Satyajit Das writes in The Times of India: Policy makers have sold the future for a precarious, short-lived stability. There is a striking similarity between the problems of the financial system, irreversible climate change and shortages of vital resources like oil, food and water… The world is remarkably unprepared for the crisis that is unfolding.
Infinite growth in a finite world?
Hopium economics has given us deeply-in-debt individuals, businesses and nations
Economic growth is a central assumption to political and economic systems. It is the mechanism relied upon for improving living standards, reducing poverty to now solving the problems of over indebted individuals, businesses and nations. All brands of politics and economics assume sustainable, strong economic growth, combined with the belief that governments and central bankers can control the economy to bring this about.
But strong growth is not normal, being a recent phenomenon over the last two centuries. Economic activity and the wealth created have increasingly relied on borrowed money and speculation. It was based upon the profligate use of mispriced natural resources such as oil, water and soil. It relied on allowing unsustainable degradation of the environment.
The human race refuses to accept that it is not possible to have infinite growth and improvement in living standards in a finite world. As author Edward Abbey warned, “Growth for the sake of growth is the ideology of a cancer cell.”
Central to the problem is the level of indebtedness. Debt accelerates consumption, as borrowed funds are used to purchase something today against the promise of paying back the money in the future. Spending that would have taken place normally over a period of years is squeezed into a relatively short period because of the availability of cheap borrowing. Business overinvests misreading demand, assuming that the exaggerated growth will continue indefinitely, increasing real asset prices and building significant overcapacity.
Around 85% of the debt incurred over the last 30-35 years funded the purchase of existing assets or consumption rather than being used for creating new businesses or productive purposes which build wealth.
Global debt now stands at around $200 trillion (over 280% of the world annual produce), an increase of $57 trillion since 2008 when high debt levels brought the world to the brink of collapse.
“Hopium” economics cannot mask the problem of excessive leverage forever. The debt will have to be repaid out of future income or proceeds of asset sales, diminishing growth or savaging investment values. If as is likely this debt cannot be repaid, then it will be written off, resulting in an unprecedented loss of wealth for savers.
Compounding the problems of debt, resources and environment are challenges of slowing rates of innovation, lower improvements in productivity, demographics, inequality and exclusion. The amount of global arable land has remained relatively constant for the last decade at 3.4 billion acres. The annual increase in global population requires water flow equivalent to Germany’s Rhine River. The frequency of extreme weather events is increasing.
In a Faustian bargain, policy makers sold the future originally for present prosperity and are now reselling it for a precarious and short-lived stability. There is a striking similarity between the problems of the financial system, irreversible climate change and shortages of vital resources like oil, food and water. In each area, society borrowed from and pushed problems into the future. Short term profits were pursued at the expense of risks which were not evident immediately and that would emerge later.
Kicking the can down the road only shifts the responsibility onto others, especially future generations. By postponing the inevitable, the adjustment becomes larger and more painful.
Economic problems feed social and political discontent, opening the way for extremism. In the Great Depression the fear and disaffection of ordinary people who had lost their jobs and savings gave rise to fascism. Writing of the period, historian A J P Taylor noted, “[The] middle class, everywhere the pillar of stability and respectability … was now utterly destroyed … they became resentful … violent and irresponsible … ready to follow the first demagogic saviour.”
Humanity faces this, its greatest crisis, with, in the words of biologist E O Wilson, “palaeolithic emotions”, “medieval institutions” and delusions about its “god-like technology”.
But a new industrial revolution is not on the horizon. It is not clear how new smartphones and connectivity that feed cheap narcissism will address the urgent problems of the world. Progress on crucial problems like improving crop yields, cheap clean energy and its storage is slow.
Many new technologies such as robotics reduce living standards as they replace or deskill most workers. Innovation enriches a few people who control or finance the technology at the expense of the vast majority of the population, entrenching and increasing inequality.
The world is remarkably unprepared for the crisis that is unfolding. During the last half-century each successive crisis has increased in severity, requiring progressively larger measures to ameliorate its effects. Over time, the policies have distorted the economy. The effectiveness of instruments has diminished.
With public finances weakened and interest rates at historic lows, there is now little room for manoeuvre. Resource constraints and environmental problems are increasingly pressing. A new crisis will be like a virulent infection attacking a body whose immune system is already compromised.
Factual debate is replaced by what comedian Stephen Colbert calls “truthiness”, things which were not true but rather things one wishes were or actually believes to be true. Any challenge to the consensus of unlimited opportunity is crushed. As Tertullian wrote, “The first reaction to truth is hatred.”