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Wednesday, 11 June 2008

The big picture - The short term looks bright, the long term doesn't

BACK in my university days, a rich student from Indonesia was among our group of friends.

His name was Yacob, but everyone called him Mr Fixit.

It's because no matter what the problem, he could fix it. If you needed help in Maths, he would pay for the tutor.

Once, he ordered 50 pizzas for everyone who was studying at the library at 11pm. And for his girlfriend's birthday, he bought her a new car.

Everyone liked Mr Fixit.

One day, we learnt his grandmother had died. She raised him when he was young and he loved her dearly. But the end came suddenly and, of course, his wealth couldn't save her.

THE BIG FIX

Governments around the world are like Mr Fixit. They have four tools to revive economies.

(i) First, they create money from thin air when Central Banks make loans to commercial banks. It is called printing money, and has been crucial to alleviating the current US credit crisis.

They can also (ii) lower interest rates; (iii) reduce exchange rates and; (iv) encourage spending, like with tax cuts and subsidies.

If none of that works the first time, they simply do it again and again.

The US Congress, for example, is already talking about a second round of tax cuts if the current one isn't sufficient.

These tools mean no more great depressions. The worst you will get is a short and mild recession.

As Mr Fixit would say: 'All problems have solutions.'

Well, all except one. Get ready for a shock.

It is death.

It can't be avoided. Not by people. Not by planets. Unfortunately, ours is dying. And moving to another, like Mars, is difficult.

A permanent surge in demand is depleting the world's natural resources.

They should last another 50 years - 100 if we are lucky.

Take oil, for example.

When the last drop is gone, that is it. To get more, you need to compress vegetation and animals, like dinosaurs, for millions of years, in perfect underground rock formations.

Creating new minerals is equally impossible.

As for food, it seems we could simply grow more. The problem is, population and incomes are expanding faster than crop yields plus new land under cultivation.

It produces long-run shortages of rice, wheat, corn and other foods.

The solution: Sorry, but there is none.

There are no more dinosaurs to squish. Even if there were, it takes a million years to convert them into oil.

GOLDEN AGE

Think of it this way: We now live in a golden age.

In the past, children could expect a better life than their parents. Not any more.

Future generations will find life difficult as we deplete the limited supplies of energy, minerals and food.

High inflation is merely a symptom of serious shortages. Ironically, the hefty prices will prove beneficial as they help to ration what is left. It puts off judgment day when the last drop of oil is used up.

When that time comes, our golden age will end.

Philosophically, we will be able to say 'we had our moment in the sun'.

We can be grateful for that.

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