Jeremy Grantham on Our Debt Solution
I understand Jeremy Grantham’s central opinion to be around a certain attitude towards a view of the economy. There is a grave flaw, he stresses, with any model of continuous growth in a fixed environment. The keyword here is “fixed,” meaning finite or limited, but definitely not expanding. However, capitalism seems to operate with an expectation and need for perpetual growth. One measure of yearly national economic growth is the Gross Domestic Product, or GDP. Many politicians, economists, and businesspeople push for growth, insisting that the US GDP is much lower than it was during the 20th century. Yet, Grantham, co-founder and Chief Investment Strategist for Grantham Mayo Van Otterloo, argues that going back to the level of annual economic growth in GDP equal to the 3% yearly increases of the “good old days” of the 20th century is improbable, to say the least. In fact, there are two imposing reasons for this: population, and natural resources.
The issue with population is that it is “a huge input into GDP – it’s population times productivity, well, population plus productivity – and the [workforce] population [increase], which often hit 1.5% [in the 20th c.] has dropped all the way down to maybe 0.2-0.3” and that these are “kind of official numbers” adjusted for the fact that people in the States work somewhat less each year. Additionally, the fact that women started working in the 20th c. greatly increased the number of people hours offered to the work force; however, the acceleration of women entering the workforce has “completely finished” since its peak around the year 2000. Because of these factors combined, Grantham believes that people should not expect more than a 0.2% increase in hours offered to the workforce, which is about 1% lower than it used to be. Consequently, a 3% increase in GDP in the 21st c. would only happen if there were to be an offsetting 1% increase in productivity. Grantham flatly points out that “there is no possibility of that.”
The other salient issue is that much of this century’s economy rests upon natural resources. Many of these resources are being depleted. Additionally, as some of these resources – fossil fuels to be exact – become scarce, they cost much more to extract. Grantham is aware of the trend “to pump all that good oil … [and] to pump all that traditional natural gas,” but he warns that if we definitely intend to dig all the coal and scramble through the tar sands, the immense cost will not only be paid financially, but also environmentally. The problem is that there is a large industry behind these fossil fuels. And if people have much of their stock value in the oil or coal reserves, then they will be “pretty reluctant to entertain the thought that it would be poisonous to the long term wellbeing to pump it out.” Therefore, it is difficult to challenge this big business.
Grantham notes that past civilizations all peaked and failed. Yet, he offers optimism by suggesting that our global civilization has hope because of two “gifts” none of those past civilizations had that might “let us off the hook,” namely: control over the fertility rate and innovation in alternative energy. He comments that in recent history, as countries got richer, people had fewer children, which then could help in boosting GDP per capita. The use of alternative energy would also help by suppressing the need to use finite resources. If we humans can implement these two strategies, we can “get off this terrible trap of expanding” before we run out of finite resources. We do have the necessary means to “move fairly seamlessly if we choose to make the effort to a renewable source of energy that will not run out.”
An additional issue Grantham tackles is the relationship between economic growth and debt. He disputes the notion that debt can eventually lead to economic growth by noting that although “we have been conned into believing by the financial world that debt is everything” the actual historical evidence says differently. In fact, since the early 1980s, the United States almost tripled its ratio of debt to GDP, yet the growth rate actually slowed down. Of course there must have been other reasons, but “there’s no room in that equation to believe that increasing debt has anything to do with long-term growth.” He repeatedly affirms there is absolutely no evidence throughout history that increasing debt increases GDP.
In addition to that, and just as interestingly, Grantham holds that in the long run, debt is “not as significant as people think.” He comments that managing debt can, of course, be a delicate matter. He also says that in his opinion, it is “substantially too high,” but that “you shouldn’t try to make it low in a hurry, but you should have a 20-year plan to chip away.” Yet, however careful we should be in getting out of debt, it is not “the overwhelming thing that will nominate our future.” In fact, he says that it distracts us from the real world because it belongs more properly to the separate accounting world. “[This separate world] is paper. The real world is the quantity and quality of your people, and the quantity and quality of your capital spending.” Therefore, people and governments should focus more on improving school systems, infrastructure, and the general quality of life.
End of Growth
Rather like Grantham, Richard Heinberg of Post Carbon Institute strongly believes that growth will never again reach the rate it had in the 20th c., but goes on to say that perpetual growth as a whole does not have much of a future in this world. He too speaks of fossil fuels and cost of extracting them.
To begin with, he notes that oil discoveries in the United States peaked in the 1930s, and that US oil production peaked in the 1970s. Therefore, ever since those dates, US oil discoveries and production have been going steadily downhill. This is inevitably the course every oil-rich country will run, for oil reserves are finite. Because of this, the nature of oil industry itself is shifting. Back in early to mid 20th c., oil could be found in on-shore areas in large pools in the ground. This oil was “relatively cheap” to drill, and the amount of energy recovered for every unit of energy invested in exploration and production was between 50 and 100 to 1, according to Heinberg. However, since this oil has already been used up, oil companies need to find other oil wells. Many are now drilling a mile or two off shore in ocean water, for example, with no guarantee for profit: “a single exploratory well can cost half a billion dollars and still com up dry.” Oil can also be found in tar sands and tight oil reserves, but the methods for extracting it are costly and controversial. Heinberg states that the world is not about to run out of oil any day now. Rather, people have been extracting it using the “low-hanging fruit principle”: people dig up the “cheapest, best and easiest stuff first and leave the more expensive, harder-to-get, environmentally risky stuff for later.” Heinberg brings attention to the fact that we are now in the “later” phase.
Apart from the environmental issues with retrieving this oil with non-traditional methods, there is an additional economic problem. Since this oil costs more to retrieve, its costs are unavoidably passed onto the consumers. Now, an important fact to know is that oil price spikes have been correlating quite soundly with the beginning of economic recessions since 1970. In fact, there has never been “a single occasion since 1970 when we’ve seen a rapid increase in oil prices when we haven’t seen a recession.” Thus, if oil prices rise to over $100 dollars a barrel and stay there because of the means of extraction used, economic growth gets undercut. To make matters worse, Heinberg holds that companies extracting this non-traditional oil have been focusing on the “sweet spots” where there is the most oil: “what we’ve been seeing so far is the best it’s ever going to get.”
Although this information is not very optimistic, Heinberg suggests some strategies to work around this predicament. He proposes to move toward getting off of this growth model to be more sustainable. Some approaches could be finding an alternative measurement to GDP and moving toward more worker-owned businesses to eradicate the usual corporate “grow-or-die” mentality. Another interesting proposition he made is to completely abolish the use of fossil fuels (as fertilizers and pesticides, etc.) from agriculture and the food system. Heinberg truly believes that if we “aim to stabilize our economies in a sensible way, downsizing the financial system in relation to manufacturing and agriculture, reorganizing our priorities, we can be happier. We can live more fulfilled, integrated lives.”
Masdar: A Green City
An ambitious innovative effort into renewable energy and sustainability is currently underway in the United Arab Emirates. Masdar is a city being built in the emirate Abu Dhabi, and is completely self-sufficient, creating and running on its own supply of energy. It is intended as a huge research laboratory which attracts scientists from all over the world. It also employs energy efficient architecture to naturally maintain temperatures low within the city and its buildings.
Because the city is situated in the desert, maintaining a reasonable temperature to live in is a vital aspect of whether the city is going to thrive or not. Keeping temperature control environmentally healthy is quite an issue. Yet, “once you optimize the passive nature of the buildings, then it’s just a question of using the minimum amount of energy of the AC system to get to the right [temperature] level.” Masdar has buildings built in proximity to each other so that one is almost always in the shade of another. Furthermore, the buildings are structured so that the wind is channeled between them, keeping the city well ventilated.
Energy efficient transportation is another key focus in Masdar. In fact, the city is designed to be completely car-less. It has its own transportation system – the Personal Rapid Transit system (PRT). The PRT is composed of electric driverless cars powered by lithium ion batteries that can last 4 hours. These batteries can be recharged at any PRT station. The PRT can run 24 hours a day, seven days a week because it is computerized. As mentioned before, the cars have no driver. Rather, they drive along select magnetic routs underneath the city.
The city also acts as a “living lab.” Scientists actively research many things dealing with environmental sustainability. Some mentioned in the video included research on water, environment and health; future energy systems; alternative and efficient electromagnetic transportation; and micro electronics and advanced materials. A specific project brought up in the video was on fuel created from algae. Once perfected, it could be made to power anything from car to jet engines. The scientists in the lab discovered that they could use up CO2 to help the algae grow. The scientist interviewed said that “you’re kind of killing two birds with one stone” because they were taking CO2 out of the atmosphere to literally grow needed fuel.
I rather appreciated these three resources. I valued learning about some of these environmental issues and the few presented solutions. I was also pleasantly surprised to learn about large-scale project because I found it to be encouraging. For me, it really illustrated Grantham’s statement that we have the necessary means to move seamlessly to a renewable source of energy and more sustainable living. All this is hopeful and encouraging especially in the face of so much evidence of the depletion of natural resources and of environmental abuse.
Grantham, Jeremy. Interviewed by Charlie Rose. Bloomberg TV. Retrieved from: http://www.bloomberg.com/video/investment-strategist-jeremy-grantham-rBP3CUZJS9mPRsuWLXpSRA.html
Heinberg, Richard. “The End of Growth.” Festival of Dangerous Ideas. 2012. Retrieved from: https://www.youtube.com/watch?v=lUsvPiwg6wU
Masdar: A Green City. Bloomberg TV. 2013. Retrieved from: http://www.bloomberg.com/video/masdar-a-green-city-bloomberg-brink-05-13-azsX~xTlSsOJO3BGwX0ufg.html