Inflation? Recession? Extinction.

This Is the Year the Economics of Climate Change Became Shockingly Real

Image Credit: South West News Service

Every day now, the headlines about the economy are getting a little more…apocalyptic. Inflation skyrocketing, a recession on the cards.

What you probably want to know is: how much longer are prices going to rise? The answer to that question is: you probably don’t want to know.

Prices rise for two reasons. One, a sudden rise in demand. Two, a sudden fall in supply. If you don’t know even that much Econ, that’s ok — now you do, and if you think about it for a moment, it’s intuitive to get why.

So. What’s going on with our world, our societies, our economies? Let’s take a quick glimpse around.

In Spain, olive oil is under threat. “Fierce heatwaves and a lack of rain in Spain threaten to reduce olive oil production from the world’s top exporter, the country’s agriculture minister has warned…as Spain accounts for the lion’s share of global olive oil production, these reductions would see a significant tightening in global availability. Looking forward, market participants are expecting prices to continue to rise unless the weather improves and gives crops some respite.” How much less olive oil is there going to be? “Market sources are suggesting that there could be year-on-year reductions of 25 to 30% for Spanish olive oil production.

Meanwhile, in France: “The French energy supplier EDF is temporarily reducing output at its nuclear power stations on the Rhône and Garonne rivers as heatwaves push up river temperatures, restricting its ability to use river water to cool the plants…The production cuts mean that France, traditionally an energy exporter, is relying on imports from countries such as Spain, Switzerland, Germany and the UK.”

And in the UK? “The United Kingdom is now projected to enter recession from the fourth quarter of this year. Real household post-tax income is projected to fall sharply in 2022 and 2023, while consumption growth turns negative.” Like the Fed, the Bank of England has massive raised interest rates — and it expects inflation to hit 13%.

Thirteen percent. That’s on top of the rising prices you’re already paying.

What’s going on here? Sadly, the links should be crystal clear in the examples above already.

Prices rise for two reasons, remember. Supply, down, or demand up. Is demand up? Nope — not by a long shot. In the UK, statistics tell us 99% of people are getting poorer. The same is true in America, and in the West in general, maybe by differences of a degree — but the big picture’s the same. Demand isn’t suddenly up.

Think about that in your own life. Know anyone with…too much money? Probably not, because the average person was struggling to make ends meet before prices suddenly went to the moon, living in a perpetual cycle of debt and paying off interest, unable to afford retirement, young people unable to afford homes or start families. Nobody has too much money, except Bezos, his fellow billionaires, and their lieutenants, hedge fund managers and bankers and minions and whatnot.

That leaves supply. Going down. Not demand, going up.

And now look at the world. See how Spain’s struggling to produce…olive oil? Olive oil. A staple of civilization dating back millennia. Yet the same story is true across the board. Crops of all kinds are failing — I’ve talked about mustard, wheat, coffee, and sugar, and there are plenty more. Meanwhile, water systems are buckling, from the American West to Mexico to Europe to Britain — that rainy isle just put in place bans on hosepipes. Think about that for a second.

What does all this mean?

Welcome to the economics of climate change. Extinction, more accurately — but I digress.

We’re at one degree, roughly, of warming. It’s taken us centuries to get there — since the dawn of the industrial revolution. And though the effects have long been predicted, they haven’t fully materialized in front of our very eyes.

Until this summer. Until the last few summers and winters. This summer, it was undeniable that our planet was warming to a shocking degree — heatwaves stretched across the North, from China to America to Europe. London burned. Climate change was suddenly something you could feel. Not just predict or theorize or see on a chart, but experience.

Now. Back to economics.

We’re at one degree of warming or so. And prices have to rise to a new equilibrium. A new level. A higher one. Why? Supply is down. Demand isn’t. That means prices must rise. Demand isn’t going down for the basics because they are the basics. We all need so much water, electricity, food, medicine to live. Demand for these things can’t really fall overmuch. Want to take one shower a week? Eat one meal a day? I didn’t think so.

So for now, prices are skyrocketing.

Our planet is warming so fast we are having one of deep history’s six mass extinctions. We’re living inside the horizon of an Extinction Event now. On such a planet, all the basics that we take for granted are harder and harder for the planet to produce. After all, the planet produces them — we don’t. Who produces the water? The utilities? The corporations that bottle it? Of course not, the planet does — rivers and aquifers and rain, to be precise. Who produces food? Industrial farms? Of course not — they might manage the process, but the soil and insects and rain produce it. The planet produces all this stuff for us. But as it heats up, it’s struggling in self-evident ways.

The ways it’s struggling are happening faster than predicted. Just like temperatures are rising faster than forecast. Crop failures and droughts like this? They weren’t supposed to happen — at least if you asked our politicians and pundits — until the 2030s, or maybe the 2040s, when climate change “really” happened. But of course all that was wishful thinking, because as us alarmists warned, we were already breaking records in terms of carbon emissions every single year.

The planet can’t supply what we’re used to consuming at the same level of plenitude and abundance anymore. Take the example of olive oil, because it’s a telling one. Prices are skyrocketing precisely because this summer, there was a heatwave, which has put the harvest in serious jeopardy. That means less olive oil, for the entire world. Prices have to rise a new equilbrium level.

Let me make that crystal clear.

This sudden economic convulsion is prices climbing towards the new post-industrial equilibrium level at one degree of global warming.

Everything’s going up in price, because everything’s scarcer now. From crops to water to energy to produce it all — like the French example illustrates, even water for cooling nuclear plants. The effects of one degree of global warming weren’t felt much — visibly, at least, experientially — until the last few summers, and especially this one. The olive oil harvest in Spain wasn’t threatened until a mega-heatwave engulfed Europe and burned through it.

2022 was the year our economies learned climate change was for real.

So what does this mean in the real world? When will prices stop rising? Well, I have some kind of OK news, and some pretty bad news. Prices will probably stabilize — for a while. They will reach a new equilibrium at one degree of warming. One degree of warming means 30% less olive oil. Other kinds of crops are down by 10%. Electronics and microchips, off by around 25%. Water? Hard to say, but again, call it 10%. The precise numbers don’t matter — we’re not doing a formal analysis in a paper. The concept does. Prices will stabilize to reflect a planet that can only now supply 30% less olive oil, 10% less wheat, 10% less fresh water, 20% less microchips, 15% fewer factories working away all the time, 20% less distribution for it all. Our world economy must now reach a new equilibrium price level at one degree of global warming — a much, much higher price level.

But you know and I know that warming isn’t going to stop. So while prices might stabilize for a time — let’s say the economy reaches this new level in a year or two, and inflation cools a bit — prices rising aren’t going to end. They will just keep on rising, in the long term. Why is that?

Because the world economy will have to reach a new equilbrium price level at two degrees of warming, too. And then three. And so on. What happens at two degrees? We don’t know, but it’s definitely not good. If olive oil is down by 30% at one degree…the situation’s probably going to be full on calamitous at two. Down by 50–60%, easily, because usually, the impacts of such things aren’t linear — what happens at two degrees is just twice what happens at one — but geometrical or exponential. Imagine a world where olive oil supplies are down by 50–60%. Shudder. Imagine the price you’ll pay at the grocery store for it.

Prices are going to keep rising in this era. For a very, very long time to come now. There’ll be periods where they stabilize — and that’s when they’re acclimatizing, like the rest of us, to a strange new overheated world. But in the long run, prices must climb in tandem with temperatures. Even faster than temperatures, because of course the planet will struggle to supply the basics far, far more at two degrees or three than it already is at one.

Now. You might think that’s the bad news, but it’s not. It’s the kind of OK news. The really bad news? What we’re doing right now is only making this much, much worse. What are central banks doing to try and stop inflation? They’re raising interest rates. That’s a huge mistake — and weirdly, they know it “Bailey said that runaway energy and food costs driven by global market forces were beyond his control, admitting he feels ‘helpless’ when it comes to surging inflation.”

Raising interest rates works when people have too much money — when prices are rising because demand is up too much, too fast. But when supply is what’s going down? It’s exactly the wrong thing to do. Why? It creates a stagflationary vicious circle.

How so? Think about it. Now people are paying that much more for mortgages, credit cards, student loans, all kinds of debt. So they’re getting poorer, super fast. And as they get poorer, what happens? There’s less left over to invest. And what’s the only real way to solve problems of undersupply? Investment, in more supply.

Let’s make that concrete. One degree of warming means that the olive oil harvest is down by 30%. Translation, we need more olive oil. How do we do that? Well, not by raising interest rates. That doesn’t solve anything, it only makes the problem worse. Does raising an interest rate…plant an olive tree? Nope. It just makes it harder for the farmer to plant a new tree to replace a dying one, or pick the harvest faster, or try to irrigate the land better, or do whatever can be done to try and save the harvest. Raising interest rates only makes investment harder, less available, and more costly. Now the poor farmer can’t afford to do any of that, because suddenly, it comes with a much, much higher price tag from the bank.

And the problem only gets worse.

See my point?

What we’re doing now — our politicians and central banks — is ensuring that a stagflationary shockwave rips through the economy. Stagflation meaning: prices skyrocket, but incomes don’t keep pace, investment doesn’t rise, society struggles to fund and renew basic systems, debt loads grow, everyone keeps getting poorer.

It’s an incredibly foolish way to approach the problem — to hammer the economy with rising interest rates, when even the people doing it know it won’t solve the problem. So why are they doing it? Because…well…that’s all they know how to do. Economists and central bankers are kind of like medieval barbers. They’ll treat any kind of illness you might have, but they’ve only got one cure — bloodletting. In this case, interest rates. But interest rates aren’t the problem here. Investment is.

The only way that our economies survive the Age of Extinction is through investment. The only way. What do we about a planet on which olive oil harvests are down by 30% — and that’s at one degree of warming? Well, if we want olive oil, we need to either a) plant more trees b) find a way to keep those trees alive or c) find a place they can still grow. All that takes investment — just think of it from the farmer’s point of view. That’s a simple example — and we’re going have to do it for everything. All our crops. All our basic systems, from water to medicine. And to do that, we’re going to have to invent whole new careers, fields, domains, pioneer scientific advances, create new technologies, reinvent entire institutions from “farms” to “factories.”

That is the only way that we increase supply. And increase doesn’t mean: lift it beyond unsustainable industrial age levels — it just means try not to let it dwindle as fast as it’s going to on a burning planet. Increase just means: try to have a planet where we still have the basics that we take for granted, even at super high price levels, because the highest price of all is things going extinct. Then they don’t exist anymore, and we can’t consume them.

Let me say it again. The only way that our civilization survives the Age of Extinction is investment that dramatically and radically increases supply. What the planet can supply, at the most basic levels, from water to food to air to medicine. Otherwise, the future is more of this: conflict over diminishing returns from the end of industrial age growth, in the form of resource wars, migration crises, fascism, theocracy, lunacy. Sudden scarcity is at the heart of every great civilizational collapse.

That isn’t where we’re headed, it’s where we are. This is 2022. We’re at one degree of warming. There is little to no doubt that we are going to hit two, and then probably three, and quite possibly four. Imagine each of those worlds. Think prices are high now? Think how high they’ll be then.

That is why we have to invest now. Yes, to prevent in whatever way we can the temperature from rising that high — though that’s a long shot, because we don’t know how to make anything from fertilizer to cement to steel without fossil fuels. But, more urgently, to give ourselves a chance. At survival.

If you think I’m exaggerating, go ahead and tell me how many more years of double digit inflation you can take. Aren’t you already being pushed to the brink, like most people, by it? So what comes next? When people are pushed past the brink, what happens? Violence does. Outwards violence, war, or inward violence, implosion and collapse.

This is not a drill. This is the Age of Extinction. And in that age, this is the summer that climate change became real.

August 2022


Latest news
Related news