This Is the End


Markets, Risk and Human Interaction

May 14, 2011

Commodity Prices and Paradigm Shifts

Jeremy Grantham put out a great quarterly letter about the scarcity of commodities and the marked rise of commodity prices, calling this “the mother of all paradigm shifts”.

Two interesting points in his letter are:
  1. China consumes between 25% and 50% of many important commodities.
  2. Prices for nearly all commodities are two or more standard deviations above their long-term mean; four standard deviations for iron ore, coal, copper and silver.
The recent drop in commodity prices notwithstanding, this and other analysis lay down the groundwork for his concern about the end of falling commodity prices. No one can deny that, absent one hundred per cent recycling, non-renewable resources extracted from a finite world will finally run out. And, furthermore, that we are using these resources more now than we have in the past, and given the growth of China and other countries, there are major sources of consumption that were a rounding error even a few years ago.

But insofar as the large dislocations in prices are due to the rapid increase in demand from China (and the lag in production gearing up to increase supply in response), the increase in commodity prices does not forebode a paradigm shift. Just an increase in demand. And much of the increase in demand is short term. China's explosive demand will finally drop from its stratospheric level, either because China's economic development falters or because China is finally totally covered over in cement.

Paradigm Shifts -- The Usual Suspects
The rise in demand from China does not constitute a paradigm shift – nor does a continuing rise in demand as other countries move up the development trajectory and follow suit.

Nor does the recent rise in speculative demand. This has been a focus early on of Michael Masters. The relatively small supply of commodities compared to the demand that can arise from pension funds and other institutions investors, which lately has trickled down through the use of EFTs to include retail investors, all can create sizable distortions; big money chasing after a limited supply of commodities, coupled with underlying inelastic demand -- because, for example, people still need to eat.

Nor is there a paradigm shift due to technology, though obviously technological change alters resource demand, sometimes for the better and sometimes for the worse. Two examples in the positive column are the reduction of copper demand due to fiber optics and wireless, and the drop in demand for silver due to digital photography. One in the negative column is the increased demand for rare earths for electronics. But technological improvements and increased efficiency are a given in our current paradigm and cannot be considered paradigm shifts; neoclassical models of growth theory have included adjustments for technological change since the 1960s.

The mother of all paradigm shifts
But there is a paradigm shift underway, maybe even the mother of all paradigm shifts, and it is coming from a direction where Grantham and other bears are not looking.

The real paradigm shift, or more like a paradigm drift, because it is slo wly enveloping us, is that we are moving toward preferences and lifestyle where we will simply consume less. A lot less. Like improvements in efficiency, changes in tastes and preferences are nothing new, but this time is different.

I have already discussed this in previous posts on life in the experience machine and the world of smaller scale. In The Accidental EgalitarianI make the point that with the increased focus on technology – where we spend more and more of our time on our cell phone, doing emails, watching DVDs and surfing the web – there is less of a difference between how the super rich and the reasonably well off spend their time hour by hour during their typical days. The point of that post is that in practical terms the income gap is not as large as it might seem; that several orders of magnitude differences in income don’t make all that much difference in what these people do with their time. The point here is a corollary: those activities do not require much in the way of material consumption, and therefore not much in terms of commodities.

In The Technology-Driven Consumption Trap I argue that in the not-so-distant future the main items we will demand, beyond food, clothing and shelter, are “game systems” that approach the level of Nozick’s experience machine, allowing us to have the experience of being anyone we want, wherever we want (even in a world we have designed), accompanied by whomever we want, all in Realicta Immersion 3-D® with full sensory feedback.

Our demand for housing and transportation, two of the biggest commodity hogs, will be lower. McMansions will be totally passe. It should already be dawning on people that most all of our non-sleeping hours at home are spent in the kitchen and its adjacent family room. Living rooms and dining rooms are relics. When people internalize the fact that they spend most of their non-sleeping, non-bathroom, non-eating time in a ten by twelve foot space with their various experience machine prototypes, large homes will, by and large, go the way of cars with fins and chrome.

We obviously will not need to drive around as much, given that so much of what we want is delivered to us electromagnetically. And, getting back to real goods and technological advances, if we take the web-based distribution a few steps further, rather than having thousands of cars running from one store to the next, a couple of delivery trucks will ply the streets. So per-capita consumption of energy and resource-intensive infrastructure will decrease.

Given our evolved interests a few decades hence, most of us will be spending a fraction of our income on consumption. There just won't be a lot that we will demand that requires nonrenewable resources. What we will demand will be in the way of electronic products, which will only consume a few ounces of such commodities. We will basically eat, sleep, work and then veg out. Give us food, plumbing, heat and our two-hundred dollar experience machine games, and we will be happy as a clam.
People who are staring at a tsunami of demand for commodities from the developing world and predicting a doomsday of $400 oil and $4000 gold are missing the longer-term retreating tide of demand as citizens of the developed world actually demand decreasing amounts of energy, large goods, and heavy infrastructure. We won't be packing up and moving to Mars, as the science fiction solutions to resource depletion propose. We will pack up and move into the virtual world.


  1. This sounds a lot like the future vision Kenyes wrote about in "Economic possibilities for our grandchildren." I would be his grandchild and we're no closer to consuming less. This social change is taking longer than expected due to the power of corporations to control the public mind.

  2. Don't mistake the average blogger for the average person. Given enough money and free time, who wouldn't want to drive a Ferrari from his own mansion to his friend's mansion for a decadent meal of lobster flown in live from Maine. Maybe it's unaffordable for most, but it's certainly desirable. This article is sour grapes, bro.

  3. Hmmm. Well, I hope to see that day in my lifetime where per capita consumption retreats on a sustained basis. Though America may be experiencing downshift, China, India, Brazil, etc. are upshifting. See the second chart here, which shows per capita energy use trends for a variety of nations.

    Not pretty.

  4. The big irony in Grantham's pronouncement of a paradigm shift is that he has made his mantra 'the regression to the mean' which he has now thrown out the window even while showing us the data of China's massive over-consumption of these commodities. Ah, this is a better signal of a commodity peak than any Time Magazine cover piece. I'm sending Jeremy a towel to wipe the egg off of his face.

  5. Quite a stark outlook for human behaviour.

  6. Most people would not be satisfied with such a shallow life as "We will basically eat, sleep, work and then veg out. Give us food, plumbing, heat and our two-hundred dollar experience machine games, and we will be happy as a clam."

    I really find that unlikely.

  7. Yes, I am taking the case to an extreme. But if we back up a little bit into a more reasonable future world, we don't have to move too far from where many of us already are to see a change in lifestyle occurring. I would assert that much of the space in the typical U.S. house is already sitting idle. All the more so for the large houses of the affluent. More and more time is spent in front of a monitor of one form or another. And that time is extending beyond watching programs to the social interaction via e-mail and social networks, and the experiences that used to occur in the real world via games.

  8. Heating and cooling idle space becomes a larger expense. Interest rates go up making that idle space a larger expense. Large houses are further out from the cities and the next generation may prefer city living which makes idle space and further travel times a larger expense. Those who built the large idle space, thinking that space could be sold for retirement, so far are not seeing that happen.

  9. Would you say that this paradigm drift is also shrinking the generation gap? In the virtual world do we become ageless?

    I wonder whether society's investment in education may be missing a big part of the picture. We spend huge amounts of our resources training our youth to become productive as adults, but far less on extending the capabilities at the opposite end of the demographic spectrum. Where the fundamental nature of work and play rely less on physical strength and endurance, we would create a more stable and harmonious economy by making sure connections are available to all.

  10. "
    I argue that in the not-so-distant future the main items we will demand, beyond food, clothing and shelter, are “game systems” that approach the level of Nozick’s experience machine, allowing us to have the experience of being anyone we want

    I'm continuously baffled at philosophical assertions stating all of humanity desires to participate in a fantasy land. The above statement may be true of some intellectually devoid segments of society (which I'll admit seem to grow larger every day) who've long ago stopped caring about "real" experiences. But as a blanket statement I think it is flawed: there are a large number of us who still know and respect the line between real and fantasy. That won't change just because the fantasy becomes more convincing or pleasurable. If we only cared about pleasure, and weren't capable of self-reflection, maybe this postulate would hold water. But we do have the power of self-reflection, many of us still choose to exercise it. Many of us are (and would in the future be) disgusted with ourselves, our friends, our families when technology holds 100% of our focus, to the extent that (for example) you have to email to get my attention even tho I'm sitting right across the room from you.

    I postulate that as electronic experiences (from email and IM all the way to full-body sensory reality simulation) continue to evolve humanity will continue to self-reflect and present a potent opposition to simulated life experiences.

  11. I think we are already more in a fantasy land than many of us would realize. Aren't the hundreds of 'friends' on Facebook a fantasy world, where the only connection is a virtual one? Is immersion in movies and computer games (and reality TV) a fantasy life of a sort? Right now it is not a very good one, but the objective it so make these increasingly real, so that it becomes easier and easier to suspend disbelief and live in that world. If you look at where we spend our time, it seems to me that we want to be in a fantasy world, and it is a matter of technology pushing us there in an increasingly full way.

  12. There will still be women however, and men will still most likely desire several inherently non-virtual experiences that involve them. Hence conspicuous consumption will rage unabated until the species either destroys itself or something resembling enlightenment becomes a majority characteristic.

  13. Add to that fictional novels, the fantasy drug of choice for generations of readers.

    One way to predict the future is to look to the very rich, scientists/engineers and the artists. Artists have always lived in liminal states between physical reality and fantasy/the Ideal, but digital media makes their artistic products as evanescent as their visions as opposed to physical paintings, sculptures, etc.. The rich and those that aspire to wealth have increasingly looked to financial markets to provide that wealth and those financial worlds have recently shown they have a very tenuous connection to physical reality. And few seem to care...playing the financial game is the thing for them. So much scientific and engineering effort in the last 60 years of the information age has been focused on contributions to a cyber-reality rather than Newton staring at light entering a prism.

    It's not 100% fantasy world by any means, nor will it be, but a movement away from physicality as a focus has been a trend for the last 50 years or so, simply because there are no limits to growth in a cyberspace that can credibly compete with physical reality for mindshare. It's a small (physical) world after all, but simulated physical worlds are effectively boundless to the human experience.

    They *are* all just photons and sound waves, whether the person is right next to you, or videochatting a thousand miles away. Unless there is something else, a bonding of common minds and spirits that requires physical presence as a catalyst, an enzyme. It wasn't a critical element in the 19th century where scholars had to write physical letters to collaborators around the world who shared their common interests...and they seemed to do OK with that limitation. So what is that special something that comes from physical proximity or contact, other than deep sexual satisfaction and the occasional child? Sounds like a worthy question for philosophical speculation and psychological exploration, but it requires actual reasoning, experimentation and analysis to explore the issue, not just some lazy "you kids get off of my lawn" whine about how everybody is listening to their iPods on the subway or texting instead attending my favorite social event...

  14. Having read your blog I am thinking Fahrenheit 451. Kind of scary.


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