Authored by Paul Donovan of UBS Global Macro,
The Hunger Games trilogy of books (and rapidly expanding film franchise) is set in a dystopian future of depleted natural resources, with humanity clinging to survival in the wake of unspecified environmental apocalypse. The Capitol governs what remains of North America, with its citizens enjoying a lifestyle redolent with material possessions - albeit often financed by debt. Meanwhile the populations of the Districts toil in dangerous conditions, generally without basic political rights, to provide the Capitol with the consumer goods that its citizens demand. The parallels to modern society are not stretched too far here. Substitute the OECD for the Capitol and a number of emerging markets for the Districts, and we are viewing the world today reflected back from a distorting mirror as a grotesque image of modern reality.
The environmental credit crunch
The challenge faced by humanity today is the unsustainable nature of modern living. This is all about credit – but about environmental credit. The world is consuming finite resources at an unsustainable rate. An example is using tomorrow’s standard of living to raise today’s standard of living (if you heat a house by burning a barrel of oil today you raise your living standard, but you can not burn that barrel of oil tomorrow, and so deny yourself that standard of living in the future). Borrowing future standards of living to enhance current standards of living is all credit is about. Here the currency is energy (or water resources, or industrial metals) rather than financial credit – but the consequences are essentially the same.
The strains of the environmental credit crunch are already visible in the global economy. Food riots, discussions of fuel poverty, export restrictions for key resources, debates over resource security – these are all manifestations of the same thing. For the first time in perhaps two generations the availability of resources might turn out to be a constraint on economic growth.
The financial credit crunch
The heroine of the Hunger Games trilogy was basically a free market economist with archery skills (most heroes and heroines turn out to be economists in disguise). One of the points of the books was to demonstrate that humanity can adapt to the constraints placed upon it. Human ingenuity leads to the more efficient use of scarce resources.
There is a caveat. Most human ingenuity requires investment. That can be investment in education. It can be investment in capital. The heroine of the Hunger Games needed both training and a bow (capital equipment) to adapt to and innovate. In the modern world, efficiency tends to require financial credit to fund the investment required. Financial credit is not necessarily the only condition, but it is a big part. Consider agriculture: economic and environmental efficiency can be achieved through upgrading agricultural infrastructure (introducing GPS to fertiliser application worldwide could save huge amounts of energy and reduce nitrogen pollution substantially).
This is where the true damage of the financial credit crunch may come in. As humanity faces up to an ever more virulent form of the “economic problem” (finite resources and infinite desires), the challenge of providing a solution to that problem will undoubtedly involve investment. The financial credit crunch limits the availability of that investment, and raises the cost – itself a further form of credit rationing.
Wrong time, wrong place
There is a risk of a double protectionism coming into place at the same time. The protection of natural resources, in particular food and energy resources, is driven by political expediency. Throughout history, populations have responded strongly to threats to food and energy supply, and the political bias to seek autarky in these areas is understandable, if regrettable. With China’s pig population due to fall ill again soon, with extreme weather changing harvest yields, and with energy poverty an increasing reality in many parts of the developed world the drive towards autarky is unlikely to diminish. This is now accompanied by a protectionist threat to the globalisation of capital flows. With government debt burdens increasing, and with the cost of capital also rising, governments are seeking to retain what capital they have within their own boundaries (naked protectionism that is often characterised by the euphemism of “financial repression”).
We therefore have an increased demand for capital to tackle the environmental credit crunch, but a reduced supply of capital because of the financial credit crunch. Investment is needed in those areas of greatest environmental stress (generally those with the least economic development), but more and more barriers are being put in place on the free movement of capital. A global problem is at risk of being overwhelmed by the forces of economic nationalism.
This is hardly an optimistic note on which to conclude the year, and we should not become too depressed. There are some grounds for optimism. Innovation can occur as an unintended consequence of other actions (the use of GPS in agriculture is a good instance). The lower trend rate of global growth may slow resource demand and delay the full force of the environmental credit crunch until such a point as human ingenuity can contain the problem. On the other hand, the most important characteristic, as the Hunger Games indicates, is the ability to adapt and change in the face of changing circumstances. Politicians tend not to be so good at doing that.