Archive for the ‘Finance’ Category
Day three of recognising the passing of 400 ppm atmospheric CO2.
In nearly four years of writing for Learning from Dogs, I can’t recall devoting three days of posts to a single subject. To put that into context, today’s post is number 1,683 since the first one was published on July 15th, 2009; not all of them from the brain of yours truly by any means you understand!
Today, I’m going to feature a recent essay written by George Monbiot finishing up three days of ‘reporting’ on the deeply disturbing, but fully anticipated, news that the planet’s atmosphere has reached a concentration of 400 ppm CO2.
Last Monday, I published What legacy do we wish to leave for others?
Then yesterday, a post under the title of 400 ppm, as the BBC reported it. I closed with a reference to a remark made by Professor Sir Brian Hoskins, director of the Grantham Institute for Climate Change at Imperial College London; the remark being “A greater sense of urgency was needed.“
I wrote that those wishy-washy words were pathetic. That we needed the sort of words that George Monbiot penned a few days ago in the Guardian newspaper. There it was entitled “Climate milestone is a moment of symbolic significance on road of idiocy“.
But I think the title that Mr. Monbiot chose to use on his own blog was far more apt: Via Dolorosa. (Note that I haven’t formally requested permission to republish the essay but trust that the following is acceptable to both Mr. Monbiot and the Guardian newspaper.)
Here’s how it opened:
May 10, 2013
Corruption and short-termism are pushing us along the path of sorrows.
By George Monbiot, published on the Guardian’s website, 10th May 2013
The records go back 800,000 years: that’s the age of the oldest fossil air bubbles extracted from Dome C, an ice-bound summit in the high Antarctic. And throughout that time there has been nothing like this. At no point in the pre-industrial record have concentrations of carbon dioxide in the air risen above 300 parts per million. 400 is a figure that belongs to a different era.
The difference between 399 and 400ppm is small, in terms of its impacts on the world’s living systems. But this is a moment of symbolic significance, a station on the Via Dolorosa of environmental destruction. It is symbolic of our collective failure to put the long term prospects of the natural world and the people it supports above immediate self-interest.
The symbolic significance of the planet’s atmospheric concentrations of CO2 passing 400ppm is that, I hope, with all the hope that my heart can summon up, it will bring us back from the brink. Then one ponders about this possibility as Monbiot’s next paragraph unfolds:
The only way forward now is back: to retrace our steps along this road and to seek to return atmospheric concentrations to around 350 parts per million, as the 350.org campaign demands. That requires, above all, that we leave the majority of the fossil fuels which have already been identified in the ground. There is not a government or an energy company which has yet agreed to do so.
“not a government or an energy company … has yet agreed to do so.”
I’m going to repeat that again, with emboldening; “not a government or an energy company … has yet agreed to do so.“
In fact, one could reasonable argue that having any hope for a turning back is utterly naive. Look what the essay goes on to say:
Just before the 400-mark was reached, Shell announced that it will go ahead with its plans to drill deeper than any offshore oil operation has gone before: almost three kilometres below the Gulf of Mexico.
A few hours later, Oxford University opened a new laboratory in its department of earth sciences. The lab is funded by Shell. Oxford says that the partnership “is designed to support more effective development of natural resources to meet fast-growing global demand for energy.” Which translates as finding and extracting even more fossil fuel.
The European Emissions Trading Scheme, which was supposed to have capped our consumption, is now, for practical purposes, dead. International climate talks have stalled; governments such as ours now seem quietly to be unpicking their domestic commitments. Practical measures to prevent the growth of global emissions are, by comparison to the scale of the challenge, almost non-existent.
As an example of the scale of the hypocrisy in which we are all immersed, last week’s The Economist magazine carried a full-age advertisement from Chevron on page 5 under the banner of ‘Protecting The Planet Is Everyone’s Job – We agree‘ and going on to explain:
We go to extraordinary lengths to protect the integrity of the places where we operate. Places all over the world, like Australia’s Barrow Island. It’s home to hundreds of native species of wildlife, including wallabies, ospreys, and perenties.
We’ve been producing energy on the island for more than 40 years, and it remains a Class A Nature Reserve.
Didn’t take me two moments to find this image:
To my mind this advertisement completely misses the point; deliberately or otherwise. Chevron and all other oil producing companies in the world are endangering the future of the entire planet by continuing to ‘produce energy’, aka oil. Period. Full stop.
Or to put it in the words of George Monbiot’s essay:
The problem is simply stated: the power of the fossil fuel companies is too great. Among those who seek and obtain high office are people characterised by a complete absence of empathy or scruples, who will take money or instructions from any corporation or billionaire who offers them, and then defend those interests against the current and future prospects of humanity. This new mark reflects a profound failure of politics, worldwide, in which democracy has quietly been supplanted by plutocracy. Without a widespread reform of campaign finance, lobbying and influence-peddling and the systematic corruption they promote, our chances of preventing climate breakdown are close to zero.
Thus the final sentence in GM’s essay carries a deep sadness.
So here we stand at a waystation along the road of idiocy, apparently determined only to complete our journey.
Why are we not seeing, hearing and reading words of a similar weight and power from just about every ‘opinion maker’ in the world?
Why not? Why not?
That pesky ‘law’ regarding the power of unintended consequences.
As many of you are aware, last week was an unusual format for Learning from Dogs in that the whole of the week was dedicated to republishing Dr. Samuel Alexander’s essay The Sufficiency Economy – Envisioning a Prosperous Way Down. If you missed that, the first chapter was a week ago today under the title of Where less is so much more.
Moving on. Many living in Northern California and South-West Oregon will have had a timely reminder that nature is tapping mankind on the shoulder in new and challenging ways. I’m referring to the massive storm that was featured in a recent Climate Crocks article that delivered over a foot of rainfall in recent days. Here in Southern Oregon we received over 10 inches! Hence the growing awareness that we have to do something!
I am an actuary interested in finite world issues – oil depletion, natural gas depletion, water shortages, and climate change. The financial system is also likely to be affected.
I’m very grateful to Gail for so promptly giving me written permission to republish her work. It is very relevant to all of us.
World leaders seem to have their minds made up regarding what will fix world CO2 emissions problems. Their list includes taxes on gasoline consumption, more general carbon taxes, cap and trade programs, increased efficiency in automobiles, greater focus on renewables, and more natural gas usage.
Unfortunately, we live in a world economy with constrained oil supply. Because of this, the chosen approaches have a tendency to backfire if some countries adopt them, and others do not. But even if everyone adopts them, it is not at all clear that they will provide the promised benefits.
The Kyoto Protocol was adopted in 1997. If emissions had risen at the average rate that they did during the 1987 to 1997 period (about 1% per year), emissions in 2011 would be 18% lower than they actually were. While there were many other things going on at the same time, the much higher rise in emissions in recent years is not an encouraging sign.
The standard fixes don’t work for several reasons:
1. In an oil-supply constrained world, if a few countries reduce their oil consumption, the big impact is to leave more oil for the countries that don’t. Oil price may drop a tiny amount, but on a world-wide basis, pretty much the same amount of oil will be extracted, and nearly all of it will be consumed.
2. Unless there is a high tax on imported products made with fossil fuels, the big impact of a carbon tax is to send manufacturing to countries without a carbon tax, such as China and India. These countries are likely to use a far higher proportion of coal in their manufacturing than OECD countries would, and this change will tend to increase world CO2 emissions. Such a change will also tend to raise the standard of living of citizens in the countries adding manufacturing, further raising emissions. This change will also tend to reduce the number of jobs available in OECD countries.
3. The only time when increasing natural gas usage will actually reduce carbon dioxide emissions is if it replaces coal consumption. Otherwise it adds to carbon emissions, but at a lower rate than other fossil fuels, relative to the energy provided.
4. Substitutes for oil, including renewable fuels, are ways of increasing consumption of coal and natural gas over what they would be in the absence of renewable fuels, because they act as add-ons to world oil supply, rather than as true substitutes for oil. Even in cases where they are theoretically more efficient, they still tend to raise carbon emissions in absolute terms, by raising the production of coal and natural gas needed to produce them.
5. Even using more biomass as fuel does not appear to be a solution. Recent work by noted scientists suggests that ramping up the use of biomass runs the risk of pushing the world past a climate change tipping point.
It is really unfortunate that the standard fixes work the way they do, because many of the proposed fixes do have good points. For example, if oil supply is limited, available oil can be shared far more equitably if people drive small fuel-efficient vehicles. The balance sheet of an oil importing nation looks better if citizens of that nation conserve oil. But we are kidding ourselves if we think these fixes will actually do much to solve the world’s CO2 emissions problem.
If we really want to reduce world CO2 emissions, we need to look at reducing world population, reducing world trade, and making more “essential” goods and services locally. It is doubtful that many countries will volunteer to use these approaches, however. It seems likely that Nature will ultimately provide its own solution, perhaps working through high oil prices and weaknesses in the world financial system.
Elastic Versus Inelastic Supply
It seems to me that many bad decisions have been made because many economists have missed the point that crude oil supply tends to be very inelastic, while other fuels are fairly elastic. Let me explain.
Elastic supply is the usual situation for most goods. Plenty of the product is available, if the price is high enough. If there is a shortage, prices rise, and in not too long a time, the market is well-supplied again. If supply is elastic, if you or I use less of it, ultimately less of the product is produced.
Coal and natural gas usually are considered to be elastic in their supply. To some extent, they are still “extract it as you need it” products. Supply of natural gas liquids (often grouped with crude oil, but acting more like a gas, so it is less suitable as a transportation fuel) is also fairly elastic.
Crude oil is the one product that is in quite short supply, on a world-wide basis. Its supply doesn’t seem to increase by more than a tiny percentage, no matter how high the price rises. This is a situation of inelastic supply.
Even though oil prices have been very high since 2005 (shown in Figure 3, below), the amount of crude oil has increased by only 0.1% per year (Figure 2, above).
In the case of oil, both supply and demand are quite inelastic. No matter how high the price, demand for oil doesn’t drop back by much. No matter how high the price of oil, world supply doesn’t rise very much, either.1
In a situation of inelastic supply, the usual actions a person might take appear to work when viewed on a local basis, but backfire on a world basis, if not everyone participates. When one country tries to conserve crude oil (whether through a carbon tax, gasoline tax, or higher automobile mileage requirement), it may reduce its own consumption, but there are still plenty of other buyers in the market for the oil that was saved. So the oil gets used by someone else, perhaps at a slightly lower price. World oil production remains virtually unchanged. Thus, a reduction in oil usage by an OECD country can translate to more oil consumption by China or India, and ultimately more development of all types by those countries.
Adding Substitutes Adds to Carbon Emissions
If we don’t have enough crude oil, one approach is to create substitutes. Because crude oil supply is inelastic, though, these substitutes aren’t really substitutes, though. They are “add ons” to world oil supply, and this is one source of our problem with increasing world emissions.
What do we use to make the substitutes? Basically, natural gas and coal, and to a limited extent oil (because we can’t avoid using oil). The catch is, that to make the substitutes, we need to burn natural gas and coal more quickly than we would, if we didn’t make the oil substitutes. Since the supply of coal and natural gas is elastic, it is possible to pull them out of the ground more quickly. Thus, making the substitutes tends to increase carbon dioxide emissions over what they would have been, if we had never come up with the idea of substitutes.
The increased use of coal and natural gas is pretty clear, if a person thinks about coal-to-liquids or gas-to-liquids. Here, we need to first build the plants used in production, and then with each barrel of substitute made, we need to use more natural gas or coal. So it is very clear that we are extracting a lot of additional coal and natural gas, to make a relatively smaller amount of oil substitute. There is often a substantial need for water to make the process work as well, adding another stress on the system.
But the same issue comes up with biofuels, and with other renewables. These too, are add-ons to the world oil supply, not substitutes. While theoretically they might produce energy with less CO2 per unit than fossil fuel systems, in absolute terms they lead to natural gas and coal being pulled out of the ground more quickly to be used in making fertilizer, electricity, concrete, and other inputs to renewables.2
Carbon Taxes and Competitiveness
Each country competes with others in the world market place. Adding a carbon tax makes products made by the local company less competitive in the world marketplace. It also signals to potential coal users that the countries adopting the carbon taxes are willing to a leave a greater proportion of world coal exports to those who are not adopting the tax, thus helping to keep the cost of imported coal down.
Asian countries already have a competitive edge over OECD countries in terms of lower wages and lower fuel costs (because of their heavy coal mix), when it comes to manufacturing. Adding a carbon tax tends to add to the Asian competitive edge. This tends to shift production offshore, and with it, jobs.
China joined the World Trade Organization in 2001. Figure 4 shows clearly that its fuel consumption ramped up rapidly thereafter. It seems likely that the number of Chinese manufacturing jobs and spending on Chinese infrastructure increased at the same time.
Economists seem to have missed the serious worldwide deterioration in CO2 emissions in recent years by looking primarily at individual country indications, including CO2 emissions per unit of GDP. Unfortunately, this narrow view misses the big picture–that total CO2 emissions are rising, and that CO2 emissions relative to world GDP have stopped falling. (See my posts Is it really possible to decouple GDP growth from energy growth and Thoughts on why energy use and CO2 emissions are rising as fast as GDP. See also Figure 1 at the top of the post.)
The Employment Connection
I have shown that in the US there is a close correlation between energy consumption and number of jobs. (For more information, including a look at older periods, see my post, The close tie between energy consumption, employment, and recession.)
There are several reasons why a connection between energy consumption and the number of jobs is to be expected:
(1) The job itself in almost every situation requires energy, even if it is only electricity to operate computers, and fuel to heat and light buildings.
(2) Equally importantly, the salaries that employees earn allow them to buy goods that require the use of energy, such as a car or house. (“Energy demand” is what people canafford; jobs allow “demand” to rise.)
(3) The lowest salaried people can be expected to spend the highest proportion of their salaries on energy-related services (such as food and gasoline for commuting). The wealthy spend their money on high priced goods and services, such as financial planning services and designer clothing that require much less energy per dollar of expenditure.
The thing I find concerning is the close timing between the ramp-up of Asian coal use and thus jobs using coal, and the drop-off of US employment as a percentage of US population, as illustrated in Figure 6 below. Arguably, the ramp up in world trade is just as important, but some aspects of programs that are intended to save CO2 emissions also seem to encourage world trade.
Of course, the US did not sign the Kyoto Protocol or enact a carbon tax, and it is its jobs that I show falling as a percentage of population. It is more that the CO2 solutions act as yet another way to encourage more international trade, and with it more “growth”, and more CO2.
Using More Biomass is Not a Fix Either
Burning more wood for fuel and creating “second generation” biofuels from biomass seems like a fix, until a person realizes that we are reaching limits there, as well.
In June 2012, twenty noted scientist published a paper in the journal Nature called Approaching a State Shift in the Earth’s Biosphere. This report indicates that humans have already converted as much as 43% of Earth’s land to urban or agricultural uses. In total, 20% to 40% of Earth’s primary productivity has been taken over by humans. The authors are concerned that we may now be reaching a tipping point leading to a state shift, because of loss of ecosystem services as use of biological products increases. With this state change would come a change in climate. Simulations indicate that this tipping point may occur when as little as 50% of land use is disturbed. This tipping point may be even lower, if world-wide synergies take place.
On Our Current Path – Lacking Good Solutions
While this list of problems relating to current proposed solutions is not complete, it gives a hint of the problems with reducing CO2 emissions using approaches suggested to date. There are many issues I have not covered.
One issue of note is the fact the cost of integrating intermittent renewables (such as wind and solar PV) increases rapidly, as we add increasing amounts to the grid. This occurs because there is more need to transport the electricity long distances and to mitigate its variability through electricity storage or fossil fuel balancing. (See for example, Low Carbon Projects Demand a New Transmission and Distribution Model, Grid Instability Has Industry Scrambling for Solutions, and Hawaii’s Solar Power Flare-Up.)
While the problems noted in these articles are probably solvable, the cost of these solutions has not been built into energy balance analyses. Energy balances (or EROEI estimates) as currently reported do not vary with the proportion of intermittent renewables added to the grid. If energy balance analyses were adjusted to reflect the high cost of adding an increasing proportion of wind or solar PV to the grid, they would likely show a rapidly declining energy balance, above a certain threshold. This would indicate that while adding a little intermittent renewables (as we have done to date) can be a partial solution, adding a lot is likely to have serious cost and energy balance issues.
Another issue that is difficult to deal with is the fact that we are not dealing with a temporary problem with CO2 emissions. The idea is not to slow down the burning of fossil fuels, and burn more later; what we really need to do is to leave unburned fossil fuels in the ground for all time. This is a problem, because there is no way that we can impose our will on people living 10 or 50 years from now. The Maximum Power Principle of H. T. Odum would seem to indicate that any species will make use of whatever energy sources are available to it, to the extent that it can. Even if we temporarily defeat this tendency with respect to humans’ use of fossil fuels, I don’t see any way that we can defeat this tendency for the long term.
Considering all of these issues, it does not appear that most of the “standard” solutions will really work.3 What other options do we have?
The Earth has been handling the problem of shifting conditions for over 4 billion years. The earth is a finite system. Nature provides that finite systems, such as the Earth, will cycle to new states of equilibrium over time, as conditions change. While we would like to defeat Earth’s tendency in this regard, it is not at all clear that we can. Part of this cycling to a new state is likely to be a change in climate.
A state change is a cause for concern to humans, but not necessarily to the Earth itself. The Earth has moved from state to state many times in its existence, and will continue to do so in the future. The changes will bring the Earth back into a new equilibrium. For example, if CO2 levels are high, species that can make use of higher CO2 levels (such as plants) are likely to become dominant, rather than humans.
Exactly how this state change might occur is subject to different views. One view is that changing CO2 levels will be a primary driver. The Nature article referenced previously suggested that increased disturbance of natural ecosystems (as with greater use of biomass) might force a state change. My personal view is that a financial collapse related to high oil price may be part of Nature’s approach to moving to a new state. It could bring about a reduction in world trade, a scale back in CO2 emissions, and a general contraction of human systems.4
However the change takes place, it could be abrupt. It will not be to many people’s liking, since most will not be prepared for it.
Steps That Might Work to Slow CO2 Emissions
It would be convenient if we could slow CO2 emissions by working to produce energy with less CO2. This option does not seem to be working well though, so I would argue that we need to work in a different direction: toward reducing humans’ need for external energy. In order to do this, I would suggest two major steps:
(1) Reduce the world’s population, through one-child policies and universal access to family planning services. This step is necessary because rising population adds to demand. If we are to reduce demand, lower population needs to play a role.
(2) Change our emphasis to producing essential goods locally, rather than outsourcing them to parts of the world that are likely use coal to produce them. I would suggest starting with food, water, and clothing, and the supply chains necessary to produce these items.
Changing our emphasis to producing essential goods locally will have a multiple benefits. It will (a) add local jobs, and (b) lead to less worldwide growth in coal usage, (c) save on transport fuel, and (d) add protection against the adverse impact of declining world oil supply, if this should happen in the not too distant future. It should also help reduce CO2 emissions. The costs of goods will likely be higher using this approach, leading to less “stuff” per person, but this, too, is part of reaching reduced CO2 emissions.
It is hard to see that the steps outlined above would be acceptable to world leaders or to the majority of world population. Thus, I am afraid we will end up falling back on Nature’s plan, discussed above.
 Michael Kumhof and Dirk Muir recently prepared a model of oil supply and demand (IMF working paper: Oil and the World Economy: Some Possible Futures). In it, they assume a long run price-elasticity of oil supply of 0.03, and remark that a paper by Benes and others indicates a range of 0.005 to 0.02 for this variable. The long term price elasticity of oil demand is assumed to be .08 in the Kumhof and Muir analysis.
 I would argue that standard EROEI measurements are defined too narrowly to give a true measure of the amount of energy used in making a particular substitute. For example, EROEI measures do not consider the energy costs associated with labor (even though workers spend their salaries on clothing, and commuting costs, and many other good and services that use fossil fuels), or with financing costs, or of indirect impacts like wear and tear on the roads by transporting corn for biofuel.
Other types of analysis have ways of dealing with this known shortfall. For example, when the number of jobs that a new employer can be expected to add to a community is evaluated, the usual approach seems to be to take the number of jobs that can be directly counted and multiply by three, to estimate the full impact. I would argue that with substitutes, some similar adjustment is needed. This adjustment which would act to increase the energy use associated with renewables, and reduce the EROEI. For example, the adjustment might divide directly calculated EROEI by three.
A calculation of the true net benefit of renewables also needs to recognize that nearly the full energy cost is paid up front, and only over time is recovered in energy production. When renewable production is growing rapidly, society tends to be in a long-term deficit position. Typically, it is only as growth slows that society reaches as net-positive energy position.
 I obviously have not covered all potential solutions. Nuclear power is sometimes mentioned, as is space solar power. There are new solutions being proposed regularly. Even if these solutions would work, ramping them up would take time and require use of fossil fuels, so it is wise to consider other options as well.
 The way that limited oil supply could interfere with world trade is as follows: High oil prices cause consumers to cut back on discretionary goods. This leads to layoffs in discretionary sectors of the economy, such as vacation travel. It also leads to secondary effects, such as debt defaults and lower housing prices. The financial effects “concentrate up” to governments of oil importing nations, because they receive less tax revenue from laid-off workers at the same time that they pay out more in unemployment benefits, stimulus, and bank bailouts. (We are already at this point.)
Eventually, countries will find that deficit spending is spiraling out of control. If countries raise taxes and cut benefits, this is likely to lead to more lay offs and debt defaults. One possible outcome is that citizens will become increasingly unhappy, and replace governments with new governments that repudiate old debt. The new governments may have difficulty establishing financial relationships with other governments, given that most are major debt defaulters. Such issues could reduce world trade substantially. With the drop of world trade would come much more limited ability to maintain our current systems, such as electricity and long distance transport.
Promoting the thoughts of Per Kurowski.
A few days ago, I published a delightful story sent to me by Richard Maugham about Helga’s Bar. It was a tongue-in-cheek look at the crazy world of finance and banking that we seem to be living in at present.
One of the regular readers of Learning from Dogs is Per Kurowski and he left a couple of comments. The first being,
As a former ED at the World Bank, 2002-2004, living close to Washington, writing articles and being an assiduous blogger, I’ve been in the middle of many discussions about those many of the challenges our world faces. And my friend, I am sorry to say, our prospects to solve these problems, do not seem good.
One of the main reasons for that negative outlook, is that I have been able to witness how the discussion of many of these problems, no matter how urgent these are, so often get hijacked by a political agenda, or by a group that decides making a business, or a living, out of it.
If we cannot break out of this mold, unfortunately, the world is toast, and this, not only from a global warming perspective.
which was then followed up by,
By the way, I managed to sit down a prominent and important bank regulator in my chair yesterday, though he was invisible and quite silent!
I then replied,
Per, just love that. Any chance of you penning a guest post that could set the background to that video in terms that make it easy for the punter to understand?
So here is Per’s interview (sound volume is a little low) and his views.
Paul… well here is “a brief summary of my thoughts on banks and risks”
Capital requirements for banks which are lower when the perceived risk of default of the borrower is low, and higher when the perceived risk is high, distort the economic resource allocation process. This is so because those perceptions of risk have already been cleared for, by bankers and markets, by means of interest rates and amounts of exposures.
All the current dangerous and obese bank exposures are to be found in areas recently considered as safe and which therefore required these banks to hold little capital. What was considered as “risky” is not, as usual, causing any problems. This is not a crisis caused by excessive risk taking by the banks, but by excessive regulatory interference by naïve and nanny type regulators.
And, if that distortion is not urgently eliminated, all our banks are doomed to end up gasping for oxygen and capital on the last officially perceived safe beach… like the US Treasury or the Bundesbank.
Bank regulators have no business regulating based on risk perceptions being right, their role is to prepare for when these perceptions turn out to be wrong.
A nation that cares more for history, what it has got, the haves, the “not-risky”, the AAA rated or the “infallible” sovereigns, than for the future, what it can get, the not-haves, the risky, the small businesses or the entrepreneurs, is a nation on its way down.
A delightful tale sent to me by Richard Maugham.
Richard and I go back too many years! He has been a dear friend despite the obvious hurdle that when we first met, he declared that he was a typewriter salesman for Olivetti in the UK with me admitting that I was a typewriter salesman for IBM UK! Here’s the story.
WHAT WENT WRONG IN EUROPE – SIMPLY EXPLAINED!
Helga is the proprietor of a bar. She realizes that virtually all of her customers are unemployed alcoholics and, as such, can no longer afford to patronize her bar. To solve this problem she comes up with a new marketing plan that allows her customers to drink now, but pay later.
Helga keeps track of the drinks consumed on a ledger (thereby granting the customers’ loans).
Word gets around about Helga’s “drink now, pay later” marketing strategy and, as a result, increasing numbers of customers flood into Helga’s bar. Soon she has the largest sales volume for any bar in town.
By providing her customers freedom from immediate payment demands, Helga gets no resistance when, at regular intervals, she substantially increases her prices for wine and beer – the most consumed beverages.
Consequently, Helga’s gross sales volumes and paper profits increase massively. A young and dynamic vice-president at the local bank recognises that these customer debts constitute valuable future assets and increases Helga’s borrowing limit. He sees no reason for any undue concern, since he has the debts of the unemployed alcoholics as collateral.
He is rewarded with a six figure bonus.
At the bank’s corporate headquarters, expert traders figure a way to make huge commissions, and transform these customer loans into DRINKBONDS. These “securities” are then bundled and traded on international securities markets.
Naive investors don’t really understand that the securities being sold to them as “AA Secured Bonds” are really debts of unemployed alcoholics. Nevertheless, the bond prices continue to climb and the securities soon become the hottest-selling items for some of the nation’s leading brokerage houses.
The traders all receive six figure bonuses.
One day, even though the bond prices are still climbing, a risk manager at the original local bank decides that the time has come to demand payment on the debts incurred by the drinkers at Helga’s bar. He so informs Helga. Helga then demands payment from her alcoholic patrons but, being unemployed alcoholics, they cannot pay back their drinking debts. Since Helga cannot fulfil her loan obligations she is forced into bankruptcy. The bar closes and Helga’s 11 employees lose their jobs.
Overnight, DRINKBOND prices drop by 90%. The collapsed bond asset value destroys the bank’s liquidity and prevents it from issuing new loans, thus freezing credit and economic activity in the community.
The suppliers of Helga’s bar had granted her generous payment extensions and had invested their firms’ pension funds in the BOND securities. They find they are now faced with having to write off her bad debt and with losing over 90% of the presumed value of the bonds. Her wine supplier also claims bankruptcy, closing the doors on a family business that had endured for three generations; her beer supplier is taken over by a competitor, who immediately closes the local plant and lays off 150 workers.
Fortunately though, the bank, the brokerage houses and their respective executives are saved and bailed out by a multibillion dollar no-strings attached cash infusion from the government.
They all receive a six figure bonus.
The funds required for this bailout are obtained by new taxes levied on employed, middle-class, non-drinkers who’ve never been in Helga’s bar……………………….!
I can add not a single word to this!
Why economists seems just as confused as me.
(A republication of a post first shown on the 8th August, 2009, still seems pretty relevant)
We live in a world where finance and money play a hugely more important role in our everyday lives than, say, 25 years ago. Well that’s how it seems. Our energy costs don’t seem to be connected to supply and demand but more in the hands of the speculators. Our house values have been greatly influenced, perhaps misaligned is a better word, by the availability of too easy money, resulting from exotic financial leveraging. Commodities are, like energy, traded for their own sake rather than to provide an efficient process of linking the grower with the consumer. And more.
So it comes as a bit of a shock to read in a recent copy of The Economist that most of the theories and economic models are being ‘re-examined’ in the light of the current global crisis. These theories and models are not esoteric ideas kept
within the scholarly walls of universities but used by Governments, investment institutions and banks so they affect you and I in the real world, big time!
They ought to work a great deal better than they do because they have the capability to harm, as millions have found out in the last 2 years.
Anyway, The Economist, July 18th-July 24th has a lengthy briefing: The state of economics, comprised of two articles. To me it makes very sobering reading. Unless you have a subscription there is no web access to the articles so here are a few extracts to give you a flavour. The first article is about turmoil among macro-economists.
In the last of his Lionel Robbins lectures at the LSE on June 10th, Mr Krugman [Paul Krugman of Princeton and the New York Times] feared that most macroeconomics of the past 30 years was “spectacularly useless at best, and positively harmful at worst”.
These internal critics argue that economists missed the origins of the crisis; failed to appreciate its worst symptoms; and cannot now agree about the cure. In other words, economists misread the economy on the way up, misread it on the way down and now mistake the right way out.
Nor can economists now agree on the best way to resolve the crisis. They mostly overestimated the power of routine monetary policy (ie, central-bank purchases of government bills) to restore prosperity. Some now dismiss the power of fiscal policy (ie, government sales of its securities) to do the same.
Towards the end of this first article in the Briefing, there is this:
In the first months of the crisis, macroeconomists reposed great faith in the powers of the Fed and other central banks. In the summer of 2007, a few weeks after the August liquidity crisis began, Frederic Mishkin, a distinguished academic economist and then a governor of the Fed, gave a reassuring talk at the
Federal Reserve Bank of Kansas City’s annual symposium in Jackson Hole, Wyoming. He presented the results of simulations from the Fed’s FRB/US model. Even if house prices fell by a fifth in the next two years, the slump would knock only 0.25% off GDP, according to his benchmark model, and add only a tenth of a percentage point to the unemployment rate. The reason was that the Fed would respond “aggressively”, by which he meant a cut in the federal funds rate of just one percentage point. He concluded that the central bank had the tools to contain the damage at a “manageable level”.
Since his presentation, the Fed has cut its key rate by five percentage points to a mere 0-0.25%. Its conventional weapons have proved insufficient to the task. This has shaken economists’ faith in monetary policy. Unfortunately, they are also horribly divided about what comes next.
The second article explores the way that the efficient-markets hypothesis has underpinned many of the financial industry models.
IN 1978 Michael Jensen, an American economist, boldly declared that “there is no other proposition in economics which has more solid empirical evidence supporting it than the efficient-markets hypothesis”
Eugene Fama, of the University of Chicago, defined its essence: that the price of a financial asset reflects all available information that is relevant to its value.
Even as financial engineers were designing all sorts of clever products on the assumption that markets were efficient, academic economists were focusing more on how markets fall short. Even before the 1987 stockmarket crash gave them their first real-world reminder of markets’ capriciousness, some of them were examining the flaws in the theory.
However, a second branch of financial economics is far more sceptical about markets’ inherent rationality. Behavioural economics, which applies the insights of psychology to finance, has boomed in the past decade.
Behavioural economists were among the first to sound the alarm about trouble in the markets. Notably, Robert Shiller of Yale gave an early warning that America’s housing market was dangerously overvalued. This was his second prescient call. In the 1990s his concerns about the bubbliness of the stockmarket had prompted Alan Greenspan, then chairman of the Federal Reserve, to wonder if the heady share prices of the day were the result of investors’ “irrational exuberance”.
One task, also of interest to macroeconomists, is to work out what central bankers should do about bubbles—now that it is plain that they do occur and can cause great damage when they burst.
Another priority is to get a better understanding of systemic risk, which Messrs Scholes [Myron Scholes]
and Thaler [Richard Thaler of the University of Chicago] agree has been seriously underestimated.
Several countries now expect to introduce a systemic-risk regulator. Financial economists may have useful advice to offer.
Financial economists also need better theories of why liquid markets suddenly become illiquid and of how to manage the risk of “moral hazard”—the danger that the existence of government regulation and safety nets encourages market participants to take bigger risks than they might otherwise have done. The sorry consequences of letting Lehman Brothers fail, which was intended to discourage moral hazard, showed that the middle of a crisis is not the time to get tough. But when is?
Mr Lo [Andrew Lo of the Massachusetts Institute of Technology] has a novel idea for future crises: creating a financial equivalent of the National Transport Safety Board, which investigates every civil-aviation crash in America. He would like similar independent, after-the-fact scrutiny of every financial
failure, to see what caused it and what lessons could be learned. Not the least of the difficulties in the continuing crisis is working out exactly what went wrong and why—and who, including financial economists, should take the blame.
Mr Lo’s idea of treating financial failures in the same way as civil aviation accidents might be a brilliant idea. After all economics is a behavioural science just like the ‘science’ of air traffic controllers and air crew. Seems to me that keeping my money as safe as my body in a civil airliner isn’t a bad goal.
If you can, do get hold of a copy of the briefing, if only to arrive at the same conclusion as me. In terms of future personal financial planning, a pair of dice may be just as accurate as economists.
An original idea that shouldn’t be regarded as innovative.
We live in interesting times! Whenever I use that phrase, and it seems to slip from my lips too often these days, I am reminded of the ancient Chinese curse, “May you live in interesting times!“
There are a goodly number of countries that have legislation that ‘impose’ a minimum wage for employees. Here in the USA, the Federal level for 2012 is $7.25 per hour but it isn’t necessarily the same across all States. Based on a 40-hour working week, 50 weeks a year, that comes to a gross of $14,500 for the full year.
Let’s contrast that with a person who has been in the news recently, Mr. Bob Diamond, Chief Executive of Barclays.
As the BBC reported on the 2nd July,
Mr Diamond has said he will not take a bonus for this year as a result of the scandal.
It is not the first time the 60-year-old Boston-born former academic – he began his career as a university lecturer – has made the headlines.
Mr Diamond was previously best-known for his huge wealth: last year he topped the list of the highest-paid chief executives in the FTSE 100.
In 2011 Mr Diamond earned £20.9m, comprising salary, bonuses and share options, and he is reported to have a personal wealth of £105m.
There has long been controversy about the amount he earns.
In 2010, Lord Mandelson described him as the “unacceptable face of banking”, saying he had taken a £63m salary for “deal-making and shuffling paper around”.
Barclays dismissed the figure as “total fiction” saying that his salary as head of Barclays Capital was actually £250,000.
BBC business editor Robert Peston said he believed Mr Diamond had earned £6m in 2009 from a long-term incentive scheme and £27m from selling his stake in a Barclays-owned business that had been sold.
So whether he earns £20.9m, £6m or even £250,000 frankly makes no difference to the fact that the gap between what the poorest may earn and the sorts of monies that are given to Mr. Diamond and his like is just plain wrong. [And since writing this on Monday, the news broke on Tuesday morning that Mr. Diamond is now unemployed.] Don’t often quote the bible in Learning from Dogs but 2 Corinthians 8:13-15 is irresistible (King James Version),
Our desire is not that others might be relieved while you are hard pressed, but that there might be equality. At the present time your plenty will supply what they need, so that in turn their plenty will supply what you need. The goal is equality, as it is written: “The one who gathered much did not have too much, and the one who gathered little did not have too little.” [my emphasis]
SUNDAY, JULY 1, 2012
France Pushing for a Maximum Wage; Will Others Follow?
A reader pointed out a news item we missed, namely, that the new government in France is trying to implement a maximum wage for the employees of state-owned companies. From the Financial Times:
France’s new socialist government has launched a crackdown on excessive corporate pay by promising to slash the wages of chief executives at companies in which it owns a controlling stake, including EDF, the nuclear power group.
In a departure from the more boardroom-friendly approach of the previous right-of-centre administration, newly elected president François Hollande wants to cap the salary of company leaders at 20 times that of their lowest-paid worker.
According to Jean-Marc Ayrault, prime minister, the measure would be imposed on chief executives at groups such as EDF’s Henri Proglio and Luc Oursel at Areva, the nuclear engineering group. Their pay would fall about 70 per cent and 50 per cent respectively should the plan be cleared by lawyers and implemented in full…
France is unusual in that it still owns large stakes in many of its biggest global companies, ranging from GDF Suez, the gas utility; to Renault, the carmaker; and EADS, parent group of passenger jet maker Airbus.
Of course, in the US, we have companies feeding so heavily at the government trough that they hardly deserve the label of being private, but the idea that the public might legitimately have reason to want to rein in ever-rising executive pay is treated as a rabid radical idea.
From Doug’s post:
For those, however, receiving bailouts, deposit insurance, government guarantees, tax breaks, tax credits, other forms of public financing, government contracts of any sort – and so on – the top paid person cannot receive more than twenty-five times the bottom paid person. This ratio, by the way, is what business visionary Peter Drucker recommended as most effective for organization performance as well as society. It also echoes Jim Collins who, in his book Good To Great, found that the most effective top leaders are paid more modestly than unsuccessful ones. And, critically, it is a ratio that is in line with various European and other nations that have dramatically lower income inequality than the United States.
In other words, the French proposal isn’t that big a change from existing norms, at least in most other advanced economics (ex the UK, which has also moved strongly in the direction of US top level pay). But despite the overwhelming evidence that corporate performance is if anything negatively correlated with CEO pay, the myth of the superstar CEO and the practical obstacles to shareholder intervention (too fragmented; too many built in protections for incumbent management, like staggered director terms; major free rider problems if any investor tries to discipline extractive CEO and C level pay, which means it’s easier to sell than protest) means ideas like this are unlikely to get even a hearing in the US. Let the looting continue!
As Patrice Ayme commented on that Naked Capitalism article, “France will pass the 20 to 1 law, as the socialists control the entire state, senate, National Assembly, Regions, big cities, etc. Only the French Constitutional Court could stop it. That’s unlikely, why? Because one cannot have a minimum wage, without a maximum wage. It’s not a question of philosophy, but of mathematics.“
Let me go back and requote this,
…. the top paid person cannot receive more than twenty-five times the bottom paid person. This ratio, by the way, is what business visionary Peter Drucker recommended as most effective for organization performance as well as society. It also echoes Jim Collins who, in his book Good To Great, found that the most effective top leaders are paid more modestly than unsuccessful ones. And, critically, it is a ratio that is in line with various European and other nations that have dramatically lower income inequality than the United States.
Thus if society was to embrace this approach to fairness, in America the top paid person in 2012 in the USA would be on 25 times the minimum wage level of $14,500 a year or, in other words, $362,500 a year.
I’m not a raving liberal but I am bound to say that this sits pretty well with me. How about you?
As I opened, an original idea that shouldn’t be regarded as innovative.
It’s rare for me to post a second item on the same day but this warrants it!
The full copy of this recently issued Press Release now available on the End Fossil Fuels Subsidies website is republished in full below.
PASS IT ON!
MIDDAY TWITTERSTORM REPORT
June 18, 2012
Call to #EndFossilFuelSubsidies at Rio+20 Tops Twitter
EU Commissioner for Climate Action Connie Hedegaard, celebrities Mark Ruffalo,
Stephen Fry, and Robert Redford, journalist Nicholas Kristof, and more join global push
RIO DE JANEIRO — The push to end fossil fuel subsidies at Rio+20 became the #2 most talked about topic worldwide on Twitter this morning.
The social networking site, which has 100 million active users, tracks discussions by hashtag and #endfossilfuelsubsidies ranked #2 globally and #2 in United States and Australia. 350.org, the global climate campaign coordinating the effort, estimated that the hashtag was being tweeted at least once a second, reaching millions of people around the world.
A number of politicians, journalists, celebrities, and high-profile activists joined in the campaign, helping catapult it into the spotlight:
American actor Mark Ruffalo, who recently played the Hulk in the box-office sensation The Avengers, tweeted, “Good Morn! Can you help us end fossil fuel subsidies? Pls tweet #endfossilfuelsubsidies TODAY to help us send a msg & spread the word.!!!”
The EU Commissioner for Climate Action Connie Hedegaard, who is expected to play a key role at the Rio+20 negotiations,tweeted, “Fossil fuels subsidies have no place in today’s world . They must be phased out as the G20 pledged. #EndFossilFuelSubsidies #Rioplus20.”
350.org founder Bill McKibben tweeted, “$1 trilllion is a lot of money–tired of the fossil fuel industry laughing at us, so joining the twitterstorm #endfossilfuelsubsidies.”
Activists with 350.org are projecting tweets in cities around the world, including Sydney, London, New Delhi, and New York, as well as inside the Rio+20 negotations.
Yesterday, 350.org and Avaaz unfurled a giant $1 trillion bill on the Copacabana beach in Rio, producing some spectacular photos. The global campaign Avaaz.org is delivering a petition with 750,000 signatures calling for an end to fossil fuel subsidies to G20 leaders in Los Cabos, Mexico this afternoon. Over a million people have signed different petitions calling for action on subsidies in the last two weeks.
The current draft of the Rio+20 agreement released on Saturday includes a paragraph on ending fossil fuel subsidies, but negotiations now hang in the balance as oil exporting countries led by Saudi Arabia and Venezuela attempt to delete any references to the proposal. The final decision is likely to come down to Brazil, who hold sway as the host country.
The Twitterstorm can be tracked at endfossilfuelsubsidies.org. Supporting organizations for endfossilfuelsubsidies.org include: 350.org, Avaaz, Climate Reality Project, Earth Day Network, Friends of the Earth International, Global Exchange, Green For All, Greenpeace International, Greenpeace New Zealand, Natural Resource Defense Council, Oil Change International, Quercus, SumOfUs, Wild Aid, WWF
CONTACT: In the US, Daniel Kessler, email@example.com, +1 510-501-1779; In Rio, Jamie Henn, firstname.lastname@example.org, +55(0)2181061948
NOTE TO EDITORS:
1. Information on the $1 Trillion in fossil fuel subsidies: http://priceofoil.org/wp-content/uploads/2012/05/1TFSFIN.pdf
PRESS ADVISORY/PHOTO CALL
‘Twitterstorm’ gathers speed before Monday’s Global Cyberaction to #EndFossilFuelSubsidies at Rio+20
RIO, 15 June 2012 — Momentum is building for this Monday’s 24-hour “Twitterstorm,” a massive international online action to increase pressure on world leaders to cut nearly $1 trillion in fossil fuel subsidies at the upcoming Rio+20 Earth Summit.
For 24 hours between June 18th and 19th, as world leaders gather at the G20 summit and prepare for Rio+20, hundreds of thousands of people around the world will tweet with the same hashtag — #EndFossilFuelSubsidies — at celebrities and politicians, flooding the popular social network with their demand. Over 1 million people have already signed a petition calling on leaders to act.
Recent developments on the Twitterstorm include:
• Confirmation of tweet projections in Sydney, London, New Dehli, and Rio (see Notes section for times and locations) (1)
• A new website with fact sheets, a tool to tweet at celebrities and Heads of State, and more resources for activists: http://www.endfossilfuelsubsidies.org
• A new Facebook event that has registered over two thousand “Tweet Team” members to recruit participants for the day of action. (2)
• Support from over a dozen civil society groups, including 350.org, Greenpeace International, Oil Change International and WWF. (3)
WHAT: A 24-hour Twitterstorm to #EndFossilFuelSubsidies at Rio+20
WHEN: The 24-hour clock will begin at 8:00 UTC (6 PM local time in Sydney) when activists will flock to Twitter with messages that will be projected in iconic locations in Sydney, New Delhi, London, and Rio. In recent weeks campaigning groups have collected over 1 million signatures demanding that leaders act now.
WHY: According to figures compiled by Oil Change International, countries are spending as much as $1 trillion USD combined annually on fossil fuel subsidies. (4) The International Energy Agency estimates that by cutting these subsidies, the world can cut global warming causing emissions in half and significantly contribute to preventing a 2 degree temperature rise, the limit most scientists say we need to stay under to prevent runaway climate change. (5)
In May, leaders of the G20 again pledged to eliminate fossil fuel subsidies. They first made the commitment in 2009 but have yet to implement the policy change at the country level.
While global warming emissions rise and gas prices spike, fossil fuel companies continue to make massive profits, which brings into doubt the need for subsidies. ExxonMobil, for example, made $41.1 billion USD in profit in 2011.
CONTACT: In the US, Daniel Kessler, 350.org, email@example.com, +1 510-501-1779; In Rio, Jamie Henn, firstname.lastname@example.org, +55(0)2181061948
NOTE TO EDITORS:
1. June 18 projection events
◦ Summary: Sydney will launch the Twitter Storm from the Sydney Opera House. Local supporters are invited to send a photo or video message to world leaders with the Sydney Opera House and Sydney Harbour Bridge as a backdrop. Projection of the Twitter feed will continue late at night around Sydney’s CBD.
◦ 6 PM (UTC+10) Sydney Opera House Boardwalks
◦ 9 PM (UTC+10) Sydney CBD
◦ CONTACT: Abi Jamines email@example.com, +61 403278621
• New Delhi
◦ Summary: There will be two projections in New Delhi.
◦ Projection 1: 6 PM – 9 PM, Moonlighting, An indoor projection while the Twitter feed is projected to an invited audience along with a speaker to discuss the issue of fossil fuel subsidies in the Indian context. (Will share speaker details soon, yet to be confirmed).
◦ Projection 2: 6PM – 11 PM An outdoor projection at a local mall called DLF Saket.
◦ CONTACT: Chaitanya Kumar, firstname.lastname@example.org, +91-9849016371
◦ Summary: There will be 3 events in London–a petition delivery at 10 Downing Street in the morning, followed by two projections.
◦ Petition delivery: 10:30am GMT+1, Number 10 Downing Street, London.
◦ Projection 1: 1:30pm GMT+1, Houses of Parliament, London
◦ Projection 2: Approximately midnight GMT+1 (Tuesday 19th June), Nelson’s Column, Trafalgar Square, London
◦ CONTACT: Emma Biermann, email@example.com, +44 (0) 78 3500 4720,
◦ Summary: Tweets will be displayed in the Rio Centro conference center all day.
◦ CONTACT: Jamie Henn, firstname.lastname@example.org, +55(0)2181061948
3. Supporting organizations include: 350.org, Avaaz, Climate Reality Project, Earth Day Network, Friends of the Earth International, Global Exchange, Green For All, Greenpeace International, Greenpeace Australia, and Greenpeace New Zealand, League of Conservation Voters, Natural Resource Defense Council, Oil Change International, Oxfam, Quercus, SumOfUs, Wild Aid, World Wildlife Fund
‘Twitter Storm’ Planned to Pressure Leaders to End Fossil Fuel Subsidies at Rio+20
Environmental conference ideal place to end wasteful giveaways to corporate polluters, says civil society groups
Oakland, 7 June 2012 — Campaigning organizations from around the world will join forces on June 18 for a 24-hour ‘Twitter storm’ in which tens of thousands of messages will be posted on the social networking site demanding that world leaders use Rio+20 to agree to end fossil fuel subsidies.
The 24 hour clock will start at 6PM local time in Sydney (8AM UTC), when activists will begin to flock to Twitter with messages that will also be projected in iconic spots in Sydney, New Delhi, London, Rio, and other locations. In recent weeks campaigning groups have collected over 1 million signatures demanding that leaders act now to end subsidies and start to invest in clean energy solutions. (1)
According to figures compiled by Oil Change International, countries together are spending as much as $1 trillion dollars annually on fossil fuel subsidies. (2) The International Energy Agency estimates that by cutting these subsidies, the world can cut global warming causing emissions in half and significantly contribute to preventing a 2 degree temperature rise, the number most scientists say we need to stay under to prevent runaway climate change. (3)
“We are giving twelve times as much in subsidies to fossil fuels as we are providing to clean energy, like wind and solar. World leaders shouldn’t be subsidizing the destruction of our planet, especially since these subsidies are cooking our planet,” said Jake Schmidt, International Climate Policy Director at the Natural Resources Defense Council.
In May, leaders of the G20 again pledged to eliminate fossil fuel subsidies. They first made the commitment in 2009 but have yet to implement the policy change at the country level.
While global warming emissions rise and gas prices spike, fossil fuel companies continue to make massive profits, which brings into doubt the need for subsidies. ExxonMobil, for example, paid an effective US federal tax rate in 2010 of 17.2 percent, while the average American paid 28 percent.
Participating organizations include 350.org, Avaaz, Greenpeace. Oil Change International, Natural Resources Defense Council, and others.
CONTACT: In the US, Daniel Kessler, 350.org, +1 510 501 1779, email@example.com
NOTE TO EDITORS:
A remarkably simple explanation, courtesy of a Greek Hotel, about financial bailouts!
Last week-end I was indebted to Neil Kelly for supplying a more humorous look at life for Learning from Dogs. This week-end I turn to friend, Bob D., a corporate airliner Captain out in the Middle East. Here is Bob’s contribution for today. (Editor’s note: at the time of posting this, 1 euro = 1.3405 US dollars, ergo €100 = $134 – read on, this will make sense.)
For those interested in world events….
How the Greek bailout package works.
It is a slow day in a damp little Greek town. The rain is beating down and the streets are deserted. Times are tough, everybody is in debt, and everybody lives on credit.
On this particular day a rich German tourist is driving through the town, stops at the local hotel and lays a €100 note on the desk, telling the hotel owner he wants to inspect the rooms upstairs in order to pick one to spend the night.
The owner gives him some keys and, as soon as the visitor has walked upstairs, the hotelier grabs the €100 note and runs next door to pay his debt to the butcher. The butcher takes the €100 note and runs down the street to repay his debt to the pig farmer.
The pig farmer takes the €100 note and heads off to pay his bill at the supplier of feed and fuel. The guy at the Farmers’ Co-op takes the €100 note and runs to pay his drinks bill at the pub. The publican slips the money along to the local prostitute drinking at the bar, who has also been facing hard times and has had to offer him “services” on credit. The hooker then rushes to the hotel and pays off her room bill to the hotel owner with the €100 note.
The hotel proprietor then places the €100 note back on the counter so the rich traveler will not suspect anything. At that moment the traveler comes down the stairs, picks up the €100 note, states that the rooms are not satisfactory, pockets the money, and leaves town.
No one produced anything. No one earned anything. However, the whole town is now out of debt and looking to the future with a lot more optimism.
And that, Ladies and Gentlemen, is how the bailout package works.
The story that could run for an awfully long time!
I rather revealed my newness as a US resident by posting my review of David Kauders’ book The Greatest Crash over 2 days last week, one of them being Thanksgiving Day. Despite that 1,895 people viewed my review which was entitled The end of an era.
A week has now passed since that review. I was curious to see what sorts of headlines had been making the news in the last 7 days. It’s just a random trawl through those items that have captured my attention.
Let’s start with the Financial Times, November 27th,
The eurozone really has only days to avoid collapse
By Wolfgang Münchau
In virtually all the debates about the eurozone I have been engaged in, someone usually makes the point that it is only when things get bad enough, the politicians finally act – eurobond, debt monetisation, quantitative easing, whatever. I am not so sure. The argument ignores the problem of acute collective action.
Last week, the crisis reached a new qualitative stage. With the spectacular flop of the German bond auction and the alarming rise in short-term rates in Spain and Italy, the government bond market across the eurozone has ceased to function.
Wolfgang concludes his article thus,
Italy’s disastrous bond auction on Friday tells us time is running out. The eurozone has 10 days at most.
Then my print copy of The Economist that arrived on the 26th had this lurid cover page,
Unless Germany and the ECB move quickly, the single currency’s collapse is looming
The leader article contains this paragraph,
Past financial crises show that this downward spiral can be arrested only by bold policies to regain market confidence. But Europe’s policymakers seem unable or unwilling to be bold enough. The much-ballyhooed leveraging of the euro-zone rescue fund agreed on in October is going nowhere. Euro-zone leaders have become adept at talking up grand long-term plans to safeguard their currency—more intrusive fiscal supervision, new treaties to advance political integration. But they offer almost no ideas for containing today’s conflagration.
and a few paragraphs later, this,
This cannot go on for much longer. Without a dramatic change of heart by the ECB and by European leaders, the single currency could break up within weeks. Any number of events, from the failure of a big bank to the collapse of a government to more dud bond auctions, could cause its demise. In the last week of January, Italy must refinance more than €30 billion ($40 billion) of bonds. If the markets balk, and the ECB refuses to blink, the world’s third-biggest sovereign borrower could be pushed into default.
Then on Sunday, 27th, MISH’s Trend Analysis blogsite reveals,
ICAP Plc, the world’s largest inter-dealer broker (one that carries out transactions for financial institutions rather than private individuals), is now Testing Trades In Greek Drachma Against Dollar, Euro
ICAP Plc is preparing its electronic trading platforms for Greece’s potential exit from the euro and a return to the drachma, senior executives at the inter-dealer broker said Sunday.
ICAP is the latest firm to disclose such preparations, joining the growing ranks of banks, governments and other key players in the global financial system whose officials are worried enough about the stability of the common currency to be making contingency plans for a possible break-up.
Investors sent Europe’s politicians a painful message last week whenGermany had a seriously disappointing government bond auction. It was unable to sell more than a third of the benchmark 10-year bonds it had sought to auction off on Nov. 23, and interest rates on 30-year German debt rose from 2.61 percent to 2.83 percent. The message? Germany is no longer a safe haven.
Ultimately, an integrated currency area may remain in Europe, albeit with fewer countries and more fiscal centralization. The Germans will force the weaker countries out of the euro area or, more likely, Germany and some others will leave the euro to form their own currency. The euro zone could be expanded again later, but only after much deeper political, economic and fiscal integration.
Tragedy awaits. European politicians are likely to stall until markets force a chaotic end upon them. Let’s hope they are planning quietly to keep disorder from turning into chaos.
Finally, on the 29th the BBC News website carried details of the Autumn Statement made by British Chancellor, George Osborne, to Parliament.
Osborne confirms pay and jobs pain as growth slows
Chancellor George Osborne has said public sector pay rises will be capped at 1% for two years, as he lowered growth forecasts for the UK economy.
The number of public sector jobs set to be lost by 2017 has also been revised up from 400,000 to 710,000.
Borrowing and unemployment are set to be higher than forecast and spending cuts to carry on to 2017, he admitted.
Just look at that figure of public sector job losses – 710,000!
Well that’s more than enough from me but it does surely endorse the opening views that David Kauders expounded in his book, as carried in my review, and reproduced here,
Starting with the first sentence, David sets out the core problem;
This book argues that it is impossible to expand the financial system much further.
expanding this a few paragraphs later,
This is the financial system limit: lack of new borrowing plus excessive weight of debt obligations from past borrowing combine to slow economies down. This is the barrier whichever way policy makers turn. It is like the lid on a boiling kettle. Enough steam can lift it for a while but it always snaps back into place. The financial system limit is a roadblock preventing growth.
A few pages later in this opening chapter ‘The roadblock preventing growth‘ this limit is explained thus,
Policy contradictions also show us that the financial system has reached a roadblock. The glaring conflict between bailout and austerity is at the core. Each bailout or stimulus requires creation of more credit, leading to false financial speculation, and for a short while markets recover their poise. The threat of inflation returns. Later, bad debts rise, the markets tumble again and a new crisis emerges. Austerity, the alternative policy, cuts spending thereby cutting the immediate level of economic activity and bringing economic decline more quickly than the stimulus alternative. Whichever way they turn, the authorities are damned.
You can understand why I called this Post a ‘footnote’ not an endnote.