The extraordinary rise in commodity prices, at the beginning of a global cyclical upswing, is beginning to reorder the pecking order of the world economy. Together with the advances made by China and India in the last decade, it is producing an entirely new world order, which many will find uncomfortable. In it, commodities, derided for decades as unimportant, have become scarce resources, to be guarded and managed with the utmost care. Conversely human labor and skill, on the basis of which the glories of human civilization were built, is entering into a state of gigantic glut.

The current commodities boom is qualitatively different from those of the past. In previous commodities booms, such as those of 1972-73 or 2006-08, the global economy was operating close to capacity, and indeed the boom was an important indicator that full capacity was about to be reached. The booms were accompanied by wage inflation and in both cases resulted in price inflation, although in 2007-08 the price inflation was aborted by the financial crash before it could really get hold.

This time, a commodities boom is occurring while the global economy is still far from full capacity and unemployment worldwide remains high. There are two reasons for this. First, a number of governments have engaged in irresponsible fiscal “stimulus,” running budget deficits unprecedented in peacetime. This has tended to prop up demand for the kinds of commodities that are used in infrastructure, especially iron ore and copper – think for example of China’s $100 billion railroad building program. Second, Chinese and Indian demand, which did no more than dip for a few months in 2008-09 before rebounding strongly, has driven up the global consumption of commodities to unprecedented levels. 1.3 billion Chinese, each with less than one fourth of the consumption propensity of each of 300 million Americans or 400 million Europeans, nevertheless between them consume a lot more materials in their expenditure, because their consumption mix is more oriented towards foods and physically bulky goods. With the Chinese automobile market now exceeding the US one in terms of units sold, it’s not surprising that Chinese steel consumption has soared.

What has not yet been fully realized is that this change is likely to be more or less permanent. We had grown used in the last half century to a world in which only about 700 million of the world’s 6.8 billion inhabitants enjoyed Western living standards, with automobiles and home appliances ubiquitous. In such a world, with extraction techniques ever improving, energy prices rose only slowly in real terms, while minerals prices actually declined. Now, with consumer demand growing at 6-10% annually among 2.5 billion consumers, the upward trend in energy and minerals usage has become much more rapid than we were used to.

We are not about to run out of either energy or minerals. Oil sands, viable at $40 per barrel, contain at least double the conventional reserves of petroleum and most metals are even further from supply exhaustion, provided the price is high enough. However there will be continual pressure on supplies, as there are not only limits to physical supply but also on how quickly output can be ramped up by bringing new supplies online. The gigantic Tupi oil fields in Brazil, for example, will come on stream only around 2013, six years after their discovery, while the lead time for tar sands oil production is at least as long, particularly given the agonizing environmental hoops new projects must jump through.

The excessive global monetary ease of the last decade has contributed to the secular change in commodities’ position, but is not solely responsible for it. Easy money encouraged speculators and made the transition to emerging markets manufacturing happen more quickly than would have been natural. However that transition, which has been the primary cause of the upsurge in Chinese and Indian commodities demand, was far more directly the result of the Internet and modern communications than of monetary policy alone. Likewise, the current upwards blip in demand has been caused as much by fiscal as by monetary excess. Conversely the inevitable tightening in global monetary policy, which in any case may only get serious 18-24 months from now, will not return commodities prices to their historic levels, even though the immediate bubble will burst. In 2020, if the world economy is in a healthy state, it will have much higher commodities prices, in terms of purchasing power, than in 2005.

The secular change in commodities prices has immense geopolitical consequences. The decline of Europe will accelerate, as most EU countries lack commodities wealth, have a surplus of labor, and will incur vast debts in the attempt to prop up living standards that are no longer viable. Canada and Australia will prosper, becoming richer than the United States, as their commodities endowment is comparable with the US and their populations very much less. The decently run parts of Latin America and Africa will flourish, as their commodities wealth allows them to improve living standards. However the majority of those continents will remain mired in socialist kleptocracy, as their commodities wealth is siphoned off by corrupt politicians or wasted in hopelessly counterproductive welfare and subsidy schemes.

The corollary of the geopolitical growth of the commodities-rich will be the geopolitical decline of the commodities-impoverished. Japan’s relative economic decline has been ubiquitously commented on, but one factor that has not been noted is that its demographic decline is entirely appropriate and indeed beneficial given its commodity-impoverished status.

Indeed, it is notable that the rich countries with very low fertility rates such as Japan, South Korea and Italy are also those with especially poor commodity endowments. An eighteenth century writer would have used this as a demonstration of the workings of Divine Providence; in secular 2010 I can only comment that it’s a very odd coincidence indeed.

However it’s not only the slow-growing rich countries that will suffer from the elevation of commodities prices: popular success stories such as China and India, with huge populations but only moderately large commodity endowments, will find their continued success much more difficult to achieve. That makes sense; if Chinese and Indian emergence into economic takeoff has warped the entire global economic fabric into a new shape, then it makes sense that such warping would exert a significant restraint upon those nations’ economic growth.

Needless to say, the worst affected countries will be those poor countries with very large, dense populations and few commodity resources. Bangladesh certainly qualifies, but so do such countries as Kenya and Nigeria, traditionally thought to be well endowed with commodities, but whose excessive population growth has outrun their commodities endowment, condemning them to continuing impoverishment and misery.

Overall, rapid economic development has thrust commodities from a position of glut into a position of relative scarcity. Conversely, the emergence of modern telecoms, the globalization of markets and the increasing wealth and education levels of billions in China, India and elsewhere, has transferred human labor, even skilled human labor, from a position of relative scarcity into a position of glut. That’s not surprising – when the number of full participants in the global economy quadruples from 700 million to 3 billion over a period of less than 20 years, those participants are likely to face an over-supply problem. It’s also not unusual – as Thomas Malthus would have told you in 1798, the periods when human labor is worth more than bare subsistence have historically been few and far between.

This glut does not merely apply to the unskilled; with India graduating 350,000 engineers per annum it applies to all but the most highly-skilled workers and you can see the effects of it everywhere. Only a few highly cartelized occupations such as legal work, which can keep out foreign competition through regulation, or investment banking, which can design new financial products to increase its “rents” extracted from the system, are immune to the immiseration produced by global competition.

In Europe, rates of unemployment among those under 30 have been running around 20% for a decade. Contrary to media opinion, those young people’s educations are not markedly inferior to their predecessors’ and their adaptability to the demands of today’s labor market is significantly greater. However, in societies where the costs of laying off experienced workers is great, both financially and in terms of public esteem, and wage and benefit rates are sticky, the new global competition from workers based in India and China is reflected in young workers’ inability to move into steady employment.

High immigration worsens this problem, since it provides direct competitive pressure on European youth from well qualified, cheaper labor within the system, as well as indirect competition from manufacturers abroad. Moderate immigration increases the skills diversification of a wealthy country without unduly impoverishing its people, but high immigration, whether skilled or unskilled, legal or illegal, impoverishes more than it diversifies.

The solution is not to erect trade barriers, artificially balkanizing the global market. That would reduce global wealth still further, impoverishing everybody in the long run. In any case with commodities now scarce the low-endowment “wealthy” countries no longer have the political or economic power to impose unilateral barriers effectively.

In summary, in today’s world commodities have become scarce and labor has become commoditized, unless fenced in by artificial restraints. With the global supply of commodities finite, this problem can only worsen if population is allowed to continue growing. A world with 10 billion people, all able to compete on an equal basis in a globalized labor market and desiring commodity-intensive modern mechanical marvels, would be a world of ever-increasing scarcity and impoverishment, besides its adverse environmental effects.

Hence population reduction programs, aiming to reduce global population to a level at which labor once more becomes more valuable than commodities, should be given the highest priority at a global level. Otherwise, with the labor supply unlimited and the skills supply nearly so, and commodities supply relatively restricted, the only wealthy people will be those who own mines or oil wells.

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(The Bear’s Lair is a weekly column that is intended to appear each Monday, an appropriately gloomy day of the week. Its rationale is that the proportion of “sell” recommendations put out by Wall Street houses remains far below that of “buy” recommendations. Accordingly, investors have an excess of positive information and very little negative information. The column thus takes the ursine view of life and the market, in the hope that it may be usefully different from what investors see elsewhere.)