There are headlines and then there are headlines. As I was reading the news this morning, this caught my eye and hit me right in the face:
Insurance giant State Farm, America’s largest auto and home insurer by premium volume, will stop selling new home insurance policies in California, citing wildfire dangers and rising construction costs.
As of Saturday, the company will no longer accept insurance applications for commercial and personal property and casualty insurance.
Furious. Sound like a big deal? It should. If not, let me translate it. The largest insurance company in the richest country in the world will no longer insure houses in one of its richest states. Why? Because… climate change.
Let me put this even more simply. California is becoming uninsurable due to climate change. Now there will be many people who want to “discuss” it. Hey, don’t “discuss” with me. What is there to discuss? It’s a fact. An empirical truth. It’s hard to accept because we don’t talk about it enough, in those terms, because the average person still thinks, “Hey, it could go either way!” LOL, meanwhile…actually…California won’t anymore insurable … and it’s only 2023.
Welcome to the extinction economy. Like I said, this is a big deal. It barely made the news but should have been everywhere. Because of the economist in me? That’s like starting a fire with nine alarms. Why? Come on. Come. The country’s largest insurance company cannot cushion the risks of climate change. And we’ve only just begun to experience it. It’s the year 2023. It’s that bad for us. Our systems are no longer up to the task.
Let’s discuss this on a micro and macro level.
What is happening at the micro level – for example at the home ownership level? Well, without insurance, it’s difficult, if not impossible, to get a mortgage. This limits creditworthiness because now, of course, the pool of insurers is smaller and those that are left will charge more. Bang, house prices are going up — and the circle of people who can own a home is shrinking even more because getting insurance is going to be a much, much harder proposition. Every day, month, year. State Farm came out and said, We can’t absorb the… wildfire risk.
Furious.
But what’s really going on here, and why this is remarkable, is the macro-level effect. What does it mean when the country’s largest insurance company, one of the largest in the world, cannot absorb risks – such as wildfire risk? This means that climate change is already such a risk that our systems – in this case our financial systems, which include insurance – are not able to cope with such a large risk. Because that is a civilizational risk. mega risk. State Farm says, “Hey, we can handle burning down a few hundred houses a year, maybe even a few thousand here and there.” But from now on? More and more houses, whole cities are simply burned? I’m sorry, we’re going broke fast. Nobody will reassure us. The business no longer works. The institution no longer works.
The extinction economy is now hitting people with a triple whammy. We economists do a pretty bad job of explaining this to them, because in my field there is little understanding of climate change, species extinction and their impact on the economy. Most central bankers – the people who run our economies – have no opinion, meaning they haven’t even thought about it, LOL. Let me explain the triple effect and why it’s… worrying.
effect one. Prices are skyrocketing – disproportionately for staples, especially groceries – because of climate change. Harvests are starting to fail, we are becoming a water-poor civilization, and we don’t know how to farm without fossil fuels. As temperatures warm, the impact on irrigation and agriculture is catastrophic around the world, from Kansas to Spain and India to China. And the average person is now seeing the direct effects of that. Skyrocketing food prices are about half the greed inflation, sure, but that greed inflation can exist because there’s real shortages here and climate change is affecting the prices of almost every type of food, from coffee to corn to sugar.
This is effect number one. Number two is what results. Interest rates rise to “control” skyrocketing prices. Not to mention this is a silly game – higher interest rates aren’t making it easier to sow a single seed, they’re just making it harder by increasing the cost of debt, of working capital, and of all that a farm really needs increase. But because central bankers don’t bother to think about climate change – they don’t recognize it at all, it’s not part of the formal models they use to predict how economies will evolve and on which they base their decisions – they increase simply further tariffs. And ordinary people are paying the price, because after going even deeper into debt to afford those exploding basic needs, there’s a double whammy: the price of debt is rising, too. Interest rates on credit cards, car payments, mortgages and everything else are going up. Bang, people are getting poorer.
Effect three is what we just saw in California. A place becomes uninsurable. And that creates a whole new level of problems. Because now you’re paying more for basic needs like food, water, and energy, and you’re paying more for debt to afford it, and now…bang…just like that…you might not be able to get insurance. Where is this taking you? If you’re a homeowner, unlucky enough, you’re left with what we in economics call “stranded assets.” Now your house may go down in value because you can’t sell it, because nobody can insure it, and… you’re stuck.
This is the extinction economy. That triple whammy. It’s a very good way to think about what’s going to happen in the next decade. And that doesn’t stop. There will be temporary resets here and there, seasonal ones of course. But in the long run? The tea leaves are very, very clear. Prices are rising as we reach the limits of our planet and can no longer produce staple foods. Interest rates rise or remain at relatively high levels. Central banks don’t know what to do because they won’t even bother to understand the basic question here. And slowly, as the temperatures rise and the mega-weather intensifies, places become uninsurable. That means more and more people are left with stranded assets. Cities, municipalities and regions are becoming “stranded assets”.
What are stranded assets doing? They naturally burden the social contracts. If you used to be a perfectly beautiful city with a thriving economy, you made a contribution to the public purse. But if you’re a burned wreck every summer, then that’s not the case. They get something out of it because the insurer of last resort is basically the state. So the state steps in and does what it can to get your town back to some degree of normality, maybe every summer – but it’s costing everyone else a pretty penny, the whole rebuild. Less is left for all of society’s other failing systems – education, transportation, water, energy. The vicious circle of ruin is accelerating.
If that sounds bad, that’s because it is. You know, I talk a lot about this stuff. And you got used to hearing me talk about it. Turn it upside down. Think how strange it is that you never hear any of my business colleagues – even the ones with big columns and whatnot – ever talk about this. Always. Think how strange it is that all of this is happening – right before your eyes – and literally nobody in economic power seems to care. Shouldn’t…Janet Yellen…Treasury Secretary…Jerome Powell…Fed Chair…Larry Summers…all these incredibly powerful people…be worried…when the largest insurance company in the country says California is uninsurable? That it no longer insures houses?
Of course they should. But they ignore the problem. It’s amazing and amazing to witness. History will view it as a case of denial of staggering, unholy proportions. But here we are. So it’s up to the rest of us to really understand what’s happening. For us, for our societies, for our economies.
When I say “Extinction Economy,” it doesn’t mean it’s Hollywood-style sci-fi. Mom, Umair said five hundred foot tsunamis would wipe out humanity…on Wednesday! And it’s already Monday! I say nothing of the sort. I say… what I just said.
This is the extinction economy. It is already here. It’s happening before our eyes. At the moment it burns slowly. But it’s accelerating. And because we’re conditioned not to talk about it, we don’t either. When we see personalities like Janet Yellen or Larry Summers or Jerome Powell… and they don’t say a word… when the biggest insurer basically says, “Sorry, we can’t insure California anymore…” we come to the conclusion, “Hey, we can.” not be a word.” very big deal! Don’t worry folks. Surely all these brilliant and powerful people would have something to say if there was something to worry about, right?
And so the extinction economy is creeping in all around us. Now it’s more and more about the economy. It’s in your skyrocketing grocery bill. It’s in your mounting utility bills. Interest rates at breathtaking levels. It is due to declining real incomes. In the declining standard of living everyone produces these. It happens that cities, regions, large cities and meanwhile entire states are no longer insurable.
How much bigger does it have to get before we notice it? Let me try to get the point across, because if I sound a little upset, maybe I am. When California becomes uninsurable, my friends, that’s a big deal. Not because I love California, I don’t, I’m a Southern through and through, sorry, sorry, bury me in my cowboy boots. It’s because the extinction economy is so big. How much it touches us. how real it is
It is of no use to us to continue to pretend. Just because our leaders, figures in power, don’t seem concerned, doesn’t mean we shouldn’t be. That’s just another kind of failure. Our concern shouldn’t be caricatured either – no one says everything will be swallowed up by the sea. But you can see how rapidly our economy is changing now. And how much is this change even accelerating?
If I had told you a decade ago that California was uninsurable – not for me, not in my opinion, but for the largest insurance company in the country – would you have believed me? And yet here we are.
This is the Extinction Economy – only some of us don’t know it yet.
tank
May 2023
Comments are closed.