Over-Capacity and a Time of Opportunity
Several times in the past we’ve made the statement that we are facing vast over-capacity and over-supply in the world today. What does this mean and where will it lead?
GLOBAL PRODUCT INDIGESTION
Some simple examples: If you go into Wal-Mart today to purchase a gas cooker, you are confronted with a choice of 10 different brands each with a large range of different options and models.
There are more book-titles published in one month than you could reasonably read in a lifetime, more leisure-time activities, fashions, movies, travel options and other “stuff” being thrust from every corner at you to consume; more than at any other time in living history.
This over-production is also true of most today’s essential commodities, whether beef, soybeans, corn, wheat, textiles or crude oil.
In simple terms this vast global over-capacity is largely due to the massive accumulated productivity gains of the last 100 or more years, a highly specialized division of labor, cheap motive-power, computer automation, technological advancements and a myriad of other efficiencies.
Just about every commodity, product or service is being produced in vast quantities worldwide.
LOST PRICING POWER
Across the corporate world there is a lack of what has been called “pricing power”. Manufacturers and producers simply cannot raise prices, the environment is far too competitive; there are too many other producers producing the same product, vying for their share of the same oversupplied market.
Because of high investment and debt levels, manufacturers and producers are unable to back out. In search of greater profitability they embrace today’s popular management myths of further gearing – debt funded production efficiencies to achieve the end result of yet more output. To keep the level of producer gearing in perspective, it’s worth remembering that just 50 years ago very few companies, corporations or producers carried any debt whatsoever.
Entering the 21st century, in many cases, every commodity, product, service or “thing” is costing the manufacturer or producer as much or more to make, raise or produce than what he will be paid for at market. This is particularly true of our essential commodities – that which we require for our daily lively-hood.
THE NEW ECONOMY
An exception to this is some technology and entertainment related products that are perceived by their nature to be “new”. For example Internet stocks are being sold for many thousand times their book value. Its worth remembering 3 score and 10 years ago, at the stock market peak of the late 1920’s, the mania then centered around “new technology” radio stocks like RCA. Likewise, the 1990’s mania is being led by “new” Internet stocks like AOL and Amzon.com. Radio 70 years ago, like the Internet today, while nice to have, does not actually produce anything.
THE MONEY THAT BUYS THE PRODUCTS
The working of our debt-issued money further compounds the problems associated with this vast production glut or global product indigestion. All the money that bids for or buys all the “stuff” being produced, or even the machines that makes the “stuff”, is all issued into existence through debt. Simply put, all the money that buys these products didn’t exist until some individual, government or organization borrowed it from the bank.
All the money circulating in the global economy today, has been lent into existence and requires interest payments to be made on it (sometimes called usury). The more money borrowed to consume, the more interest will need to be paid. Inherently it is a system that is bankrupting to its users.
WHAT DOES IT ALL MEAN?
We are facing a world today where there is far too much production of everything, and a populace that are shopped- out and drowning in debt. Meanwhile producers, workers and manufacturers are competing for a finite market-share at unsustainable margins. To cap it off, everyone is using a monetary system that constantly requires further borrowings, or greater levels of debt, just to make the interest payments.
WHEN THE MUSIC STOPS
Despite unheeded calls of warning from some, this overproduction-consumer-debt cycle has survived and afforded us the trappings of an unparalleled era of prosperity.
But the inevitable question; what happens when we can no longer consume at the rate we are today, or due to some extraordinary discontinuity, stop spending and consuming altogether? What happens when the manufacturer, producer or consumer can no longer meet the interest payments on the money he borrowed yesterday?
Sadly the great debt-backed consumer economy of the late 1900’s will fold like a pack of cards.
CHANGES AND OPPORTUNITY
I am not alone in the claim that the days ahead will see a great transfer of wealth. Times of great change are always accompanied by great opportunity. It is likely to be a time of great questioning, not just a time of wealth or credit questioning, but when people will again start to ask; what do I really believe and whom do I really rely on?
This transfer of wealth will be for those people that are prepared, who have paid down debt, liquidated unnecessary assets, are holding tangible assets and have their liquidity in tact.
by Philip Judge