What If All The Cheap Stuff Goes Away?

Authored by Charles Hugh Smith via OfTwoMinds blog,

Nothing stays the same in dynamic systems, and it's inevitable that the current glut of low costs / cheap stuff will give way to scarcities that cannot be filled at current low prices.

One of the books I just finished reading is The Fate of Rome: Climate, Disease, and the End of an Empire. The thesis of the book is fascinating to those of us interested in the rise and fall of empires: Rome expanded for many reasons, but one that is overlooked was the good fortune of an era of moderate weather from around 200 BC to 150 AD: rain was relatively plentiful/ regular and temperatures were relatively warm.

Then one of Earth's numerous periods of cooling--a mini ice age--replaced the moderate weather, pressuring agricultural production.

Roman technology and security greatly expanded trade, opening routes to China, India and Africa that supplied much of Roman Europe with luxury goods. The Mediterranean acted as a cost-effective inland sea for transporting enormous quantities of grain, wine, etc. around the empire.

These trade routes acted as vectors for diseases from afar that swept through the Roman world, decimating the empire's hundreds of densely populated cities whose residents had little resistance to the unfamiliar microbes.

Rome collapsed not just from civil strife and mismanagement, but from environmental and infectious disease pressures that did not exist in its heyday.

Colder, drier weather stresses the populace by reducing their food intake, which leaves them more vulnerable to infectious diseases. This dynamic was also present in the 15th century during another mini ice age, when the bubonic plague (Black Death) killed approximately 40% of Europe's population.

Which brings us to the present: global weather has been conducive to record harvests of grains and other foodstuffs, and I wonder what will happen when this run of good fortune ends, something history tells us is inevitable. Despite the slow erosion of inflation, food is remarkably cheap in the developed world.

What happens should immoderate weather strike major grain-growing regions of the world?

Then there's infectious diseases.  Global air travel and trade has expanded the spectrum of disease vectors to levels that give experts pause.  The potential for an infectious disease that can't be mitigated to spread globally is another seriously under-appreciated threat to trade, tourism and cheap stuff in general.

There are other factors that could spell the end of cheap stuff, not just food but manufactured goods:

1. Fossil fuels could become much more costly. While I consider it highly likely that the price of oil in US dollars will fall to $40/barrel or lower in a global recession due to a sharp drop in demand (what I've long termed the head-fake), longer term, it's inevitable that the cheap-to-access fossil fuels (other than coal) will become depleted and the cost of accessing, processing and transporting what's left will rise.

Since fossil fuels remain the backbone of industrial societies everywhere (yes, including Germany), a steady increase in fuel costs will push the cost of everything that uses energy (i.e. everything) higher.

2. Trade restrictions/conflicts. Globalization and populism both target "unfair trade practices" in which "unfair" is in the eye of the beholder: imports hurt the domestic economy everywhere, and exports help the domestic economy everywhere.

If trade is restricted for whatever reason, the costs of commoditized goods will likely increase, possibly by a lot.

3. Global wages are rising. You've probably seen signs at Home Depot and fast-food chain outlets announcing "we're hiring": even though 100 million working-age people are "not in the work force" in the U.S., many of these individuals lack the skills and/or willingness to take jobs in the modern economy, which demand a lot of workers even in so-called low-skill fields such as fast food. To work in fast food, individuals must be able to handle high pressure and a fast pace; it's not an easy job by any means.

Many employers are reporting that they can't find enough qualified candidates who pass drug tests, yet another fallout of the opioid epidemic. Many people are saddled with felony convictions for nonviolent drug offenses, rendering them ineligible for most corporate or government employment.

Immigration restrictions and minimum wage laws will add to the rising cost of labor.

Globally, the baby Boom generation is retiring, leaving worker shortages on the horizon even in China. (Note that workers tend to retire much earlier in Asia and Europe than in the U.S.: 60 or 62 is typically the mandatory retirement age in much of the global economy.)

As Immanuel Wallerstein has observed (I've written about his work many times), there are systemic, secular pressures to raise wages and benefits everywhere: costs are rising, and people expect more government services such as education and income security, and as taxes increase, wages must rise to maintain the net earnings (purchasing power) of the workers.

We in North America have become accustomed to cheap stuff; we consider it our birthright: cheap fuels, cheap manufactured goods, cheap food and cheap labor. Without even being aware of it, we feel entitled to "low prices always." We may feel fuel, food and consumer goods are expensive now, but we are comparing prices to an extended period of extraordinarily low costs.

Prices for energy could easily rise 50%, impacting the cost of everything; should harvests be crippled by bad weather, the cost of grains could easily double or triple from their current historic lows. Should trade be restricted and wages rise virtually everywhere, manufactured consumer goods could go up in price even as robots replace human labor: energy and raw materials will still be costly inputs even if all human labor is eliminated.

Add in some stiff tariffs for unfair trade practices, and all the robots in the world won't keep prices down.

Nothing stays the same in dynamic systems, and it's inevitable that the current glut of low costs / cheap stuff will give way to scarcities that cannot be filled at current low prices. Cheap stuff will go away, and everything will cost more. It seems highly likely that the next decade will not be like the last 10 years of abundance and cheap stuff.

Courtesy of Incrementum AG, here is a chart of the commodity/S&P 500 ratio. Commodities are at historic lows in relation to stock market valuations. Stocks can decline, or commodities can rise, or both can occur in tandem. If history is any guide, this ratio will reverse and reach a peak within the next decade.

*  *  *

My new book Money and Work Unchained is $9.95 for the Kindle ebook and $20 for the print edition. Read the first section for free in PDF format. If you found value in this content, please join me in seeking solutions by becoming a $1/month patron of my work via patreon.com.

Comments

Peterman333 Chicken Farmer Sat, 03/31/2018 - 22:57 Permalink

The rest of the world likely appreciates their low cost prescriptions while in the US we pay $1,000 for an allergy shot so the drug company can make all their money off the American market. The whole world is wacked I'll give you that but the US subsidizes the whole world's drug prices and that's not all.

You eat the worm and sometimes the worm eats you.

In reply to by Chicken Farmer

Savvy Peterman333 Sat, 03/31/2018 - 23:14 Permalink

You obviously have no idea how the intl drug market works. Well let me help you out so you don't look so uninformed in the future. R & D plus a reasonable profit margin = drug cost all across the planet no matter who is selling or who is buying.

It amazes me no end Americans are so pussy whipped by their own ignorance.

In reply to by Peterman333

HRH of Aquitaine 2.0 Peterman333 Sun, 04/01/2018 - 01:17 Permalink

MDR TB is now in NYC. (MDR: multi drug resistant). "“Active TB can usually be treated successfully in six to nine months at a cost of $17,000 per patient, according to the Centers for Disease Control (CDC), but MDR TB treatment costs more than $150,000 per patient and can take between 20 and 26 months,” Breitbart News reported previously." http://www.breitbart.com/big-government/2018/03/30/fourteen-percent-of-…

In Africa, anyone with XDR / MDR TB was quarantined until they were cured or died. Most died. I watched this Frontline episode when it aired in 2014. It is graphic. http://www.pbs.org/video/frontline-the-warning/

In reply to by Peterman333

philipat Savvy Sun, 04/01/2018 - 02:51 Permalink

Sorry but you're wrong. I worked in the MNC pharma industry at a senior management level for all of my professional career so I know how it works.

First, Big Pharma makes 80%+ of its profits from a single market: the US. That's why in most Big Pharma Annual Reports you will always see a breakdown of Revenues by geographical Region, but NEVER a similar breakdown of profits. 

All other Western major economies operate some form of "single payer" system where new drugs must apply for reimbursement and successfully negotiate a price with Government before being allowed on the market. In the US, despite the fact that Government, either directly or indirectly, is the major purchaser of drugs, the Government still allows Big Pharma to charge what the market can bear, and since "someone else is paying" there are no incentives anywhere in the system to charge less. Further, in the US the fear of medical malpractise suits (and the cost of those suits which gets built into medical fees)  forces physicians to run every test know to mankind and use the newest most expensive patent drugs almost always.The US healthcare system throughout operates on a "fee for service" model, which has never contained costs anywhere in the world.

And on the issue of R&D. First understand that most of this cost is the "D" (Mostly clinical trials to achieve FDA Registration, often using highly questionable Trialists paid large amounts of money by Big Pharma and using unscientific protocols often with goal-seeked outcomes) not the "R" and in the US much of the research cost is covered by Government research grants and tax incentives.

For Big Pharma by far the largest expense item is marketing and that includes some highly unethical practises. Sorry to shock you but Physicians are not all Saints in white coats!!

So maybe it is you who is clueless as to how the international drug market works?

In reply to by Savvy

BandGap philipat Sun, 04/01/2018 - 09:04 Permalink

I have worked in pharma for 25 years, making and testing drugs.

50% of the world's prescriptions are sold in the US. We take a lot of drugs. For me the worst at the ADHD and serotonin uptake/mood adjusting drugs. We are taught from a very early age that we can take a pill to calm down, to become happy or peaceful. We are paying the cost for believing humans can be emotionally adjusted.

We will face hell when these drugs are taken away. Purgatory until there are. These drugs make people robots/zombies. I urge people to never take these drugs, and to not allow you families to be poisoned.

In reply to by philipat

philipat BandGap Sun, 04/01/2018 - 21:13 Permalink

I don't accept your figure of 50% of all prescriptions are in the US but yes it is certainly higher than the 4% of global population that the US represents. Remember also that there are many large countries (including, closest to home, Mexico) where a prescription isn't needed, which would distort "prescription" data.

I stand by my own data but I agree that the proportion of profits coming from the US for Big Pharma is a factor of BOTH very high (unregulated) prices AND the fact that the US does consume a lot of drugs; far higher on a per capita basis than anywhere else in the world.

I also share your views regarding, in particular, the SSRI's where additionally the risks of suicide are very much underestimated.

In reply to by BandGap

1033eruth Peterman333 Sun, 04/01/2018 - 09:41 Permalink

Subsidizes?  I think you used the wrong term.  In no way shape or form does the US, PAY other countries so that they can offer cheaper prescriptions to their citizens.  Find the line item in our budget that does that.   

What has happened is that our congressmen have been lobbied to allow monopolies and the lack of competition in our country.  I'll give you a large, GLARING example.  Medicare does not negotiate drug prices.

https://www.healthline.com/health-news/what-if-medicare-negotiated-drug…

Tell me how Uncle Fraud freely paying for drug prices is a "subsidy" for other countries?  You better check YOUR definition of subsidy and try again.  

Read the very informative article I linked.  Within said article:

"They point out that Medicare Part D pays 73 percent more than Medicaid and 80 percent more than the Veterans administration for brand name drugs."

In reply to by Peterman333

nmewn Savvy Sat, 03/31/2018 - 22:02 Permalink

Its ZH's latest zeitgeist. Russia & China = good. America = bad. 

Still waiting on Trump to declare himself absolute emperor for life! (like China's Xi) though.

A Congressional vote would be just a formality.

//////

Now wut?

How bout France & Germany = good. America = bad.

Better? ;-)

In reply to by Savvy

nmewn Savvy Sun, 04/01/2018 - 07:55 Permalink

Being called a nazi (who were in fact socialists) has lost all it's impact on societies world wide from misuse & overuse of the word. It is also interesting to note that, the ones who misused & overused the word nazi as an insult are in fact themselves, socialists.

Now, I don't know if that was premeditated on the lefts part (to take the sting of the word nazi away) or uneducated incompetence but that is the result ;-)

In reply to by Savvy

DanDaley nmewn Sun, 04/01/2018 - 09:15 Permalink

Yeah, so now I just use Mussolini's definition (he invented fascism, after all -so if you can't trust him...)

"Everything within the state, nothing outside the state."

Then all you have to do is ask yourself: Now, let me see...Who wants that? Oh, yeah, the people who love the state, i.e., just about everybody but anarchists or people who want government at all levels the hell out of their lives.

In reply to by nmewn

HRH of Aquitaine 2.0 FreeEarCandy Sun, 04/01/2018 - 01:00 Permalink

Or people will figure out how banks work and stop using them. I am still reading that book I got last week (or the week before), "Hope of the Wicked" by Ted Flynn. I read one chapter a night. It isn't fun but he is good at summarizing ideas and putting it into plain language. He also saved me having to read quite a number of old and obscure texts that are out of print or some, like "Tragedy and Hope" that are so fucking long (I enjoy long fiction books but 1300 pages of economics and political crap would drive me over the edge long before I got to the last page).

Chapter 12 has this title: "Nothing Federal and No Reserves." He includes the quote from Jefferson in the intro. He prints out a long joke from the British magazine, "Punch," published on April 3, 1957 and is also quoted in the beginning of "The Creature from Jekyll Island."

This is the joke, in full:

Q: What are banks for?
A: To make money.

Q: For the customers?
A: For the banks.

Q: Why doesn't bank advertising mention this?
A: It would not be in good taste. But it is mentioned by implication in references to reserves of $249,000,000 or thereabouts. That is the money that they have made.

Q: Out of the customers?
A: I suppose so.

Q: They also mention Assets of $500,000,000 or thereabouts. Have they made that too?
A: Not exactly. That is the money they use to make money.

Q: I see. And they keep it in a safe somewhere?
A: Not at all. They lend it to customers.

Q: Then they haven't got it?
A: No.

Q: Then how is it Assets?
A: They maintain that it would be if they got it back.

Q: But they must have some money in a safe somewhere?
A: Yes, usually $500,000,000 or thereabouts. This is called Liabilities.

Q: But if they've got it, how can they be liable for it?
A: Because it isn't theirs.

Q: Then why do they have it?
A: It has been lent to them by customers.

Q: You mean customers lend banks money?
A: In effect. They put money into their accounts so it is really lent to the banks.

Q: And what do the banks do with it?
A: Lend it to other customers.

Q: But you said that money they lent to other people was Assets?
A: Yes.

Q: Then Assets and Liabilities must be the same thing?
A: You can't really say that.

Q: But you've just said it. If I ut $100 into my account the bank is liable to have to pay it back so it's Liabiltiies. But they go and lend it to someone else and he is liable to have to pay it back, so it's Assets. It's the same $100, isn't it?
A: Yes. But . . .

Q. Then it cancels out. It means, doesn't it, that banks haven't really any money at all.
A: Theoretically . . .

Q: Never mind theoretically. And if they haven't any money, where do they get their Reserves of $249,000,000 or thereabouts?
A: I told you. That is the money they have made.

Q: How?
A: Well, when they lend your $100 to someone they charge him interest.

Q: How much?
A: It depends on the Bank Rate. Say five and half percent. That's their profit.

Q: Why isn't it my profit? Isn't it my money?
A: It's the theory of banking practice that . . .

Q: When I lend them my $100 why don't I charge them interest?
A: You do.

Q: You don't say? How much?
A: It depends on the Bank Rate. Say half a percent.

Q: Grasping of me, rather?
A: But that's only if you're not going to draw the money out again.

Q: Why not? If I keep it there you say it's a Liability. Wouldn't they be glad if I reduced their Liabilities by removing it?
A: No. Because if you remove it they can't lend it to anyone else.

Q: But if I wanted to remove it they'd have to let me?
A: Certainly.

Q: But suppose they've already lent it to another customer?
A: Then they'll let you have someone else's money.

Q: But suppose he wants his too . . . and they've let me have it?
A: Your'e being purposely obtuse.

Q: I think I'm being acute [sic]. What if everyone wanted their money at once?
A: It's the theory of banking practice that they never would.

Q: So what banks bank on is not having to meet their commitments?
A: I wouldn't say that.

Q: Naturallly. Well, if there's nothing else you think you you can tell me . . . ?
A: Quite so. Now you can go off and open a banking account.

Q: Just one last question.
A: Of course.

Q: Wouldn't I do better to go off and open up a bank?
______________________

I apologize for the length. I thought I would cut out part and then thought I should type the whole quote. From pages 203 to 206 in paperback copy of "Hope of the Wicked."

Why doesn't every seventh or eighth grader have to read that little joke? Is anyone else not laughing?

In reply to by FreeEarCandy

css1971 HRH of Aquitaine 2.0 Sun, 04/01/2018 - 05:32 Permalink

... Looks wrong ...

Q: Never mind theoretically. And if they haven't any money, where do they get their Reserves of $249,000,000 or thereabouts?
A: I told you. That is the money they have made.

Q: How?
A: Well, when they lend your $100 to someone they charge him interest.

This bit is technically wrong. Banks don't lend your money out. They just create new records in their books.

i.e. they create new money to lend out.

https://www.sciencedirect.com/science/article/pii/S1057521914001070

 

FWIW, I'm writing my own "Notes about the world" for my kids, with all the things which they don't teach kids in school but which are absolutely vital to understand how the world functions.

In reply to by HRH of Aquitaine 2.0

Endgame Napoleon FreeEarCandy Sun, 04/01/2018 - 01:11 Permalink

Cheapness is relative. When housing consumes more than half of your monthly pay, everything you buy subsequent to covering rent is expensive. If you spend only 1% of your income, a paid-in-full house can be cheap. If the cheap stuff becomes less plentiful, maybe, the too-old-to-do-it neighbor, playing music so loud that is vibrating across the space between houses at 12:11 a.m., will not be able to afford an ear-drum-busting sound system. 

In reply to by FreeEarCandy