Posted by: Marshall Sponder | April 7, 2008

China – Krugman – an interesting insight

An insight just hit me in the face, somewhat unexpectedly while reading Paul Krugman’s Food Shortage Op-Ed article in the New York Times tonight – what China has given the world in cheap imports and financing it has taken back as ENERGY. My thinking was not what Krugman intended – but I wish he’d follow up on my insight. Take a look:

“…First, there’s the march of the meat-eating Chinese — that is, the growing number of people in emerging economies who are, for the first time, rich enough to start eating like Westerners. Since it takes about 700 calories’ worth of animal feed to produce a 100-calorie piece of beef, this change in diet increases the overall demand for grains.”

“…With oil persistently above $100 per barrel, energy costs have become a major factor driving up agricultural costs.

High oil prices, by the way, also have a lot to do with the growth of China and other emerging economies. Directly and indirectly, these rising economic powers are competing with the rest of us for scarce resources, including oil and farmland, driving up prices for raw materials of all sorts.”

Essentially, when China lent money to the United States (so that we could have the housing boom that was financed with Sub-Prime Mortgages and other kinds of exotic debt instruments) what they might have really wanted was not only a safe haven for all the extra money their economy produced – but a version of the Matrix – China sapped the energy from the West – to serve the East.

This is not at all what Paul Krugman intended to say – but a synthesis of the information he summarizes in his article that immediately hit me – ironic, if I’m right. I’ll admit, there is much more that I don’t see, that is unknown (to me) that might fill in this picture with much more texture and color.

However, that’s what I see – the Western Economies are now running into a weird dynamic of suffering from Energy Inflation which is driving up the cost of everything as China comes online and into the 21st Century.

Remember all those cheap Chinese Imports …. little did we realize the price that’s been paid and will be paid will be far, far more than any money anyone ever saved.

But looked at in another way – what is happening as China and India rise is the “Economic Karma” of the 19th and 20th Century coming back to bite the West with a vengeance. Because so much of the world’s population is contained in China and India – as those nations modernize (rightfully – and for their own benefit) the world Energy Grid and World Economy can not sustain it – we are running out of Energy Resources faster than we can generate Energy (and the resources derived from it) and if anything – this could likely drive the next global “depression”.

It’s almost as if you have a power circuit (say a 20 Amp circuit in your apartment or house) and you put too many devices on that line – it heats up and eventually blows the Fuse. Oh, wait a second – that’s what should have happened – nope – we didn’t blow the fuse yet – the fuse is kept going by all these attempts to keep the Financial System running which is going to heat up the circuit till it gets RED HOT and melts.

But there’s more to the Krugman article – he sees the way countries have treated grain and food resources in the same way he views global debt – both coming from the same error of thinking on the part of those who run world economies:

“…One more thing: one reason the food crisis has gotten so severe, so fast, is that major players in the grain market grew complacent.

Governments and private grain dealers used to hold large inventories in normal times, just in case a bad harvest created a sudden shortage. Over the years, however, these precautionary inventories were allowed to shrink, mainly because everyone came to believe that countries suffering crop failures could always import the food they needed.

This left the world food balance highly vulnerable to a crisis affecting many countries at once — in much the same way that the marketing of complex financial securities, which was supposed to diversify away risk, left world financial markets highly vulnerable to a system wide shock.”

Anyway, I write this as I see it in my mind – all of this is coming to me as I write.

After all, behind the Web Analyst, stands an Artist.

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