Jeremy Grantham - Q2 2011 Quarterly Letter - Resource Limitations 2

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Jul 25, 2011
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"You and I, and our government must avoid the impulse to live only for today, plundering, for our own ease and convenience, the precious resources of tomorrow." — Dwight D. Eisenhower, 1961

"[They] would have us believe that there is no cause for anxiety, that reserves [of oil] will last thousands of years, and that before they run out science will have produced miracles. Our past history and security have given us the sentimental belief that the things we fear will never really happen – that everything turns out right in the end. But prudent men will reject these tranquilizers and prefer to face the facts so that they can plan intelligently…" — Admiral Hyman Rickover, 1957

"The nation that destroys its soil destroys itself." Franklin Delano Roosevelt, 1937


Last quarter I tried to make the case that the inevitable mismatch between finite resources and exponential population growth had finally shown its true face after many false alarms. This was made manifest through a remarkably bubble-like explosion of prices for raw materials. Importantly, prices surged twice in four years, which is a most un-bubble-like event in our history book. The data suggested to us that rarest of rare birds; a new paradigm. And a very uncomfortable one at that. (In general, though, I have tried here not to repeat arguments or data used last quarter.)

This quarter, I would like to focus on the most dangerous parts of the coming shortages. I will try to separate those that, for us rich countries, are merely going to slow down the growth rate of our wealth through rising prices, and those that will do not only that, but will actually be a threat to the long-term viability of our species when we reach a population level of 10 billion. In all cases, poorer countries will be the most threatened. Situations that will irritate some of us with higher prices will cause others to starve. Situations that will cause some of us to go hungry will be for others a real disaster, and I believe this, unfortunately, will not be in the dim and distant future.

Obviously, experts have written books on subtopics that I reduce tone sentence. I might add that these books and a myriad of articles by these experts – who have decades of experience – absolutely do not agree with each other. In fact, they differ probably as widely as any scientific topic around, often by a literal order of magnitude and often with heat. Unlike many scientific differences, some of those concerning our resources in the long run may actually be a matter of life and death. I have tried to start from a weighted-average position and then have allowed for a safety margin tilted in favor of protecting our long-term well-being. By definition, plenty of experts will disagree with each statement made here. My hope is that "our" experts are those that are more rigorous, intelligent, and protective.

Capitalism does not address these very long-term issues easily or well. It seems to me that capitalism's effectiveness moves along the spectrum of time horizons, brilliant at the short end but lost, irrelevant, and even plain dangerous at the very long end.


We humans have the brains and the means to reach real planetary sustainability. The problem is with us and our focus on short-term growth and profits, which is likely to cause suffering on a vast scale. With foresight and thoughtful planning, this suffering is completely avoidable.

Although we will have energy problems with peak oil, this is probably an area where human ingenuity will indeed eventually triumph and in 50 years we will have muddled through well enough, despite price problems along the way.

Shortages of metals and fresh water will each cause severe problems, but in the end we will adjust our behavior enough to be merely irritated rather than threatened, although in the case of metals, the pressure from shortages and higher prices will slowly increase forever.

Running out completely of potassium (potash) and phosphorus (phosphates) and eroding our soils are the real long-term problems we face. Their total or nearly total depletion would make it impossible to feed the 10 billion people expected 50 years from now.

Potassium and phosphorus are necessary for all life; they cannot be manufactured and cannot be substituted for. We depend on finite mined resources that are very unevenly scattered around the world.

Globally, soil is eroding at a rate that is several times that of the natural replacement rate. It is probable, although not certain, that the U.S. is still losing ground. The world as a whole certainly is.

The one piece of unequivocal good news can be found in the growth of no-till farming. In no-till, the residue of the previous crop is left on the ground and new seeds are planted without plowing. This technique reduces erosion by around 80%, reduces fertilizer run-off, preserves moisture, improves the soil (and, quite possibly, the quality of the food), and reduces the emissions of heat trapping gasses.

The growth of no-till has been very rapid in South America, rapid in the U.S. (which is now at 35%), and moderate in many other developed countries. But it is used on only about 5% of farms globally.

Overall, the best farms will have no erosion problems but, on average, soil will continue to be lost across the globe. Together with increased weather extremes and higher input prices (perhaps much higher), there will be increasing problems in feeding the world's growing population.

In particular, a significant number of poor countries found mostly in Africa and Asia will almost certainly suffer from increasing malnutrition and starvation. The possibility of foreign assistance on the scale required seems remote.

The many stresses on agriculture will be exacerbated at least slightly by increasing temperatures, and severely by increased weather instability, especially more frequent and severe droughts and floods.

These types of slow-burning problems that creep up on us over decades and are surrounded by a lack of scientific precision hit both our capitalist system and our human nature where it hurts.

Capitalism, despite its magnificent virtues in the short term – above all, its ability to adjust to changing conditions – has several weaknesses that affect this issue.

It cannot deal with the tragedy of the commons, e.g., overfishing, collective soil erosion, and air contamination.

The finiteness of natural resources is simply ignored, and pricing is based entirely on short-term supply and demand.

More generally, because of the use of very high discount rates, modern capitalism attributes no material cost to damage that occurs far into the future. Our grandchildren and the problems they will face because of a warming planet with increasing weather instability and, particularly, with resource shortages, have, to the standard capitalist approach, no material present value.


With hindsight, there are a few additions and qualifications I would like to make regarding my letter on resources of last quarter. I will start with an overview of the prospects for our collective well-being: there is nothing about the resource limitation problem that we cannot resolve. We have the brain power and, especially, the inventiveness.

We have some nearly infinite resources: the sun's energy and the water in the oceans. We have some critically finite resources, but they can be rationed and stretched by sensible, far-sighted behavior tfill the gap between today, when we live far beyond a sustainable level, and, say, 200 years from now, when we may have achieved true long-term sustainability. Such sustainability would require improved energy and agricultural technologies and, probably, a substantially reduced population. With intelligent planning, all of this could be reasonably expected.

A population reduction could be arrived at by a slow and voluntary decline (perhaps with some encouragement of smaller family size achieved, for example, through greater education). Such a reduction might leave us with a world population of anywhere from 1.5 billion t5 billion, depending on the subtleties and interactions of many complicated variables. We would then be in long-term balance with our resources, including what will remain by then of our current biodiversity, which will hopefully be as much as one-half to three-quarters of what we have today.

The problem is not what we are capable of, but how we will actually behave. The wasteful status quo has powerful allies in the present corporate and political system. We do not easily accept bad news, nor dwe easily deal with long horizon problems. As mentioned last quarter, we are not particularly good with numbers, especially when it comes to probabilities, compound growth, and discount rates. We have a capitalist system that reflects our weaknesses; one that is fine-tuned only for the present and immediate future. Because of these factors, we will probably wait to deal with the obvious problems of living well beyond our means until the signs are powerful and clear that we must change; until, that is, it is basically too late. Too late in the sense of failing to protect much of what we enjoy and value today. Too late to have avoided plundering our grand children's resources.

It's a shame, but it's the bet a well-informed gambler, observing from another planet, would probably make. It's why, in the environmental business, which shares many of the same problems with resource management, it can be honestly said that there are old environmentalists and optimistic environmentalists, but no old, optimistic environmentalists. I'm probably as close as you're going to get. The following argument looks at the resource problems we face in order of declining optimism.

I think what follows is reasonable rather than apocalyptic. And, there is one remarkable piece of good news – the steady rise of no-till farming. In this, the developed world at least seems to have truly lucked out! However, with the pressures of short-term profit maximizing, there is some chance that we will not capitalize on our good luck.

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