naked capitalism

This Real News Network story describes how the EPA is under attack from a very specific group of right wing interests are suing to try to prevent the EPA from acting to implement anti-carbon measures as stipulated in a Supreme Court decision. The intriguing bit is the group one might assume would be most opposed to new standards, the auto industry, is actually supportive.

Science has published a troubling but not entirely surprising article on the fact that the oceans are acidifying at the fastest rate in 300 million years. Actually, it could be the fastest rate over an even longer time period, but we can only go back with any degree of accuracy for 300 million years.

We first wrote about this issue in early 2007, and this section, which quoted Stormy from Angry Bear, will help bring readers up to speed:

….there are side effects to our love affair with CO2 that are not often mentioned. In fact, whether the earth cools or warms is absolutely irrelevant to these effects. I repeat: Absolutely irrelevant.

One of the most startling effects is the acidification of the oceans. Since 1750, the oceans have become increasingly acidic. In the oceans, CO2 forms carbonic acid, a serious threat to the base of the food chain, especially on shellfish of all sizes. Carbonic acid dissolves calcium carbonate, an essential component of any life form with an exoskeleton. In short, all life forms with an exoskeleton are threatened: shell fish, an important part of the food chain for many fish; coral reefs, the habitat of many species of fish….

The formation of carbonic acid does not depend upon temperature. Whether the oceans warm or cool is irrelevant. Of concern only is the amount of CO2 that enters the oceans.

Fast forward to today. Consider the scope of the paper in Science, per a very good discussion in ars technica:

A new paper in Science examines the geologic record for context relating to ocean acidification…The research group (twenty-one scientists from nearly as many different universities) reviewed the evidence from past known or suspected intervals of ocean acidification…They find that the current rate of ocean acidification puts us on a track that, if continued, would likely be unprecedented in last 300 million years.

There is an important driver of this process that this overview mentions only in passing further on, and it’s useful to have it in mind when you review the discussion of the historical record: ocean acidification depends primarily on the rate of atmospheric CO2 increases, not the absolute concentration. Look at how attenuated the rate of past CO2 changes was in the past versus the speed now:

The first period the researchers looked at was the end of the last ice age, starting around 18,000 years ago. Over a period of about 6,000 years, atmospheric CO2 levels increased by 30 percent, a change of roughly 75 ppm. (For reference, atmospheric CO2 has gone up by about the same amount over the past 50 years.) Over that 6,000 year time period, surface ocean pH dropped by approximately 0.15 units. That comes out to about 0.002 units per century. Our current rate is over 0.1 units per century—two orders of magnitude greater, which lines up well with a model estimate we covered recently.

The last deglaciation did not trigger a mass extinction, but it did cause changes in some species…

During the Pliocene warm period, about 3 million years ago, atmospheric CO2 was about the same as today, but pH was only 0.06 to 0.11 units lower than preindustrial conditions. This is because the event played out over 320,000 years or so. We see species migration in the fossil record in response to the warming planet, but not ill effects on calcifiers…

Next, the researchers turned their focus to the Paleocene-Eocene Thermal Maximum (or PETM), which occurred 56 million years ago. Global temperature increased about 6°C over 20,000 years due to an abrupt release of carbon to the atmosphere (though this was not as abrupt as current emissions). The PETM saw the largest extinction of deep-sea foraminifera of the last 75 million years, and was one of the four biggest coral reef disasters of the last 300 million years…

The group also examined the several mass extinctions that defined the Mesozoic—the age of dinosaurs. The boundary between the Triassic and Jurassic included a large increase in atmospheric CO2 (adding as much as 1,300 to 2,400 ppm) over a relatively short period of time, perhaps just 20,000 years. The authors write, “A calcification crisis amongst hypercalcifying taxa is inferred for this period, with reefs and scleractinian corals experiencing a near-total collapse.” Again, though, it’s unclear how much of the catastrophe can be blamed on acidification rather than warming.

Finally, we come the big one—The Great Dying. The Permian-Triassic mass extinction (about 252 million years ago) wiped out around 96 percent of marine species. Still, the rate of CO2 released to the atmosphere that drove the dangerous climate change was 10-100 times slower than current emissions…

In the end, the researchers conclude that the PETM, Triassic-Jurassic boundary, and Permian-Triassic boundary are the closest analogs to the modern day, at least as far as acidification is concerned. Due to the poor ocean chemistry data for the latter two, the PETM is the best event for us to compare current conditions. It’s still not perfect—the rate of CO2 increase was slower than today…

The authors conclude, “[T]he current rate of (mainly fossil fuel) CO2 release stands out as capable of driving a combination and magnitude of ocean geochemical changes potentially unparalleled in at least the last ~300 [million years] of Earth history, raising the possibility that we are entering an unknown territory of marine ecosystem change.”

Translation: “We’re probably fucked, but the data is so far outside of historical parameters, we can’t say anything with a high degree of certainty.”

By David Llewellyn-Smith, the founding publisher and former editor-in-chief of The Diplomat magazine, now the Asia Pacific’s leading geo-politics website. He is also the co-author of The Great Crash of 2008 with Ross Garnaut. Cross posted from MacroBusiness

So, global PMIs for November have passed. Where do they suggest that the global economy is heading? Let’s begin with the good news, the US of A. The combined ISM Manufacturing and Services Indexes are below:

The headline figure for manufacturing lifted modestly and it contracted modestly for services. New orders improved for both but so too did inventories. Less promising is that employment for manufacturing collapsed into contraction and services went close as well. Clearly, US businesses are not confident enough about the current bounce to hire into it.

So much for the good news. Let’s cross the Pacific to North Asia where we find China really struggling. We already know about the plunge of the manufacturing PMI from 51 to 47.7 last week. Yesterday we added the Services PMI which recorded a moderate fall from 54.2 to 52.5, still expanding. But the composit PMI that combines the two give you an idea of the current trajectory of the Chinese economy:

That’s 48.9, down from 52.6. Chinese business is not enjoying itself just now. Although, the sub-component employment indexes showed that maufacturing is not yet shedding jobs although the jumping inventory ratios suggest they will shortly, and services are expanding the fastest since June. Authorities have begun to ease the foot off the break but so far, minimally and if we are to take them at their word, it will be a slow easing.

This China slowdown has hit the rest of Asia hard with manufacturing contracting in Japan, Korea and Taiwan. All three reported flat employment indexes.

Swinging to Europe, we know that maufacturing is contracting fast, down from 47.1 in October to 46.4 in November. The employment sub-index reported active job losses as busiensses became more cautious. Last night we added the services PMI and the result was a weak 47.5, slightly up from 46.4 in October.

The core nations of Germany and France added jobs whilst Ireland, Spain and most dramtically Italy shedded jobs. The composit PMI for the Eurozone now looks like it’s projecting a mild recession:

So, where does that leave world growth? First, the global economy for services:

Still expanding at a crappy pace but note the employment index turning negative. Next, the global economy for manufacturing:

Activity contracting with the employment index heading that way as well. That all adds up to this insipid growth:

A flatline in global PMIs within which there has been significent churn, with the EZ and China falling and the US rising.

So, what does all of this say about the global business cycle? Firstly, we’d have to say that without the US, global production would be in big trouble. Everywhere else is slowing swiftly. I’d describe where we are as stall speed for the global economy. In my view, it cannot stay here sustainably. Either employment losses will accererate as businesses seek to claw back profits lost to declining demand or the new stimulus that’s being pumped in will turn demand around, lift production and job creation as inventories fall. Unfortunately, the Eurozone is doing the opposite of stimulus: austerity. Likewise, China’s seeming determination to keep a lid on property is preventing any rapid loosening there too. My bet remains, therefore, that we see further slowing from here into next year irrespective of any credit event that would repeat 2008′s dizzying plunge.

By Cameron Murray, a professional economist with a background in property development, environmental economics research and economic regulation. Cross posted from MacroBusiness

The word efficiency carries a meaning immersed in all things positive – you never hear that being more efficient could possibly be detrimental. In fact, if you can bear the evangelical fervour, you may have read about achieving ‘Factor Four’ or ‘Factor Five’ gains in energy efficiency, as part of a ‘Natural Capital’ revolution comprising a ‘decoupling’ economic growth from a growth in the consumption of exhaustible resources – also known as ‘sustainability’. You may even have heard about the equation I=PAT or I = P x A x T, where environmental impact (I) is a function of population (P), affluence (A) and technology (T), and that becoming more efficient will enable a desired level of affluence with far less environmental cost.

Historical experience shows that these claims are untrue. While energy and resource efficiency does make us more productive, the facts suggest greater energy efficiency is counterproductive to the stated aims of curbing resource use and decreasing negative environmental externalities.

When it comes to natural resource use, and the externalities associated with resource extraction and production, efficiency alone is the enabler of greater consumption. William Stanley Jevons first noted that technological improvement, in terms of greater efficiency and therefore productivity, was the enabler of greater coal consumption in Britain back in 1865 in his book, The Coal Question: an Inquiry Concerning the Progress of the Nation, and the Probable Exhaustion of our Coal-mines. His observation was coined Jevons Paradox, even though the argument that technological improvements in resource efficiency (modes of economy) leads to greater resource use was already widely accepted in the labour market:

As a rule, new modes of economy will lead to an increase in consumption according to a principle recognised in many parallel instances. The economy of labor effected by the introduction of new machinery throws labourers out of employment for the moment. But such is the increased demand for the cheapened products, that eventually the sphere of employment is greatly widened.

One hundred and fifty years later, the modern debate is fuelled by economic ignorance, with many of the most influential economists and environmentalists remaining confused – failing to acknowledge the parallel effects of technology on the resource called ‘labour’ and other resource inputs to the economy.

More rigorous economists have reopened the debate, under the new term rebound effect, breaking down the transition mechanisms between greater efficiency and greater resource consumption.

1. Direct rebound effect: Increased fuel efficiency lowers the cost of consumption, and hence increases the consumption of that good because of the substitution effect.
2. Indirect rebound effect: Through the income effect, decreased cost of the good enables increased household consumption of other goods and services, increasing the consumption of the resource embodied in those goods and services.
3. Economy wide effects: New technology creates new production possibilities and increases economic growth.

UCLA mathematics professor Terence Tao explains the direct effect as follows:

Suppose one has to decide whether to use one light bulb or two light bulbs to light a room. Ignoring energy costs (and the initial cost of purchasing the bulbs), let’s say that lighting a room with one light bulb will provide $10/month of utility to the room owner, whereas lighting with two light bulbs will provide $15/month of utility. (Like most goods, the utility from lighting tends to obey a law of diminishing returns.)

Let us first suppose that the energy cost of a light bulb is $6/month. Then the net utility per month becomes $4 for one light bulb and $3 for two light bulbs, so the rational choice would be to use one light bulb, for a net energy cost of $6/month.

Now suppose that, thanks to advances in energy efficiency, the energy cost of a light bulb drops to $4/month. Then the net utility becomes $6/month for one light bulb and $7/month for two light bulbs; so it is now rational to switch to two light bulbs. But by doing so, the net energy cost jumps up to $8/month.

So is a gain in energy efficiency good for the environment in this case? It depends on how one measures it. In the first scenario, there was less energy used (the equivalent of $6/month), but also there was less net utility obtained ($4/month in this case). In the second scenario, more energy was used ($8/month). But more net utility was obtained as a consequence ($7/month). As a consequence of energy efficiency gains, the energy cost per capita increased (from $6/month to $8/month); but the energy cost per unit of utility decreased (from 6/4 = 1.5 to 8/7 ~ 1.14).

The indirect effect is more subtle and it is the environmental cost of consumption of other goods due to costs saved on, for example, lighting. If, in the above example, lighting costs were reduced to $2 per bulb for the room, it would be rational to spend $4 on lighting (using two bulbs) and spend the $2 saved on lighting to consume other goods which themselves have energy use embodied in their production.

Finally, the economy wide effect occurs due to stimulated demand for other goods and efficiency gains being shared across other sectors (due to the principle of the indivisibility of economic productivity – the linked article is highly recommended).

These economy wide effects have gained recent attention in The Economist where it is estimated that energy efficient lighting will contribute to greater energy use in the long run. You will note from the comments, the cognitive dissonance of economists when referring to labour and other resource inputs remains.

Conservation, using less at a given level of technology by giving up some utility, is equally ineffective (also highly recommended). We still face the indirect effects from conservation as we spend elsewhere in the economy, and if you believe all consumption has equal environmental cost per dollar (due to indivisibility once more and conceptual boundary problems to traditional input-output analysis of embodied resources), then you are back to where you started.

Further, conservation, like waste, is a relative concept, and by definition we can’t all do it. And we wouldn’t do it either due to the tragedy of the commons problem, where it is in each person’s best interest to defect from a cooperative conservation strategy. Terence Tao once again explains:

However, if there are enough private citizens sharing the same resource, then the “tragedy of the commons” effect kicks in. Suppose for instance that there are 100 citizens sharing the same energy resource, which is worth $1200 x 100 = $120,000 units of energy. If all the citizens conserve, then the resource lasts for $120,000/$400 = 300 months and everyone obtains $1800 long-term utility. But then if one of the citizens “defects” by using two light bulbs, driving up the net monthly energy cost from $400 to $404, then the resource now only lasts for $120,000/$404 ~ 297 months; the defecting citizen now gains ~ $7 x 297 = $2079 utility, while the remaining conserving citizens’ utility drops from $1800 to $6 x 297 = $1782. Thus we see that it is in each citizen’s long-term interest (and not merely short-term interest) to defect; and indeed if one continues this process one can see that one ends up in the situation in which all citizens defect. Thus we see that the tragedy of the commons effectively replaces long-term incentives with short-term ones, and the effects of voluntary conservation are not equivalent to the compulsory effects caused by government policy. (Emphasis added)

If energy efficiency is a counterproductive action for our environment, and personal conservation is useless, what should be done? As renowned ecological economist Blake Alcott points out:

If Jevons is right, efficiency policies are counter-productive, and business-as-usual efficiency gains must be compensated for with physical caps like quotas or rationing.

It really is that easy. If you are concerned about greenhouse gases, a cap on greenhouse gases is what is required. If you are worried about deforestation, you create a cap by ‘fencing off’ areas that are not be touched. If you are worried about over-fishing, you create a cap. Whether these caps/quotas are tradeable is a secondary concern, but making the caps tradeable does enable the cap to be met most efficiently.

What about a tax instead?

Many commentators argue that taxing negative externalities (such as a carbon tax) would not only reduce greenhouse gas emissions, but would also provide a ‘double dividend’ of improved economic efficiency because taxes which create other economic distortions could be reduced. However, the very nature of reducing other taxes to ensure revenue neutrality would mean that other sectors of the economy with a reduced tax burden now have greater purchasing power to pay for those goods subject to the new tax. Thus the double dividend comes at a cost to the primary dividend of reducing externalities.

Politics and ideology probably explain why the most basic economics is tossed out the window when it comes to the environmental protection. Then again, maybe we just can’t acknowledge that such a thing of beauty – efficiency – could possibly have a downside.

I can’t recommended enough the book The Jevons Paradox and the Myth of Resource Efficiency Improvements for a more thorough discussion of the topic.

By Jon Rynn, author of the book Manufacturing Green Prosperity: The power to rebuild the American middle class. He holds a Ph.D. in political science and is a Visiting Scholar at the CUNY Institute for Urban Systems. Cross posted from New Deal 2.0.

Between questionable science, health hazards, and exorbitant costs, there’s no fracking way that drilling for natural gas will solve our long-term energy issues.

Natural gas is being touted as a fuel of the future, a way to bridge the gap between a dirty energy and clean energy economy. But according to numerous articles and a report from David Hughes at the Post-Carbon Institute, what we may have is another bridge to nowhere (page numbers in this post refer to Hughes’ study). Fracking, the rapidly expanding technique for pulling natural gas out of the ground, may be worse for global warming than coal, ultimately very expensive, and not productive enough to make much of a difference in natural gas supply anyway.

Fracking, or hydraulic fracturing, is a 60-year old technique that has recently been applied to the huge deposits of what is called shale, a form of rock that can contain large amounts of natural gas or oil. Now natural gas companies are drilling thousands of these wells, fracturing the shale, and pumping millions of gallons of water laced with hundreds of chemicals to release the natural gas (pages 22-24).

While burning natural gas emits about half the greenhouse gases of coal, transporting, processing, and delivering that gas significantly reduces its advantages. And methane — natural gas — is a much stronger greenhouse gas than carbon dioxide for about 20 years. According to a recent study and other research, shale gas actually leads to more greenhouse gas emissions than conventional drilling.

The main problem seems to be that the drilling companies and trucking companies do a sloppy job and let gas escape into the atmosphere – and into drinking water. This was best exemplified in the movie GasLand, which showed that people near drilling sites could light their tap water on fire.

An enormous controversy has erupted around this technique, with some making accusations of potentially catastrophic environmental impacts, while others call fracking a ”game changer.” A new study shows that drinking water near fracking sites contains large amounts of natural gas, while proponents claim that none of the toxic chemicals that make up the fracking mixture have contaminated water supplies. New York State has temporarily banned the procedure, although Governor Cuomo has indicated he will lift the ban for most of the state. New Jersey (and France) will probably ban it. The EPA is still studying the issue, but Dick Cheney and company made sure that fracking is not covered by the Safe Drinking Water Act, and states have less expertise, money and motivation to monitor the situation.

The Federal Energy Information Administration (EIA) gets more and more bullish about the prospects for shale gas, recently claiming that 45% of natural gas in this country will come from shale gas by 2034. Currently, the number is only 25% (pages 28-30). But according to the New York Times, this opinion is contested from within the agency itself. There are signs that the EIA is following the lead of the natural gas industry, not doing independent research. Meanwhile, the current price for natural gas, about 4 dollars per thousand cubic feet (mcf), is below the level needed to make shale gas profitable for most drilling – costs estimates range from a bit over 4 dollars to an average of 7 dollars and even 11 dollars per mcf (page 31). And many fracking firms are now moving to drill for oil, not gas, because the price for gas is too low to justify the added expense.

Some fracking advocates claim that we could switch our transportation system to be natural gas based. But to do that would require a doubling of our natural gas production (pages 52-54). Despite all the hype, even the EIA seems to think that natural gas production in this country will only increase from about 24 trillion cubic feet to about 26 trillion by 2034 (page 29). That isn’t enough to even keep up with the anticipated demand, and basically shale gas production will make up for declining conventional gas production, assuming there is as much shale gas as advertised. As David Hughes explains, the EIA is grossly underestimating the amount of wells that would have to be drilled. Recently that number has climbed as high as 30,000 per year(page 19). If half of those use fracking techniques, and a good percentage of those use millions of gallons of water that become toxic – well, it certainly doesn’t sound like a very sustainable solution.

Even if we wanted to make the switch, getting gas from there to here poses its own challenges. The only way to do it is with liquified natural gas (LNG); that is, cooling it way down to liquid form, putting it on a big ship that keeps it cool, and warming it back up when it gets here. It has been estimated that LNG adds enough greenhouse gas emissions that the natural gas has about the same emissions as coal. It is also more expensive than domestic gas, and it also means the US would become dependent on nations like Qatar, Russia, and — hmmm, Iran — than we might want to be.

Another strike against natural gas: wind is getting very cost competitive. Wind could form the backbone of a national electrical system, with gas used for those times when there isn’t enough wind blowing – although the more wind built in the more places, the less gas would be needed for this purpose. A new report suggests that solar panels on buildings could be used to substitute for gas used at peak usage times, say when air conditioners are going full blast, at pretty close to the same price.

There is one interesting technology that could make natural gas more sustainable: microturbines. These are systems that are installed in a large building — say, an apartment building that has 60 or more apartments, according to the New York Times. These can use any source of natural gas, such as natural gas generated from a building’s own waste, or from landfills. And because the turbine is in the building, the heat from the turbine can be used to heat air and water, in a process called co-generation. Up to about 80% of the energy from natural gas can be captured by these units, as opposed to the miserable 32% or so when centralized gas or coal plants generate electricity. Many European countries, such as Denmark, use district heating, a method of using the heat from energy production to warm neighborhoods. This is a reason that density in cities and towns can be more efficient than sprawl.

Even if natural gas emitted “only” half the greenhouse gases of coal, or if fracking turns out to be not as toxic as feared, and relatively profitable, natural gas would still not be a “game changer”: we need to take greenhouse gases out of the atmosphere, not put any more in; we shouldn’t be endangering our water supplies. and we can find renewable sources of energy that, in the long run, make much more economic sense. Not only will natural gas not be the fuel of the future, we won’t be using much fuel. Instead we will use renewable sources of energy from the sun, wind, and the earth.

Andrew Sheng, Chief Adviser to the China Banking Regulatory Commission, is wonderfully straightforward and realistic for an economist. He is willing to say, as he does in this video, things that are obvious yet somehow unacceptable to ‘fess up to in policy circles, like the planet simply cannot support 3 billion people in Asia living European lifestyles. He warns of the danger of creating the mother of all crises if governments cannot stem the tide of leveraged capital flows, and also discusses the role of China on the global stage.

Enjoy!

The warnings of successful shorts like Jim Chanos, old Asia hands like Frank Verneroso, and economists like Victor Shih and Michael Pettis have failed to curb enthusiasm for the belief that the rise of China is inevitable and unstoppable. As someone who was deeply involved with Japan when it was seen as destined to replace the sclerotic US, I’ve learned to regard more or less straight line growth projections with considerable skepticism. (Update: I think the US is a mess, but that does not mean that the China bull case is not a tad overdone)

China has accomplished the impressive feat of bringing literally hundreds of millions out of poverty in a comparatively short time frame. It has also studied the Japanese playbook and managed to avoid some of its pitfalls (of course, it has the advantage of not being a military protectorate of the US), in particular refusing to liberalize its financial markets (some accounts of the Japanese bubble and burst give considerable weight to overly rapid deregulation and the growth of what was then called zaitech, or financial speculation). is also hostile to neoclassical economists.

China escaped much of the impact of the global financial crisis by ramping up investment even higher than its pre-crisis level. It now has investment approaching 50% of GDP, an unheard of level on a sustained basis. A big chunk of that is housing related (housing is an estimated 13.5% of GDP), and prices have long been considerably out of line with incomes, a telltale sign of a bubble. In Beijing, admittedly one of the hottest markets, an average priced new apartment was equal to 57 years of average worker savings (and if you tried to pay for it with a super-long dated mortgage, you’d be in hock even longer, since you would also need to cover the interest charges).

Another warning sign is inventory overhang; the Wall Street Journal reports tonight that Standard Chartered forecasts that level of unsold apartments in secondary cities will amounts to roughly 20 months of sales by year end (and that’s before considering that many of the apartments are being acquired as investments rather than for use).

The Journal story tonight provides evidence that the Chinese housing market is going into reverse. A nine-city price index by the firm Dragonomics shows housing prices in April 4.9% lower than the level a year prior (the increase in 2010 was 21.5%). A consultancy, Sofun, has property prices rising an average of 5.1% over the past twelve months, but that represents a slowdown. Standard Chartered projects that housing prices in some second-tier cities will fall 10% to 20%.

The Wall Street Journal describes the broader ramifications:

Real estate is a foundation of China’s phenomenal growth record in the past two decades, and its health is crucial to China’s construction, steel and cement sectors. Real estate is also a favored investment of Chinese looking to get better returns than bank deposits pay. Local municipalities and provinces depend on rising prices for land sales as well to fund infrastructure projects….

If the Chinese housing market slows faster than people had expected, the impact would be felt in a number of markets that export heavily to China. Many Latin American and African economies have shifted their focus toward Chinese demand for their raw materials, and many Western firms, including U.S. retailers and fast-food chains, now bank on Chinese consumers feeling wealthier to make up for stagnating sales elsewhere. Also, plans by local Chinese governments to improve infrastructure loom large for heavy-equipment makers like Caterpillar Inc.

And this development comes on top of other signs of economic slowdown:
Last week, two surveys of purchasing managers showed a slowing of manufacturing activity.

China, the world’s second-largest economy after the U.S., grew at 9.7% in the first quarter from a year earlier. In late May, Goldman Sachs lowered its estimate of Chinese second-quarter growth to 8% from its previous estimate of 8.8% as the government continues to tighten monetary policy to fight inflation and import demand from the U.S. weakens.UBS economist Tao Wang says she thinks the price decline will be short-lived as Chinese investors, with few other options, will again pour money into real estate and as local governments push up the price of land they sell to developers. Real-estate prices will rise for another three to five years, she estimates. A sharp fall then would batter investors, banks, construction firms and other sectors.

In other words, when this party ends, it’s likely to get pretty ugly.

Andrew Haldane and Richard Davies of the Bank of England have released a very useful new paper on short-termism in the investment arena. They contend that this problem real and getting worse. This may at first blush seem to be mere official confirmation of most people’s gut instinct. However, the authors take the critical step of developing some estimates of the severity of the phenomenon, since past efforts to do so are surprisingly scarce.

A short-term perspective is tantamount to applying an overly high discount rate to an investment project or similarly, requiring an excessively rapid payback. In corporate capital budgeting settings, the distortions are pronounced:

Most recently, in 2011 PriceWaterhouseCoopers conducted a survey of FTSE-100 and 250 executives, the majority of which chose a low return option sooner (£250,000 tomorrow) rather than a high return later (£450,000 in 3 years). This suggested annual discount rates of over 20%. Recently, Matthew Rose, CEO of Burlington Northern Santa Fe (America’s second biggest rail company), expressed frustration at the focus on quarterly earnings when locomotives lasted for 20 years and tracks for 30 to 40 years. Echoes, here, of “quarterly capitalism”.

This table illustrates in a more concrete fashion how investment myopia leads to projects with longer-term results being misrated:

Haldane and Davies argue the effect is significant:

First, there is statistically significant evidence of short-termism in the pricing of companies’ equities. This is true across all industrial sectors. Moreover, there is evidence of short-termism having increased over the recent past. Myopia is mounting.

Second, estimates of short-termism are economically as well as statistically significant.
Empirical evidence points to excess discounting of between 5% and 10% per year.

The result is that projects with long-term payback, beyond the 30 to 35 year timeframe, are treated as having no value. No wonder we don’t fund basic science, infrastructure, or climate change related projects.

The writers point out the first order bad effects: good projects don’t get funded, and those projects are often the ones with the highest potential for broad social impact (would we ever build the US highway system now?). But the knock-on effects are if anything more pernicious. The fact that most investors employ overly high discount rates produces is the same result you’d see with oligopoly pricing: overly high returns with restricted output. And this is consistent with the picture we see in most of the world. Perversely, the corporate sector has been a net saver for nearly a decade in the US, longer than that in some other economies. As we wrote with Rob Parenteau last year:

Over the past decade and a half, corporations have been saving more and investing less in their own businesses. A 2005 report from JPMorgan Research noted with concern that, since 2002, American corporations on average ran a net financial surplus of 1.7 percent of the gross domestic product — a drastic change from the previous 40 years, when they had maintained an average deficit of 1.2 percent of G.D.P. More recent studies have indicated that companies in Europe, Japan and China are also running unprecedented surpluses.

The irony is that China, with its command economy, is more willing to make long-term investments than capitalist economics which rely on the supposedly superior wisdom of having the capital markets play a dominant role in the pricing of risk funding. Now I’m of the school that China will likely have a bad stumble; there’s ample evidence that its unprecedented level of investment, which is fueled by lending, is scoring lower and lower returns. But the West’s short-sightedness increases the odds that this massive gamble might work out pretty well by moving into the type of projects that myopic capitalists are unwilling to take on.

Haldane and Davies prefer minor interventions to dirigisme:

Transparency: The lightest touch approach would be to require greater disclosures by financial and non-financial firms of their long-term intentions – for example, their
long-term performance, strategy and compensation practices. For financial firms, this might include metrics of portfolio churn. This could be accompanied by a programme of educating managers, investors and advisors of their fiduciary responsibilities.

Governance: A more intensive approach would involve acting directly on
shareholder incentives through their voting rights. For example, fiduciary duties could be expanded to recognise explicitly long-term objectives. More concretely, shareholder rights could be enhanced for long-term investors, perhaps with a duration-dependent sliding scale of voting rights.

Contract Design: There have been various attempts over the past few years to make compensation contracts more sensitive to long-term performance and risk. This includes employment contracts conditioned on long-term performance, or with deferral or clawback. Changes in the compensation instrument can also help – for example, remunerating in equity is better than in cash and remunerating in junior or convertible debt might be better than either.

Taxation/Subsidies: Authors have suggested a variety of ways in which government could penalise short-duration holdings of securities, or incentivise long duration holdings, using tax and / or subsidy measures. These measures differ in detail, but the underlying principle is to link them to the duration of an investor’s holdings or the length or nature of a company’s investment.

We have a peculiar desire in America to pretend that we have unfettered capitalism when, even before you consider the banking industry boondoggle, we have a remarkable amount of industrial policy by accident, via lots of special interest receiving subsidies and tax breaks. We’d do much better to try to put some of it on a more rational footing and implement broad-based programs of the sort Haldane and Davies suggest. But we may need to lose more ground to advanced economies before complacent CEOs and their various message validators are willing to consider more radical changes in how we do business.

I’m pretty amazed that no one looked into the greenhouse gas impact of fracking until now. One of the big rationales for fracking, which is already controversial due to reports of damage to aquifers, is that it was abundant in North America and also produces comparatively little in the way of carbon emissions.

The problem, per a study soon to be published by Cornell University, is fracking results in the release of methane, one of the most potent greenhouse gases, apparently enough to undercut the claims that it is relatively “clean”. From NewsWise:

Extracting natural gas from the Marcellus Shale could do more to aggravate global warming than mining coal, according to a Cornell study published in the May issue of the peer-reviewed journal Climatic Change Letters.

While natural gas has been touted as a clean-burning fuel that produces less carbon dioxide than coal, ecologist Robert Howarth warns that we should be more concerned about methane leaking into the atmosphere during hydraulic fracturing.

Natural gas is mostly methane, which is a much more potent greenhouse gas, especially in the short term, with 105 times more warming impact, pound for pound, than carbon dioxide, Howarth said, adding that even small leaks make a big difference. He estimated that as much as 8 percent of the methane in shale gas leaks into the air during the lifetime of a hydraulic shale gas well – up to twice what escapes from conventional gas production.

“The take-home message of our study is that if you do an integration of 20 years following the development of the gas, shale gas is worse than conventional gas and is, in fact, worse than coal and worse than oil,” Howarth said. “We are not advocating for more coal or oil, but rather to move to a truly green, renewable future as quickly as possible. We need to look at the true environmental consequences of shale gas.”….

We are highlighting unconventional gas because it is a contemporary problem for us in upstate New York, and because there is a big difference between developing gas from an unconventional well and a conventional well, for the mere reason that unconventional wells are bigger,” Ingraffea said.

He noted that the hydraulic fracturing process lends itself to more leakage because it takes more time to drill the well, requires more venting and produces more flowback waste, he said.

“We do not intend for you to accept what we’ve reported on today as the definitive scientific study in regards to this question. It’s clearly not,” he added. “What we’re hoping to do with this study is to stimulate the science that should have been done before. In my opinion, corporate business plans superseded national energy strategy.”

From The Hill (hat tip reader Thomas R):

In essence, the Cornell study argues that methane emissions from these shale gas projects mean that shale gas ultimately brings climate consequences comparable to coal over a century, and worse than coal over two decades….

Obama has touted the potential of natural gas for use in vehicles, in addition to its role in power generation (natural gas currently produces around a fifth of U.S. electricity).

His proposed “clean energy standard,” which would require utilities to greatly expand the supply of power from low-carbon sources, includes partial credit for natural gas.

More broadly, many gas supporters see domestic reserves as a “bridge” fuel while alternative energy sources are brought into wider use.

Howarth’s study questions this idea.

“The large GHG footprint of shale gas undercuts the logic of its use as a bridging fuel over coming decades, if the goal is to reduce global warming,” the study states.

The report in the New York Times on the same study is understated even if factually accurate (note the title says “studies” but the second study depends on the Cornell research for some of its key data):

Natural gas, with its reputation as a linchpin in the effort to wean the nation off dirtier fossil fuels and reduce global warming, may not be as clean over all as its proponents say.

Even as natural gas production in the United States increases and Washington gives it a warm embrace as a crucial component of America’s energy future, two coming studies try to poke holes in the clean-and-green reputation of natural gas. They suggest that the rush to develop the nation’s vast, unconventional sources of natural gas is logistically impractical and likely to do more to heat up the planet than mining and burning coal.

The problem, the studies suggest, is that planet-warming methane, the chief component of natural gas, is escaping into the atmosphere in far larger quantities than previously thought, with as much as 7.9 percent of it puffing out from shale gas wells, intentionally vented or flared, or seeping from loose pipe fittings along gas distribution lines. This offsets natural gas’s most important advantage as an energy source: it burns cleaner than other fossil fuels and releases lower carbon dioxide emissions.

Obama had been planning to construct 9 to 12 nuclear reactors in addition to emphasizing shale gas as ways to reduce carbon emissions. Fukushima is going to make it harder if not impossible to get nuclear plants built, and fracking is looking less attractive the more scrutiny it gets. Looks like it’s time to develop Plan B.

One of the interesting features during the Fukushima reactor crisis were the fistfights that broke out in comments between the defenders of nuclear power and the opponents. The boosters argued that the worst case scenario problems were overblown, both in terms of estimation of the odds of occurrence and the likely consequences. The critics contended that nuclear power was not economical ex massive subsidies, that there was no “safe” method of waste disposal, and that nuclear plants were always subject to corners-cutting, both in design and operation, so the ongoing hazards were greater than they appeared.

Reader Crocodile Chuck passed along a story from the Bulletin of Atomic Scientists, “The Lessons of Fukushima“, by anthropologist Hugh Gusterson. Here is the key section:

And presumably there are other complicated technological scenarios that we have not foreseen, earthquake faults that are undetected or underestimated, and terrorists hatching plans for mayhem as yet unknown. Not to mention regulators who place too much trust in those they regulate.

Thus it is hard to resist the conclusion reached by sociologist Charles Perrow in his book Normal Accidents: Living with High-Risk Technologies: Nuclear reactors are such inherently complex, tightly coupled systems that, in rare, emergency situations, cascading interactions will unfold very rapidly in such a way that human operators will be unable to predict and master them. To this anthropologist, then, the lesson of Fukushima is not that we now know what we need to know to design the perfectly safe reactor, but that the perfectly safe reactor is always just around the corner. It is technoscientific hubris to think otherwise.

This leaves us with a choice between walking back from a technology that we decide is too dangerous or normalizing the risks of nuclear energy and accepting that an occasional Fukushima is the price we have to pay for a world with less carbon dioxide. It is wishful thinking to believe there is a third choice of nuclear energy without nuclear accidents.

Readers will correctly argue that other energy sources have considerable human and environmental costs. Coal fired electrical plants are major CO2 emitters, and the older ones also spew a lot of particulates. Many communities in the US are fighting fracking out of well warranted concerns about the damage it might do to underground water supplies. Others readers have contended that we need to get over our growth addiction and start adapting to less energy intensive lifestyles (which if we were really serious about it, means much more urbanization in the US).

Is nuclear power worth the risk? And if you argue against it, what energy/economic strategy do you recommend in its place?

Reader Crocodile Chuck highlighted an important post at Houses and Holes, an economics-oriented Australian blog. While Australia is reeling from the immediate impact, the broader impact of 2010-11 weather patterns may have much bigger ramifications for food and energy prices in Australia and abroad.

The post focuses on the possibility, increasingly endorsed by top meteorologists, that the heavy Australian rains are the result of a super La Niña, the last of which was seen in 1973-4,the time of the last severe flooding in Queensland. Super La Niñas are hugely disruptive to agricultural production and can have other nasty knock-on effects (some contend the 1917 La Niña helped spawn the 1918 influenza pandemic).

In this case, the damage of a super La Niña will not only increase food costs at a time when price rises and food scarcity are already a major concern, but will likely extend to energy prices as well. That one-two punch would be particularly devastating to China.

In Australia, fruit and vegetable prices are projected to increase 30% this year as a result of La Niña. And recall Australia is a major agricultural exporter, so production shortfalls there will hit other markets. Super La Niñas tend to impair food output overall. 2007-8 saw a borderline super La Niña, and we saw sharply higher food prices in the first half of that year. Note that the UN’s Food and Agriculture Organisation reports that staples are already more costly than at any time in 2008.

Similarly, energy markets are already showing signs of supply pressure even before possible weather effects, namely, more and more intense hurricanes in the Gulf and Caribbean reducing oil output, in addition to the expected decline in coal shipments out of Australia.

The effects of adverse weather patterns will be amplified by bad policy choices. Jim Quinn has a solid post up on the disastrous ramifications of US ethanol policy. This program is absolutely hairbrained; it was roundly denounced in 2008 as being an environmentally costly and inefficient way to augment energy supplies. The only type of ethanol that is a net plus when all the environmental impacts are considered (water usage, effect of taking land out of food production on agricultural prices) is Brazilian sugar-based ethanol. But we’ve decided to impose a 54 cent tariff on that. As Quinn tells us:

The United States is the major player in the world corn market providing more than 50% of the world’s corn supply. In excess of 20% of our corn crop had been exported to other countries, but the government ethanol mandates have reduced the amount that is available to export.

This year, the US will harvest approximately 12.5 million bushels of corn. More than 42% will be used to feed livestock in the US, another 40% will be used to produce government mandated ethanol fuel, 2% will be used for food products, and 16% is exported to other countries. Ending stocks are down 963 million bushels from last year. The stocks-to-use ratio is projected at 5.5%, the lowest since 1995/96 when it dropped to 5.0%. As you can see in the chart below, poor developing countries are most dependent on imports of corn from the US. Food as a percentage of income for peasants in developing countries in Africa and Southeast Asia exceeds 50%. When the price of corn rises 75% in one year, poor people starve…The 107 million tons of grain that went to U.S. ethanol distilleries in 2009 was enough to feed 330 million people for one year at average world consumption levels…

The amount of grain needed to fill the tank of an SUV with ethanol just once can feed one person for an entire year. The average income of the owners of the world’s 940 million automobiles is at least ten times larger than that of the world’s 2 billion hungriest people. In the competition between cars and hungry people for the world’s harvest, the car is destined to win. In March 2008, a report commissioned by the Coalition for Balanced Food and Fuel Policy estimated that the bio-fuels mandates passed by Congress cost the U.S. economy more than $100 billion from 2006 to 2009. The report declared that “The policy favoring ethanol and other bio-fuels over food uses of grains and other crops acts as a regressive tax on the poor.” A 2008 Organization for Economic Cooperation and Development (O.E.C.D.) issued its report on bio-fuels that concluded: “Further development and expansion of the bio-fuels sector will contribute to higher food prices over the medium term and to food insecurity for the most vulnerable population groups in developing countries.” These forecasts are coming to fruition today.

The Houses and Holes post teases out the implications of higher fuel and food costs for China:

Amid dangerously accommodative monetary policy in the US and China, where the latter’s M2 money supply has surged by some 20% in the past year, inflation matters dearly. As Patrick Chovanec from Beijing’s Tsinghua University’s School of Economics points out, the recent fall in China’s CPI from 5.1% in November to 4.3% in December is a misleading indicator, due to the ultimately unsustainable retail food price crackdown and tepid cash rate measures. And as fellow expat academic, now securities strategist, Michael Pettis, writes this week, no lending quota – China’s de rigueur disinflationary measure – has yet to be set, much to everyone’s surprise.

China is caught between fuelling an economy based on cheap exports and fixed investment with arguable social returns, and the commodity inflation that this development model drives.

These concerns have been noticed by John Berthelsen and Benjamin Shobert, who respectively write that China faces grave social risks from food price inflation and food insecurity as a result of imbalanced economic policy, poor agricultural practices and the effects of climate change and deforestation. Shobert furthermore notes: “of the 13 major famines China has endured, six have been inexorably inter-related to political upheaval and conflict. China’s current leaders are aware of this part of their history,” he writes, “which is why the government’s stated goal of ‘95% self-sufficiency’ [in food supply] is deemed so critical.”

As much as the mainstream press likes to focus on China’s stranglehold of rare earth materials, the real danger in an era of trade wars and rising commodity prices is China’s dearth of food and fuel supply. China’s policy reaction to these challenges will be the ultimate determinant of whether the New Year ends in growth or ends in recession…

Following a Malthusian act of nature, highly combustible coal has been tossed onto the blaze of the world’s growing commodity inflation.

And with La Nina still skipping coolly across the Pacific, more may be yet to come.

It would indeed be the ultimate black swan if La Niña pushed Chinese inflation into a cycle-busting inflation spike.

Memories of food riots in developing economies in 2008 have largely vanished from the consciousness of most Americans. Yet have food riots in the Maghreb and some governments are already implementing emergency measures. Few seem to be factoring the risk of food shortages and resulting political instability into cheery forecasts for 2011.

This post first appeared on February 5, 2007

We have to admit to being a little slow on the uptake from time to time. We reported on the FT’s February 2 editorial, which commented on the publication of the first of four reports by the Intergovernmental Panel on Climate Change. (Media watch item: still no editorial yet on this topic in the New York Times. And a Barbaro-related story again took pride of place, this time on the first page of the Sunday “Week In Review,” section, with a big photo, while the global warming got a teeny story on the second page. 1:22 A.M. correction: we do have an NYT comment, a satirical op-ed discussing the efforts of a Park Avenue co-op to reduce its carbon footprint. If this is all the Times has to offer, we’ll take Barbaro any day).

The FT editorial, “We need a clear and predictable price for carbon,” gives a high level discussion of the global warming problem and the key elements of an effective response.

Do read the editorial (see our post ). We call attention to two items. First, the article recommends acting on the recommendations of the UK’s Stern Report, which suggests that the costs of combating global warming may only be 1% of world GDP if steps are taken now. What is noteworthy is that the Stern report has gotten very little press in the US (if you type “Stern report” and “global warming” in Google News, nearly all the entries are in Commonwealth newspapers. And the few references in America are buried in comparatively long stories).

Why is this of concern? It increases the possibility that those who have something to lose will exaggerate the costs of taking action.

The second matter is the recommendation in the headline, “a clear and predictable price for carbon.” That may sound simple and uncontroversial, but it is anything but that. The regime that business finds most palatable for dealing with global warming is carbon trading. Indeed, as we discussed earlier, Wall Street firm are keenly interested in this area, not just as investors, but as market makers.

Unless I am missing something, the idea of having a market is antithetical to having a stable, let alone predictable, price. But from a public policy standpoint, you need some level of price predictability in order for companies and entrepreneurs to fund projects Volatility favors speculators, not investors. But it seems that the speculators are leading the development of this market.

By Wallace C. Turbrville, the former CEO of VMAC LLC who writes at New Deal 2.0

In the 1930s, a great many Southerners had no access to electricity. The Roosevelt administration perceived an enormous opportunity to restructure the region’s economy. By building facilities to bring power to the rural South, jobs would be created from thin air to mitigate the unemployment of the Great Depression. More importantly for the long run, commercially vibrant communities would replace subsistence farms. For the people directly affected, lives of toil and sweat would be a thing of the past; for the nation, large populations would be integrated into the economy for the first time, helping to assure sustainable and diverse growth in the post-depression era.

The political effects were dramatic. Robert Caro, in his epic biography of Lyndon Johnson, described the brutal life of West Texas before the creation of the Lower Colorado River Authority. He pointed out that the dramatic life-changing effect of rural electrification spawned a fierce loyalty to New Dealers like Johnson. This persisted throughout the South for three decades until, ironically, Johnson’s Civil Rights legislation snuffed it out.

For those 30 years, electrification and other tangible benefits of the New Deal drove political discourse in this country. For the next three decades (and still), the Civil Rights legislation animated politics. The issue morphed from overt racism to resentment of the federal government telling people what to do. We must remember to thank Rand Paul for reminding us of the connection between race and the radical right.

Today, the federal government is considering a second revolution in energy. The issues are more abstract than those of the 1930s. We no longer have insufficient energy infrastructure. We have the wrong infrastructure. Instead of a backwards region dragging on an economy already in dire straits, the concerns today are threats to our future well-being: climate change and dependence on foreign sources of fuel. A comparison of the 30s and today is like the difference between treatment of a bleeding artery and a wellness program. Both will save your life, but the wellness program can be started next week.

It will be necessary to overcome both parochial regional opposition and ideological opposition by the Republican right. The right has a general aversion to federal expenditures to secure a promised benefit in the future. The aversion is strongest in regions whose economies depend disproportionately on coal. Their upfront cost is disproportionately large and the anticipated benefits are spread over the whole society.

The key to success is to articulate an urgency to act on concerns that are somewhat intangible. Energy reform addresses two distinct concerns. Climate change constitutes a catastrophic threat while energy independence is a national security matter, a defense against economic tactics in the conflict with Islamic extremism. A portion of the public is susceptible to both concerns. However, on the extremes, representing the most politically active people, there is much less overlap. In particular, the people who are most attached to the national security rationale are unlikely to be motivated by environmental risks. For example, despite the tragedy of the BP oil spill, many on the right are resistant to a drilling moratorium. The winning strategy is to keep as many individuals from these two groups together as possible. This is a treacherous endeavor.

The task of the proponents for a new energy revolution can be framed by an analysis of the opponents’ strategy. The most direct strategy, obfuscation, was signaled by Lamar Alexander in his response to the President’s Oval Office speech on energy and the oil spill. He characterized the proposed Climate Change legislation as an “energy tax.” He proposed as an alternative simply replacing half of our vehicles with electric powered cars, trucks and buses.

For those who thought that the legislation was about the environment, this alternative proposal sounds like nonsense. The new vehicles will still require energy, just not gasoline as fuel. Transportation represents about 33% of total carbon emissions in the US. Power generation accounts for about 42%. Simple logic suggests that the 16.5% reduction in transportation sources would be transferred to power generation which would then constitute 58.5%. Almost certainly this is imprecise, but, as they say in Tennessee where Senator Alexander and I grew up, “it’s close enough for gov’ment work.”

Alexander’s proposal is not about the environment. It is designed to separate the national security advocates from the environmentalists. It is unlikely that Republicans view it as a realistic alternative. It echoes the tactics employed in the health care debate. In health care, they attempted to carve back the scope of the bill by advocating an incremental approach, knowing full well that the only way to benefit poorer people was comprehensive legislation. Their purpose was to separate middle income people interested in insurance reform from those also interested in the plight of the poor. The Democrats were tentative about advocating benefits of helping poor people and the opponents achieved significant success. If the same tentativeness is used regarding the environmental benefits of the Climate Change legislation, we can expect the same type of result or much worse.

The second strategy of the opponents is de-legitimization. The far right has turned this into a socio-political movement, encompassing everything from the Birthers to the Tea Party enthusiasts dressed in Revolutionary War costumes. They embrace the position that scientific proof of climate change caused by human activity is untrue. To explain these beliefs in the face of concrete evidence they resort to pseudo science and preposterous conspiracy theories. (This is a remarkable echo of the religious right’s reliance on literal readings of the Bible to counter scientific facts like evolution.)

Republican leaders have seized on this anti-intellectual movement. It is hard to believe that politicians who are able to ascend to positions of leadership and commentators able to construct and manage media empires are unpersuaded by the scientific consensus on climate change. The only alternative is that they are driven by cynical opportunism and venality. Their motives are known only to them. The practical problem is that the movement is a useful weapon for ideological opponents of Climate Change legislation.

Of the two opposition strategies, obfuscation will only be successful if de-legitimization works to undercut the threat of climate change. The message of de-legitimization is particularly powerful in America today. The American public is insecure and feels as if leadership of all kinds has failed it. Being normal humans, they are unlikely to blame themselves for bad decisions. It is easier to de-legitimize the people and institutions in which they formerly chose to believe. The President and other leaders must not allow themselves to be ridiculed and bullied by know-nothings.

If the climate debate becomes an argument over competing beliefs through de-legitimization of proponents, the cause is lost. Opponents would not advertise their real intent to kill the whole effort. They would offer easier incremental options designed to appeal to those most interested in national security, hoping to smother the environmental elements of the legislation.

The proponents cannot succeed by relying on compellingly logical proofs. The problem is not that people doubt the data and the algorithms; it’s that they doubt the messengers. The first step in bolstering legitimacy is to demonstrate sincerity of the messengers. Sincere people are more legitimate. The President is the dominant messenger in our system so it must start with him.

Climate change threatens future generations. It would be powerful if the President conveyed with sincerity that addressing climate change now is important to him because of concern for his family and that he shares this concern with all American parents. The threat to the future must made concrete and personal and that means families. Political agendas must be secondary to sincere and shared concern for future generations. If the public believes that the single leader elected by all of us sincerely is concerned for their children’s well-being, de-legitimization will lose its bite. Science can then make the case for prompt action.

An important little post by Amanda Reed at WorldChanging reveals how conventional measures of carbon emissions give consumers a free pass and ignore the greenhouse gas production resulting from global sourcing of consumer goods.

John Barnett of the Stockholm Environment Institute gave a presentation based on his work in the UK and 40 local governments in Europe. He focused on the fact that tallies of carbon output focus on producers, which has the convenient effect of omitting the impact of shipping finished goods to end buyers:

25-30% of emissions come from products and services that are produced in one country then traded to another…

As it stands now, most emissions data focuses on the production side of our consumer society. For example, the factory that makes your gadget in China contributes to China’s emissions count. When that same gadget is shipped to a UK consumer it does not count towards the UK’s emissions count. Barrett showed that the result of this approach has led to what he called “carbon leakage.” He said that as countries become more and more service based, with demand for products and services met by imports rather than production, the overall amount of carbon leakage goes up. “The volume of emissions that are not counted goes up.” This lack of accounting for growing imports of consumer goods shows up directly in the UK’s emissions records…the Kyoto numbers show an overall emissions reduction in the UK, but consumer emissions have actually gone up in the same time period!

Yves here. When this carbon leakage is factored back in, “green consumerism” looks to be an oxymoron:

“Green products” have less impact in reducing emissions than most people think. The growth of green consumption has not reduced emissions.

Gains in emissions reductions from technological advances have been wiped out by increases in consumption as people demand higher levels of affluence.

The UK’s 50-70% of gains from home energy conservation are lost when they’re redirected for other resource consumption, by people buying other goods and services with the money saved.

Yves again. I admittedly have a coldwater Yankee bias, but I continue to be amazed how consumers fail to be attuned to the fact that the job of a producer is to figure out how to empty their pockets. Why has the public so meekly accepted planned obsolescence? All sort of products, from cars to consumer durables to consumer electronics used to have much longer average lives in service. More frequent trade ins/ups seem to have been foisted upon consumers by playing on status-seeking and a desire for novelty. Yes, some new gadgets really do offer better and different functionality, but consider how many things you discard that are perfectly usable (of course, your truly is a real outlier here, since I particularly resent how computer manufacturers and software designers engage in feature bloat to compress product life cycles and take perverse pride in fighting it. I loved my NeXT computer and used it 10 1/2 years; this post is being written on a 8 year old laptop that had more memory and a bigger hard drive added later in its life. And do not get me started on the topic of fashion….).

Barnett addressed related issues:

Barrett said that some economists are exploring one possible solution: a move toward a future of “steady state economics,” in which a high quality of life exists with no economic growth, since economic growth has (so far) driven growth in material consumption.

Others argue that if we want to have economic growth without rising emissions, we need to do a much better job of decoupling quality of life and well-being from energy and resource use. A growing movement of people are looking at land use, transportation, energy and food systems, finding ways of providing a better quality of life in more urban and post-consumer patterns, and re-thinking how we define and deliver affluence at a systemic level away from the consumption of stuff…. The message, in the meantime, is clear: we can’t shop our way into the future.

Yves again. Tell people not to consume? Horrors. Aside from the fact that it would take a generational shift in values, or a Great Depression II to undo America’s addiction to retail therapy, another ugly complicating factor is that emerging economies, particularly China and India, are out to provide larger proportions of their population with middle class lifestyles. That is generally believed to entail owning more stuff.

Since confronting mass consumerism frontally seems unlikely to make much headway, one can only hope that outlier ideas like freeganism which essentially arb the system, wind up having more impact on values and behavior. Before you dismiss this idea as nuts, remember that organic food was seen as equally oddball in the 1960s. From the New York Times (hat tip reader John L):

Freegans maintain that by salvaging waste, they diminish their need for money, which allows them to live a more thoughtful, responsible and deliberate existence. But if they succeed in their overriding goal, and society ends up becoming less wasteful, the freegan lifestyle will no longer be possible.

That would constitute a considerable victory, if you ask me.

By John Bougearel, author of Riding the Storm Out and Director of Financial and Equity Research for Structural Logic

Policymakers managed to extinguish a financial panic in 2008-09 by March 2009. This rescue operation allowed the broad U.S. stock market as measured by the SP500 to rally nearly 70%. Extinguishing the panic was to be expected. What I have questioned throughout the year are the measures that policymakers took to extinguish the panic and effect a stock market rescue. In particular, I wonder if the measures taken are only masking over serious unresolved issues within our financial atmosphere.

U.S. Treasury Secretary Timothy Geithner in a December 22, 2009, All Things Considered interview with Michele Norris claimed that 2009 is ending on the road to recovery.

The economy’s growing again. The policies the president put in place are helping lay the foundation for growth and job creation…American’s “can be more confident about their financial future, financial security. Growth looks like its accelerating in the 4th quarter.

NPR queried Timothy about a second wave of systemic crisis coming from commercial real estate or some other seen or unforeseen or unintended time bomb. Many experts remain quite concerned this credit crisis will be back-end loaded with second-round effects and positive feedback loops that spirals us further into the rabbit hole the economy entered in 2008-09. Geithner adamantly replied,

We’re not going to have a second wave of financial crisis. We will do what is necessary to prevent that. We can not afford to let the country live again with the risks of another series of events like we had last year. That’s not something that is acceptable and we will prevent that. And that is something completely within our capacity to prevent… When you have the will to act we have substantial ability to prevent that and we will do what is necessary.

Much of the Treasury Secretary’s positive forecast for 2010 and beyond is predicated on the political will to act and anecdotal signs of Q4 GDP growth, incremental increases in business confidence and consumer spending, and the stabilization of the housing and jobs markets. Never again will America be plunged into the 2008-09 rabbit hole because the Treasury Secretary asserts “that is something completely within our capacity to prevent,” and they have the political “will to act.” Throughout the crisis, we saw policymakers displaying the political will to act in a manner that best served the interests of financial lobbyists, not that of the American public. That was transparent enough. Less apparent was how well policymakers served the short and long term interests of their constituents, the highest authority to which politicians’ should have been appealing.

I do not share Treasury Secretary Geithner’s confidence in the policies the Obama administration “put in place” to effect this recovery, and I will not champion them. In fact, many of the policies put in place only mask unresolved issues. So, I am quite concerned about the secondary effects resulting from this global financial meltdown. There are significant unrealized losses still in the pipeline. The full effects of this global financial meltdown have not been felt yet.

Nor do I share Mr. Geithner’s peculiar brand of optimism which is seemingly reminiscent of Chance the Gardener played by Peter Sellers in Being There “As long as the roots are not severed, all is well, and will be well, in the garden.” Policy measures and legislation passed to date to stabilize the financial crisis in 2008-09 have primarily been aimed at saving the dysfunctional big banks and preserving the OTC Debt and Derivatives markets. In short, the aim has been to restore the tentacled and tightly coupled roots in the big banks Financial Garden of Eden. The fact that lawmakers on Capitol Hill helped big banks preserve their Financial Garden of Eden in 2008-009 as much as possible should come as no surprise, because these same lawmakers had previously played such a large role helping banks create their garden in the first place which made possible the big banks fall and subsequent global financial meltdown.

I do have a great deal of reservations and skepticism about America’s financial future and more specifically about American’s financial security. As 2009 comes to a close, we are in the eye of the hurricane. We have yet to be hit by the backside of this financial storm. This credit-collapse is not your typical Post WWII recovery from recession as economist David Rosenberg and others like Paul Volker so often and thankfully remind us. Paul Volcker in a December 2009 Der Spiegel Interview titled America Must Reassert Stability and Leadership:

What complicates this [crisis] as compared to the ordinary garden variety recession is that we have this financial collapse on top of an economic disequilibrium…We have not been on a sustainable track and that has to be changed….those changes don’t come…in a quarter [or] in a year. If we don’t make that adjustment and if we pump up consumption, we will just walk into another crisis. We have not yet achieved self-reinforcing recovery. We are heavily dependent upon government support so far…both in the financial markets and in the economy.

The Room For Policy Error is Enormous

Thus, the room for error in Mr. Geithner’s optimistic forecast is enormous. His outlook ignores the fact that an incredible, wide array of uncertainties can blind-side both domestic and global policymakers in a post credit-bubble collapse environment. In particular, I will add, the room for downside risks to the Treasury Secretary’s optimism is significantly heightened by the policy measures implemented to stabilize the big banks, precisely because these policies masked the effects of so many underlying issues. If the stabilization of the big banks and the financial system becomes unhinged again, in spite of what Mr. Geithner insists must be and can be prevented from ever happening again, we will walk right back into crisis and Irving Fisher’s debt-deflation spiral will resume.

Charles Kindleberger tells us financial crises are “hardy perennials.” That is true, but traditional remedies for extinguishing panics in the financial system over the past two hundred years have more or less always followed Walter Bagehot’s prescript that you “lend freely and early, to solvent firms, against good collateral, and at high rates.” This is what the bank of England did to avert the Panic of 1825. It is exactly what JP Morgan did to avert the Rich Man’s Panic of 1907 ~ he liquidated the bad banks and recapped the good ones. This is roughly what FDR did in 1933 and what Sweden did in the 1990s. They all separated the good banks and good collateral from the bad banks and bad collateral, letting the bad banks fail, and backstopping the still solvent banks. The broader aim was always the same, to save the financial system rather than the bad banks and their shaky collateral. To do this, they let the under-collateralized banks fail, and lent freely to solvent banks against good collateral at a high rate.

The financial panic of 2008-09 stands in stark contrast to the extinguishing of previous financial panics. The most outstanding features to the financial panic of 2008-09 was that the policies set in place were to save the bad banks loaded with toxic collateral on and off its balance sheets rather than to save the financial system itself. Lawmakers effected this change in March 2009 when they eliminated the fair value accounting rule to allow insolvent banks to mark their toxic assets at full value rather than at market value. Effectively, they swept the toxic asset under the rug. They masked their toxic effect, but unresolved issues remain. These toxic assets are now being stored on the Federal Reserves and other off-balance sheets, loaded with unrealized losses. The Basel Committee and FASB are now allowing banks until 2012-2013 to put these assets back onto their balance sheets. This explosive timetable has been reset to 2012, the end of the Mayan Calendar. For those with an eschatological bent, this date with destiny might be the End Days of our financial system as we knew it.

This is a first-ever occurrence in 200 years of banking history that losses stemming from bad collateral were not realized early on. They are time bombs with delayed fuses. To partially offset this day of reckoning in 2012, the Federal Reserve adopted a Zero Interest Rate Policy (ZIRP) to help the very same insolvent banks lever up the yield curve borrowing short and lending long to earn their way out of insolvency. But rather than letting these profits restore the banks impaired balance sheets, bank executives are redistributing these profits in the form of bonuses. Worse yet, ZIRP is a financial hardship that hurts millions of saving Americans plowing their hard earned dollars into CDs and money market funds. In this way, a zero interest rate policy serves to undermine the financial security of millions of Americans. And still, the unanswered question is whether insolvent banks can successfully recap themselves before these Bouncing-Betty’s detonate. In a race against the clock, policymakers are simply buying banks time, hoping they can avoid mutually assured destruction when their eschatological date with destiny arrives.

Global Warming Trends Serve as a Model for the Global Financial Meltdown

Financial innovation over the past thirty years led to a huge growth spurt in the OTC Debt and Derivatives markets. One could say that innovation led to a revolution within the financial industry. This revolution has created vast sums of toxic assets now being stored on the Federal Reserves and other off-balance sheet vehicles. By way of analogy, these man-made toxic assets can be likened to man-made greenhouse gases being created by the industrial revolution and fossil-fuel industries which are now contributing to accelerating global-warming trends. The meltdown in the global financial markets has many dangerous parallels to global-warming trends to consider.

Man-made greenhouse gases like carbon dioxide that have been released into the earth’s atmosphere are being partially absorbed by the ocean and then stored there. However, the carbon dioxides that have been absorbed into the ocean are not passively sitting there; they are actively destroying the ocean’s corral reefs and shellfish. These gases being stored in the ocean have yet to be re-released into the earth’s atmosphere. The ocean creates a lagged effect on global warming trends. When they are re-released into the earth’s atmosphere, this will create negative second-round effects thereby accelerating global-warming trends in the decades ahead.

Today, the Federal Reserve acts much like the ocean for greenhouse gases, absorbing and storing the toxic assets and shaky collateral [OTC Debt and Derivative products] created and released by the big banks. These financial carbon dioxides being stored on and eating away at the Fed’s balance sheets have yet to be re-released into the global financial system. When these financial carbon dioxides are re-released into the global financial system, this will create negative second-round effects that will broaden the reach of the global financial meltdown in the immediate years ahead [2011-2013]. Do you see where I am going now?

Jim Hansen, a leading global warming scientist has shown us that global warming trends in the earth’s atmosphere do not respond instantaneously to increases in greenhouse gases. There is a “substantial amount of what Jim calls ‘unrealized warming’ or warming that was still ‘in the pipeline’ – we hadn’t felt it yet.” What Jim Hansen is describing are the feedback loops and secondary effects that are still in the pipeline. “And feedbacks are inherently slow to unfold.” One of the most important examples of feedback is the melting of permafrost in Alaska, northern Canada and Siberia. “Plants that have been frozen for thousands of years are now supplementing the greenhouse effect as they decompose and send prodigious quantities of carbon dioxide and methane into the air.” The artic tundra stores more than 500 billion tons of carbon which is twice that of all the rainforests on the planet and 20 times the amount of fossil fuels emitted in a year. The secondary and lag effects with respect to global warming, Jim Hansen notes “obviously complicates the tasks of decision-makers.”

To the extent that the policy measures put in place in 2009 to “mask” “store” and “freeze” the financial dioxides embedded in the financial system rather than having them purged them from the system, most American’s financial futures and their financial security will be at risk for several years to come. I see no room for complacency. Moreover, American’s financial security will be further compromised in the coming decades as and when Social Security and Medicare pass their tipping points as well. Will the U.S. government default on their social obligations to meet their financial obligations in the years to come?

So what happens as and when the frozen and unrealized losses still in the pipeline and being stored on off-balance sheets are allowed to decompose over the course of the next three years? What will be the cost to millions of American’s financial security once the full effect of this financial meltdown is felt? And I speak as if this were only an American problem. But in point of fact, this is a global problem, particularly in those countries running large deficits. The financial security and well being of hundreds of millions of global citizens remain vulnerable.

Mr. Geithner’s reassurances to Americans aside, the lagged consequences of the global financial meltdown remain considerable. While some of these risks are transparent, many of the risks are opaque and remain hidden. Final outcomes are imaginable yet highly uncertain and largely unquantifiable. No one person can possibly get their arms around all of the risks. Below I attempt to highlight some of the foreseeable uncertainties, risks, and challenge that lie ahead between 2010 and 2013. The list is by no means comprehensive.

Domestic Risks and Uncertainties

1. The Bulk of the Option Arm resets trigger in 2010-2011 – “The reality is that these loans were never meant to survive the reset. Unless an alternative is created, the human pain and loss will be massive.” Institutional Risk Analyst Chris Whalen
2. The Black Holes at FNM and FRE and other GSEs continue to grow
3. Bank hoarding in 2009, with no end in sight until those option arm resets trigger and all toxic assets have been brought back onto their balance sheets by 2013
4. State and local governments defaulting on financial obligations. To meet financial obligations, austerity measures will be required, social obligations will suffer, meaning more unemployment and less teachers, firemen, and policemen. This burden will be another source of drag on the U.S. economy.
5. Credibility of the Fed and U.S. Treasury and White House Administration will be on the forefront on Investors minds in 2010 and beyond. If their credibility suffers, there will be negative ramifications in the financial markets
6. Stock Market Rescue Operations like the one that got underway in March 2009 tend to last roughly two years, and are followed by bear market resumptions. My models indicate the 2009 bear market rally may end sometime in 2H 2010 followed by a resumption of the secular bear market into 2012-2013.
7. My models also indicate the 2009 bear market rally in the Dow Jones may peak at 11,750-to 12,000, near the bull market crest in 2000. That leaves maybe 12% further upside in 2010 and implies that most of the gains from this bear market rally are already in place. As David Rosenberg pointed out throughout 2009, this is a rally for investors to ‘rent.’ What reallocations can they make as and when the rally ends?
8. Advanced Economies in America and Europe all face Pension liability nightmares with shrinking workforces to support the retiring population, recent examples are GM and YRC pension nightmares. Are taxpayers going to be obligated to fund all private and public pensions of bankrupt companies and state governments?
9. Risk Aversion, saving more versus spending more will be a drag on the economy
10. U.S. government mandate requiring 30 million uninsured Americans to buy health insurance will curb consumer spending and act as a tax on the economy. It will also curb hiring plans amongst U.S. employers further prolonging Americans sidelined from employment opportunities and exacerbating the unemployment rate issues.
11. Will the kindness of foreigners continue to fund the U.S. deficit spending? Eric Sprott and David Franklin noted in their December 2009 missive titled “Is it all just a Ponzi Scheme?” that the “household sector” bought $528 billion of the $1.88 trillion of U.S. debt that was issued to them. This sector only bought $15 billion of treasuries in 2008, where would this group find the wherewithal to buy 35 times more than then bought in the previous year. Sprott concludes that makes no sense with accelerating unemployment and foreclosures, so the household sector must be a “phantom. They don’t exist. They merely serve to balance the ledger in the Federal Reserve’s Flow of Funds report.”

Global Risks and Uncertainties
12. Sovereign Risks of Default are increasing as is their fiscal credibility in countries with large debts
13. Asymmetries within the EMU could precipitate a possible breakup of the EMU. The solidification of the countries in the EMU may break-up like ice sheets in the Artic tundra as the global financial meltdown puts further stress on the EMU. Incentives to remain in the EMU, for many EU countries it might be better to leave the EMU than stick around for its constraints and austerity measures
14. The One-size fits-all monetary policy in the EMU may be derailed by this crisis
15. Germany may not want to subsidize weaker countries in the EMU if their exports to those weaker euro countries are falling off a cliff as the crisis rolls on
16. The ECB may not be able to accept sovereign collateral and assets from countries in the EMU that have a negative credit outlook and are later hit with further downgrades. That could have spillover effects into the banks-at-large, including the ones the U.S. government sought so frantically to save.
17. The PIIGS (Portugal, Ireland, Italy, Greece, and Spain) debt ratios are all expected to exceed the 3% GDP 1992 Maastricht Treaty requirement.
18. PIIGs negative 2009 GDP resulting from global export decline leaves them with little incentive to stay strapped to an expensive Euro.
19. Italy is expected to be the first country that will first kiss the EMU good riddance. Greece and Spain might not be far behind as a domino-effect takes hold.