The “Hunger Games” trilogy of books, which has just begun its bid to be the next “Harry Potter” or “Twilight” film franchise, is a classic tale of economic resource management. The books are set in a dystopian future. The world’s ability to obtain energy, food and other basic materials has been severely constrained. For most of the inhabitants of the country of Panem, life (and their labour) is cheap. The majority of the population work in conditions of extreme poverty, to provide goods for those lucky enough to have been born in the right geographic location. The beneficiaries of this system (the citizens of the Capital) frequently incur huge debts in their attempts to acquire the latest material possessions.
Never mind the idea of a dystopian future; the “Hunger Games” is a story that could serve as a mirror to the balance of the world economy of today.In the midst of the structural upheaval that has followed the world’s financial credit crunch, one feature of the global economy has been the relatively elevated level of commodity prices. The worst global recession since the 1930s has generated a very different price outcome from that of the 1930s. The 1930s saw US farm prices lose almost two thirds of their value from the 1928 peak, and the 1929 level was not regained for thirteen years. Today, US farm prices are already 5% higher than their pre crisis peak. Oil prices have recently hit all time highs in Euro and sterling terms. The drivers of today’s commodity price gains are complex, but a central part of this story is the “economic problem” (the issue that is the most basic starting point of the economics profession); the infinite desires of a growing global population are set against the finite resources of the natural world that are needed to satisfy those desires.What is happening is not an inflation shock, as such. An inflation shock is normally defined by economists as a general rise in the price level, and that is not what the world is currently experiencing. What is happening is a relative price shock. Commodity prices are rising relative to the price of labour. It is the “Hunger Games” economic pricing model.
There are three potential outcomes if basic material costs are going to rise more than labour costs in the years ahead.
First, labour costs rise, and commodity prices rise by more. This is an inflationary environment (a general price increase), and not too dissimilar from the early 1970s. Real standards of living decline in this environment.
Second, labour costs fall because wages fall, and commodity prices rise modestly. This is a low inflation environment, but one that sees the real standard of living of most people decline as their real incomes fall.Third, labour costs fall because productivity improves, and commodity prices rise modestly. In this scenario the real standard of living of most people could improve, as wages can still rise. Labour costs fall because the increase in wages is more than offset by the productivity gains achieved.
If commodity prices are increasing and living standards are declining the complication for investors is the role of politics. People do not like it when their standards of living decline. Dissatisfaction is likely to force a political response. The realistic if unwelcome political response is resource nationalism. If a country has access to its own domestic resources then there is an incentive to prioritise the needs of the local population in supplying that resource.
It's quite interesting, what do you guys think of it?
