Limits to growth 72 and the financial crisis 2011

1. Limits to growth 72 and the financial crisis 2011 Inflection Point or Turning Point

2. LTG 72 and its successors

3. LTG 72 and the Financial Crisis Limits to Growth 72 is a study commissioned by the Club of Rome to look at the impact of a rapidly expanding global population in relation to finite resource supplies Authors were Donella H. Meadows, Dennis L. Meadows, Jørgen Randers, and William W. Behrens III Based on MIT’s World3 Model Conclusions broadly Malthusian Predicted a fundamental resource constraint on oil resources by the end of the 20th century Most recent version ‘Limits to Growth; the 30 year update 2004

4. Commonwealth Scientific and Industrial Research Organisation (CSIRO) in Australia Author Graham Turner, 2008 A Comparison of `The Limits to Growth` with Thirty Years of Reality It examined the past thirty years of reality with the predictions made in 1972 and found that changes in industrial production, food production and pollution are all in line with the book's predictions of economic and societal collapse in the 21st century. - All versions of the LTG 72 have largely been dismissed as doomsday Al Gore’s ‘Earth in the Balance’ is ultimately grounded on LTD 72 Conclusions: • Comparisons with data 1970 to 2000 compare favorably with LTG 72 ‘business-as-usual’ standard run scenario (collapse mid-way thru 21st century) • Comparisons with data 1970 to 2000 do not compare favorably with LTG 72 comprehensive use of technology and stabilization policies

5. The Limits of Exponential Growth Feedback mechanism described in LTG 72 is valid Limits to exponential growth are already showing; depleted fish stocks, significant pollution levels, peaking commodities, and an incomprehensible global population and energy demand by 2030, let alone 2050-2070. Even now, we are now entering the world’s second Food Crisis, the results of which can be seen in Egypt and Tunisia. Conclusion: • In fact, the danger is that the relative abundance of oil has facilitated an exponential population overshoot beyond other commodity peak outputs. Impact of Peak Oil is therefore magnified

6. Demand Led Peak Oil and Underinvestment Has the insatiable appetite for energy in China, paid for largely with cheap Chinese labor, triggered Peak Oil? Did global investment in oil production miss the new Chinese demand for Oil? Has there been global underinvestment in commodities relative to the new BRIC demand? This depends on how you define Peak Oil, is it a peak in affordable oil or volume? Assuming the world has underinvested for the new BRIC world, is it therefore possible that we are ultimately going to be constrained by a global budget constraint? Might we be looking at Peak Capital?

7. Food Crisis 2007 – 20082011?Peak Commodities

8. Food Crisis 2007 - 2008 Grain stocks have been in decline since 1986 2007 – 2008 dramatic increase in world staple food prices • prices initially spiked 2006 Hit the poor • food riots in Developing Countries • Subprime debt default US

9. Food Crisis 2007 - 2008 Reducing inventories combined with increasing trade and demand • Higher grain/ food price volatility Net grain deficit for the last two years • Peak Wheat? 2011 market going unilateral • Unilateral/bilateral grain agreements • Rejection of the market • Export curbs, price controls, and investment in increased grain production

10. Food Crisis 2007 - 2008 Gradual change in diet among newly prosperous populations is the most important factor underpinning the rise in global food prices. Increased food utilization largely due to processed ("value added") foods sold in developing and developed nations Global shortage of whiskey due to Chinese boom • Some Scottish distilleries are now rationing Most popular drink in Chinese clubs whiskey and green tea • 351m litres 1993, 395m litres 2007

11. Peak Commodities, Lithium The largest reserve base of lithium is in the Salar de Uyuni area of Bolivia, which has 5.4 million tonnes. US Geological Survey, estimates that in 2009 Chile had the largest reserves by far (7.5 million tonnes) and the highest annual production (7,400 tonnes). Other major suppliers include Australia, Argentina and China.[31][39] Other estimates put Argentina's reserve base (7.52 million tonnes) above that of Chile (6 million). However, recent covert geological research indicates world’s biggest lithium deposit are located in Afghanistan. Are we replacing Peak Oil with Peak Lithium?

12. Peak Copper 3rd most important metal used by man by weight Like oil in 1970’s, the inflection point has already passed More importantly, copper ore grades are in serious decline

13. Peak Phosphorus (Fertilizer) Upside is that market goes green, manure Downside is that food production cannot support global population growth our diet needs about 222.5kg per person per year of phosphorus for a normal modern balanced diet

14. Peak Oil 2010

15. Peak Oil Term "peak oil" used by energy experts to refer to a time when global (affordable) oil reserves pass their zenith and production gradually begins to decline. This would result in a permanent supply crisis -- and fear of it can trigger turbulence in commodity markets and on stock exchanges. Net loss of reserves hit in the 1980’s, ie greater growth in demand than supply Production inflection point, 1970’s

16. Peak Oil - Controversy

17. Peak Oil

18. Peak Oil

19. Peak OilThe world increased its daily oil consumption from 63 million barrels (Mbbl) in 1980 to 85,000,000 barrels (13,500,000 m3) in 2006.

20. Peak Oil 2010 – Intelligence Reports Germany Future Analysis department of the Bundeswehr Transformation Center, German Military Intelligence Report 2009 - Lieutenant Colonel Thomas Will Warns of a potentially drastic oil and resource crisis and irreversible depletion or reserves – recognises term ‘Peak Oil’ Decline will not be gradual, markets will collapse and bilateral strategic deals will dominate market Decline of Western industrial nations Very similar to the Food crisis since 2007 – bilateral deals and food hording with collapse in market mechanisms Peak Oil 2010, security collapse 15 to 30 years later UK UK upgrade of key international oil relationships UK Peak Oil 2010 Report UK Party Parliamentary Peak Oil Committee Guardian newspaper reported British Department of Energy and Climate Change (DECC) is keeping documents secret which show the UK government is concerned about an impending supply crisis. DECC, the Bank of England and the British Ministry of Defence are working alongside industry representatives to develop a crisis plan to deal with possible shortfalls in energy supply

21. Peak Oil – German Intel Summary 95% of industrial goods relies directly of indirectly on oil Collapse of industrialised world Return of gov’t controls, rationing and even planned economies Germany cannot escape regional collapse as too tied into global economy Collapse of democracy and open conflict Russian domination of German foreign policy Crude oil expert Steffen Bukold, summary of German Military Report; Market Failure and Globalisation collapse Oil will determine regional and global power Limited window means oil producing countries likely to be aggressive Bi-national contracts replace the liberal international oil market! Collapse of international trade & transportation, shortage of key materials – ie Food

22. Peak oil, LTG 72, and the financial crisis – subprime catalyst

23. Historical Oil Prices What has happened since 1971? The inflection point.

24. Peak Oil and Subprime

25. Greenspan’s Bubbles Greenspan presided over two huge asset bubbles • Dot Com Bubble replaced with Housing Bubble Dot Com crashed summer 2000 falling 40% in the following 2 years Greenspan drops Fed Funds rate to 1% saving the US from recession, but creating a massive property bubble Housing Bubble begins to deflate 2006 (just as oil prices go stratospheric) Much of the new ‘bubble’ lending was Subprime

26. Commodity Boom – Copper peak 2006 Copper price appreciation until 2006 followed by volatility Other commodities, particularly grain, follow similar patterns Even fertilizer, oil based, has arguably peaked (feeding food prices)

27. Peak Oil and LTG72 Clearly see oil pricing underlying Egyptian spread Rise in Tunisian and other MENA risk spreads Food/ Oil Peak driven?

28. Financial Concentration, Central Bank Failure Collapse of subprime drove a liquidity crisis in the US banking system The collapse of Lehman through the concentration of off-balance sheet commitments between a core group of banks, resulted in ‘credit gridlock’, the almost complete collapse of liquiditybetween international banks, in the US or globally The central banks were too slow to step in with liquidity, resulting in total ‘credit gridlock’ and the rapid collapse of banks with 3m +/-3m cash Anglo-Saxons not prepared to provide liquidity necessary to bail out banks/ economy occasionally stuck in a Keynsian ‘liquidity trap’ Niall Ferguson ‘Between 1990 and 2008, according to Wall Street veteran Henry Kaufman, the share of financial assets held by the 10 largest U.S. financial institutions rose from 10 percent to 50 percent, even as the number of banks fell from more than 15,000 to about 8,000. By the end of 2007, 15 institutions with combined shareholder equity of $857 billion had total assets of $13.6 trillion and off-balance-sheet commitments of $5.8 trillion—a total leverage ratio of 23 to 1. They also had underwritten derivatives with a gross notional value of $216 trillion. These firms had once been Wall Street's "bulge bracket," the companies that led underwriting syndicates. Now they did more than bulge. These institutions had become so big that the failure of just one of them would pose a systemic risk.’

29. Credit Gridlock As TED spread illustrates, inter-bank liquidity collapsed. Consequent desperate deleveraging and conversion to cash resulted ina ‘fire-sale’ of bank assets, or outright collapse, exacerbating the collapse Banks pulled ‘big ticket’ loan facilities • Housing further hit • Car industry hit Global property bubbles hit • Ireland, Spain, UK, Portugal Amazingly, the liquidity crunch occurred in a world with plenty of cheap capital

30. Global Financial Crisis 2008 Plenty of literature predicting financial collapse • Industry players • Krugman • Rubini LTCM Crisis, 2008 in miniature, but without the Peak Oil/LTG72 issues

31. Limited Capital?

32. Limited Capital Bursting of the recent credit bubble follows three decades of increasingly cheaper capital. Are low interest rates the norm? McKinsey Global Institute research indicates that long term trends in saving and investment contributed to low rates and the recent bubble, but will reverse. Capital will become both expensive and scarce, mainly as the result of an ageing global population driving lower savings. McKinsey results impact from LTG72 factors? Investment rate of mature economies declined since 1970’s Drop of $20t from 1980 to 2008, resulting in lower interest rates and the credit bubble World looking at surging investment in infrastructure by emerging markets Estimates show investment demand outstripping savings with a consequent increase in interest rates McKinsey estimates a rise of 150 basis points within five years

33. Conclusions

34. Conclusions What sparked the Subprime crisis, leading to the international financial crisis of 2008 and Global Economic crisis, was the same as what is driving MENA spreads and sovereign upheaval in Egypt and Tunisia If LTG72 is right, things will get a lot worse We will be looking at a whole new set of international economic rules, including the end of globalisation and the rise of oil powers and bilateral strategic relationships Not just the return of ‘Depression Economics’, but the new economics of limited and declining resources Western deleveraging inevitable?

35. Financial Markets warning ‘Knee Jerk’ banking regulations increase risk in the system • Regulations are taxes • Increased capitalisation has not decreased risk • Risk and leverage should be regulated, not banks and products! • Too big to fail was already solved in 1930, simply needs to be updated • Sub-contracting the trading desk does not reduce banking risk. • Central Banks need to adopt what Professor Burnstein called ‘The New Art of Central Banking’ • Central Banks job to ensure market liquidity and manage or avoid bubbles, not the banks • Much if not most of the mayhem from shadow banking system, off-balance sheet institutional concentration, and non-banking institutions • Risk always hits you from behind

36. Sources

37. Sources JP Morgan ‘Emerging Markets Outlook & Strategy’, various, but particularly 10th February 2011 JP Morgan Research, various Paul Krugman, ‘The Return of Depression Economics and the Crisis of 2008’, Penguin Books 2008 Wikipedia, various Bloomberg, various FT online, Various, particularly Martin Wolf Mckinsey Global Institute online, various including ‘Farewell to Cheap Capital’ Dec 2010 RoubiniEconimics online, various Brookings Institute, 2010, The Financial Crisis CATO Institute, ‘We have never had it so good’, 2008 Limits to Growth, Potomac Associates Book, 1972, Donella H. MeadowsDennis L. MeadowsJørgen RandersWilliam W. Behrens III Limits to Growth, the 30 year update, Donella H. MeadowsDennis L. MeadowsJørgen Randers A Comparison of the Limits to Growth with 30 years of reality, Graham Turner, June 2008, CSIRO, Canberra, Australia

38. Recent Developments

39. Recent Developments Presentation to UK All Party Parliamentary Peak Oil Committee Hedge Funds, subcontracting of investment banking risk Misplaced Anglo-Saxon banking regulations Movies, Hurt Locker II? Impaired debt trading, arbitrage Increased investment profile of KZ Regional LTG72, energy and food crisis, Kyrgistan, Tajikistan. • Chinese purchase of BMB Munai • Research into Agriculture, 7m lag in US grain price impact • Hong Kong listings vs London, the Dim Sum market • Boom in EM local corporate bond markets? • Establishing High Tech JV based on cloud computing in Almaty Tech Park • Establish new Saudi Investment Bank • Yemen, vs Kurdish vs Kazakh upstream assets