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Effects of 'limits to growth' on financial markets

This call for research closed on 12 August 2011 and the content on this page is for information only

Background

By 2050 or so, the human population is expected to reach nine billion, essentially adding two Chinas to the number of people alive today (and may hit 10.1bn by the year 2100 according to a recent United nations projection). Those billions will be seeking food, water and other resources on a planet where, scientists say, humans are already shaping climate and the web of life. Economic growth is seen as being a pre-requisite for the well-being of this increased global population. The World Bank projects (World Bank, The Road to 2050) a 385% increase in global GDP by 2050.

The objective of the research is to shed light on the following:

  1. Actuaries well-understand that physical growth cannot continue indefinitely. The mathematics of exponential growth, as illustrated by compound interest, tells us this. What happens if that economic growth does not continue for the reasons outlined above either regionally or globally
  2. The historical perspective has been that technological development and the advancement of human knowledge drives economic growth. What is the risk that resource or environmental constraints will outweigh improving technology and constrain growth, in a timescale relevant to our (and an actuaries’ clients) generation?
  3. Investigate further the relationships between capital (financial and human), complexity, energy, money and GDP from a macro-economic perspective?
  4. What would financial markets look like in a prolonged period with the absence of economic growth? How would interest rates, credit spreads, equity risk premia, discount rates, inflation and mortality be likely affected?

We envisage the research to be in two broad parts:

Part 1 – Investigation of limits to growth:

  • energy availability
  • energy security
  • climate change
  • population changes
  • environmental degradation, water scarcity, food prices; and
  • resource depletion.

There are a number of separate questions here:

  • Is further economic growth desirable for rich nations, or does the risk of growth outweigh the benefits?
  • Is further economic growth through the 21st century possible?
  • Is it possible over the long term to have rich nations experiencing economic stagnant growth (perhaps flipping between low growth and recession) while ‘developing nations’ grow more rapidly?

The research should cover, inter alia, the following topics:

  • A comprehensive literature review of the economics of “limits to growth”
  • What do we mean by economic growth? Is it possible/useful to break down the
  • impediments to growth into four categories – abrupt and continuous, local and universal? If so, how could this to be done?
  • Using advanced statistics quantify the links between economic growth, energy consumption, population growth, commodity and food prices, food production, availability of fresh water
  • Dependence of the world’s financial system on economic growth (current system is debtbased whereby money is ‘loaned’ into existence – repayment with interest requires economic growth and/or inflation)
  • Evidence regarding ‘peak’ oil and other constraints on the net energy input to the global economy
  • The capital intensity of modern economies. One of the 'Limits to Growth's key predictions as limits are approached they will be experienced as an increase in capital intensity i.e. each unit of production will require more capital input. Is there evidence for this now? At what point would increasing capital intensity cause economic growth to become uneconomic?
  • Has this increased to the point where growth in the developed world has become uneconomic?

Part 2 – What would happen to financial markets if economics was a “zero-sum game”

The second section of the research is to focus on the actuarial implications of the slow-down or cessation of, and regional variations in, global economic growth. It will be necessary to have some actuarial input for this section.

The practical impact of zero-growth on financial markets at a regional and global scale with particular emphasis on the following (not an exhaustive list):

  • Discount rates
  • Equity risk premia
  • Credit spreads
  • Social upheaval - how may it affect risk management; changes in attitudes to making insurance claims
  • Inflation expectations
  • Mortality, morbidity.

 

Contact Details

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