Citizen Action Monitor

This is the beginning of the end of the Hydrocarbon Revolution, says one of world’s most influential investors

The end is coming because the human species has failed to accept the impossibility of sustained compound growth

I rarely say this is a “Must Read” but this is a “MUST READ”

No 1066 Posted by fw, June 2, 2014

“The bottom line really, though, is that no compound growth can be sustainable. Yet, how far this reality is from the way we live today, with our unrealistic levels of expectations and, above all, the optimistic outcomes that are simply assumed by our leaders. Now no one, in round numbers, wants to buy into the implication that we must rescale our collective growth ambitions…. Many other civilizations, despite being armed with the same brains as we have, bit the dust or just faded away after the misuse of their resources. This faith in the human brain is just human exceptionalism and is not justified either by our past disasters, the accumulated damage we have done to the planet, or the frozen-in-the-headlights response we are showing right now in the face of the distant locomotive quite rapidly approaching and, thoughtfully enough, whistling loudly.”Jeremy Grantham

Jeremy Grantham is the Chief Investment Officer of GMO Capital, a global investment management firm. Wikipedia notes that “Grantham is regarded as a highly knowledgeable investor in various stock, bond, and commodity markets, and is particularly noted for his prediction of various bubbles….In 2011 he was included in the 50 Most Influential ranking of Bloomberg Markets magazine.” When Grantham speaks, knowledgeable investors listen.

The following post is a slightly modified and reformatted excerpt from a much longer Grantham essay first published in GMO’s 1st quarterly newsletter of 2011. Although the link to the original newsletter version is broken, The Oil Drum published a reformatted version in 2011. And it is from this source that the following much shorter selected passage appears. (By the way, after running for 8 years, 2005-2013, The Oil Drum ceased publication, but the content remains available on the Website).

Time to Wake Up: Days of Abundant Resources and Falling Prices Are Over Forever by Jeremy Grantham, Republished by The Oil Drum, April 29, 2011

This is the beginning of the end of the Hydrocarbon Revolution

I believe that we are in the midst of one of the giant inflection points [turning points] in economic history. This is likely the beginning of the end for the heroic growth spurt in population and wealth caused by what I think of as the Hydrocarbon Revolution rather than the Industrial Revolution. The unprecedented broad price rise would seem to confirm this. Three years ago I warned of “chain-linked” crises in commodities, which have come to pass, and all without a fully-fledged oil crisis.

Yet there is so little panicking, so little analysis even. I think this paradox exists because of some unusual human traits.

The Problem with Humans

As a product of hundreds of thousands, if not millions, of years of trial and error, it is perhaps not surprising that our species is excellent at many things. Bred to survive on the open savannah, we can run quite fast, throw quite accurately, and climb well enough. Above all, we have excellent spatial awareness and hand/eye coordination. We are often flexible and occasionally inventive.

      • For dealing with the modern world, we are not, however, particularly well-equipped. We don’t seem to deal well with long horizon issues and deferring gratification. Because we could not store food for over 99% of our species’ career and were totally concerned with staying alive this year and this week, this is not surprising.
      • We are also innumerate. Our typical math skills seem quite undeveloped relative to our nuanced language skills. Again, communication was life and death, math was not. Have you not admired, as I have, the incredible average skill and, perhaps more importantly, the high minimum skill shown by our species in driving through heavy traffic? At what other activity does almost everyone perform so well? Just imagine what driving would be like if those driving skills, which reflect the requirements of our distant past, were replaced by our average math skills!
      • We also became an optimistic and overconfident species, which early on were characteristics that may have helped us to survive and today are reaffirmed consistently by the new breed of research behaviorists. And some branches of our culture today are more optimistic and overconfident than others. At the top of my list would be the U.S. and Australia. In a well-known recent international test, U.S. students came a rather sad 28/40 in math and a very mediocre eighteenth in language skills, but when asked at the end of the test how well they had done in math, they were right at the top of the confidence list. Conversely, the Hong Kongers, in the #1 spot for actual math skills, were averagely humble in their expectations.

Fortunately, optimism appears to be a real indicator of future success. A famous Harvard study in the 1930s found that optimistic students had more success in all aspects of their early life and, eventually, they even lived longer. Optimism likely has a lot to do with America’s commercial success. For example, we attempt far more ventures in new technologies like the internet than the more conservative Europeans and, not surprisingly, end up with more of the winners.

      • But optimism has a downside. No one likes to hear bad news, but in my experience, no one hates it as passionately as the U.S. and Australia. Less optimistic Europeans and others are more open to gloomy talk. Tell a Brit you think they’re in a housing bubble, and you’ll have a discussion. Tell an Australian, and you’ll have World War III. Tell an American in 1999 that a terrible bust in growth stocks was coming, and he was likely to have told you that you had missed the point, that 65 times earnings was justified by the Internet and other dazzling technology, and, by the way, please stay out of my building in the future.

This excessive optimism has also been stuck up my nose several times on climate change, where so many otherwise sensible people would much prefer an optimistic sound bite from Fox News than to listen to bad news, even when clearly realistic. I have heard several brilliant contrarian financial analysts, siding with climate skeptics, all for want of, say, 10 or 12 hours of their own serious analysis. My complete lack of success in stirring up interest in our resource problems has similarly impressed me: it was like dropping reports into a black hole. Finally, in desperation, we have ground a lot of data and, the more we grind, the worse, unfortunately, it looks.

      • Failure to appreciate the impossibility of sustained compound growth. I briefly referred to our lack of numeracy as a species, and I would like to look at one aspect of this in greater detail: our inability to understand and internalize the effects of compound growth. This incapacity has played a large role in our willingness to ignore the effects of our compounding growth in demand on limited resources. Four years ago I was talking to a group of super quants [experts], mostly PhDs in mathematics, about finance and the environment. I used the growth rate of the global economy back then – 4.5% for two years, back to back – and I argued that it was the growth rate to which we now aspired.

To point to the ludicrous unsustainability of this compound growth I suggested that we imagine the Ancient Egyptians (an example I had offered in my July 2008 Letter) whose gods, pharaohs, language, and general culture lasted for well over 3,000 years. Starting with only a cubic meter of physical possessions (to make calculations easy), I asked how much physical wealth they would have had 3,000 years later at 4.5% compounded growth. Now, these were trained mathematicians, so I teased them: “Come on, make a guess. Internalize the general idea. You know it’s a very big number.”

And the answers came back: “Miles deep around the planet,” “No, it’s much bigger than that, from here to the moon.” Big quantities to be sure, but no one came close. In fact, not one of these potential experts came within one billionth of 1% of the actual number, which is approximately 1057, a number so vast that it could not be squeezed into a billion of our Solar Systems. Go on, check it.

“The bottom line really, though, is that no compound growth can be sustainable”

If trained mathematicians get it so wrong, how can an ordinary specimen of Homo Sapiens have a clue? Well, he doesn’t. The bottom line really, though, is that no compound growth can be sustainable. Yet, how far this reality is from the way we live today, with our unrealistic levels of expectations and, above all, the optimistic outcomes that are simply assumed by our leaders. Now no one, in round numbers, wants to buy into the implication that we must rescale our collective growth ambitions.

The faith in the human brain to ride to the rescue like the cavalry is not justified

I was once invited to a monthly discussion held by a very diverse, very smart group, at which it slowly dawned on my jet-lagged brain that I was expected to contribute. So finally, in desperation, I gave my first-ever “running out of everything” harangue. Not one solitary soul agreed. What they did agree on was that the human mind is – unlike resources – infinite and, consequently, the intellectual cavalry would always ride to the rescue. I was too tired to argue that the infinite brains present in Mayan civilization after Mayan civilization could not stop them from imploding as weather (mainly) moved against them. Many other civilizations, despite being armed with the same brains as we have, bit the dust or just faded away after the misuse of their resources.

This faith in the human brain is just human exceptionalism and is not justified either by our past disasters, the accumulated damage we have done to the planet, or the frozen-in-the-headlights response we are showing right now in the face of the distant locomotive quite rapidly approaching and, thoughtfully enough, whistling loudly.

SEE ALSO

    • The Impossibility of Growth by George Monbiot, www.monbiot.com, May 27, 2014 – Monbiot cites Grantham’s essay in his own tightly reasoned, well documented article that reaches the same “We’re Screwed” conclusion as Grantham: Statements of the bleeding obvious, the outcomes of basic arithmetic, are treated as exotic and unpardonable distractions, while the impossible proposition by which we live is regarded as so sane and normal and unremarkable that it isn’t worthy of mention. That’s how you measure the depth of this problem: by our inability even to discuss it.”
    • Transcript of William Rees’ 2010 lecture “Is Humanity Inherently Unsustainable?” posted December 13, 2012 — Rees concludes: “I cannot be sustainable on my own.  No country can be sustainable on it’s own.  If the rest of the world carries on down the current pathway, they will take us down with it.”

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