I have been reading Dr. Leeb for a long time now, and I can think of no greater guide to world events and my investment portfolio than his books and financial newsletter. In his previous books (The Oil Factor, The Coming Economic Collapse, and Game Over), Dr. Leeb predicted, with chilling foresight, the sustained upturn in commodity prices that we are witnessing today, which has served as the major drag on US economic growth. Leeb continues his analysis in Red Alert, focusing on the primary culprit behind these skyrocketing commodity prices: China.
Leeb's thesis is extremely well thought out and multi-faceted, and I will do my best to sketch his arguments here. First, the increased demand that China places on basic commodities -- oil, copper, silver, rare earths, iron ore, etc. -- is creating a genuine scarcity of these goods, leading not only to higher commodity prices, but to the threat of our civilization running out of these commodities altogether. Of course, "running out" doesn't necessarily mean there won't be any copper or oil left in the ground; rather, it means we reach a point where there is a net resource loss from new extraction -- that is, any new resources will require more resource inputs than the resources we obtain.
If we had, by some magical means, access to unlimited, cheap energy, many of the other resource problems would be solved, and indeed, many of our current economic ills would be made far easier to deal with; low energy costs would make extracting other basic resources infinitely easier, in turn making production costs cheaper for almost all the goods we currently use, allowing companies to charge less and still turn a profit, creating jobs, etc.; indeed, Leeb makes the compelling case that the high price of oil and other vital commodities was one of the crucial (and widely-overlooked) causes of the financial meltdown in 2008.
The problem, though, is that our current, conventional energy sources are fast being depleted -- Leeb cites estimates that the world's oil production may already have peaked, and that there is far less coal and other fossil fuels in the ground than people think. So why doesn't the market switch to renewables? The key insight Leeb made in his previous book, Game Over, and that he reiterates in Red Alert, is that resources depend on each other in complicated ways. Building renewables itself requires massive resource inputs; the magnets in wind turbines require heavy rare earths, and large scale solar panels require silver, to name just two examples. Extracting these other resources in turn requires still more resources, not to mention massive amounts of energy -- a tangled web indeed. So to control one resource, such as energy, it is necessary to control many other resources as well -- all of which are subject to greater and greater scarcity.
Of course, resources can only be scarce relative to the demand put on them -- and as we said above, the lion's share of global demand comes from China. I read people all the time -- from Jim Chanos to Fareed Zakaria -- who say China's growth is simply a bubble, or they have overbuilt their infrastructure, or it is not sustainable for one reason or another. If only it were true. Leeb's argument is that the Chinese have methodically paced their economic growth with great foresight, and most of the so-called "overbuilt" infrastructure is part of a well-laid plan to sustain this growth in the long-term -- for instance, building more housing than is currently necessary in urban centers makes it available in the future for the large number of people moving from rural locations into cities. The most crucial purpose of this infrastructure, however, is to facilitate the construction of alternative energies around the country.
This leads us to Leeb's central argument: not only is it China whose demand is putting such a strain on resources, but the Chinese leadership is keenly aware of the emerging resource crisis, and has been vigorously mobilizing to secure the earth's remaining commodities so that they can build out alternative energies and secure their country's future. China's leaders recognize the interdependencies among resources, and seek to control the earth's supply of all the commodities necessary for future growth and the construction of renewable energies. China already has a near monopoly on heavy rare earths (crucial for wind power) and the production of solar panels; and they have been making deals with leaders in Africa and the Middle East to secure the precious commodities in these parts of the world. One fact Leeb cites that really boiled my blood is that while the brave men and women of the US army are risking life and limb trying to make Afghanistan secure, it is Chinese mining companies, not US firms, that have won the bids to the copper mines in this country -- copper being the commodity that will play a crucial role in building a smart grid across China.
China has also taken devious steps to derail the construction of alternative energies in other countries like the US, to ward off competition for the resources necessary for renewables. Leeb makes the interesting point that in the US, "alternative energies" have become almost synonymous with "climate change" -- that is, the people in this country who support renewable energy do so for environmental reasons, not for the sake of resource scarcity. The Chinese used this to their advantage when they sabotaged the Copenhagen climate change agreement; by preventing any binding agreement to reduce emissions, they all but guaranteed that Western powers, especially the US, would not commit to building alternative energies, since the US still sees emission reduction as the primary rationale for alternatives. The Chinese government has also kept the price of solar panels and rare earths relatively cheap to drive US firms out of business, thereby giving their country global dominance in the production of solar and wind energy -- and the accumulation of the resources necessary for this production.
Leeb paints a stark picture of the world we are likely to face in the coming years -- a world of resource scarcity and "resource nationalism" that will come to define the geopolitical landscape and drive our standard of living lower and lower. We simply cannot create sustainable economic growth in a world of persistently high and ever-increasing energy and commodity prices, and a persistent failure to recognize this is leading us towards a position that will make our current "Great Recession" look like paradise in comparison. China currently has a dramatic, and perhaps insurmountable, lead in the race to secure the earth's vital resources, while the US and other Western countries seem almost oblivious to the threat. Indeed, the vast stockpiles of rare earths that the US used to control have largely been sold off, and the one major rare earth mine on our land -- the Molycorp mine -- has been unused for several decades; in fact, the US training of engineers in rare earth mining has all but disappeared.
What we need in this country is a laser-like focus on securing the world's resources and building alternative energies -- and we could learn a thing or two from the Chinese about how to get this done. In particular, as Leeb discusses, it is senseless to wait for new technologies to save us; time is already short, and we must focus on improving the technologies we have and scaling them up. If we do not want to cede the 21st century to the Chinese and become a second or third rate power, we need to be devoted to building renewable energy infrastructure, and accumulating the resources necessary to do so, the way we were devoted pre-World War II to preparing for war with the Axis powers. Nothing less than the future prosperity of this civilization is at stake. Leeb has made the case as clearly and compellingly as one could, laying out the facts for all to see; it is up to our policy-makers, and the citizens of this great country, to listen.