THE BLOG
05/07/2013 12:14 pm ET | Updated Jul 07, 2013

Jeremy Grantham Has Bad News and Good News

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Jeremy Grantham, the famed investor and co-founder of GMO, one of the world's most successful investments firms, has both bad news and good news for us. The bad news, briefly stated, is that we are on the road to economic and ecological ruin. Grantham's good news, if I can characterize it, is that there may yet be some hope.

Most of the bad news -- the likely impact of climate change and resource scarcity -- is spelled out in five quarterly letters to his investors published in the past two years. Most of the good news is reserved for "The Race of Our Lives," the just-released sixth and final installment of the series.

The good news is that declining fertility and the improving technology for renewal energy may, in Grantham's words, "...arrive like the U.S. Cavalry, just in time to turn us away from the cliff edge." Let's hope so.

Grantham's greatest concern, though far from his only one, is that the world's farmers may not be able to produce enough food at affordable prices to feed the 9 billion or so people that are projected to inhabit the planet by mid-century or sooner. He fears that the effects of climate change -- combined with water scarcity, shortages of arable land, loss of topsoil, and the rising costs of fuel and fertilizer -- will hamper food production and boost the costs of basic food staples beyond the household budgets of those living in severe poverty.

Grantham, however, hopes that fertility rates will fall faster than currently anticipated and that world population will peak sooner than most demographers anticipate.

In making its population projections, the United Nations proposes three possible variants for fertility rates and population growth: high, medium, and low. Grantham hopes that the low variant will turn out to be more accurate. It projects world population peaking around 8 billion at mid-century and then declining to 6 billion by the end of the 21st century.

Unfortunately, few demographers believe that the UN's low variant is a likely scenario. Indeed, one of the world's most respected demographic authorities, the Population Reference Bureau, projects that world population will increase to 9.6 billion by 2050. Simply put, fertility rates in many developing countries are not falling as fast as once hoped. In male-dominated societies, particularly those where child marriage is prevalent, women -- even those who access to contraceptives -- have little or no say as to how many children they will have. In some of these countries the rate of adolescent pregnancies is actually on the rise.

In some parts of the world, population growth is still viewed as an economic elixir. Egypt's new government, for example, has shelved its commitment to family planning under the assumption, apparently, that its heavy reliance on food imports for survival is a transitory problem.

Grantham's other chief concern is "our massive dependence on cheap energy." He worries that we are not prepared for the looming post-carbon economy. He hopes, however, that "the technologies of solar, wind power, and other alternatives as well as electric grid efficiencies and improved energy storage" will come to our rescue in time to avoid climate disaster and economic collapse. By 2030 or sooner he anticipates that both solar and wind power will be cheaper than coal. He also foresees that there may be significant advances in energy storage, which he describes as the "Holy Grail" of environmental progress.

Grantham's guarded optimism is not unwarranted. On both fronts -- declining fertility rates and renewal energy -- there are some very low costs policy options that could significantly improve the chances of the "Cavalry" arriving on time. Curbing the practice of child marriage and raising the status of women could go a long ways towards reducing fertility rates in countries that are struggling with severe poverty and chronic hunger. Similarly, taxing "externalities" like pollution and greenhouse gas emissions could radically improve the competitive position of wind, solar, and energy conservation.

The biggest obstacle, which Grantham clearly recognizes, is the "cornucopian" conviction that technology has all the answers, and that mid-course corrections in the human trajectory are simply not required.

As Grantham duly notes in his latest investment letter, history shows that the road to ruin is paved with unjustified optimism. Let's hope that Grantham's guarded optimism is well justified.