The Great Disruption (12 page)

On the demand side, of course, we had an extra eighty million people to feed globally each year, along with increasing wealth leading to a desire to eat more grain-intensive livestock and the shift of corn in particular to use as a biofuel feedstock.

So as we moved toward 2008, alongside these underlying issues of supply and demand, we saw the impacts of climate change, with widespread droughts reducing harvests in many countries and floods destroying crops in others. Thus the conditions emerged for a perfect storm of economic growth hitting the system limits.

Sure enough, over the second half of 2007 and the first half of 2008, the logic of the sustainability argument found its way into the economy. For those who still think the environment is a place you visit on weekends, consider what actually happened over this period.

Food prices started to rise, driven by the array of system challenges referred to above, including climate-induced water shortages and degraded soil quality. As booming economic growth drove oil consumption, oil prices rose to historic highs, and as the techno-optimists argue, this drove investment in the alternatives. One of these was corn, which competes strongly for fuel with oil when oil prices increase. This caused U.S. farmers to switch from soybeans for food to corn for oil partly because of the subsidies for corn-based ethanol in the United States. Together these drove up both corn and soy prices globally.
3

The gap in the soy market caused by the exit of U.S. farmers encouraged Brazilian ranchers to convert their ranches into soy farms, grabbing the opportunity presented by higher soy prices. This caused a gap in the meat market, which drove other ranchers to increase deforestation in the Brazilian rain forests to get new grazing land. There was also rain forest clearing for more soy farming. This deforestation is a huge driver of climate change. Climate change is blamed by many for the worst drought ever in Australia over this period, which saw wheat output decline, and for crop-destroying floods in America, both of which further drove up grain prices globally.

Food and oil prices soon soared to levels way above all historical highs. As Lester Brown points out, with people in poor countries spending 50 to 70 percent of their income on food, increasing food prices in 2007–2008 caused major political instability. Food riots and unrest spread across dozens of countries, and governments moved to ban food exports to protect their national supplies, further tightening global food supply and driving up prices. Even developed countries faced political unrest over spiking oil prices.

In another insight into the future, the food price rises in 2007 and 2008 drove those countries concerned about security of supply to invest in taking over agricultural land in other countries. While foreign investment in agriculture is not new, what is different this time around is an emphasis by some states on controlling land and growing food exclusively for export to the investing country, driven by concerns around food security. No one yet knows the full scale of land involved, in part because states are reluctant to publicize what has been called by some a “new colonialism.”

One study by the UN's Food and Agriculture Organization and international NGOs found that in the five African countries of Ethiopia, Ghana, Madagascar, Mali, and Sudan, about 2.5 million hectares of agricultural land were acquired by foreign investors between 2004 and 2009.
4
This staggering figure represents almost half the arable land of the United Kingdom—but represents only a fraction of the land involved internationally. One estimate by the International Food Policy Research Institute put the total figure at 30 million hectares in 2009. Another estimate by the Oakland Institute puts the total at 50 million hectares (an area equivalent to half of all the arable land in China).
5
Prominent examples include an attempt by China to secure 3 million hectares for oil palm production in the Democratic Republic of the Congo, a signed deal for a South Korean company to grow wheat on 690,000 hectares in Sudan, and a large Saudi fund focused on buying up or long-term leasing foreign agricultural land.
6
When food runs low, it is the foreign power that has control over the land and the rights to its produce—media reports already indicate that Pakistan plans to deploy one hundred thousand troops to defend foreign-owned farms.
7

It is inevitable there will in future be political unrest and geopolitical instability caused by poor countries losing their arable land to wealthier countries, especially when those countries bring in their own farmworkers to grow the food, displacing poor local farmers.

While on the one hand some would see all the above as the market at work, in reality it's more like a chaotic and risky scramble for resources in a world of diminishing availability. Lester Brown points out that unlike previous food price increases that were driven by a particular drought or monsoon failure and therefore returned to normal on the next harvest, these were unresolved long-term trends that were limiting food supply and increasing demand. It's harder for the market to respond with more supply if there is insufficient land and water.

This view has been reinforced by price movements since that time. While of course prices dropped with the global financial crisis hitting demand so strongly, even then they stayed well above historical levels, suggesting that we are now facing systemic shifts. As I am writing, wheat prices are spiking again, driven by floods and droughts across many countries, and Russia has just banned wheat exports to protect its food supplies. So these types of problems are rapidly becoming the new normal as we bounce around up against the system limits.

While in any particular crisis experts will argue as to the key causes, there always being many, 2008 certainly showed us what the Great Disruption will feel like. It presented a particularly good example of how resource constraints and ecosystem changes can create havoc in the human economy and do so in complex and unpredictable ways.

It is easy to forget in light of subsequent events that in early 2008 most market participants remained optimistic about the growth prospects for the global economy. Problems in the U.S. economy and rising global oil and food prices were seen as temporary blips that did not suggest anything other than business as usual.

And yet the signs were there, with these issues merely indicators of deeper structural problems in the global economy. When the banks started collapsing later in 2008, this became abundantly clear.

While I couldn't see the detail of what was to come, by early 2008, it was clear to me that the Crash was no longer a forecast but actually under way. As a result, I got to work on my follow-up letter to “Scream Crash Boom,” this one called “The Great Disruption.”

Although only a few thousand words, it took me over four months to write. I think in hindsight I was fearful of making the call in such a public way. Despite the oil and food price rises, we were at this stage still in boom times. I remember in the first month I was writing that the Dow soared from 11,800 back up to 13,000. Many saw this whole period as the triumph of globalized capitalism. The shakiness in the financial markets in 2007 and early 2008 was seen as a minor blip in an endless boom and an era of supercycles. Saying it was all over felt like exposing myself to serious ridicule.

Nevertheless, in July 2008 I sent the letter out far and wide. The first page read as follows:

And so the moment arrives.

In my first “Scream Crash Boom” letter of 2005 I forecast the inevitable crash of the global ecosystem. I said the resulting economic and social crises would then drive an investment boom in a new industrial revolution and economic transformation. I thought I was forecasting events a decade or two away. Now, just three years later, look around us. The global economy is trembling under its own weight. We see:

•  riots and political crises across Asia as surging food prices, driven by extreme climatic events and surging economic growth, put severe pressure on the daily lives of billions of people;

•  protests, strikes and political upheaval across the world as oil prices respond to the reality of limited supply, threatening recession, or worse;

•  global financial markets lurching from crisis to crisis as complexity, greed and interconnectedness drives the financial system to the edge;

•  debate about external military intervention in countries that can't deal with the humanitarian consequences of extreme weather, such as Burma;

•  scientists mystified by dramatic increases in melting at the Northern Polar and Antarctic icecaps, at rates way beyond their forecast models;

•  and countless more impacts with floods and fires in the United States, droughts and dying rivers in Australia, melting glaciers all over the world, and on and on.

The ecosystem crash I thought was decades away is now underway and the resulting economic crash is not far behind, perhaps the slide has already begun.

It went on to talk about how this would all unfold over the years ahead and how the global financial markets were inevitably going to be hit by their own complexity:

We have built an incredibly complex, interlinked global society and economic system. While we're very proud of our creation, its very complexity makes it highly prone to shocks. The interconnectedness we marvel at could well be our downfall as parallel shocks bring the whole system down.

It was clear to me that whereas my friends in business would marvel at the incredible connectedness of the global marketplace, I like many others saw risk in bright red flashing lights.

The response to the letter was very strong. Unlike my 2005 letter, this was not being taken as a forecast of intellectual interest. This time people could feel something was wrong. There was a sense that the world was facing a serious, destabilizing period. While the financial and economic consequences were yet to unfold and the mainstream market had yet to feel any substantial effects, there was sufficient evidence—for those wanting to see it—that something was deeply wrong.

So the responses, even from corporate leaders, generally acknowledged the system was shaking, that there were now risks that could bring it all down. As a CEO of a major Australian company wrote to me, “This resonates very closely with how I'm feeling.”

Another common response was to agree directionally but to be more optimistic about our ability to change. For instance, the CEO of a major company listed on the New York Stock Exchange said in an e-mail to me, “Directionally I feel you are right. I would debate the degree and how fast we will adjust when we see reality.”

Of course, over the next year the economy went into its worst decline since the Great Depression. After the first flurry of blame on investment bank cowboys and weird financial products, people started to wonder if something deeper was going on. They started to question the system.

Thomas Friedman, long a passionate advocate for markets and globalization, wrote a
New York Times
column in March 2009 that asked:

What if the crisis of 2008 represents something much more fundamental than a deep recession? What if it's telling us that the whole growth model we created over the last 50 years is simply unsustainable economically and ecologically and that 2008 was when we hit the wall—when Mother Nature and the market both said: “No more.”

My view, firmly held at the time and since, is that 2008 was the year that growth stopped. It was the year, as Thomas Friedman said, “when Mother Nature and Father Greed hit the wall at once.”

While I was naturally very focused on the environmental drivers of the Great Disruption, market advocates like Friedman were looking at the appalling behavior of the investment banks with horror. It was greed gone mad, bad enough in its own right but incredibly dangerous when it happens at the center of a complicated, interconnected system. Everyone had become addicted. When Iceland almost went broke, Friedman described the country as being like a “hedge fund with glaciers.” But now the hedge fund had melted and the glaciers weren't far behind.

What brings these two drivers together is growth. The demand for growth drives investment bankers to take greater risks in order to deliver the profits and growth their CEOs and shareholders demand. Their cleverness in designing new products that no one else even understands ensures they deliver that growth and personally get their bonuses and promotions. They lend other people's money to people who can't afford to pay it back and offset the risk to themselves. The government dares not intervene because these bankers are driving the growth that keeps the masses happy and them elected. All growth is good, no questions asked.

In fact government actively supports the process and in doing so increases the risks further. They borrow to stimulate the economy, with the resulting massive debt putting the economy further at risk, while hoping growth will sufficiently increase government revenues to pay back the debt. Thus the system locks itself in to further addiction.

Of course no one will ever be able to prove what caused the particular crisis in 2008 because the system is too complex. We can't even forecast the oil price, a single commodity in a relatively simple market. So the idea that we can know in detail how the global economy and society behave in any particular year is not realistic.

What we can know, however, with a high level of certainty is how a system behaves when it reaches its physical limits. It is on that analysis I conclude we hit the limits in 2008. While the crisis may have manifested as food and oil prices spiking followed by a credit crisis, was that credit crisis caused by our addiction to growth and the need to provide cheap credit to drive it? Or did the doubling of oil and food prices take money out of the economy and reduce consumption of other goods on which growth depended?

We can't know. What we can know, because we can prove it with simple math and physics, is that the global economy is now bigger than the planet, and that means the economy at some point will stop growing. Whether that was 2008 or is still to come in 2012 or 2015 is of historical interest only. It is certainly going to come.