Eurozone will eventually be unveiled.

How the European Endgame Will Be the Death Knell For Modern Economics

by Gregor Macdonald, contributing editor

Monday, December 5, 2011

Executive Summary

Central banks are running out of options, leaving only increasingly desperate choices
Why Europe is most likely to begrudgingly print a whole lot more money soon
The harsh judgment day is approaching for mainstream economists
Why 2012 heralds the dawn of a new era of economic understanding

Part I: It’s Time To Give Up On Mainstream Economics

If you have not yet read Part I, available free to all readers, please click here to read it first.

Part II: How the European Endgame Will Be the Death Knell For Modern Central Banking

Central Banks Becoming Increasingly Desperate

It’s Time To Give Up On Mainstream Economics

Few modern economists would, for example, monitor the behaviour of Procter and Gamble, assemble data on the market for steel, or observe the behaviour of traders. The modern economist is the clinician with no patients, the engineer with no projects. ~ John Kay, from The Map is Not the Territory: An Essay on the State of Economics, October 2011

I’m not quite sure what a depression is. ~ Martin Feldstein, in an interview with Kelly Evans of the Wall Street Journal, October 2011

A Failure To See the Obvious

Prior to 2008 it was generally understood that the profession hardly merited its claims of its own predictive utility. So the failure to assign enough risk to such a crisis as befell the developed world in 2008 was, frankly, no surprise. But in the aftermath of the crisis, economics, in its professional form, has revealed itself to be damagingly disconnected from observable reality.

A glaring example of this is how it cannot come to any agreement as to how the debt crisis occurred, and accordingly remains quite confused in its proffered solutions.

It’s Time To Give Up On Mainstream Economics

Few modern economists would, for example, monitor the behaviour of Procter and Gamble, assemble data on the market for steel, or observe the behaviour of traders. The modern economist is the clinician with no patients, the engineer with no projects. ~ John Kay, from The Map is Not the Territory: An Essay on the State of Economics, October 2011

I’m not quite sure what a depression is. ~ Martin Feldstein, in an interview with Kelly Evans of the Wall Street Journal, October 2011

A Failure To See the Obvious

A glaring example of this is how it cannot come to any agreement as to how the debt crisis occurred, and accordingly remains quite confused in its proffered solutions.

The New Price Era of Oil and Gold

“If society consumed no energy, civilization would be worthless. It is only by consuming energy that civilization is able to maintain the activities that give it economic value. This means that if we ever start to run out of energy, then the value of civilization is going to fall and even collapse absent discovery of new energy sources.”

~ Dr. Tim Garrett, University of Utah

The New Oil Cycle is Suffocating Economic Growth

There was a time when central bankers used to fight high oil prices with interest-rate hikes. But we are now in a different era with that equation, and central bankers are more likely to lament, as Ben Bernanke quipped in his spring 2011 press conference, that “the FED can’t print oil.” Yes, precisely. At the zero bound of interest rates and with debt saturation coursing through the private and public sector, the developed world faces not an inflationary restraint from oil prices, but rather an additional deflationary barrier. Welcome to the new oil cycle.

The New Price Era of Oil and Gold

~ Dr. Tim Garrett, University of Utah

The New Oil Cycle is Suffocating Economic Growth

Understanding Where Gold and Silver Go from Here

by Gregor Macdonald, contributing editor

Monday, November 21, 2011

Executive Summary

The outlook for precious metals will be heavily influenced by the steps the European Central Bank (ECB) takes in the near future.
Understanding the likely price trajectories of the precious metals whether or not central banks resume quantitative easing (QE, a.k.a. money printing)
The specific price targets for both gold and silver under the most likely scenarios
Underscoring the gravity of our current situation

Part I – The New Price Era of Oil and Gold

If you have not yet read Part I, available free to all readers, please click here to read it first.

Part II – Understanding Where Gold and Silver Go from Here

As readers now understand, I am not currently a supporter of higher gold prices as a function of inflation risk. Instead, my view is that we must first move through the various iterations of crisis, collapse, debt default, instability, and policy panic before gold attaches itself to inflation. Yes, I agree with the Paul Brodsky thesis (and the FOFOA thesis) that the foundations of future inflation have already been laid. But it’s also my view that for a severe inflation to unfold, there has to be a collapse in currency demand itself. It would also be necessary for global industrial production to have collapsed down to much lower levels to provide sufficient scarcity of goods. Mind you, I see both of these conditions — rejection of currencies and industrial collapse — as high risk. The two maps I offer here include them.

Mapping the Price Future of Gold and Silver

The first price path I want to share with you is called The Grand QE Cycle. It begins with the resolution to the most pressing question facing markets right here, right now, today: Will the ECB federalize all Eurozone debt?

Based on my own analysis and in consultation with contacts, I concluded for myself weeks ago that the crisis in the EU was becoming increasingly binary. Indeed, it is now fully binary. Either the ECB guides to a new charter or mandate, allowing it to buy unlimited quantities of EU debt, or it follows through on its hard-money threats — and the sovereign debt, which forms the core asset of pension funds, banks, institutions across the EU, will become distressed debt, forcing a cataclysmic purge.

Because this urgent question has not been definitively answered as yet, gold is making its way in volatile fashion towards a price of…

Understanding Where Gold and Silver Go from Here

by Gregor Macdonald, contributing editor

Monday, November 21, 2011

Executive Summary

The outlook for precious metals will be heavily influenced by the steps the European Central Bank (ECB) takes in the near future.
Understanding the likely price trajectories of the precious metals whether or not central banks resume quantitative easing (QE, a.k.a. money printing)
The specific price targets for both gold and silver under the most likely scenarios
Underscoring the gravity of our current situation

Part I – The New Price Era of Oil and Gold

If you have not yet read Part I, available free to all readers, please click here to read it first.

Part II – Understanding Where Gold and Silver Go from Here

Mapping the Price Future of Gold and Silver

Because this urgent question has not been definitively answered as yet, gold is making its way in volatile fashion towards a price of…

How To Position For the Next Great Oil Squeeze

by Gregor Macdonald, contributing editor

Monday, November 14, 2011

Executive Summary

Why smaller, independent oil companies should thrive as America struggles to increase domestic supply
A breakdown of often-touted ‘new sources of domestic supply’ (shale oil, kerogen, offshore fields, other Western Hemisphere finds) and why they won’t come close to meeting US demand needs
How to hedge against the next great oil price spike
The wisdom of adopting a slower-based oil consumption lifestyle now

Part I – Selling the Oil Illusion, American Style

If you have not yet read Part I, available free to all readers, please click here to read it first.

Part II – How To Position For the Next Great Oil Squeeze

Using the latest data from EIA Washington, I made the following chart of actual imports of crude oil against production. This is a simple and direct accounting of what can become a rather complex topic filled with obfuscation and bad math. For example, by counting biofuels, ethanol, natural gas liquids, and the use of our own natural gas inputs to refine crude oil into gasoline, you can produce rather misleading accounts of net imports, such as this piece from EIA Washington titled How Dependent Are We on Foreign Oil?

Just so that we are very clear on the facts, natural gas liquids (NGLs) contain only 65% of the btu of oil, and, of course, they are not oil. As Jeff Rubin likes to say, “NGLs can go straight to your butane cigarette lighter, not your automobile.” But by adding NGLs and ethanol to “oil supply,” we can delude ourselves into thinking that the US produces not 5.596 mbpd of crude oil, but rather 10.037 mbpd of liquids.

Despite any legitimate conversation we could have about the usefulness of various energy resources, it would be silly to say (for example) that “we need not worry about expensive oil and its effect on the economy, because we can just switch to ethanol.” The vastly smaller btu content of biofuel feedstock makes its inclusion in the accounting unhelpful, to say the least. As one Oil Drum commenter said to my previously cited post:

If the goal is to highlight the decline of crude oil production over time then including all other fuel sources is improper. You can’t project a future production trend of one commodity by including other commodities in the analysis.

(Source)

Yes, precisely. To that point, let’s now look at the chart.

Why smaller, independent oil companies should thrive as America struggles to increase domestic supply
A breakdown of often-touted ‘new sources of domestic supply’ (shale oil, kerogen, offshore fields, other Western Hemisphere finds) and why they won’t come close to meeting US demand needs
How to hedge against the next great oil price spike
The wisdom of adopting a slower-based oil consumption lifestyle now

Part I – Selling the Oil Illusion, American Style

If you have not yet read Part I, available free to all readers, please click here to read it first.

Part II – How To Position For the Next Great Oil Squeeze

If the goal is to highlight the decline of crude oil production over time then including all other fuel sources is improper. You can’t project a future production trend of one commodity by including other commodities in the analysis.

(Source)

Yes, precisely. To that point, let’s now look at the chart.

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