I learned an important lesson at an early age, the power of compounding interest.
I learned that if I took a part of what I earned, about 10% or so, and put it away in an investment account like an IRA or a 401K it would grow into something much, much bigger later in life. If you invest early and let your money compound over a long time, you could lead to a more comfortable retirement. You can also save this way to pay for a house or a child’s college education by doing the same trick outside of a retirement account. The same logic holds for anyone with a pension. You work for decades and have a large sum of money waiting for you that has grown substantially due to compounding interest.
If you started with $10,000 invested $200 per month for thirty years, and got a 10% return each year, in thirty years, you would have about $372,000. If you started at 20 years old with no money, saved $100 per month, and did this until you were 65, even with only an 8% assumed yearly return, you would have a nice $464,000 nest egg when you retired. You can make these numbers much higher by increasing your monthly contribution as you get older and earn more in salary each year. There are plenty of compounding interest calculators on the internet that can show you just how much you can save over a specific time period based on the inputs you put in. It’s a great way to learn about the delayed gratification required to save a huge some for later in life.
The magic of compound interest is founded on the belief that the markets in the long term tend to go up. That is not of course the case everywhere. The Japanese stock set a high in 1989, that was only hit again this year. For about 35 years in between, the Japanese stock market meandered below that previous high.
But for the most part, we have been able to count on an economy growing a little bit each year, (GDP growth of 2-3% is what we’ve gotten used to), which means we are producing and consuming a little more as a country and as a world each year.
The dirty little secret of the stock market is that they all assume a relatively stable economic environment where new technology can increase productivity, or new resources can create new innovative products that drive demand. That will all come to an end – likely in your lifetime.
The stock market has generally always gone up over the long term because we have been growing as an economy over the long term. Even a relatively modest 2-3% growth rate will double the size of the economy over a few decades. That growth comes from more consumption of goods and services, which leads to more jobs to fill increased demand, which leads to more growth, and on and on in a virtuous cycle, right?
Wrong.
Do you want growth, or do you want to survive?
We have the problem we have today with climate change because our growth has been fueled by the burning of fossil fuels. By 1994, about 13.5 percent of the world’s energy came from renewable or low-carbon energy sources. Twenty-five years later, in 2019, that percentage of clean energy had only risen to 16.6 percent. As of 2023, renewables and low-carbon energy made up only 18 percent of the global energy mix. That progress is too slow.
Think about your 401-K or pension again. Think about the stock market. If we continue to prioritize growth, so that these asset values keep going up, we will need to do that with an energy mix that is mostly fossil fuels for the foreseeable future. That ramp-up in growth, even a small 2 – 3 percent yearly growth, will doom us to putting more CO2 in the atmosphere, and we already have far too much up there.
So, there is no way we can prioritize the 2 -3 percent growth that makes our stock market and 401-Ks keep going up. I don’t say this. Physics says this. Even a modest 2 -3 percent growth rate will blow us past any safe concentration of CO2 in the atmosphere, and that will have catastrophic impacts on our way of life. The more CO2 we put in the atmosphere, the worse our quality of life will get, the harder it will be to get food, water, shelter and the other essentials of life. The more CO2 we load into the atmosphere the more Mother Nature will punish us with oppressive heat, severe weather, flooding, forest fires, and destruction.
In the end, it is simple math. As of 2023 about 80 percent of all energy comes from fossil fuels. Even if that percentage drops by 1 percent each year, (an assumption that is much faster than the pace we are currently on) we will still get over 50 percent of our energy from fossil fuels by 2050. And 2050 is the “net-zero” date that companies and governments are promising that they will achieve net-zero emissions. Net zero by 2050 is the promise that has been made to keep us under 1.5 degrees C warming by that date.
We aren’t going to hit that goal on our current trajectory.
The financial markets are heading for devastation one way or another. If we continue the path we are on, or even if we move to 50 percent renewables by 2050, or even 75 percent renewables by 2050, the impacts on the planet will begin to become catastrophic in individual societies, if not at the level of our civilization. Our civilization may crumble under the pressure. Stock markets don’t do well when civilizations collapse.
Or we could abandon our addiction to growth, slam on the brakes, and double and triple the speed at which we move away from fossil fuels. Stock markets don’t do well when there is no growth or negative growth, and the promise of a “green energy revolution” is unlikely to materialize fast enough to save us.
It is very possible, and maybe even likely, that the United States and perhaps the world is in for what Japan has seen over the last 30 years, a stock market that goes in fits and starts, but just doesn’t grow, or declines and settles at a new equilibrium far below what we see today.
We could keep prioritizing growth and increase the risk of our civilization going off a cliff.
We could slam on the brakes, and not go off the cliff.
Either way, your pension, your 401-K, and mine, are in trouble.
Matt, this is a great essay and I want to forward it to my financial advisor, who is very much a "green growth" guy. But for folks in finance, what's the answer? If the 401K is doomed, what's the off-ramp besides losing all you've invested? I'd love to see a follow-up article on "So here's what we do..."