On 12/4/2012 9:02 AM, Dan Minette wrote:
  I sent this to a single person instead of the list due to Killer B being
changed (probably automatically) from the sender to a cc.  I think this
happened a couple of other times.  I've gotten replies, but will not post
them, because they aren't my emails.  But if the sender would, or would give
me permission to, that would be great.
In reply to Kevin, I wrote:

The Chinese were extremely ham-handed about this.  In particular,
their stoppage of rare earth shipments in response to an incident
involving their extrodinary claims to ocean territory (basically any
territory claims of the Chinese over the last 1000 years are
considered valid and enforceable by the the Chinese government)
generated strong reaction.  Given the fact that consumers rightfully
believed that the Chinese were untrustworthy suppliers, as well as
expensive ones, it was reasonable for them to sacrifice a little
performance to switch to a more reliable and cheaper supply.  The Chinese
overplayed their hand, as they have overall the last year.

And if the Chinese try to raise further, it only creates more incentives to look into alternatives.

I think this may be one of the reasons why the Club of Rome predictions failed (there are clearly numerous reasons). As an economist named Hotelling pointed out early in the 20th century, there are good reasons in economics to expect the prices of non-renewable resources to rise over time at approximately the same rate as the interest rate. (I'm just giving a simplified explanation here, see the Journal article if you really like this sort of thing.) But any time a resource has rising prices it creates incentives to look for substitutes, and the higher the price, the higher the incentive. So a lot of products are no longer made with steel, but with plastics or composites, for instance. The other price obviously is to stimulate the search for new sources of supply. Put those together and you can see why those predictions of disaster have not materialized.

By similar reasoning, any attempt to monopolize a resource or product can only succeed if there is some way of preventing and competitor from entering the market. Most commonly this requires government action to create and sustain the monopoly. Since that will not happen in the case of rare earth elements, I doubt there can be a lasting monopoly problem here. In a similar way, recall how the oil prices hikes of the 70s turned into the price collapse of the 1980s as both fuel efficiency and increased exploration responded ot the market price signals.

They can probably drive Western companies out of the solar cell business.
Their entire ecconomic model, with artifically low value on their
currency, and the disdaining of IP right of other countries, fits
this.  They may very well increase prices after becoming a near
monopoly, but the alternatives are oil and gas and coal and wind.
And, for certain remote applications, solar power actually works best.
Well, they can drive them out, perhaps, but can they keep them out? One of two things seems likely:

1. China creates a temporary monopoly, then tries to raise prices to profit from it. See above for how market forces respond.

2. China creates a monopoly, then subsidizes solar panel producers permanently to maintain that monopoly. And permanently low prices for solar panels cause terrible devastation to the U.S. economy...Wait, that doesn't quite make sense. I think I rather like low prices for solar panels. And this could create a boom in low-cost, non-polluting energy which only benefits us.

So, I'm guessing that it will not be the big win they see.  But, they
are caught at a GDP level where Huntington has pointed out that
totalitarian goverments begin to get pushed by the growing middle
class.  Their reaction is to clamp down harder....especially with the
new leadership, where all the leaders are both well filtered and the
result of nepotism.  It is a dangerous mixture.  Putting this together
with their demographic window of opportunity (the 1-child policy has a
big demographic bubble that will be old in 20 years), a surplus of
males, and one has a classic situation where countries become aggressive.
OK, this is where my "economist" hat no longer gives me any particular aid. I will say that indeed it will get interesting, but the factor that is most likely to cause aggression on a large scale is water. That is in short supply, unless we can access abundant cheap energy to desalinate ocean water to make potable water.


Kevin B. O'Brien
A damsel with a dulcimer in a vision once I saw.


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