Causes for Concern

One of the best businesses to be in is predicting disaster and selling books or newsletters telling people how to overcome the next cataclysmic decline in civilization. Thousands of investors missed the greatest bull market in history because they were subscribing to the monthly predictions contained in Money Week (UK) and Howard Ruff’s Ruff Times (US) newsletter–which advocated investments in Krugerrands, guns and canned food and water against an apocalypse that never came. Going back further, Thomas Malthus predicted that rising human populations would eventually overwhelm the food supply, and Karl Marx predicted that capitalism itself would grow increasingly unwieldy and unsustainable until the inevitable revolt of the proletariat. In our times, we have seen sober predictions that the world would run out of oil, and a best-selling book saying that we’re on the verge of financial collapse. (“The Great Deformation,” which is not recommended here.)

Of course, our civilization managed to overcome all of these predictions with remarkable resiliency. Betting against the future has never been wise or profitable. But will that always be true?

A recent article by Kenneth Rogoff, professor of economics and public policy at Harvard University, outlines some future challenges which our civilization has never seen before, and which will require unusual resiliency. Rogoff is too smart to bet against the future, but the article does say that we have not yet come up with a solution to these challenges, and time is growing short.

What challenges? First, Rogoff says that our global economic systems have not done a very good job of defining “property rights” when it comes to our environment–specifically the quality of our air and water. Right now, oil companies are able to take millions of gallons of ground water and pump it into their fracking wells in order to drive up oil and natural gas. This fresh water is lost forever to our ecosystem, which in many areas is experiencing water shortages already. What do the companies pay for this water? Nothing. It’s there in the aquifers for the taking–for now, at least.

Our power companies and factories, meanwhile, are not restricted in the amount of carbon they can return to the atmosphere after burning coal and oil, which has, over the last 150 years, dramatically changed the composition of the envelope of air that nurtures our global ecosystem. There are varying reports on the impact of these changes, including a scientific consensus that global temperatures are rising. Yet these companies pay no more for the privilege of adding greenhouse gasses to the atmosphere than you or I do for the oxygen we breathe.

Rogoff says that we need to do a better job of accounting for the present and future costs of using what have traditionally been public resources, and he doesn’t see a lot of progress in our political system, and less in many foreign political arenas.

A second set of challenges revolves around the core assumption of our economic system: that it is fair to all. Rogoff says that this perception can no longer be taken for granted as we see greater income inequality within and between countries. He points to near-record gaps between the wealthiest and the rest, and anyone who witnessed the bailouts of the investment banks, at a time when those institutions were paying out multi-million-pound bonuses to the very people who engineered the collapse that led to the bailout, might wonder if we totally have this dynamic under control. Currently, much of the money that UK and US governments are pumping into their respective economies is sitting in interest-bearing accounts at these same banks, and more is being pumped in every day.

The third set of challenges involves something that is truly unique to our modern world: the aging populations in developed nations. Birthrates have fallen as a result of economic prosperity, at the same time that dramatic medical advances have prolonged lifespans to almost double what they were a century ago. Credible medical professionals are now talking about virtually unlimited lifespans for younger people who are alive today. The problem, of course, is that most of the systems that were set up to care for the elderly, and provide for their retirement, relied on the idea that there would be multiple workers for every retiree. What happens to those equations when the percentages are turned around? Nobody knows, and you don’t hear anybody asking about it in the halls of political power.

Dr. Rogoff points out that there are some workable short-term fixes for the aging population problem–like immigration reform, where we allow the best and brightest younger people into the country more freely, and encouraging people over 65 to stay in the workforce. But the longer-term fix will require us to rethink how we support aging populations through the economy–especially if some of our citizens are destined to retire at, say, age 55 and never die.

The conclusion is that our capitalist economies have been spectacularly efficient at overcoming challenges in the long-term. But the challenges are coming at us faster and with more complexity than ever before, and our political systems seem to be slowing down and becoming less adept at handling complexity–hardly an ideal combination. Dr. Rogoff is not predicting calamity or suggesting that you buy a shotgun and hide out in a cabin in the hills. His concern is more prosaic, and worth pondering: Will each future generation continue to enjoy a better quality of life than its predecessor? Or are we about to see humanity break our civilization’s long winning streak?


One Response to “Causes for Concern”

John Sturrock
30th March, 2014 at 8:56 pm

This is all obviously correct. Therefore, past approaches to investing are less certain to be as fruitful and are, by definition, more risky against such an uncertain background.

So, for IFAs, the question is simple and needs to be answered frankly and clearly: what should clients now be advised as regards future and longer term planning?

Duncan R Glassey
Senior Partner – Wealthflow LLP

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