Mega-trends and their impact in 2012

To arrive at an outlook for the year ahead we first need to analyze the big trends that endure for decades and in some cases even longer.

Population growth and food resources

The number one dynamic over the last century has been the exponential rise in global population. It took 123 years for the world population to grow from 1 to 2 billion (by 1927) and only 12 years to grow from 5 to 6 billion (by 1999). Growth, however, is now slowing and we are predicted to rise from the current 7 billion to a peak of 9 billion in the 2050s.

At the same time we are faced with increasing scarcity of food and water. Advances in technology have improved crop yields, but increased meat consumption in China and other Asian economies will reduce overall output. The area of land required to produce an equivalent amount of edible protein from livestock is 4 to 5 times higher compared to traditional grains and legumes, and up to 10 times higher for beef. Diversion of land use for ethanol production will also restrict food output.

Global warming, whether man-made or a natural cycle, may also contribute to declining food production — through droughts, floods and depleting fish stocks.

Depleting natural resources

We are also depleting global deposits of ferrous- and non-ferrous ores — as well as energy reserves of crude oil and coal — as global industrialization accelerates. Commodity costs can be expected to rise as readily available resources are depleted and we are forced to dig deeper and endure harsher conditions in order to access fresh deposits. Deep water ocean-drilling and exploration within the Arctic and Antarctic circles are likely to increase.

As energy resources are depleted, nuclear energy production is likely to expand despite current safety concerns. Development of technologies such as thorium fluoride reactors hold out some hope of safer nuclear options, but these may be some way off. Wind and solar energy are likely to remain on the fringe until technology develops to the point where they are cost effective compared to alternative sources.

Global competition

Competition for scarce resources will increase tensions between major economic players, with each attempting to expand their sphere of influence — and secure their sources of supply. The Middle East, Africa, South America, Australia, Mongolia and the former USSR are all potential targets because of their rich resource base.

Trade wars

In addition to competition for scarce resources, we are also likely to see increased competition for international trade. Resistance to further currency manipulation — initiated by Japan in the 1980s and perpetuated by China in the last decade — is likely to rise. US Treasury holdings by China and Japan currently sit at more than $2.3 Trillion, the inflows on capital account being used to offset outflows on current account and maintain a competitive trade advantage by suppressing their exchange rate.

Rise of democracy

Another factor contributing to instability is the rise of democracy in some parts of the world. The Arab Spring is still in its infancy, but the development has no doubt caused concern amongst autocratic governments around the globe. Food shortages and rising global prices will act as a catalyst. The likely result is increased suppression in some autocracies and a rapid transition to democracy in others, like Myanmar. But the transition to democracy is never smooth — especially in countries with clear fault lines, such as language, religious, racial or cultural differences — and can lead to decades of conflict before some degree of stability is achieved.

Decay of Democracy

On the other hand we are witnessing the decay of long-standing, mature Western democracies. Undue influence exerted by special interest groups with large cash resources — such as banks, big oil, and armaments manufacturers — force politicians to serve not only their electorate but their financial sponsors. Aging populations pose a new threat: large voting blocs who are not participants in the economic workforce will wield increasing influence over distribution of social welfare payments such as Medicare and Pensions. And politicians are increasingly guilty of over-spending, running up public debt and debasing currencies, in their attempt to keep voters happy and secure re-election.

The long term hope is that we evolve a more consensus-based form of democracy, along the lines of the Swiss model, and away from the excesses of the current winner-takes-all system.

Global debt binge

The decay in Western democracy resulted in a massive debt binge over the last 3 decades, with private debt often growing at double-figure rates, accompanied by burgeoning public debt levels. The massive debt bubble far outstripped GDP growth, effectively debasing currencies and causing soaring inflation of consumer and asset (housing and stock) prices. The GFC marked the peak of the debt expansion and was followed rapid contraction as the private sector diverted income to repay debt. Debt contraction is catastrophic, however, and can cause GDP to fall by up to 25 percent as in the Great Depression of the 1930s.

The response has been a massive expansion of public debt as governments run deficits in order to offset the private debt contraction. Overall debt levels hardly faltered as government spending programs filled the hole left by private debt contraction. While this succeeded in plugging the gap, many Western governments are left with huge public debt and increasingly nervous bond markets.

Central banks such as the Fed and BOE stepped into the breach, purchasing government bonds with newly-created money. Apart from putting gold performance on steroids, central bank asset purchases had little impact on inflation because the effect was offset by the deflationary debt contraction. But cessation of the debt contraction would let the genie out of the bottle.

Outlook for 2012

Here is how I believe these big trends will impact on 2012. I do not claim to have a crystal ball and it may be amusing to review these predictions at the end of the year:

  • Further debt contraction
    Contraction of private debt and constraints on government borrowing will strengthen deflationary forces.
  • Further QE
    The Fed and BOE are likely to expand their balance sheets to support public borrowing. The ECB may make a limited response because of constraints imposed by member states such as Germany.
  • Low inflation
    Deflationary forces will outweigh the inflationary effect of QE by central banks.
  • Low global growth
    Debt contraction and a euro-zone banking crisis will ensure low growth.
  • Euro-zone banking crisis will require further bank rescues
    Placing further stress on public debt levels, and pressure on the ECB to act.
  • China “soft” landing
    A second massive stimulus focused on low-cost housing and quelling social unrest will restore economic activity, but export markets will remain flat and the banking sector inundated with non-performing loans.
  • Easing of commodity prices slows
    Massive stimulus from China will support commodity prices.
  • Further social unrest amongst autocratic regimes
    The Arab Spring will continue sporadically across a far wider area.
  • Crude oil prices remain high, aided by further conflict
    High crude prices will also contribute to low growth.
  • US current account deficit shrinks as yuan rises
    Increased pressure from the US will prevent China from expanding its Treasury investments causing the yuan to strengthen against the dollar.
  • Dollar strengthens against euro
    A euro-zone banking crisis will ensure that the dollar preserves its safe-haven status.
  • Gold bull-trend when QE resumes
    Resumption of QE by the Fed would ensure that gold resumes its bull-trend against the dollar.

I wish you peace and prosperity in the year ahead but, most of all, the good health to enjoy it.

Regards,
Colin Twiggs

28 thoughts on “Mega-trends and their impact in 2012

  1. ehmu says:

    Responding to the notion that geopolitical economics or social structures cannot change quickly.

    I site the shift in Egypt, Lybya, Syrria and soon Greece. These shifts can happen in the blink of an eye, when the masses finally overcome the illusory power structure. Potentially these shifts can develop in to a collapse when there has been a large build up of inertia in the masses.

    ” The complex phenomena observed everywhere indicate nature operates at the self-organized critical state. The behaviour of the critical sandpile mimics several phenomena associated with complexity that can easily be observed across many sciences. This is particularly true for in geological sciences, where large catastrophic events such as turbidite systems, which cannot be understood within the set of references developed within the conventional scientific domains. The theory of complexity is able to explain such phenomena, at least partially.

    Consider the scenario of a child at the beach letting sand trickle down to form a pile . At the beginning, the pile is flat, and the individual grains remain close to where they land. Their motion can be understood in terms of their physical properties. As the sand pile grows steeper, there will be little sand-slides. As time goes on, the sand slides becomes bigger and bigger. Eventually, some of the sand slides may even span over most of the pile. At that point, the system is far out of balance, and its behaviour can no longer be understood in terms of the behaviour of the individual grains. These avalanches form a dynamic of their own, which can be understood only from a holistic description of the properties of the entire pile rather than from a reductionist description of individual grains: the sandpile is a complex system.

    The sandpile is the canonical example of a Self-Organized Critical system (SOC). It exhibits punctuated equilibrium behaviour, where periods of stasis are interrupted by intermittent sand slides (as in turbidite systems). It can be expressed as a straight line on a double logarithmic plot, which indicates that the number of events is represented by a simple power law or logarithmic fractal. “

  2. Graham Wright says:

    I am reminded of the short story “Animal Farm” (George Orwell 1945). The men dominated the pigs until the pigs became men an the men became pigs. Thus the dominators became the dominated.
    Political and administration systems are all about enhancing power of the state (and those within it) and expanding that power beyond the state borders. Today, the world borders are retracing and power is being re-distributed. But people seem to be ignoring the history of China. China has survived as an autocracy for more than 2000 years. Emperors and regimes have ranged between total authoritarianism and benevolence as it has survived and evolved. How can we expect 2000 years of history to change in a generation? Furthermore, why would a proven system give way to a minor system that was confined to a small nondescript country for most of that 2000 years. New ideas only take hold and grow when they empower somebody. Power is not given up, it is taken away. We are seeing a world power re-distribution now and China has no need to yield to anybody but can influence others to yield to it.
    Graham

  3. tonydd says:

    Fantastic analysis Colin.

    I love the way you teach (that is what you really are, a teacher), Other commentator / experts provide conclusions without including the variables that influence the analysis.

    You sowo the reader (student) due respect by having thourough explanation of the pertenant issues and allow the reader to draw a logical conclusion.

    Thankyou so much

    TD

  4. Ben Burstin says:

    There are some concerns about the future of democracy:

    1. The emergence of “no-compromise parties”, e.g. Greens, Tea-party, making it difficult for broad based parties to govern sensibly and have some consensis in general support.

    2. The “Arab spring” poses a lot of questions. What are the various forces behind it? To what extent are there common interests? Could differences be even stronger resulting in civil strife?

  5. Patrick P says:

    Colin – thanks for all your very insightful commentary throughout the year – you are one of the more interesting sources I follow.

    By way of comment I would like to say that I’m not sure China is going to save anyone – in fact it may be the Black swan event of 2012 (refer the book Black Swan by Taleb). In complexity theory its not the last grain of sand on the pile that causes it collapse but the poor founding at the base – China is a bubble economy about to burst – property prices are falling radically and the government is not in any more control than the US Government is in control of the Fed (which is a private organisation). Given China needs Europe and the US buying you have to worry about the sustainability of their manufacturing and with the Yuan linked to the dollar the US can print ad infinitum with no fear of inflation – it exports it to China via the exchange rate – for every $ the US prints the Chinese have to print the same amount of linked Yuan. They already have hundreds of ships sitting tied up that got built with stimulus and entire cities constructed with no one in them. The great plan is only as good as the use the product gets put to and that looks to have failed – private enterprise is dying as shown by the decline in the Chinese markets at a time that the US markets rose – surely thats telling us that China isn’t that healthy (that said we also fell so go figure).

    On Europe – how many Australians would accept Obama pushing aside Gillard and Abbot and appointing Ken Henry to cut spending and ramp up taxes. I don’t like either of them but I like the fact that they get there because we elect them. How long are the Greeks and Italians going to accept being told what to do by the Germans and the French. The lid isn’t going to stay on in Europe for too much longer – may not be weeks or months beyond that who knows? If I was Italian I would say I don’t care what Merkel and Sarkozy say I want an elected rep running the country – they’ve had 60 elections since the end of WW11 – does the European Union nomination mean 61?

    Given the amount of debt in the world (over 300% of world GDP – the only time its ever exceeded 200% in history was when the world was fighting a major war and then the victor gets the vanquished to pay the bill). Reversing the maxed out credit card is impossible.

    Some fun thoughts to make it an interesting year – taking a lateral view on all the issues this could be a once in a century opportunity to make some really good money when the lid pops but one is going to have to set themselves up and to expect the unexpected – the Black Swan – when it comes it looks like it will be a negative push down not a positive push up. Then the world can get back to normal!!.

    In conclusion the critical issue that we westerners seemed to have missed is that bankruptcy is an essential element to ensure that stability is maintained. The incessant interference by governments looking to stay in office means that at every turn they try and negate loss of wealth which ultimately worsens the situation. Let it happen.

    Its not the end of the world – just a lot of wealth that gets evaporated and a bit of pain ensues, but the sun still comes up and we live another day.

    PS – on the wealth distribution from “poor” to “rich” – thats a mathematical issue not a social one so lets not make it one (if I have $100 and get 5% I get $5 – if my brother has $1000 and gets 2% he gets $200 – I’m more successful, he has more money). In a system where we rely on growth the mathematics causes the problem but thats another issue!

  6. NEIL LATGAM says:

    Why is it that Governments on both sides penalise their people with Taxes while 50% of the mining profits go out of the country,25% of the support companies have been taken over by overseas companies , their profits go over seas, Australian labour account for 10% and is Taxed over and over many times and 15% disappears. Why are the working people being treated as modern slaves in the name of democracy? Workers are penalised for living here. Middle Australia is being taken out.
    The example i see in USA

  7. Adrian Watkins says:

    Until the environmental costs of carbon-based energy is factored in, we won’t know whether wind & solar energy is cost effective. I suspect the latter are already cost effective.

  8. picturefun says:

    As Chinese and other Asians eat more meat, OVERWEIGHT Americans should consume LESS meat!

    • Jason says:

      It is not meat that make people fat. Personal trainers with lean bodies have lots of protein (including meat) and less carbs, and they don’t get fat.

      Carbs on the other hand can make one overweight, but Asians have lots of carbs (rice + noodles 3 times a day) and they are not that fat.

      Sugar is the culprit. Americans comsume lots of sugar and that’s why they are overweight.

  9. Jim Scott says:

    Dad lauds Amerca’s “foundng fathers” and that is all well and good. But while I am as loyal an American as anyone, I am also a realist who has studied history. Such studies reveal a “political establishment” both during the founding and at later times, that was JUST as acrimonious during the founding as were are now…if not more so.

    At least we haven’t recently had one Senator severely beat another with his cane of the floor of the Senate as Preston Brooks did in the Civil War era.

    And we MUST remember…before nominating any of our Founding Fathers for sainthood, that they created a nation wherein blacks were considered sub-human chattel BY LAW and where women weren’t regarded as being all that much higher on the food chain…so much so that they were not even considered capable of so much as casting a relevant vote!

    It took 100-150 years to clean up those messes, so let’s not be too full of ourselves when we refer to the foundations upon which this nation was created.

    A GREAT DEAL of America’s greatness resulted from its massivley abundant land mass and natural resources…much of which we literally confiscated from other sovereign nations at gun point under the mantra of “manifest destiny.” And another HUGE component of our greatness evolved from IMMIGRANTS…not citizens born in America.

    And we STILL haven’t become a true “democracy” in the sense that our Presidents are NOT elected by popular vote but rather by the Electors in the Electoral College…an institution created by the Founding Fathers because they were CERTAIN that the average voters were rubes who could not be trusted with the actual election of our Presidents.

    So, God Bless America and I really mean that but let’s not get too carried away with our “exceptionalism” and remember that we have a LOT or work to do before we pat ourselves on the back too often. In that context, God give us the grace to view ourselves as others do.

    Jim

  10. Nick says:

    Re population. The west is in productive decline. The current 80 million USA “40-55 year old’s” have had 40 million kids. That number should be the other way around. There aren’t enough kids to pay taxes. The demand from the state on this group will be enormous. This situation is repeated to varying degrees, throughout the west.

    The “entitlement” mentality and “dependence” on the state by western populations can only exacerbate this “co-dependent” relationship.

    The USA has demonstrated a weakened ability to project power. It didn’t get involved in Libya. Took years to sort out Afghanistan and Iraq. And China has just built it’s 1st aircraft carrier, which means it’s only projection of power can be economic and therefore political which is messy.

    The weakening of the projection of western power will give rise to increased political instability throughout the rest of the world as political nuts “try on” their their new status.

    The interest payments by the USA to China, in a few years, will fund the entire Peoples Liberation Army. While it’s own military spending will be cut because it has to. There will soon be nothing to fear from the western military. Which means despots and morons will be able to get away with more for longer. And China isn’t ready to police anything other than it;s own interests. Last time I looked China wasn’t big on, Free Speech, Free Press, Freedom of thought, Political Freedom etc. Even if they were ready, I don’t think many in the west would like it.

    Re: Global warming. Looking at past climate and signals tells us we’re headed for a prolonged period of cooling if not freezing. Definitively not warming though.
    Therefore:
    The demand on “fuel” will be high (prices rise) and all the money spent on solar, wind, geothermal, Co2 sequestration will weaken the environmental movements influence.

    It may even strengthen the forces that have led to in-balance of wealth distribution in the west over the past 30-40 years.

    This could leave room for “other” movements to rise. I’m suggesting not though. There is not enough variety of coherent, rational, outcomes based thought and expression throughout the west at this time. As exampled by the “Occupy anything” movements confusion.

    I’m not sure of the outcomes of any of this, but I don’t think the “Ma and Pa” population is going to like it.

  11. Eddiewano says:

    Hi very interesting reading. But you have left out the economic benefits of war in your calculations.

    One gruesome human factor that I believe will stop anything good from happening in the economy is the total lack of good-will between everybody in the U.S. right now. It seems to me like everybody hates everybody else.

    Citizens hate migrants, who do the jobs nobody else wants, employers hate workers, who keep them in business, the list goes on….

    This situation is always bad for business, and I don’t see how this can be resolved by any means other than full scale conventional war with another super power.

    But like so many things in our modern world, we have mechanized war to the point where we almost don’t need to hire humans as cannon fodder anymore; which negates the possibility of dead soldiers, and grieving families, generating good will back home.

    The nuclear umbrella is working very well at keeping the peace, only problem, we here at the top aren’t used to friendly relations with our enemies.

    I guess the old ways are just that…

  12. Bill says:

    Good to see an acknowledgement of population as a potential problem for once. I have noticed that population graphs drawn in the media also follow this theory that population growth will somehow peak and only reach 9 million by 2050. Anyone who has studied graphs as long as you have Colin must see that it is basically exponential, so there would have to be some dramatic change in the trend for that to happen and there is no sign of it.

    As for Nuclear power becoming more popular, it seems unlikely with the costs of Fukashima still mounting up but maybe that can help solve the population growth thing?

  13. Frank Marshall says:

    Interesting views Colin……which I mostly agree with :).

    As Churchill said, something like this……”Democracy is a ‘crap’ system except when compared to any of the alternatives”.

    Democracy’s achilles heel is well described by your writing here…..politicians are, ultimately, corrupt in that their primary goal is retaining power. You, rightly, say that this is achieved by courting powerful lobbies like me (older person 🙂 and those businesses and individuals who can finance the campaigns and associated TV advertising….NOT to forget the worrying and increasing power of the Christian Right wing fundamentalists…..The ‘Christian Taliban’. This is taken to its extreme, as usual, by the USA who plumb the embarrassing depths of corruption and moral poverty. Retaining power is placed well before their duty to their country and its peoples.

    Ideally!, I have been and would still like to be an idealist and I thought that democracy was as good as it gets. However, looking at the Arab Spring countries, for example, it’s starting to look as if an iron fisted dictator or autocratic government might be best for them. Some populations, with their religious and cultural divides, are just not ready for democracy.

    Religion, being what it is, means that even you were able to put all those of one religion in ONE country , in order to stop the fighting,…..over time there would again be a breakaway faction within that religion who would then fight for THEIR variation.

    Democracy can ONLY work IF everyone accepts the rules……so, whilst there are religious factions (and there will ALWAYS be those because of the way some human beings are wired up and/or brought up….even with education). It’s hard to imagine democracy working with your Sunni and Shi’a muslems (or Sonny and Cher muslims…as I call them) but also the Christian factions, of equal stupidity, in the various Catholic, Protestant and other camps.

    Having voted for Blair (I’m not a single party person; having voted for them all over the years) I was so disappointed when Blair revealed, right at the end of his reign that he was a serious Christian…..so looking back it was no surprise that Blair and Bush (B&B) got on so well…..Christianity was clearly more important to them than their opposite political beliefs.

    Sorry to dwell on the religious aspects of the world situation but it really concerns me that they seem to be making ground in the west; even after all the efforts which have been made to educate the populations!!! All we need is another Blair and Bush pairing to set of another Crusade.

    At the very least it’s destabilising for the markets due to all the intertwined consequencies of religious conflict.

  14. John Vettel says:

    The rise of Democracy, the Arab Spring, etc are led largely by relative illiterates who cannot be compared to the men who wrote the US Declaration of Independence, the Constitution, the Federalist, and the Bill of Rights.

    When asked “What have you given us, Mr. Franklin?” he responded, “A Republic, if you can keep it.”

    The very fact that supposedly intelligent people don’t understand the difference between a democracy and a republic is a strong indication of the dire condition of our republic. It is in its death knell!

    • Pitchman says:

      Right on John!

      “The very fact that supposedly intelligent people don’t understand the difference between a democracy and a republic is a strong indication of the dire condition of our republic. It is in its death knell!”

      Strong indication indeed! Only If American’s understood “we the people” are responsible for defending the Republic from the government. Our representatives are under a social contract to preserve and defend the constitution. No man stands above the law and as Patriots it is their duty assure this. Take the time and learn THE USA IS NOT A DEMOCRACY! WE ARE A REPUBLIC! AND THE RULE OF LAW GOVERNS ALL IN THE REALM, not the mob or a small group who attempt to put themselves above it. Once you understand “OUR REPUBLIC you will see how we have allowed a few sociopaths to use and abuse the people for their own ends and how they are spreading their NEW WORLD ORDER OF DEBT SLAVERY ECONOMICS.

      See:

      Merry Christmas! “A Republic: If You Can Keep It” – Benjamin Franklin

      http://notionalvalue.blogspot.com/2011/12/merry-christmas-republic-if-you-can.html

      LIBERTY LOST – http://notionalvalue.blogspot.com/2011/12/liberty-lost.html

      Lawrence Lessig: Republic, Lost – Americans: It Is Ours To Take Back!

      (note he gets the Democracy/Republic mixed up but try to understand the gist- there is one common theme all American’s can agree on and this is where we must start.)

      http://notionalvalue.blogspot.com/2011/12/lawrence-lessig-republic-lost-americans.html

      See more below

      • Colin Twiggs says:

        “We are and we have to remain the strongest military in the world. We are not going to back off from our position. If we are going to be a world leader, we have got to maintain our military power.” ~ Defense Secretary Leon Panetta.

        ……sounds more like an empire than a republic.

  15. Dan says:

    “The Middle East, Africa, South America, Australia, Mongolia and the former USSR are all potential targets because of their rich resource base.”

    The scariest part of this article is the US assumption that a nation with resources is a valid target. History has shown that every empire that has tried to push too hard and too far has eventually fallen.

  16. Andrew D says:

    Scary stuff!
    I do think Australia is selling its self out. Or should I say our regulators and politicians are allowing it to be sold out, especially to the Chinese. Both agriculture and resources.
    Wah Nam is a recent example of the Chinese outsmarting our regulators to acquire a Iron Ore asset ( Brockman Resources ), fleecing Australian shareholders and setting up a future supply to the People’s Republic of China which will undermine our big resource companies. The first of many no doubt.

    We need to take a stronger stance to protect our nations non renewable assets and ensure the future of all Australians.

    I also think we should have a 2 child policy throughout the world in order to sustain this one and only planet! We simply cannot sustain this path of consumerism and destruction of forests and marine life.

    Andy

  17. Peter Baird says:

    Colin.
    Regarding the world economy, not just the USA, where does the ever increasing wealth held in and by China fit in your picture of who should be doing and spending what?
    China is currently directing their spending and investing program mainly within their borders, but this will change as they become more affluent. What happens then and can the West work with them to solve this situation down the line?

    Just one of the world-wide situations we are facing in the next 10-15 years.

    Peter

  18. Is there something too in the decline in respect for those in so called ‘authority’ and the skewing of wealth in a capatalist system so the rich get richer?

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