What is "Unsustainable" Really?
I should probably mention here that this post is basically a rant and a gloomy one that that... but I think these issues are important enough to discuss. “If something is unsustainable, it will stop.” I was thinking about that famous quote by Herb Stein when I realized something: everything is unsustainable. One of the facts of life is that nothing goes on forever. Everything must end eventually, including the latest market bubble, "spiraling-out-of-control debt" of any kind, the United States' economic policies, the United States in general, the Earth, the human race, the universe, etc. (OK, I'm not really sure about that last one...) This may seem trivial - how does this apply to us as investors, you ask?
First of all, this is very important to investing from a philosophical point of view, because it reduces long-term investors and short-term traders down to essentially the same thing. We are all trend followers in one way or another, the only difference is the duration of the trends we're interested in. There's no such thing as a sure thing, just things that are more or less likely. The stock market won't always have a real return of ~7% a year because the stock market will eventually reach 0 at one point, long before the human race is extinct. Circling back to this later...
In the more immediate future (hopefully), we need to worry about lots of other unsustainable things. There are the obvious ones like the US debt situtation, China's trade imbalance with everybody, global warming, peak oil, etc. In the scenario where everything plays out beautifully and no economic catastrophes occur, the investors with the best returns will be the ones who went all-in. But is that the most intelligent way to invest, to plunge in and hope for the best? Or is it wiser to protect yourself, even slightly, and guarantee you will survive no matter the outcome? For a good analogy, because of the shorter time frames, look at traders. If you have read Nassim Nicholas Taleb's Fooled by Randomness, this will sound familiar. Over the short-term, the best traders do not have the best returns. Most of the traders with the best returns at any given time take on enormous but invisible tail risk (that is, risks that have a very low chance but high impact). They perform magnificently for a few years, then blow up when the extremely unexpected occurs. The best traders survive and compound over decades.
I believe that most investors do not really appreciate the magnitude of many of the problems that the world faces, and has faced in the past. Just because we overcame our past problems does not diminish them in any way, and does not guarantee we will succeed in the future, or even make it likelier. Experience is not as useful as we would like to think, when we are facing completely new problems, but can even hurt us by giving us a false sense of security. We need to consider each issue independently, and not brush it off with an arrogant "we did it before so we can do it again" attitude. We are actually lucky to be alive and thriving, as a species, after all we have gone through. It's a dramatic statement, but think about how many times we came to the brink, but managed to escape relatively unscathed. As morbid as it sounds, we will not survive forever.
Finally, even though everything is unsustainable, we still have control over our destinies, and I believe one unsustainable thing needs to be understood and thought about by everyone is - economic growth is unsustainable. I'm not talking about hundreds of years in the future, I'm talking within this century. Almost never is economic growth seen as a negative, and if we had our way, we would grow forever. The recession sucked, right? From my perspective, it was a breath of fresh air.
The undeniable truth is, the ideal of "infinite economic growth" is closing in on a wall known as "finite resources". Growth cannot continue at the current pace, because for the first time in our history, we are pushing the limits of what the Earth can sustain. Tying back to what I mentioned earlier, climate change has become a very serious issue, and peak oil and peak commodities are just over the horizon. But these are actually just symptoms of the greater issue that is uncontrolled growth. Yet the human population continues to multiply, with each person making a bigger impact on the planet as standards of living rise. With our current level of technology, we cannot outgrow our planet, but it seems like we want to try anyway. Here is a great example of "unsustainable" (actually, the text sums up nicely what I'm stumbling to say here). It's almost certain that before we have spaceships that can colonize other worlds, we will be faced with the difficult choice of slowing ourselves down, or the gruesome alternative.