Revising the Limits

Are we seeing the limits to demand?

Copyright: Dennis Meadows. Source: Amazon

Back in the early 1970s, a think-tank called the “Club of Rome” published a little book called the “Limits to Growth.” It used a fairly simple computer model to predict that unless people radically changed the way they lived, we would run out of some of the key resources necessary for modern life. They described our expected population growth-path as “overshoot and collapse.” The book predicted that because we were continually increasing our standard of living and human populations keep growing, we would overshoot the earth’s sustainable carrying capacity—like white-tailed deer on the Kaibab Peninsula.

Needless to say, their predictions didn’t pan out as expected. Technology made it not only cheaper but also easier to produce more goods and services using fewer resources, and population growth slowed dramatically in country after country once industrialization arrived and child mortality fell. People aren’t ungulates overgrazing their feeding grounds. The ultimate natural resource is human creativity—especially when it‘s brought to bear on problems critial to our survival.

Photo: Sgarton. Source: Morguefile

But the predictions seemed to make sense when everything was getting more and more expensive: gas went from 7 cents a gallon to 25 cents, then to $1.50. Houses that cost $5000 to build went to $25,000, then $100,000. Inflation was running in the double digits, and we could see starving masses in China and Biafra on television every night. What we couldn’t see was technology-driven green-revolution crops and integrated microprocessors that would make life radically better for billions of people. Who thought computers would both predict and solve the problems of scarcity?

Now we’re facing new limits: limits to demand. The problem isn’t inflation, it’s deflation. We don’t have too many dollars chasing too few goods, we have too few dollars and too many goods. We don’t have too little computing power, now we all have an Apollo 11 computer in our back pockets, tied to a networked database with the world’s knowledge available with one spoken search string. And lots of cat videos.

CRB Commodity Index. Source: Bloomberg

In the ‘70s Keynesian economists tried to fine-tune demand when demand was rising and supply was stagnant. The result was too much demand and too little supply—a recipe for accelerating inflation. Since then a global supply-side revolution has created an age of over-abundance where resource deflation threatens the financial economy that made all this production possible in the first place. The result is falling demand and increasing supply.

35 years ago I actually worked and studied with two of the authors of “Limits to Growth,” Dana and Dennis Meadows. But today we’re not seeing limits to growth. Rather, it’s the limits of growth.

Douglas R. Tengdin, CFA

Chief Investment Officer

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