There is a fantastic book called This Time is Different: Eight Centuries of Financial Folly. The ironic title refers to the fact that across 66 countries and eight centuries, nations, investors, businesspeople, lenders and borrowers make the same mistakes. They believe that their rapid growth in wealth and success are well-deserved, low-risk and will continue indefinitely. This comprehensive book is a great read and is fast becoming the go-to for financial researchers and media; however, I must demur... This Time is Different.
The current financial crisis is coupled with a natural resources crisis that the world has not seen before. We've all read about defunct civilizations from the Sumerians to the Mayans, both of whom caused their own demise due to overuse of water and land. But in the modern era, even though we have access to huge amounts of data, we neglect to notice that our natural resources crisis mirrors the financial one. And these twin crises cannot be localized. If the Southwestern United States or Chinese provinces run out of water, or the world’s ICT industry runs out of rare earths, or climate changes causes the spread of floods, fires or superbugs, the financial effects are unfathomable.
Two of the main causes of financial crises in history are debt in a variety of forms and asset and price bubbles. Both are analogous to our environmental situation. First of all, DEBT. Our 21st century lifestyle uses more water, air and land than the planet’s natural systems can replenish. Just as a variety of US politicians and pundits pontificate about the financial debt we are leaving to future generations, even more alarming is that no amount of hard work, frugality or taxes could ever bring back clean air, land and water.
In September, President Obama rejected a new ozone protection regulation. Business lobbyists said that it would cost America jobs in the midst of a major unemployment crisis. Actually, this new regulation would have SAVED money by protecting tens of thousands of people from illness and preventing approximately 12,000 deaths. In addition to the pain and suffering of those afflicted, these unnecessary medical costs will be borne by local governments and individual families. Other businesses will have excess labor costs due to low productivity. And additionally, businesses will suffer because as innovation laggards, they will lose future market share. This is society wracking up debt in all the wrong ways. Debt that might have a solid return would include building infrastructure and training workers for the 21st century’s clean technology industries.
Second, ASSET AND PRICE BUBBLES. We have an inverse problem. Our commodity prices are too low given their scarcity and their real costs. Instead, we complain about the cost of gasoline at the pump and ignore the cost of gasoline on the environment as well as on all other parts of our economy (ie. Medical costs, pipeline infrastructure, war and foreign policy, land and water destruction, air quality, etc.). People in Las Vegas would not get cheap building permits and would have astronomical water bills if they paid the real cost of their water. They are using water on borrowed time. Our current asset and price problems are analogous to an asset bubble but are in fact myriad mispriced asset classes.
Yes, we must begin incorporating the value of natural resources into everyday business because indeed this financial crisis must not be used to exacerbate the environmental crises at hand.
This Time is Different.