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Signs and Portents along the Way – Catastrophes

April 12, 2011

According to a chart ( prepared by Swiss RE, Cred EM-DAT and TMB analytics)  that appeared in a recent issue of the Bangkok Post,  the number of catastrophic events per year have increased almost 10 fold since 1970, while the amount of the damages that were covered by insurance has only grown by a factor of two or three. In addition the accompanying article reports that 8 of the 10 highest insurance payouts within that time have happened during the past decade.

Of course, a forty-year trend in world events is too brief a time period to draw general conclusions as to its cause or duration. Nevertheless assuming the information contained in the article and chart is accurate, I believe I can infer the following:

1. The weather and climatic trends described in the chart appear to mirror the predictions of most climate models.

2. The increased disparity between the damages caused by these catastrophes and the amount covered by private insurance indicates either government is making up the difference through tax revenue or borrowing or more and more of the damage is going unrestored or compensated resulting in a decrease in actual sunk capital of a region or nation.

Also, in this article they describe the results that a well-known economist has drawn from this information. The economist, notes that the rate of return demanded by capital markets on debt and investments currently are higher than warranted by the apparent risks involved. This he maintains is the result of the market accounting for the unreimbursed costs and risks on the ever-increasing damage caused by the escalating number of large catastrophes.

Now if we discount for a moment my own questions about the validity of the assumptions implied in this kind of economic analysis and the reliability of its suppositions and assume that it more or less accurately describes the situation, then I think that the following conclusions may be ventured:

1. Inflation is just about as likely from the supply side as from the demand and monetary policy is probably inadequate a remedy.

2. Commodity prices (e.g., food and raw materials) should increase at a greater rate than justified by the temporary scarcity of the natural resources caused by the catastrophic events.

3. World capital availability will be diminished at an ever increasing rate due to both this surcharge on capital and by the resulting inflation.

4. In an attempt to preserve their capital, those that have accumulated great amounts of it will seek its preservation by strategies that in one way or another impoverish production rather than using the capital to increase it, for as Adam Smith observed:  “…all… men, love to reap where they never sowed….”

A revised and updated version of this post has appeard in Daily Kos, May 6 2011,

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