How central bankers could save the
world By Chan Akya
I am
not sure what the climate change discussions in
Bali are expected to achieve, besides imposing
unnecessary hardships on Australians looking for
cheap booze before the Christmas break. (I am
usually inclined to accommodate such wishes with
respect to the antipodeans, and their ejection of
prime minister John Howard in recent elections has
made them quite popular in Asia.)
If the
intent of the conference was to reshape the global
economy, then the assembled delegates have started
completely the wrong way. Then again, these
left-leaning do-gooders cannot be
expected to get things right
anyway.
Where I propose they start is in
the halls of global central banks instead, for the
biggest culprits of the global warming debate lie
right there. To explain why I believe that is the
case, readers can look at the following topics -
consumption, negative goods and innovation. Once
these are explained, it becomes easy to see what
global central bankers should do.
Consumption By and large, the
world economy thrives on consumption and
especially the American kind. The US economy
supplies one in five dollars of global
consumption. This, added to the second dollar
supplied by Europe, is what pushes global warming.
The US economy doesn’t produce as much as
it consumes, hence its significant current account
deficit. The other deficit, namely budget, is
merely a function of Dick Cheney lying through his
teeth (dentures?) about pretty much everything the
government does.
Going back to the current
account deficit though, it represents the
''dream'' target of any Green. In actual carbon
terms, the import of Asian products for example
represents the carbon emissions of Asian countries
as well as those of the global shipping industry.
All told, various publications cite different
figures but it would not be hazardous to assign
some 30% of global emissions to the US current
account deficit.
This is what the Greens
miss completely - they count the emissions of
China and India in the same league as those of the
US and Europe, and that is wrong because a
substantial portion of Asian emissions goes to the
manufacture of goods consumed in the US.
In turn, what gets consumed in the US is
also financed by Asia because Americans stopped
saving from the time Carter stepped down. This is
the billions of dollars in Asian central banks
devoted to the purchase of US treasury bonds, as
well as various ''highly rated'' securities. I
have written often enough about how much money
will be lost in Asia because of these bonds, and
there is no need to repeat my arguments here.
To a large extent, the twin forces of a
disingenuous Fed (euphemism for outright liars)
and harmony-seeking Asian central banks (euphemism
for dumb no-gooders who wouldn’t get a job
flipping burgers if their uncles hadn’t made them
the governors of the People's Bank of China or
Bank of Japan or whatever) allow this circle of
deficit-financed consumption to persist.
At the moment, with US consumer loans
looking very risky indeed – this week for example
reports showed sharply increased delinquency rates
on auto loans in addition to the continued
defaults on housing loans - Asian bankers are
panicking about what to do with the billions of US
securities on their books.
They have urged
the US Fed to become more aggressive on interest
rate cuts to help the US economy recover, in
effect helping to perpetuate the cycle of global
warming described above. In the face of rampant
inflation, it makes sense for the US Fed to hike
rates now and engineer a hard landing for the US
economy. A few million Americans will be thrown
out of work, but so what - they weren’t
necessarily working on anything except selling
each other inflated housing anyway.
A hard
landing for the US economy will help cut global
carbon emissions, by a factor of over 10%, so why
not engineer it? This will also force Asian
central banks to abandon their US dollar pegs
(which is the main reason their incompetence can
never be seen by the public) and actually try to
manage inflation and growth in their own
countries.
With a bulk of the world’s
manufacturing now in Asia, a shift in consumption
to the region would not be a bad thing, and anyway
overall shipping emissions will decline because
goods will be consumed closer to the point of
manufacture.
Negative economic
goods The second aspect that the Greens
miss out is the pricing of negative economic
goods. The Greenspan Fed introduced some
innovations in the calculation of inflation (and
here I use the word innovation in the sense of
lying) wherein the pricing of goods was adjusted
for improvements in the product.
Thus, a
medium-sized family car could well cost a couple
of thousand dollars more than the last year’s
model, but by incorporating metrics such as
improved safety, higher engine capacity and bigger
boot, the Fed could say that the price of the car
actually fell for the year. This in turn meant
that inflation was negative, which in turn allowed
them to cut interest rates, boost consumption and
all the stuff described above.
Think back
though - if the world’s central banks can be urged
to price negative economic goods into their
calculation of inflation, they would have a
completely different picture. In practice, the
price of an average supermarket widget would have
to be pushed up to highlight the effect of
shipping it over from China, to the detriment of
the global climate.
That alone can add
some 10 percentage points to inflation
calculations in the US and Europe, which should be
sufficient to push these central banks from
accommodative to restrictive in one step. The idea
is hardly new as the US pioneered the pricing of
negative economic goods with the tobacco industry.
Just as smoking is bad for the lungs, driving cars
and shipping dolls from China is bad for the
environment. The reduction in living standards
thus entailed should be reflected in the price of
the product.
Innovation There
is an old joke from the dot-com era, wherein the
computer industry makes light of the automobile
industry. The computer nerds point out that if
cars had evolved as quickly as computers in the
nineties, the average automobile would drive like
a Rolls Royce, be priced like a Hyundai and have
the fuel economy of an electric car. The joke of
course was in the response from the car industry,
which said - yes, all that is technically
possible, but if cars performed like computers,
you would need to change your models every time
the road markers were repainted, among other
quibbles.
Whichever way you lean on the
joke above, ie, sympathetic to the computer nerds
or the automobile engineers, the fact of the
matter is that innovation in the car industry has
been extremely slow by the standards of modern
science. I have written previously about the
economics of the car industry, with the main point
being that the intervention in the automobile
industries of Europe and Japan by local
governments is one of the main factors limiting
innovation in the industry.
There are
other industries, such as carbon capture, where
the right dose of pricing – see the argument on
negative economic goods above - would help push
innovation that is currently stalled. Promising
new technologies such as fuel cell stacks for
homes, wind power for large industries and
electric cars on the road are all stalled due to
the limits on the economics of innovation.
Much as the global pharmaceutical industry
refuses to research drugs for diseases that do not
affect Americans and Europeans, research and
development of alternative energy technologies
will not take off until underlying economics are
addressed. This is the most significant force that
humanity possesses to offset global emissions, and
yet there has been little to no progress.
Pricing money correctly The
price of money, much like anything else, can
induce behavioral shifts. The problem of global
warming is linked closely to the excessive
deficit-financed consumption of the US, but
equally the thoughtless pricing of negative
economic goods in the process.
Global
central banks have the responsibility as well as
the ability to make a difference. The major
central banks such as the US Fed, European Central
Bank, Bank of Japan and Bank of England should be
urged to change their inflation calculations to
incorporate the effect of environmental damage
wrought by various activities. This will help
countries to change the mix of domestic production
and consumption, through the rather blunt
instrument of interest rate changes. These banks
would for example look to raise rather than cut
interest rates now, if these adjustments were
made.
That would necessarily push the
world into recession, but it will be a short one
as innovation takes over and new products and
technologies that come to the forefront will help
reduce the carbon footprint of global industry.
The second aspect is to ensure that
unnecessary restrictions on the pricing of
currency rates are removed. China’s peg is not
just bad for the global environment; it also
encourages other countries in Asia and Latin
America to maintain currency intervention well
past anything required realistically.
The
last change that is required is for the Greens to
stop assembling in various exotic locations.
Available technologies such as video conferencing
and internet blogging are more than sufficient to
get their points across to various government
officials. Plus it would leave the cheap booze for
the Australians, as demanded by nature.
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