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What is "Unsustainable" Really?



March 15, 2010 – Comments (12)

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.

12 Comments – Post Your Own

#1) On March 15, 2010 at 11:06 PM, dragonLZ (85.60) wrote:

Finally a post (with 22 recs in first 44 minutes) that gives me the nice warm feeling that the rally will continue.

Thanks. I must admit I was getting worried...

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#2) On March 15, 2010 at 11:29 PM, sentinelbrit (56.14) wrote:

The ironic thing is that this capitalist nation could not have achieved the growth it has without the government's help!

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#3) On March 16, 2010 at 9:46 AM, outoffocus (23.96) wrote:

I hope you submitted this article to Fool Commentary.  This was pretty good.

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#4) On March 16, 2010 at 10:16 AM, miteycasey (28.93) wrote:

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.

It's call innovation. 

As resource run thin innovation will find a way to stretch them farther.

We'll turn to the SUN for our energy, each family will have a hydroponic garden to feed themselves and buildings will be built taller to house more people.

Could you imagine a 50 story building with nothing, but hydroponic gardens to feed a city? Or taking those plants to make electricity?

And these are technologizes that we have today. I can't imagine 50 years from now.


The cycle will continue for a very long time.

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#5) On March 16, 2010 at 10:42 AM, binve (< 20) wrote:

Hi walt,

This is a very intersting post with a lot of good ideas. I agree with some, but (probably surprising to the permabulls who more or less hate me) I don't agree with everything here.

Like you my answer will start off in the realm of economics and then drift off elsewhere :)

Unsustainable economic growth - in prespective

I like your description of economic growth, but I would like to qualify it. The economy cannot grow continuously all the time indefinitely. Same goes goes for any population of anything. Your description of a finite world is accurate. But I will qualify this too in a minute.

The problem is that there are no straight lines. Not in nature and not in the systems that humans create. We as humans want to see linear realtionships, but they are a myth by and large. The world is inherently nonlinear. But more importantly, the world is cyclical. The are all kinds of very long cycles in nature: the fast 11 year solar cycle, 13 year cicadas, 26000 year precession cycle of the North Pole, etc.

There are also economic cycles that last a very long time, such as the 33 year Long Valuation wave cycle, or the 40 year Kondratiev Wave cycle.

But humans are *very* bad at pick out cycles that last more than 1 year. And we always want to extroplate linearly.

So I agree, the next phase of most of our investing lifetimes will be marked by economic contraction. We were on a broad upswing for many decades and now we will contract for a long time as well. It does not make sense that we will just grow indefinitely with only brief pauses (1975, 1982, 2000, 2008).

But this is PRECISELY the reason why I am *NOT* a PERMABEAR

Because the world is cyclical. Nothing goes up forever, and nothing goes down forever.

Uptrends need to be corrected down. And once those corrections are complete, in both size and duration, the human race goes back to making progress.

The human race will always make net progress in all of it endeavors.

This is why the stock market will *never* go to "zero".

Every advancement, whether it is with the market or economy or any other endeavor, there is a hiatus and an appropriate retracemnet, but then the next wave will advance.

It is the reason why I am very optimistic for the future. Because after the current correction plays out (and I have layed out my case for why it is not over many times. Others don't agree with me and that is fine) the next bull run will be truly awesome.

Because it has to do with this idea of net advancement.

We do have a finite world with finite resources. But we have *unlimited* potential in how efficiently we use them. The advacements we have made in the last 100 years in all areas of science, but most importantly materials science, is nothing short of astounding.

As long as humans have the creative will to continue to learn and grow, we will never become extinct. We will face our challenges and come up with solutions. Are fate is very literally in our own hands. And I have no doubt whatsoever of the outcome.

Which makes very very long term bullish on the prospects of humanity. It also makes me very long term bullish on the prospects of human endeavors. And yes, that includes the stock market. I am not bullish for the intermediate term. Like I said above, we are in a long cycle, and that cycle is not over. But it will not go down forever.

Thanks for a great post with a lot of great thoughts!!..

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#6) On March 16, 2010 at 11:26 AM, chk999 (99.97) wrote:

 I'm not talking about hundreds of years in the future, I'm talking within this century.

 This is the sentence I don't buy. We are no where near either the energy limits or the technological limits of the possible. Given that Thorium based reactors could power us for millions of years, I think we will see more growth in the 2100s than in all previous centuries combined.

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#7) On March 16, 2010 at 1:14 PM, walt373 (99.88) wrote:

Thanks to everyone with your great responses. Lots of food for thought here.

I agree that human ingenuity and resourcefulness are never to be underestimated. But the rates at which we are multiplying and consuming resources are arguably faster than the rate at which technology improves. We might have the science for higher efficiency, but the tougher question is implementation - how are we going to get the thorium based reactors from the physics lab to powering billions of buildings? Creating the infrastructure needed to utilize technology is the vastly larger part of the efficiency problem.

Efficiency is problem one. Population growth is problem two. If we double the efficiency with which we use resources, and the human population triples by then, the rate at which we consume is still increasing.

The scary thing is, we haven't even tackled the efficiency problem because currently each human is using more resources as time goes on. Multiply this by population growth, which itself is exponential, and you can see that the rate at which we consume resources is accelerating rapidly - the second derivative of consumption is a huge positive number.

But, here is the most important point: even if we somehow manage to decrease our overall consumption, the fact is, consumption will never be negative. We are talking about actual consumption now, not the first or second derivative. Because of this, the world will eventually run out of resources (not literally all resources, but the resources that are economical to obtain). Once pass this point, aka "peak commodities", recovery will be nearly impossible, because we will not have the resources to do so, at least on planet Earth.

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#8) On March 16, 2010 at 5:59 PM, Oregonjim (< 20) wrote:

There us one aspect of the discussion that is often overlooked, and that is the limit of a given system to process information and reach productive decisions. That is one reason, for example, that fusion has not developed beyond the laboratory stage: the organization required to coordinate the production and supply chain of the elements, administer the reactor, allocate the capital, maintain safety, repair equipment, secure the whole process, etc. would just be too great. Arrow's law about the inevitability of accidents in human-machine systems governs this issue - and it's akin to MIllgram's work decades ago on information overload. The technical fixes may be invented, but putting them into widespread operation depends on human organization. At this point we just aren't very good at that. We can't even arrange capital for long-term nuclear power plants without an extraordinary stretch. The licensing requirements, the constant temptations to cheat on inspection results, the NIMBY responses and the lies that are used to counter them - it all adds up to organizational chaos, a chaos that will stop the progress by itself. My personal prediction is that we will end up in local communities in simpler relationships in a post-capitalist society that will come about in a self-organizing process - and we will be happier for it.

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#9) On March 16, 2010 at 9:07 PM, dwot (29.42) wrote:

I agree that the growth can not go on as it has and I tend tot think we have already reached the limits of what our planet can sustain. 

Just look at the oceans, Atlantic fisheries had collapses a few years back and the pacific fisheries have been in trouble and some have collapsed as well.

Water issues are huge.  We are not naturally recycling our clean water supply as fast as we are using it.  Some areas have run out of sources of clean water for expansion.

One thing I really like about being Canadian is that Canada is very lightly populated so Canadians are lucky to have plentiful resources.

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#10) On March 16, 2010 at 10:56 PM, APJ4RealHoldings (44.65) wrote:

sentinel, a capitalist system is in which actual saved capital is invested.

in the US, there has been no capitalist system for over 30 years, the growth (fueled by borrowed capital)...its been debt based. so i think what you really mean is...."could not have achieved the growth it has without the" central bank's help.

capitalist system > debt based monetary system


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#11) On March 19, 2010 at 4:57 PM, alexxlea (61.35) wrote:

Too many ballast bags holding down our hot air balloon, perhaps we'll just cut the cords and lift-off.

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#12) On May 19, 2010 at 8:48 AM, enrikemal (< 20) wrote:

Yeah, you don't need to write a dissertation in economics to know about finite resources. But the thing is, we just don't know everything. Can anyone predict in 19th century that in 100 years there will be nuclear energy and antimatter synthesis? I bet noone did. So are we now. We should base on "finite resource" base now, but we also should (or even must) expect that we can invent or discover some new source of energy. Or some kind of matter creator machine. Or, i don't know, we'll learn how to teleport things. That's the pace of science. Often unpredictable, sometimes strange, but it goes forth.

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