Why you have to change your idea of ‘investing’ in the coming years to come

February 16th, 2011

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The global economy is in a diabolical dilemma right now. If the world economy is paralysed by deflation (which is Bernanke’s nightmare), prices of many things will fall. For example, as we wrote in How to buy and invest in physical gold and silver bullion,

In the second half of 2008, the world experienced unprecedented asset and commodity price deflation. As noted earlier, oil prices fell from a high of almost US$150 to just over $30 over the space of months. Base metals and agricultural commodities plunged along with a panic in the stock market. The US dollar and US Treasury bonds surged (at one point, short-term US Treasury bonds had a negative yield). Statistically (in terms of price volatility), the panic in 2008 was worse than the crashes of 1929 and 1987.

Despite the mainstream commentary screaming “Disaster,” we believe such extreme deflation wasn’t that evil in the bigger scheme of things.

Why?

If you believe that burning fossil fuels causes climate change? or that Peak Oil is one of the greatest threat to humanity, wouldn’t such extreme deflation give planet Earth an urgently needed respite? Wouldn’t the collapse of global demand for goods and services save planet Earth for the sake of the next generation? Since 2008, the world witnessed a ‘recovery’ (that was brought about by massive money printing).

But what do we get out of that ‘recovery’?

Surging price inflation that threatens the poor with starvation and pushed many from middle-class to poor.

For example, as Food prices at dangerous levels, says World Bank reported,

The World Bank says food prices are at “dangerous levels” and have pushed 44 million more people into poverty since last June.

This, our dear readers, is just the beginning of a more serious global food crisis. Australia’s CSIRO scientist, Julian Cribb wrote a very sobering book, The Coming Famine: The Global Food Crisis and What We Can Do to Avoid it. As this New York Times book review wrote,

Like many other experts, he argues that we have passed the peak of oil production, and it?s all downhill from now on. He then presents evidence that we have passed the peaks for water, fertilizer and land, and that we will all soon be made painfully aware that we have passed it for food, as wealthy nations experience shortages and rising prices, and poorer ones starve.

This is the price that the this and the next generation will have to pay if we keep up the current way of exploiting planet Earth for the sake of economic ‘growth.’ Hardly surprisingly, a recent Wikileaks revealed that Saudi Arabia cannot pump enough oil to keep a lid on prices.

Dear readers, don’t you see that this economic ‘recovery’ is an illusion?

The ultra-rich, on the other hand, have less to worry about starvation and more to worry about how to preserve the purchasing power of their existing surplus wealth. Some of them will rush to hoard agricultural land and commodities, which will exacerbate the plight of the poor.

The middle-class will see their standard of living being eroded by rising food and energy prices. As we wrote in April 2007, Smart money in alternative energy?Part 1: current energy quandary,

The most important ingredient that drives the efficiencies, comforts, automation and wonders of today?s modern way of life is energy. The trains, cars, ships and aeroplanes that transport massive quantities of people and goods over vast distances quickly require energy in the form of fuel. The heavy machines that do heavy physical work far beyond the scope of human labour require energy too. The powerful computers that process and store vast amount of data and information as well as automate mental labour requires energy in the form of electricity. The heating in winter and cooling in summer of our abode requires energy too. Take energy away and our modern way of life will very much grind to a halt and bring us back to the hard life of our ancestors. In fact, contemporary life rests on the premise of abundant and cheap energy. Therefore, whoever controls the supply and provision of energy controls power and wealth.

When energy prices go up, the prices of everything else will go up. When the prices of everything else go up, your standard of living will go down.

Some of the poor, who are already spending a large portion of their income on food, will have to starve. But before that will happen, we will witness increased incidence of revolutions, wars and conflicts. What we see in Tunisia and Egypt is just the beginning- there will be more.

Dear readers, after reading all these, wouldn’t you come to the realisation that this will have grave implications on the idea of ‘investing.’ Normally, investing is associated with ‘making’ money. But in the context of surging price inflation, ‘making’ money becomes meaningless as the value of money diminishes.

In the next article, we will talk more about this implication. In the meantime, have a think about it.

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  • Pete

    Wow great article! I thoroughly agree with all of it.

    We’re in a bit of a predicament I guess.

    Some people also suggest that the wealthy will look to Gold in order to preserve their wealth. It’s an interesting thought given that the seriously wealthy own a significant portion of the worlds wealth.

    High inflation will spell the end of fiat currency as we know it, IMO. Other countries simply won’t allow the US to continue inflationary measures like they have and still have the worlds reserve currency. I just hope we don’t get something that involves the pathetic IMF.

  • We are seeing the consequences of several bad policies. The most destructive is the one mandating and subsidizing ethanol production from the food grain , corn. Market prices have doubled. Third and second world populations have suffered most. The only real solution is to vote these blind followers of a policy out of office and replace them with commonsence representatives.

    In the not too distant future, food will be the most expensive commodity on earth. The bible says that a loaf of bread will cost an entire day’s wages in the end times. You can’t eat gold or silver, nor petroleum.

    People will kill you for your food. People you know will kill you for you food, including friends and enemies alike.

    If you store food away for an emergency, tell no one…… including most family members. Where do you think the hungry will go when they run out of food? They will come to your house because the will remember you boasting of storing food and when you answer the door, they will empty both barrels of a shotgun into your chest.

    Do not tell anyone you are storing food.

    Rob Fisher
    The Australian Property ‘Megablog’ Site

  • Neuralnetwriter

    Well, I’m a little confused.
    I read this:
    “In the second half of 2008, the world experienced unprecedented asset and commodity price deflation.”
    and
    “Despite the mainstream commentary screaming ?Disaster,? we believe such extreme deflation wasn?t that evil in the bigger scheme of things.”
    and
    “Surging price inflation”

    Yet in this article: http://contrarianinvestorsjournal.com/?page_id=383
    it says:
    “Now that we have learnt that the increase in the supply of money is inflation”

    The reason for my confusion is that I don’t know what “price deflation” and “price inflation” are.

    Does this mean falling and rising prices, or does it mean falling and rising prices as a result of deflation/inflation?

  • Well, money printing begets more price rise which begets more money printing. Add in factors that crunch supply (e.g. Peak Oil, El Nino) and increases demand (rise of China/India, population growth), you get further price rise.

  • Talnik

    If all the poor nations starve, that will that leave more land, water and food for the rest of us. This solves itself!

  • Pete

    Starving people might tend to move to more prosperous lands. How good is our navy?

    But seriously, that would assume there is not a wealth redistribution either. We could be the ‘poor’ who starve. Impossible? The local price of food could skyrocket if our dollar drops low enough, due to the value of exporting the food instead. Couple that with our high exposure to overseas debt and what then?

    Be careful what you wish for.