The causal
relationship between scarcity, demand, and price is intuitive. Whatever
is scarce and in demand will rise in price; whatever is abundant and in low
demand will decline in price to its cost basis.
The corollary is
somewhat less intuitive, but still solidly sensible: the cure for high
prices is high prices, meaning that as the price of a commodity or
service reaches a threshold of affordability/pain, suppliers and consumers will
seek out alternatives or modify their behaviors to lower consumption.
We talk about the
demand for commodities being elastic or inelastic, meaning that some
commodities such as oil and grain are so essential that the demand for them is
less elastic than demand for discretionary goods and services. Despite
its essential role in the global economy, the demand for oil is not fixed; as
prices rise, demand falls. Since all commodities are priced at the margin, the
price of oil is actually quite volatile, despite the supposed inelasticity of
demand for oil.
Scarcity is only one price input.
Another is the cost basis of the good or service.
If shale oil costs $50 per barrel to extract, refine, and ship to market, no
supplier can sell it for less than $50/barrel for long.
This leads to an
apparent paradox: Demand can be robust and supplies can be abundant, yet
prices can still be high, but not high enough to trigger a profitable search
for alternatives if the “pain” felt by consumers does not reach a
behavior-modifying threshold.
There is another
input to price: opportunity cost, a concept that describes the
relationship of scarcity and choice. If grain rises in price, consumers
could choose to eat less meat, as grain is the primary cost input to the price
of meat. The opportunity cost is what they could have done with the money
saved by eating less expensive vegetable protein rather than continuing to
buying high-priced meat.
The point here is
that scarcity remains a critical input to the price of goods and services, but
the cost basis and opportunity costs are equally important inputs.
Since the world’s
resources are finite, it’s easy to extrapolate linear demand and predict much
higher prices for ultimately scarce commodities. But such predictions
often fail to account for behavioral and technological changes that lower or shift
demand.
Let’s say that
copper and cement skyrocket in price as demand for new housing surges
globally. In a linear projection of demand and supply, we might predict
higher prices for new homes far into the future. But the supply of housing is
not as inelastic as many imagine; for example, the density of residents per
dwelling is remarkably low in the U.S., and so a very modest increase of
density (i.e., more people living in existing dwellings) has an enormous impact
on demand for new housing.
The opportunity
cost of buying a home has also changed radically since the real estate bubble
burst. Potential buyers are calculating the opportunity cost not just in
terms of mortgage payments but in terms of being stuck in a locale should home
prices decline further. Owners of homes with empty bedrooms are realizing
that the Web has simplified access to a large market of potential renters.
Linear projections
of higher prices based solely on demand and scarcity fail because they do not
include feedback loops from behavioral options, opportunity costs,
technological innovations, and the cost basis of goods and services.
Access and Ownership
Much of the
supposedly inelastic demand for goods is based on the presumptive value of
ownership. We presume future generations will covet owning a vehicle that
requires enormous quantities of materials to manufacture, maintain, and fuel,
and that they will demand an expansive home that sucks up stupendous resources
to build and maintain.
But what if future
generations of consumers instead prefer 'access' to ownership?
Sharing (renting)
existing resources for transport and housing would slash demand for costly
“money/resource pits” such as vehicles and houses, and demand for the
commodities used in their manufacture would decline, possibly seriously.
It is not
inconceivable that a large household of eight adults could manage quite well
sharing a single vehicle and using public transport, even if they would at one
time have purchased eight vehicles (one for each adult) when each lived in
their own dwelling
This trend of
eschewing ownership of autos and homes is already well-established among young
people in Japan, and is an increasingly visible trend in the U.S. and other
developed economies.
Access to
transport and housing is sufficient; ownership is not necessary. This reality
(which can be described as the systemic reappraisal of the opportunity cost of
ownership) will have a profound impact on demand for ultimately scarce
commodities.
Income and Scarcity
There is another
reason that ownership of resource-intensive assets such as autos and houses is
declining on a structural level. Incomes are declining for all but the
top 10% of households, and this trend is likely to accelerate as
financialization’s self-destruct sequence pushes the global economy into a
deep, and very likely prolonged, recession.
Many analysts
(including me) have discussed this decades-long decline in the purchasing power
of labor. The primary takeaway is that this trend is the result of
structural forces that cannot be “fixed” by a political policy du jour or
central bank intervention. I have described this misalignment of Central
Planning goals and tools many times. The tools available cannot possibly
accomplish the tasks at hand. Metaphorically speaking, central banks are
trying to pound nails with handsaws, as they have no hammers in their
toolboxes.
For many workers,
there simply won’t be enough income to indulge in the ownership model.
The cost in cash and opportunity are too high.
This leads to a
profound conclusion: What will be scarce is income, not
commodities. The corollary is equally profound: All the
capital that has been sunk into pursuit of commodities and ownership-model
assets such as homes and vehicles is in danger of becoming trapped
capital. That is, if there is little demand for commodities and
resource-intensive ownership-model assets, there will be little demand for
these capital-intensive assets.
Another way of
describing trapped capital is to say that it is illiquid, meaning that when you
place the asset for sale on the open market, there are few buyers at any price
above liquidation value.
What Will Be Scarce: Liquidity and Reliable Income Streams
If we follow this
chain of evidence and reasoning, we conclude that what will be scarce going
forward are not commodities or resource-intensive, ownership-model assets but
liquidity and reliable income streams. Ownership-model asset bubbles and
the commodity/equity bubbles that arose as a result of ownership-model demand
have lumbered off into the sunset.
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