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Unsustainable Developments

It seems like we right now are running hard from facing the  truths and some associated pain, and that in at least two instances that  are striking for their similarities: the global financial crisis and  climate change. Let me begin with the financial crisis. The main problem  of the financial crisis is that levels of debt have become too large  and cannot be repaid by the original debtors. Lenders and many  politicians are now desperately searching for others to take on these  debts, and throughout the crisis unfortunately governments have been all  too willing to take over the liabilities of banks and other financial  institutions. They should not have done that!

How do I know that debt levels are too large? An analysis by McKinsey shows that debt levels have reached a new high in 2010 at 212 trillion dollars (T$ – Teradollars). The global, total GDP,  for a reference, was T$63. The global GDP measures all the income of  all humans in a year, 2010.  If you are a homeowner looking for a  mortgage, lending 3.5 times your annual income is about as high as it  gets. Then you need to put up your home as a guarantee. What is the  global value of ‘homes’? The World Bank puts the total value of all produced assets –  buildings, roads, railroads, factories and machines – at T$124. (The  latest available estimate is for 2005 and has probably risen since then  due to the massive investment in China, but the debt in 2005 was already  higher, at over T$150.) Debt hence exceeds the total value of all the  physical capital in the world. Therefore, if you hence try to unwind all  the debt in bankruptcy proceedings, you end up with physical capital  being redistributed to the lenders, but not sufficient cover the nominal  value of the debt. As some of the capital is owned by people who have  no or little debt, there is even less real value out there that backs up  the existing loans.(For more on this issue, check out Keen.)

Financial markets are now desperate for government action. Market  analysts describe stock valuations being driven by government action,  not economic fundamentals. Markets call for more credit, for more  liquidity to enable more lending and to rescue financial institutions  that have made loans that cannot be repaid. They want governments to  take on more of the liability of private actors. For those governments  who would now longer be solvent if they accepted the bank debt  accumulated in their countries, markets want Germany and – through the  World Bank, China – to take on the liability of governments . This is a  process of burdening the future tax payer with liabilities she has no  responsibility for. What does she get in return? Market actors who  have learned that they can offload risk to others. We are turning our  children into debt slaves. Future tax income is mostly from taxes on  labor and consumption, and if these liabilities are accepted taxes will  have to be raised. Accepting these debts means burdening future  generations in order to rescue capital owners from the collective  consequences of their poor decisions.

The only way out of this crisis is to write off bad debt. We should have started with this in 2007, as Stiglitz argues.  We should certainly do it now. Creating more debt by national banks  producing excessive liquidity and governments nationalizing debt only  makes the problem worse and the ultimate pain larger. It is  irresponsible.

Now let’s turn to climate change: We have understood the problem for a  long time and the evidence is becoming increasingly stark. Currently,  we are experiencing a rapidly increasing rate of emissions of greenhouse  gases (for an analysis by the Global Carbon Project co-authored by Glen Peters, see here) at a time when we should be rapidly decreasing the emissions. The IEA’s Global Energy Outlook confirms  that emissions need to peak by 2015-2017 the latest for us to have any  chance at all to reduce emissions to levels which allow temperatures to  stabilize at 2 degrees of warming. What is instead happening is that we  continue a mode of development which so systematically leads us to a  projected temperature rise with +6 degree by the end of the century. The  implications of such a policy will be dramatic. Why do we postpone  action? Because the evidence is not 100% air tight, according to the  standard of proof required by some? The evidence will be so only once it  is too late. It is irresponsible to further postpone actions.

Here, the room for even drastic action to succeed limiting climate  change to a level that might still be acceptable is running out if we do  not act more quickly. What we will need to do is to revise our mode of  economic development. Not doing so will result in an economy that is not  fit for the future, and in a rapidly changing climate that is  threatening much of our natural capital. Again, our children will be the  ones who will suffer as a result of our inaction.

Climate change and the global financial crisis are similar: our  actions are such that we currently make bad problems worse. We postpone  dealing with the problem so that our children will be left to sort out  the mess. They will be in a much worse position to do so.

Some of the solutions to the two problems are the same. We need to  find a new mode of economic development that does not rely on debt to  finance overconsumption or to build assets we cannot afford to operate.  We need to invest our savings in things that have a return on  investment: infrastructure that furthers human well-being by promoting  human-powered transport and that requires little energy to operate, a  renewable energy supply system, skills, and natural assets. The  parallels do not stop here. Why do we hesitate pursuing this course of  action?

About the author

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Edgar Hertwich

I am professor of industrial ecology at the Norwegian University of Science and Technology.

December 12, 2011