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Wednesday, 11 June 2008

Get ready for hard times

Some reasons that high inflation could be here to stay

GET ready for a new, more frugal lifestyle. It is because the world's resources are diminishing. That changes everything, as I will explain.

Worldwide demand has exploded along with rising incomes in the Middle East, China and India. The new middle class want their share of the good life and they want it now.

While you can't blame them, it is putting a strain on our planet's limited resources.

Oil is the biggest concern since everything uses it. Last week, oil prices rose another 10 per cent, hitting an all-time high of US$135 ($183) per barrel.

In a way, high prices are beneficial since they help allocate scarce resources. But it is a painful process.

Singapore's inflation hit an annual rate of 6.6 per cent for the past three months, the fifth highest on record.

At my favourite fruit stall, the boss told me: 'My suppliers have been raising prices for the past four months. But I didn't pass them on. I have been selling at a loss and can't take it anymore.

'I have just increased the price of all my fruits by 20 per cent and I still only break even. Die, die.'

I suspect he is exaggerating and makes a small profit. But it shows how higher prices eventually get passed along to us. When they do, they act like a tax, reducing our incomes and spending. The risk is it will lower economic growth.

PERMANENT RECESSIONS?

On 21 April, Dr Tony Tan, deputy chairman of the Government of Singapore Investment Corporation, said: 'We could be facing a recession which is longer, deeper and wider than any recession that we have encountered in the last 30 years.'

This was the most pessimistic of his three scenarios, but could things really get that bad?

Worse. We are seeing unlimited demand meet limited supplies. It produces a problem with no solution.

Consider the basics: Without concrete and steel, we can't build buildings. Without petrol, we can't drive cars or airplanes. Without food, we can't eat.

Without raw materials, economic output will decline, pushing us into a new era of perpetual recessions.

To postpone the inevitable, nations are furiously competing to lock-in whatever resources remain.

China is perhaps the most effective, buying up natural resources from Australia to Africa. Most recently, it bought a 12 per cent stake in Australian mining giant Rio Tinto.

In the past, we have always had continuous economic growth with an occasional recession every 10 or 15years.

Now, supply shortages are turning things around. Expect permanent recessions with the odd year of positive economic growth.

PERMANENT INFLATION?

Not everyone agrees. Some feel this is just a speculative bubble and prices will soon return to normal, like they did after the high inflation in the early '70s and mid '80s.

It was a happy ending. Oil prices ultimately reached a low of US$11.40 per barrel in Feb 1999, less than a decade ago. Could it happen again?

It is a nice thought. The problem is demand from developing nations is real while the supply of resources may be more limited than we had thought.

For example, there is no way to know if producing countries have all the oil reserves they claim. No Opec nation has ever permitted an independent audit of its oil fields.

Combine increasing demand with decreasing supplies and what do you get?

Disaster. Expect continuously rising prices, not just for oil but other natural resources as well.

What's worse is that higher prices are merely a reflection of resource shortages.

The world's economies need food, fuel and minerals to operate. Even the most clever technology cannot produce output without inputs.

If resources eventually decline to zero in a few generations, output will also fall to zero.

Then, we will revert to subsistence living, like sophisticated cavemen. Call us the Cro-Magnon smarties.

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