Wednesday, April 17, 2013

Capitalism Is Great, But It Assigns No Value To Your Grandchildren, GRANTHAM

It started [in the mid-1990s] with a visit to the Amazon and to Borneo with the kids. And without thinking about it you start talking about the logs along the side of the river and the lack of mature forests in Borneo.

Jeremy Grantham

We were on family trips and happened to do a couple of tropical forests back to back. I'm sure that played a role, but we didn't treat it as an epiphany. I would argue that one of our children got there first. While we were environmentalists, but low key, one of my sons happened to get a job which saw him end up in a dry tropical forest in Paraguay for five years and then off into the forestry business. Shortly behind that, we [his investment company GMO] began to follow that interest in forestry. We started our own forestry operation 15 years ago [at GMO] because our interest in forestry and of our realisation that land is so important. Forests were mispriced and were an attractive investment. My interest in forestry at that point was entirely commercial and then it began to morph into a decent investment, plus, "look how important these forests are to maintain fresh water, carbon sequestration, etc"…

I picked up none of that [James Hansen's 1988 testimony before Congress on climate change and the 1992 Rio Earth Summit]. No. Absolutely not. I was following along afterwards [once the foundation launched in 1997] asking the big NGOs where was the leverage for the birds flying through Costa Rica and Panama. Let's put our money there. Where were the hotspots? The climate question wasn't there for me at that time. Now it is at least half of the focus for the foundation. And in the other half it brushes up against climate all the time. We are late arrivals to all this and I have nothing but admirations to those who beat me to the punch by a few decades.

On why his environmental interests moved beyond habitat conservation:

I was a moderate environmentalist 10-15 years ago. But then I started to get embroiled in resources and that [the rise in price of] oil was the first paradigm shift that we'd ever come across in an important asset class, and nothing is more important than oil. I realised that the price of oil had changed forever and is not going back to the old $15 a barrel. There had been a majorly important shift. That led us to asking the question, why only oil? Why not every finite resource? And so we ended up about four years ago saying, "watch out, we seem to be running out of things". Two years ago, we did a very detailed paper which took on a life of its own and helped to put these issues onto institutional agenda items, I think. That led me to the realisation, by looking at the data, that between population growth and China gobbling up the world that the world had changed – and dangerously so – and hidden under that that oil and food were the two most dangerous components and within that [the availability of] phosphorous was perhaps the most dangerous long-term issue of all. Digging into the phosphate problem, you realised that it can be handled, but only if the great majority of the world is fed via sustainable farming which means nurturing the soil and having it once again full of micro-organisms. If you kill them every year with herbicides and pesticides then you're dealing basically with sand. You've got to restore and renew the ability to grow by re-applying all the nutrients in very big, expensive doses every year. This is in contrast to well-nurtured soil. There's a 30-year patch in Pennsylvania at the Rodale Institute where they've never put on any phosphorous at all and they are getting productivity equal to regular farming up the road.

We arrived at all this just by looking at the numbers and the more I did the more I became concerned that we were already deep into a food crisis. Arab Spring countries were already getting throttled a bit by rising price of energy and food. They don't spend 8-10% of their budget on these, they spend 40%. So when that starts to double on you, you can see how quickly why people take to the streets. And that's where we are. The rich countries are really not that concerned and their casual behaviour is only serving to push up the price which is not that big a deal to them, certainly not the movers and shakers who make all the money. But it's a terrible deal for the poor half of the world and a disaster for the poorest 10% or so. That's the world we're in and it could lead to country after country being destabilised.
It has forced me to go back and read all the classics. On my iPad I think I have 40 or so books now. I recommend a book by a scholar who summarises all these works back to Gibbon's Decline and Fall of the Roman Empire. It's calledImmoderate Greatness: Why Civilisations Fail by William Ophuls. And then there's perhaps my favourite book of a more detailed type which is called Dirt: The Erosion of Civilisation [by David R Montgomery]. That's a really good read. Then there's Collapse by Jared Diamond, which seems to have done quite well and is reasonable. A lot of details are queried by the experts in the field, but I thought it was fine. Then there are books on peak oil and shortages of raw materials. Books on the whole package of long-term growth on a finite planet, going back to the Limits to Growth and a book by one of the co-authors that looks at the next 40 years. That's called 2052 [by Jorgen Randers]. And so on and so forth.

On the strengths and weaknesses of capitalism:

Capitalism does millions of things better than the alternatives. It balances supply and demand in an elegant way that central planning has never come close to. However, it is totally ill-equipped to deal with a small handful of issues. Unfortunately, today, they are the issues that are absolutely central to our long-term wellbeing and even survival. It doesn't think long-term very well because of high discount rate structure. If you're a typical corporation anything lying out 30 years literally doesn't matter. Or, as I like to say: QED, your grandchildren have no value. And they usually act as if that was true, even though I'm sure they are actually very kind to their grandchildren. More