Building a Bridge to the Future, readying for slower growth

By James Frazier
If the current economic paradigm were a person, he would be someone we’ve known long and well. He believes that the world economy only goes in one direction: up. Any setbacks are viewed as temporary and are met only with single-minded determination to make up the setback and then proceed forward again, full steam ahead. Perpetual growth is needed, he is sure, to maintain or increase standards of living for a growing world population that is also living longer than ever before.

Tidal turbine

The problem with this thinking is that perpetual growth based on non-renewable resources cannot happen within a finite system like our planet. The paradigm of seemingly perpetual growth has been supported for decades by the extraction of cheap energy and natural resources. Now, the “low hanging fruit” of the energy world has been consumed, and new energy sources such as deep water oil are proving to be more expensive and dangerous than those we’ve relied on until now.

Not surprisingly, then, the cost of economic growth is increasing, bringing down our “net” growth after the rising costs have been subtracted. This is especially true for highly indebted developed nations like ours, since we are collectively paying out interest instead of receiving it. Theoretically, the longer we continue with the existing paradigm, the more expensive new growth will become, until the costs exceed the benefits and we are forced to shift to a new, more sustainable model.

What might a new paradigm look like? Our energy mix will be far more renewable, for one. Whether solar, wind, tidal, geothermal, or biofuel, all energy supplies must ultimately be based on essentially unlimited sources (as oil and coal were viewed not too long ago). We will also be recycling and reusing materials in novel and amazing ways in order to limit the extraction of finite resources from the earth’s crust.

The implications for economic growth are clear. Over the long run, we cannot expect to sustainably grow our economy any faster than we can harvest the infinitely renewable energy of the sun and earth. A “steady-state” economy will eventually emerge, generating a low, steady, and sustainable amount of net growth at times, and mildly contracting at other times. We will have shifted from a rampant, cancerous state of hyper-growth to a more natural, symbiotic existence with the planet and each other.

Of course, this shift cannot happen overnight, since massive investments in the old paradigm remain. Therefore, it’s better to focus our energy on navigating a gradual but insistent transition to a low growth economy, rather than attempting to fully live in that future economy today. We can then leverage the benefit of reasonably priced non-renewable energy sources towards facilitating a smooth transition.

During any major sea change, skilled navigators understand what is coming and get in sync with the change as it arrives.

With this in mind, it’s time to understand how growth rates affect our investment strategies, and adjust our expectations of future growth. Retirement planning is a prime example of the importance of realistic expectations, since it is so dependent on the difference between projected future growth rates and the actual growth rates we eventually experience.

The current paradigm assumes that the very strong economic growth that we have known throughout our lifetimes will continue indefinitely. These generous growth assumptions are priced in to Social Security, public and private pensions, annuity & life insurance company models, and financial planning software that helps individuals ensure that their savings will last as long as they need. What happens if (or when) yesterday’s growth assumptions don’t pan out? Most likely, we will need to make do with less income and more community and self-reliance.

Less can be enough. Once we have accepted the possibility of an outcome like this within our lifetimes, we can start preparing for it now. While there are a wide variety of partial solutions, none of them are a “magic bullet” that will cure all. Here is a short list of new approaches to get you thinking:

1) Investigate the financial health of any retirement income sources you will be relying on, particularly pensions and annuities. Ask hard questions about their funding status (do they currently have enough to pay all expected future obligations?), their growth assumptions, and their contingency plans in case growth targets are not met over the long run. Plan for a conservative outcome. If you work with a financial planner, start a conversation about growth rates and how you can create a realistic retirement for yourself.

2) Invest in your own renewable energy sources, either by yourself or as part of your larger interconnected community. With sizable tax credits and above-market rates being paid for generated power, renewable energy systems can have a very attractive investment return, and can play an important role in your retirement plan by reducing expenses or generating income. Best of all, going renewable helps move our society in the direction it needs to go.

3) Increase your savings at any age by taking on part-time work or starting a small, low-key home-based business, because every bit of incremental income helps both now and in the future. Shed unnecessary expenses and consumption, especially of non-renewable goods. Decrease your reliance on cash by seeking opportunities to trade your goods or services with others in your community that have resources you need.

4) Build fruitful community ties by finding and working with others who share your goals. Connect with worldwide sustain- ability movements like Transition Towns and permaculture that provide roadmaps and skills for creating more resilient “future-proof” households and communities. Invest part of your portfolio in local businesses that provide goods and services for your community or that will play a key role in the future economy.

Change can be scary, but it can also be empowering to proactively meet a grand challenge. Though today’s challenges largely stem from our own hubris, humanity’s path has also been one of great achievements, and it’s incredible to think that our best work may be yet to come. Working together, we can and will build a bridge to a better future.

This article first appeared in the Fall 2010 edition of the Natural Investing newsletter

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James Frazier

Welcome to my archive of newsletter articles and blog posts. For more information on my service offerings, please go to my advisor webpage.

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