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What will bring this about? Well, the inflation will emerge primarily from two critical sources: food and oil. You can’t have $130 oil without it affecting the prices of almost everything. We use oil to grow crops, in the form of fertilizers. We use oil to plant and harvest crops. We use oil to transport crops to processors. We use it to process food. We transport it to distribution centers, and again to stores, and we use oil to go to those stores and buy the food and bring it home again. Every step will be more expensive – and not just for food, but for all goods and services. And the inflation due to higher oil prices has only just started to work its way into the system.

Next: food. First, there are more people eating more food. In particular, the last decade has seen one of humanity’s proudest accomplishments: more than 400 million humans have been lifted out of abject poverty. But, as they say, no good deed goes unpunished, and part of the cost of that accomplishment is that as people get richer, they eat more, and they eat better. Let’s use China as a prime example. In the early 1960s, the average Chinese consumed about 1400 calories a day. Today it’s over 3000 calories – and they are more expensive calories, because they include more meat, which takes substantially more resources to produce than a comparable number of calories from vegetables or grain. As a result, food is being hit by a double-whammy: lots more people eating lots more food. This is reversing the 20th Century trend of ever-cheaper foodstuffs, at least for the next few years.

In addition, there is competition for what might be called “ground share.” In the past, farmers earned an income by producing the “Three F’s”: Food, Feed, and Fibers. Today, thanks to biotechnology, there are three additional F’s from which farmers can make money: Fuel, industrial Feedstocks (such as polymers and plastics grown from plants), and Farm-aceuticals (sorry about that – not my invention). The net result is that there is going to be steadily rising competition for the attention – and the seeded acreage – of farmers, with the result that food will inevitably get a smaller amount of ground share than it has today. The net result is that the supply of food will shrink, and prices will rise for the next decade or so.

The demand for other commodities will rise as well. In particular there is freshwater, which is far more important, and the demand for which is more important than any thing else except air, and we’re running short.

To start, even though roughly 3/4 of the world’s surface is covered with water, only about 2 1/2% of that is freshwater. Of that 2 1/2%, the large majority is locked up in ice and snow, mostly in the arctic regions, plus groundwater. Only about 1/2 of 1% is found in lakes and rivers, which are the principle sources of renewable freshwater. And most of that isn’t where it’s needed most, or available when it’s needed.

Yet, we have consistently treated water as if it were free, free as air (and we are starting to realize how costly “free air” actually is). We have under-invested in sources of water, we have abused and overused fossil water supplies, notably in aquifers, and we have neglected municipal water delivery systems. The net result is that the cost of water is about to rise, and potentially rise dramatically.

There are other issues as well, such as the under-investment in infrastructure for roads, bridges, fresh water, and so on, but you get the point.

Meanwhile, the U.S. economy, and especially the U.S.consumer, which has been the primary driver of the global economy for decades, are exhausted. Americans have overspent their incomes for years. They’ve used their house mortgages as an ATM, buying groceries and lifestyles with them. And the credit crunch and the bursting of the house price bubble has left them feeling exposed and vulnerable, as, indeed, they are. The result is that although I believe the U.S. economy is now starting to emerge from the recession the government hasn’t yet acknowledged, it’s going to be a long, slow, tedious time before America sees strong growth rates again.

So: high inflation and slow growth – that ’70s show. And if you wanted to invest your money in that period, where could you make profits? Not in bonds; rising inflation forced interest rates higher, imposing significant losses on bonds. Not in stocks; higher interest rates competed for money with stocks. Why risk your money in stocks when you could make 10, 12, 15% in short-term bank deposits , GICs, CDs, and the like? No, instead you either rolled you money over in the money market (even though after deducting inflation and taxes, you were still losing money), or you put it into real assets.

But what are real assets? Well, the very things that are inflating: commodities, and real estate. And money is flooding into funds and ETFs that invest in commodities, especially foodstuffs.

But real estate? In this day and age, when housing prices in many parts of the developed world (such as America, Britain, and Australia) are in retreat? Yes, even so. Not right away, and not all at once, for real estate is always and everywhere a local, and regional market, not a national or global market. So there is money to be made in real estate – but pick your spots, and watch your timing.

Longer term, like five to 10 years and more from now, these problems will, by themselves, produce their own solutions in the form of rising supply

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The credit crisis unfolding in the U.S. is not over, nor have we seen the worst of what may be to come. Indeed, I would argue that we have seen two of the four Horsemen of the (financial) Apocalypse, and should keep our eyes peeled for the other two. 

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