Supply-Demand . . . . Implosion

by Milo Clark

June 7, 2004   


I often cite Leopold Kohr's dictum that everything, every system, has its right size. When that right size is exceeded, implosion follows. We are deeply immersed in implosions.

In the corporate world, Enron is only a leading indicator. In politics, neither US political party represents substance, only greed and idealized greed. Money seems the only criteria. Politicians sell their souls for campaign funds. Incumbents are measured by the amount of pork barrel money they deliver to their constituents, especially those who bought them in the first place.

There are also solid indicators that massive system implosion is upon us.

In economics, there are sets of statistical arcana being tripped by actualities. Using basic supply/demand criteria, whenever production or supply trails demand and can catch up only by exceeding systems capabilities, implosion nears.

With resources of finite supply, there is a point in time when catching up by increasing supply fails due to added costs related to increasing supply. In classical economic theory, while consumption holds up during reduced supply, prices move up to try to stem demand. When increasing prices fail to stem demand, perhaps failing to moderate the demand curve adequately or to divert consumers to fungible alternatives, inflationary pressures rebound throughout the economic systems. Some of this logic marked the come-down from Vietnam when a period of high inflation and high interest rates developed in response to the technical bankruptcy which existed.

In agriculture, huge areas of once productive land are now out of production due to failure of water supply. In the past, these areas were irrigated. When the water tables dropped below economic costs of pumping, the land is taken out of production. In the later stages of using such land, too deep irrigation tended to bring up heavily salted waters which contaminated the top few inches of soil. These salty deposits add ruination to the damages. Finding new sources of suitable water and bringing it to these fields is compromised by the contaminated soil. Double whammy.

World wide, as Lester Brown told us annually in his State of the World series, industrialized agriculture has advanced far along the relevant economic curves and is now onto the edges of decline in terms of yield in reference to population demand. Overall production per acre per crop no longer responds adequately to chemical stimuli. More fertilizer doesn't necessarily yield more crop. Moving into this year's temperate zone growing seasons, pricing pressures are already reflected in futures' prices. Monsanto recently stumbled in its efforts to force genetically modified wheat onto the world. It has been withdrawn from the market. Whether or not a reader is in favor of genetically modified crops, Monsanto was attempting to increase yields to meet the changing slopes of agribusiness economic curves.

In Arizona, for example, thousands and thousands of acres once planted in cotton now lay abandoned and salt-encrusted. Billions of dollars were spent on the Central Arizona Project (CAP) to bring Colorado River water hundreds of miles into the Phoenix area. The cover story for spending bond and tax money for the CAP was to revitalize agriculture, read agribusiness, industrial agriculture. Actuality shows that CAP primarily boosts non-agricultural projects, housing, malls, Venice-like canals in mega-RICO developments and resorts. CAP water is too expensive for general agricultural use other than for specialized truck farming, and that marginally.

When bonds are issued for minimally productive projects, funds are diverted from essential infrastructure. Sports stadiums built for private benefit with public funds are a case in point. Let them eat gladiators!

Shown graphically, infrastructure, schools, highways, bridges, etc. end up taking less of public funding in relation to demonstrable needs. Overall expenditure grows at rate X while benefits from such expenditure follow a declining relationship to X. With tax burdens shifted from corporations and high income people to middle and lower-middle taxpayers, the clamps on household disposable income get tighter and tighter.

From 1950 through the early 1970s, overall US Gross Domestic Product (GDP) grew at an annualized rate a bit more than 3.0%. Since 1973, that rate has declined to about 2.0%. As economists and statisticians delight to point out, the difference between 2.0 and 3.0 is not one but 50%. What happened?

Several coterminous processes intervened. The Vietnam War was a guns and butter war. The public was not called upon to make sacrifices other than bodies killed and mutilated. The public figures for war expense were significantly understated. Economists will tell us that military expenditures are a kind of dead end process having relatively few multipliers within the larger economy. Workers are diverted from more socially productive roles. Military assets blown up, discarded, diverted to black markets, surrendered to enemies or lost make no positive economic contribution. Whereas similar funds spent on productive tooling and processes to make products for civilian markets do make economic and societal contributions.

The economic hangover from Vietnam held down the economy for many years, decimating the Carter years with high interest rates as US debt required treasury bond sales beyond the structural domestic savings rates. When Reagan took over, he drove military spending to new heights, ran heavy deficits and drove the overall system deeper and deeper beyond short term fixes. Foreign money has kept the US afloat for more than thirty years now.

A political objective of tempting system failure is to prevent future legislators from expanding programs of domestic benefit. With Clinton becoming more Republican in form, the economy crawled back to surplus by the end of his term. The incoming Bush people, totally abandoning the long held Republican shibboleths of balanced budget, no deficit spending and such, drove us back down to massive deficits and into very expensive war. Adding insult to injury, tax reductions primarily benefiting the wealthy were compounded by a specious Medicare prescription drug program designed to serve pharmaceutical manufacturers rather than senior citizens. Cynicism abounds.

Extractive minerals and fossil fuels follow similar curves. There are vast areas of the United States where mining is done, finished, kaput. In Upper Michigan and nearby areas of Wisconsin, once iron ore rich, there is now little productive economic activity possible. Those who hang on live hardscrabble lives.

Huge gouges of earth laid bare to rip out coal in middle Appalachian states scar the land. Forests from east to west coastal areas were striped of lumber long ago. In the southwestern states, communities centered on gold, silver, uranium, coal are derelicts. Meaningful employment or rewarding entrepreneurial ventures are lost.

Domestic production of many extractive commodities has now faltered. Overseas sources have been developed to stem off implosion, always at significant cost. All extractive industries depend on one central actuality. None pay for the commodity itself. The entire cost structure of the industry is based on processing the commodity and delivering it to conversion facilities on the way to end users.

In the United States, tax advantages are given for maximizing extraction: called depletion allowances. Examined closely, depletion allowances pay corporations for the non-cost of extracted commodities. In other words, the more they take, the more they make both in end sales of the commodity and through allowances reducing taxes.

Let's get more basic. Visualize demand/supply curves over time. Typically, these curves will approximate a bell curve. Goes up at an angle, levels off and declines at an angle. The height of the peak and the angles of the ascending and descending slopes vary. Product development curves are similar although usually shorter.

Media and governments tend to show only ascending slopes within X-Y dimensions. Interest is lost when the leveling off moves to descending shapes.

While supply exceeds demand, any expanding or upward curve of production was once met by technological innovations. Technological innovations usually add end user cost as in metals and fossil fuel systems. They may also reduce end user unit costs as is typical of electronic systems, i.e., computers and related peripheral equipment.

Where supply is finite, although expandable up to a point by finding more of the finite supply at increasing distances and higher costs, present use is at the expense of future supply. The vast consumption machine that is the US economy, as noted above, has long exceeded domestic supply in many areas, moving farther and farther overseas to bring in supply.

Essential to cost maintenance is to keep wages as low as possible. Taking manufacturing and service jobs overseas has several effects. It reduces wage costs while accepting capital costs, presumably to be amortized over the life of products to be produced. It breaks employment relationships along with unions. Benefit and pension promises are simply abrogated leaving ex-employees bereft.

In these cases, world supply becomes the relevant criterion in any commodity. Labor is a commodity in world surplus. When world supply of any commodity falls behind demand and productive innovations fail to bridge gaps, economic measurements falter and fall off. Watching relevant curves, astute observers can make increasingly tighter estimates of supply. Supply itself goes through a range of predictable stages which, in shorter to medium terms, can mask decline.

An example is the steps taken after the gas shocks in early 1970s. The Club of Rome issued reports, accurate in terms of known factors, that oil would probably run out in 40 years, that is, about now. Huge expenditures to find new reserves, huge expenditures to build pipelines, gigantic ocean-going tankers, processing facilities to handle lesser quality input, tank farms and refineries, fleets of delivery trucks, etc. gave the appearance of postponing the inevitable. Ever gullible consumers upped the game by backing off conservation and heading for opposite extremes and SUV world. Viva Humvees, Arnie baby!

When supply exceeds demands, end user prices are a factor of extracting, converting, transporting and marketing expenses. As supply contracts; becomes more expensive to extract, convert, transport and market; pricing increasingly impacts demand. Economic theory predicts that the higher the price, the lower the demand. Economists talk about elasticity and inelasticity of markets.

Trouble with economics is that it doesn't do well in modeling actualities. Conditional variables such as lust, shaped demand through promotion and advertising, envy and greed intrude. Global conditioning to the excesses of American television models now shape world demand. Everyone wants an American consumption future. Logo t-shirts yield to flat panel TV sets and SUV dynamics much more predictably than marijuana leads to smack addiction. Welcome aboard a sinking lifeboat.

When, as is presently emerging in many commodity markets, demand outpaces both supply and technological capacities to increase supply, the system creaks and groans. World oil supply is poised at such a point. Corrective measures, market operations, demand smoothers are bumping up against people.

Escalating world demand, fueled by emerging economies such as China, India, Southeast Asia, even parts of Africa are pushing system limits. The emerging economies, at earlier stages of technological sophistication in basic industries, are energy gourmands. Add in the switches from bullock carts to bicycles to scooters to cars and trucks, compound these changes with accelerating population densities, in turn compounded with growing affluence, consumptive capacities gone exponential and demand outstrips supply. Meanwhile, the First World economies are roaring up their own exponential curves of demand and consumption. And here we are, teetering over an economic black hole.

Need a clue? Pull into a gas station and look at the prices posted. Realize, in parallel, that US gas prices are subsidized not only by depletion allowances but also by the immense expense related to attempts physically to dominate critical supply areas by military force. Iraq is merely a pimple on the butt of world economics. Watch people come unglued when gas goes beyond some internalized panic point. I have seen articles in financial publications speculating that the American panic point is around $3.00 per gallon. Note, however, that world pump prices already exceed the equivalent in local currencies outside producer states such as Saudi Arabia. Will desire trump actuality?

A Wal*Mart economist recently estimated that increases in gasoline prices over the last six months took an average of seven dollars each week from American householders in their market areas (virtually the world nowadays). Seven times fifty two weeks times roughly two million American households packs up to 728 millions dollars in diverted spending. The Financial Times reports that the rate of increase in pump prices in America has doubled in the last six weeks. We just tripped over a billion dollars taken from disposable income.

In the last two months, here in my corner of Hawaii, pump prices have jumped from just under $2.00/gallon to over $2.30. Too many working folks of this island are stuck with long commutes. Somewhat affordable housing is now largely confined to the southeastern corner of Hawaii island. Low wage jobs tend to be far across the island on the Kona side. Many are doing daily commutes of four hours to do grunt labor with few take-home bucks for eight hours.

With housing prices jumping as more "Mainland Haoles" escaping the continent bid up prices, with gas prices pushing local panic points, with vehicle ownership and repair costs climbing to match, the black hole yawns locally. We are seeing more horrendous accidents, more crazed drivers taking reckless chances to gain a few feet in the congealing traffic, less aloha. These patterns are replicated throughout rural America.

Had enough? Don't be seduced by technological innovation sillies such as hybrid vehicles, hydrogenizing energy, solar panels, windfarms and the like. They rob Peter to pay an ephemeral Paul. Consumption statistics show that Americans are increasing debt and consuming at exponential rates.

Implosion? Not in this backyard!

Denial is just a river in Egypt.

That's a joke, son.

· · · · · ·


The Resource Base - by Milo Clark (February 2001)

Conservation Is Not Enough - Compiled by Michael G. Hanauer (February 2001)

The Imperial Conservation Crusade - by Gilles d'Aymery (February 2001)

America the 'beautiful' on Swans


Milo Clark on Swans (with bio).

Do you wish to share your opinion? We invite your comments. E-mail the Editor. Please include your full name, address and phone number. If we publish your opinion we will only include your name, city, state, and country.

Please, feel free to insert a link to this article on your Web site or to disseminate its URL on your favorite lists, quoting the first paragraph or providing a summary. However, please DO NOT steal, scavenge or repost this work without the expressed written authorization of Swans. This material is copyrighted, © Milo G. Clark 2004. All rights reserved.
· · · · · ·


This Week's Internal Links

Commodified Hell And The Poetry Of Dark Providence - by Phil Rockstroh

What Does It Mean To Be American? - by Manuel García, Jr.

Rot - by Richard Macintosh

Unlawful Orders - Poem by Gerard Donnelly Smith

Stay The Course - Poem by by Gilles d'Aymery

Latest Epidemic: Gas Pain Syndrome! - by Philip Greenspan

Peter Singer's The President of Good & Evil - by Jan Baughman

Letters to the Editor


Published June 7, 2004
[Copyright]-[Archives]-[Resources]-[Main Page]