Yet Another Trillion-Dollar Unfunded Liability…California Wildfires Edition

Yesterday an entire California town burned down. Paridise, CA has (had) 27,000 residents and over 1,000 buildings, and now it’s pretty .

That fire and several others are still expanding across the state, threatening tens of thousands of homes. The sets of the TV show WestWorld are gone. Malibu has been evacuated. And dry, windy conditions persist, so the story is nowhere near over.

If this sounds familiar, it’s because massive, sometimes uncontrollable California wildfires are now an annual occurrence, due in part to gradual warming and persistent drought which combine to suck the moisture out of vegetation and turn the landscape into a tinderbox. Here’s a chart showing the recent take-off in the number of fires reported in the state (2013 was most recent year I could find, but the trend is clear – and since then the number of fires has apparently soared).

The reason this rates coverage in a financial blog is population. We’ve been moving millions of people into a place that has always had and always will have wildfires. California’s population is now about four times what it was in 1950, and the influx continues.

Fire is a crucial part of that and many other ecosystems, clearing out dead plants to make room for living. But add 40 million humans along with their buildings and vehicles, and a healthy, resilient semi-desert becomes a hell-scape.

A very expensive hell-scape. What does it cost to rebuild a town of 27,000 people from scratch? A back-of-the-envelope calculation (1,000 buildings at $100,000 a pop, 15,000 cars at $25,000 per, $10,000 per person for roads, sewers, landscaping, etc) yields several hundred million dollars. For one little town.

Is California budgeting for this? Are the insurance companies? Is Washington? All probably say they are, but only the insurance companies actually are – and even they are probably under-reserved for the past few years’ natural disasters.

This is a massive public planning failure, and yet another unfunded liability – that is, a future cost incurred but not saved for – to go alongside public pensions, government debt and multiplying environmental time bombs.

The result: A future of unpleasant surprises, in which governments are constantly saying “Oops, there’s this huge new expense that no one could have foreseen, and we’re all going to have to tighten our belts to cover it, sorry about the bad roads and closed libraries” – or – “Oops, there’s a huge unforeseen expense and we’re going to have to create a trillion new dollars to cover it, sorry about the inflation.”

But isn’t this mostly a private sector issue, between homeowner and insurance company, you ask? In many cases that’s true. But insurance companies have to make a profit, which means homeowner policy premiums have to be high enough to cover expected losses. As the latter rise, so necessarily do the former. Which means the part of our cost of living that’s devoted to insurance will soar as a direct result of California’s asleep-at-the-switch population management policy.

Are California wildfires as big an unfunded liability as the one resulting from the Right Coast’s soaring Hurricane Alley population? Probably not, because fires, even big ones, are smaller than tropical storms. Still, it could easily exceed a trillion dollars (let’s see what today’s fires end up costing) which – hitting a state that’s already overburdened with unfunded pensions and crumbling infrastructure – will probably end up being added to the federal government’s balance sheet via some kind of bail-out.

All of which makes a currency reset that much more likely in the not too distant future. Paying off this mountain of debts, promises and “guaranteed surprises” with current dollars is mathematically impossible. But after a 70% devaluation the numbers might work.

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