Meanwhile, the big wigs at the International Monetary Fund put out the bat signal over the weekend, arguing for more intervention in the credit markets. Why is that? Could it be that the U.S. Federal Reserve’s generous lending at the discount window to investment banks has failed to improve the quality of hundreds of billions if bad debt still sitting on investment bank and bank balance sheets?

“I really think that the need for public intervention is becoming more evident,” says International Monetary Fund managing director Dominique Strauss-Kahn. He says that a “third line of defence” is necessary to reinforce monetary and fiscal policy. Those lines are not holding.

Inflation batters them in the food and energy markets while deflation in financial prices continues its relentless assault. “Effort has to be made on loan restructuring. With respect to the banks, if capital buffers cannot be repaired quickly enough by the private sector, use of public money can be examined.”

Hmmn. Well, good luck with that. It is quite obvious that the post-war institutions designed to facilitate the expansion of global markets (the International Monetary Fund, the World Bank, the dollar standard itself) are under heavy stress (this makes sense when you realise the main tool of global expansion is credit… and we now have a bear market in credit). It is not at all obvious what will replace these institutions of expansion, or if anything can.

That’s a scary but perfectly reasonable thought. Think of the global economy as a system of systems. Food, energy, credit, transportation, information… all these systems are interconnected and interdependent. Energy is what keeps them all connected.

As the price of energy grows, the connections become stressed and frayed. A world with more expensive energy is a less connected world. When you stop throwing cheap energy at an economy, its total growth slows down and the real growth becomes more isolated and selective.

Reserve Bank board member Roger Corbett warned Australians about the problem least week. He said that energy prices may go up by a factor of ten. “The impact of that energy becoming scarcer and the marketplace costing the real cost into energy, is going to create certainly an upward pressure on the cost of energy.”

There is an embedded energy cost in everything you use (or eat) in the world. When goods start reflecting that increased cost of energy, they will get more expensive. “The only way to curb it and to fairly balance it is really the marketplace and the marketplace will cost energy much (higher). I don’t think it’s beyond the realms of possibility that it could go to five times the current level or even more. I think we’re looking at the five to 10-year timeframe.”

Is this good news for anyone? It’s certainly not goods news for consumers. The oil producers? Here’s a newsflash: the big, greedy, publicly traded oil companies don’t control most of the world’s oil reserves (making it hard for share market investors to profit from the increase in the underlying price.) National oil companies in Mexico, Venezuela, Russia, and the Middle East own the world’s oil reserves. You can’t buy a share in Vladimir Putin, Inc.

This is why we reckon the market for oil and gas alternatives is potentially lucrative. You can conserve your energy use. You can improve the efficiency of energy using appliances. But ultimately, the world is going to have to diversify its sources of energy, or face much leaner times ahead due to higher energy prices.

Yet lean times may be head even if we do get an explosion in energy innovation. For two hundred years food and energy prices have tended to go down. That’s a pretty powerful long-term trend. But the world’s population started the 20th century and about one and a half billion. It finished the century at six billion. Since 1961 alone the population has doubled.

Huge increases in the productivity of farmland (the Green Revolution) and the relative stability of a fiat money global dollar standard, plus a healthy supply of cheap energy, made this global expansion possible. Now, money and energy are both becoming more expensive. The shockwaves resulting from their increased cost are spreading. And one of the first sectors to get hit (as the rice story above demonstrates) is agriculture.

“The UN International Fund for Agriculture predicts food riots will become common on the world scene for at least a year. The World Bank says 33 countries face unrest from higher prices in both food and energy,” reports today’s Christian Science Monitor. “Egypt’s government said police arrested more than 500 people across the country as it suppressed a one-day national strike to protest rising food prices,” reports Bloomberg.

Last week, three small regional airlines in the United States went bankrupt and ceased operations. They all cited the rising cost of jet fuel as the main reason their economic model went belly up. An energy scarce world is a less mobile world, quite literally.

The Australian Petroleum Production and Exploration Association (APPEA) sees all this and says, “explore!” “Australia’s oil explorers need to widen their search for discoveries in so-called frontier areas to avoid a $28 billion petroleum trade deficit within a decade,” according to Angela Macdonald-Smith at Bloomberg.

“Australia has 50 sedimentary basins, of which just 12 are producing oil and gas, pointing to potential for drilling in little-explored areas,” says APPEA CEO Belinda Robinson. If Australia doesn’t find more domestic oil, it will be importing 80 of its refined petroleum products by 2015, according to Resources and Energy Minister Martin Ferguson.

And while we’re on the subject of how complex civilisations collapse, let us pay tribute to the late great Charlton Heston. You may remember him as Moses, or Judah Ben-Hur (the chariot race in the Coliseum is one of the great scenes in film). But our favourite Heston film is easily Planet of the Apes.

Is there a better ending scene in the movies? Note, if you haven’t seen the movie, don’t let us spoil it here. If you have, read on. Heston’s character, astronaut George Taylor, has escaped from his monkey captors on horseback with a gorgeous brunette.

It’s a little like Adam and Even on horseback going up the beach into the future. But Taylor finds out that this planet is not some bright new future, but an awful past. Round the corner of the coast they run into a half buried Statue of Liberty.

“You maniacs,” Taylor yells. “You blew it up. You finally did it. Damn you. Damn you all to hell,” he yells.

That was in 1968, when it seemed like the world would end in nuclear holocaust. It didn’t (thank goodness). But has anyone planned for a world that just kept growing? And is that lack of planning now showing up in higher food and energy prices? It sure looks like it. Now, we wonder what’s next…

Dan Denning
The Daily Reckoning Australia

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