Wednesday, February 29, 2012

Leap Day Weather Weirdness Suggests Global Warming Is Not Just A Hoax

A scan of the headlines on on Leap Day 2012 illustrates that weather weirdness is striking across the U.S. While weather extremes are normal, today is yet another day when the weather seems to be on steroids.
  1. Record heat is being experienced in the South and Midwest, 
  2. 17 tornadoes have been reported and damage is widespread in some towns
  3. the drought in California is worsening. 
Is seems hard to reconcile Rick Santorum's claim that "global warming is a hoax" with the increasing frequency of extreme weather. While the weather being experienced today across the U.S. does not prove anything in regard to climate change, it certainly seems to be a reason to pay attention to the predictions of those warning about global warming. Of course, with it being a leap day, the high temperature records that will be set today only have 1/4th the usual competition as on others day of the year, so they can be somewhat discounted. However, regardless of the lower hurdle for new records on a leap day, the 80 degree temperatures predicted for southern Texas and Florida are remarkably warm for February.

Hottest Day Records

If global warming theory is valid, the U.S. may be in for a hot summer. It appears that La Nina is winding down and may end in a few months. Thus, the cooling effect of La Nina caused by cold waters rising to the surface in the Pacific is unlikely to influence the summer temperatures in the U.S.  Last year was the coolest La Nina year on record. This summer we will discover if  new records for hot weather will be set without the qualifier of only being compared to other La Nina years.

Tornadoes and Hurricanes

The wild card into whether there is a trend toward an increase in extreme weather in the U.S will be shown by whether there is a change in tornado and hurricane activity.  According to meteorologist Jeff Masters, last year's "incredibly violent tornado season is either a fluke, the start of a new trend, or an early warning symptom that the climate is growing unstable and is transitioning to a new, higher energy state with the potential to create unprecedented weather and climate events. All are reasonable explanations".

It is also impossible to predict the number and potential devastation from hurricanes striking the U.S.  Any of the following the could either be the beginning of a trend or a normal variation in the weather:
  1. an increase in tropical storms in 2010 and 2011- suggesting more hurricanes hitting the U.S. 
  2. only one hurricane has made landfall in the U.S. since 2008- suggesting no change in hurricanes hitting the U.S.
  3. the massive devastation from hurricane Irene - suggesting the hurricanes hitting the U.S. may become more powerful and destructive in the future
The weird weather striking across the U.S. provides evidence that climate change may be having an impact on local weather. However, while the debate about global warming is a source of contentious debate, there is too much evidence of its impact to label it a hoax. Global warming researchers predictions may be faulty, but there is not an organized attempt to perpetuate a giant hoax. 

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Monday, February 27, 2012

U.S. Debt Ceiling Scenarios - When Will The Ceiling Be Hit and Which Party Will Control Congress

The U.S. government is rapidly spending its way toward the debt ceiling. Treasury Secretary Tim Geithner recently told lawmakers that he expects the debt limit to be reached "quite late in the year." The United States will likely hit the $16.4 trillion debt ceiling between late November 2012 and early January 2013.

The Treasury Department can employ a variety of accounting maneuvers to push back the deadline prior to  the U.S. defaulting on its debt. It did so last year, when the debt limit was technically reached in May but Treasury was able to push back the deadline until early August. Thus, it seems unlikely that the debt ceiling debate will have to be broached by Congress until after the November election.

Regardless of what scenario plays out, the solution will be messy. The credit rating of the U.S. is in danger of being slashed again. Here are a couple of critical considerations:
1) Will Congress and the Presidency be unified under one party or remain split between the Democrats and Republicans?
2) Will raising the debt ceiling fall to a lame duck Congress and/or President to vote upon after the November elections but before the winners actually take their seats in January?
If the Democrats take control of all three branches of Federal government, raising the debt ceiling will probably be noisy, particularly if there is a Republican attempt at a filibuster, but should pass fairly easily. If Republicans take control of all three branches, it may take considerable arm twisting to round up the votes to pass the debt ceiling. however, it seems unlikely that they would force a Federal government shutdown by not passing an increase. As pointed out by Norm Ornstein, of the American Enterprise Institute, if President Obama loses the election, he may still have a strong hand to play in the debt ceiling negotiations, since the newly elected Republican President will not want his first task in office to be rounding up votes for a debt ceiling increase.

The most likely outcome seems to be that the U.S. will continue to have a divided Federal government after the 2012 elections. The seems little cause for optimism that the 2012 Congress will be any better at achieving compromises than the current Congress. The debt ceiling debate is likely to be just as contentious as it was last summer, however, the Republicans may not be amenable to any sort of compromise after the failure of the Super Committee to achieve an amenable solution to reducing the deficit.  

If voters send another divided government to D.C. in the 2012 elections, the potential for a bitter stalemate over legislation to raise the debt ceiling may be in the cards. A shutdown of the Federal government seems like an outcome with a reasonably high probability of occurring. Federal employees should probably be prepared for skipped paychecks and investors should probably be prepared for stock and bond prices to take a hit from a continuation of dysfunctional U.S. government.

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Thursday, February 23, 2012

Cold Snap and High Oil Prices Will Accelerate European Slow Down

Beware of economic data and surveys from Europe. Any backwards looking reports that are based on results prior to January 26 incorporate the boost to economic activity provided by the mild winter and stable oil prices up to that point. The cold snap and higher oil price will serve as a one-two punch that will lead to a dip in economic activity that will show up when reports on February results are released.

An example of using backward looking data to suggest that the European economic situation is muddling through is provided by EU Economic and Monetary Affairs Commissioner Olli Rehn who stated ""recent developments in survey data suggest that the expected slowdown will be rather mild and temporary" at a news conference the other day.

Europe is in danger of an economic slowdown that is much worse than just "mild and temporary". European December Industrial Output declined by 1.1%, led by a 2.7% drop by Germany, compared to November (which in turn was a 0.3% decline). The slide in industrial production most likely will show another big drop when February results are published.

The cold snap led to blocked transportation, reduced shopping and tourism, and higher energy costs. Just one  aspect of the cold snap, the freezing of the Danube, led to millions of dollars (actually Euros) in reduced economic activity. As shown in the map from NOAA, the temperatures in most of Europe were 4-6 degrees below normal for 30 day period from January 22 - February 20.

The European economy (as well as the U.S.) is being propped up by the $2 trillion liquidity injection in the past 4-6 months by global central banks, however, this massive money printing is starting to be reflected in higher prices for oil. Continued money printing (or if your prefer, quantitative easing) seems likely to lead to further increases in the price of oil. Combine the dangers of money printing with fact that the Greek debt deal is likely to unravel in the very near future, and it is challenging to come to any other conclusion than that the financial  markets are behaving with irrational exuberance. The recession in Europe is likely to be both severe and lengthy. At the very least, the results for February economic activity are likely to be depressed and come in lower than currently projected.

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Tuesday, February 21, 2012

Will Rising Oil Prices Burst the Money Printing Bubble?

The debt crisis has remained reasonably well contained over the last few months. The impact of planned austerity measures has not hit the northern tier of the Euro zone countries. Japan, the U.K., Canada, the U.S. and most of the world's other developed economies have blissfully proceeded along with continued profligate government spending. The reason that interest rates required to finance the burgeoning government debts has not gone through the roof is that central banks have been printing money by buying up the supply up government debt. Central banks have pumped nearly $7 trillion into buying government debt in the past 4 years.

So far, the gold bugs that have been warning that this money printing will lead to hyper inflation have been wrong. However, funding trillions of dollars in new debt simply by having central banks buy up the debt is unsustainable. There is a time limit on how many more years that U.S. can continue to add a trillion dollar to the national debt. Japan may already be at the edge of an economic abyss.

The inflationary effect of higher oil prices may hasten the bursting of the money printing bubble. If the opinion of some economists that proclaim that oil prices have a bigger impact on inflation than federal deficit spending is correct, then we may be in for a bout of inflation. The cost of oil impacts the price of almost every product sold in the U.S. in addition to its huge impact on food and transportation costs, as detailed in Do 2012 Economic Forecasts for U.S. Foolishly Discount High Cost of Oil?

There is a real danger that higher oil costs will function synergistically with the massive money printing to reignite inflation. And if interest rates go up due to inflation, government deficits will grow even larger as interest expense will grow. The whole process could turn into a vicious cycle of increasing inflation.

The irony of higher oil prices is that the effort of the U.S. to impose oil sanctions on Iran is backfiring. The higher prices of oil hurts the economies of the U.S. its oil importing allies, while increasing the compensation to Iran for their oil sales. The concept that an embargo on Iranian oil can be effective is incredibly foolish. Oil is too fungible to be effectively embargoed simply via economic sanctions.

The central bank money printing is creating a bubble that is sure to burst at some point during the next few years. Given the saber rattling by Iran, Israel, and the U.S., the price of oil seems unlikely to be headed anywhere but up. The higher price of oil could reignite an inflationary spiral and burst the money printing bubble before the November U.S. election. The rally in the price of gold over the past two days seems likely to continue. The gold bugs are starting to seem a lot smarter than they did when the price of WTI oil temporarily dropped below $100 a barrel.

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Thursday, February 16, 2012

Japan - Will The Economic Powerhouse of the Eighties Become The Next Greece?

During the 1980's Japan was a manufacturing dynamo that many feared would decimate the American industrial base. However, the country has lost its status as an exporting powerhouse. During 2011 it ran its first annual trade deficit since 1980.  The country also experienced a  2.3% contraction in the  GDP in the fourth quarter. It is stunning to contemplate the downward spiral that the Japanese economy has undergone within the last few decades. Japan may be approaching a tipping point that could lead the country into a depression. 

As reported by the New York Times in 2010, 
Japan rode one of the great speculative stock and property bubbles of all time in the 1980s to become the first Asian country to challenge the long dominance of the West. But the bubbles popped in the late 1980s and early 1990s, and Japan fell into a slow but relentless decline that neither enormous budget deficits nor a flood of easy money has reversed. For nearly a generation now, the nation has been trapped in low growth and a corrosive downward spiral of prices, known as deflation, in the process shriveling from an economic Godzilla to little more than an afterthought in the global economy.  
The economic outlook for Japan had gotten even worse over the last couple of years due to: 

  1. the March 2011 Tsunami 
  2. the increased cost of energy due to shutting down of nuclear plants
  3. the country's ageing and declining population
  4. the largest debt to GDP ratio of any country in the world at 235% 
  5. a government budget that will fund half off all spending via borrowing in 2012
The tipping point for Japan may be the countries high cost of energy. A powerful anti-nuclear movement has prevented Japan's nuclear reactors from being brought back online after they are shut for routine maintenance, and only three of 54 are now operating. Without approval for restarts, all of them could be shut by the end of April, boosting fossil fuel use and adding over $30 billion a year to the nation's energy costs. The elimination of this source of electricity has led to frequent brownouts, leading to increased manufacturing costs..

Tepco, the struggling operator of the tsunami-hit Fukushima nuclear complex, plans to raise electricity prices for commercial customers by an average 17 percent, citing a higher import bill as it shifts to fossil fuel-fired power generation. Concerns over the unstable supply and high cost of electricity have led to industrial production being shifted overseas, making it even more difficult to reverse the downward spiral of the economy.

The multiple problems facing Japan's economy make addressing the enormous budget deficit extremely challenging. The huge debt is only sustainable for now due to the low rate of interest on the government issued debt. However, if buyers start demanding higher yields for government debt, the size of the Japanese deficit will start increasing almost exponentially. 

Japanese Prime Minister Yoshihiko Noda's Cabinet is set to endorse his plan to double the sales tax in three years. With outstanding public debt that is over twice the size of the economy-- and higher than in Greece--Noda wants to raise the current 5% sales tax to 8% in April 2014 and then to 10% by October 2015 to fund growing social welfare spending. 

If the doubling of the sales tax passes, it may be as disastrous for the Japanese economy as austerity measures have been for the Greek economy. The downward spiral of the Japanese economy may pick up momentum and lead it to become the next Greece. 

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Tuesday, February 14, 2012

Will Chatter About Iran And Return of 12th Imam Mahdi Drive Up Price of Oil

Is the Iranian leadership made up of reasonable men or are they driven by a sense of a divine mission? As tension builds over Iran's nuclear program, the answer to this question becomes important in calculating the risk of the Gulf of Hormuz being shut down and oil becoming very expensive.

There are numerous commentators that have posted that Iran's Supreme Leader Ayatollah Ali Khamanei  and President Mahmoud Ahmadinejad  believe that  the 12th Imam Mahdi will return to earth either as result of or to bring about the apocalyptic end of days. These commentators suggest that the Iranian leaders may be governing with the intent of triggering an apocalypse and hastening the appearance of the Mahdi

If the idea that Iranian leaders would welcome an apocalypse becomes commonplace, then it seems likely that the price of oil will be bid up due to a higher perceived risk factor that Iran will attempt to shut down the Gulf of Hormuz.

In regard to the short term price of oil, it is irrelevant as to whether the assumption  is correct that Ayatollah Khamanei and President Ahmadinejad  believe the 12th Imam Mahdi will return to earth. What really matters is whether oil traders come around to the opinion that the Iranian leadership are true believers. If oil traders become fearful the Ayatollah Khamanei may attempt to close down the Strait of Hormuz as an aspect of his divine mission, then the risk factor included in the price of oil will go even higher.

The following are a couple of recent posts on Iran and the return of the 12th Imam Madhi. When reading, ask yourself not only if you think they are credible, but also if you think this theory is likely to gain credence with oil traders.

Why Iran will not ‘come to its senses’

What Does the Ayatollah Want?

Monday, February 13, 2012

Voters in Euro Zone Will Elect New Leaders, U.S. Voters Likely to Extend Gridlock

The Euro zone crisis is likely to lead to electoral defeats of ruling parties across the continent. They will be punished for implementing austerity measures. In contrast, here in the U.S. it is looking increasingly likely that incumbents will do well in the November elections. It seems probable most incumbents will be returned to office and that control of the the Presidency, Senate and House will remain split between the Democrats and Republicans. Gridlock will continue and hard decisions about the budget will be kicked down the road.

The election schedule for the Euro zone during 2012 is rather light. Among the countries that have been generating the most headlines in the financial press, only France and Greece have elections scheduled. In France, President Sarkozy appears to be headed for defeat at the hands of Socialist party candidate, Francois Hollande. A poll by the daily Le Parisien, showed Hollande remains the clear favorite, and predicted him easily defeating Sarkozy in a second-round runoff with 58 percent to 42 percent.

In Greece, Antonis Samaras, head of the New Democracy party, is the front runner to become the country's  next prime minister, replacing Lucas Papademos.

Given the turmoil in the Euro zone due to the debt crisis, it would not be surprising if parliamentary governing coalitions fall apart and snap elections are called in additional Euro zone countries. And even if their coalitions can hold together until required elections, Angela Merkel and Mario Monti seem unlikely to survive as heads of state after the 2013 elections in Germany and Italy.

In the Euro zone, the voters will probably kick out of office politicians that are attempting to rein in the huge budget deficits. In the U.S. the voters will probably reward the politicians that continue to ring up unsustainable trillion dollar deficits with another term in office. 

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Thursday, February 9, 2012

Will the Weather On Steroids Damage Santorum for Taking A Know Nothing Position On Global Warming?

The claim by Rick Santorum that "global warming is a hoax" is becoming one of his campaign's bedrock issues.  While it is a claim that appeals to his core base of supporters, it is also is likely to lead the majority of moderate and independent voters to question his judgement. About 63 percent of Americans said they believed that global warming is occurring according to polling by the Yale University Project on Climate Change Communication, which tracks Americans' opinions about climate change.

The increasing destructiveness of extreme weather is a major cause of the tilt in the opinion of the majority of Americans to now judging that global warming is occurring. The phrase "weather on steroids" is a succinct  way of describing the effect of global climate change on weather events. This use of the phrase seems likely to become increasingly commonplace. There is even a Weather on Steroids website.

Our minds are hard-wired to spot patterns as it helps us make sense of the world. Thus, we often confuse correlation with causation. In the case of extreme weather, at least some of the droughts, flash floods, and record breaking snowfalls of the last few years probably can be attributed to global climate change. It is easy to make a connection between changing weather patterns and the climate and one that some researchers judge to be scientifically valid. Once an individual has made a connection between extreme weather and global climate change, it becomes likely that they will make a connection between every extreme weather event and global warming. 

Here are two predictions that are almost certain to come true: 1) there will be extreme weather events between now and the end of the Presidential primary season; and 2) extreme weather events will reinforce the concerns of those that are worried about global warming.  Each extreme weather event enhances the likelihood that voters will decide that Rick Santorum is a "wingnut" on the issue of global warming. 

New evidence that believers in "global warming is a hoax" have their heads buried in the sand comes out almost every week. In addition to the freaky weather, U.S. scientists using satellite data have found that thinning glaciers and icecaps have been pushing up sea levels by 0.06 inches a year, and that sea levels are rising by about 0.14 inches per year. While a 0.14 inch rise in sea levels in any one year is manageable, if that level of rise is extrapolated out over multiple decades, it become threatening to the millions of inhabitants of low lying areas. Further, if the pace of the melt escalates as some climate researchers predict, the consequences within just a few decades could be devastating. 

The "global warming is a hoax" position of Rick Santorum makes him incredibly vulnerable in a general election. As increasing evidence of global climate changes makes it harder to ignore, the majority of Americans' are going to be dismissive of a candidate that takes a "know nothing" position denying its existence. Every extreme weather event will make Santorum appear increasingly foolish, regardless of  whether the events are scientifically attributable to global climate change. Each "weather on steroids" occurrence will damage Santorum's credibility with voters.

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Monday, February 6, 2012

Be Happy, Do Not Worry About Looming Debt, Expensive Oil, and Extreme Weather Crises

Stocks around the world are off to their best start in 18 years. The permabears are getting massacred as they get stopped out on their short positions. My own bearish forecasts made less than two months ago are looking terribly misguided.

However, despite the good start to the year, I worry that terrible problems are just being kicked down the road. I still have a sense of dread over the headwinds the economy will face over next few years.

Debt - Europe, Japan, and the U.S. keep piling on trillions of dollars of unsustainable deficits. In Europe, the proposed austerity measures do not end the deficit spending by governments in 2012, they simply reduce the size of the budget shortfalls. The debt problem is growing by the day.

So far, Japan and the U.S. have felt minimal consequences of their profligate government spending. However, the complacency about continuing to running huge budget deficits is already coming to an end in Japan and most likely will also in the U.S. when the contentious debate over the debt limit and the Bush era tax cuts return to the headlines within less than a year

Japan's total public debt is estimated at l 1,024 trillion yen ($13.31 trillion), which means every child born in the country today comes into the world owing more than $100,000. Dwindling tax revenues cover only 40% of Japan's annual government budget, a shortfall being financed by adding even more new debt. With the tax increases and entitlement cuts that are being proposed to cut the deficit, Japan's economic future may be almost as bleak as that of the PIIGs (Portugal, Italy, Ireland, and Spain).

For now, the U.S is able to pump up the fragile economy by adding  a trillion dollars a year of fiscal stimulus via deficit spending. However, financing the expanding U.S. debt will become ever more difficult as the interest costs eat up an increasing portion of tax revenues. 

Expensive Oil - Despite the resurgence in oil production in the U.S., the world is running out of cheap oil. Newly discovered sources of oil require higher costs to extract, more time to obtain permits and construct drilling rigs, and more energy to pump the oil. Despite shrinking demand in the U.S. and Europe, global consumption will increase by 1.2 percent in 2012, according to International Energy Agency estimates. Demand in the most industrialized nations will shrink by 300,000 barrels a day, or 0.7 percent, this year, while fuel use in emerging economies will grow by 1.4 million barrels, or 3.2 percent, the agency forecasts. Regardless of new technologies, oil will be critically important as a transportation fuel and fertilizer feed stock for at least a decade. Oil is likely to continue getting more expensive simply based on demand, supply, and cost of production. Geopolitical tension in the mid-east and Nigeria may also inflate the price of oil.

Extreme Weather Events - The current debate over whether the earth's temperature has risen over the past 15 years seems misguided. Most global warming Cassandra's point to the potential for catastrophic consequences due to the rise of sea levels by 2050 if global temperatures rise by another 2 degrees Fahrenheit. However, a 2 degree rise over a 40 year period is only 0.05 degrees per year. Given the variability of weather from year to year, a 0.05 degree Fahrenheit change is not going to be very noticeable. However, the increase in extreme weather events is noticeable to anyone reading the headlines. Flash floods and droughts are increasing commonplace. The world may already have reached a tipping point in terms of extreme weather events due to an increase in water vapor in the air and the thinning of the arctic ice sheet. While no single extreme weather event can be blamed on global climate change, the almost daily occurrence of record breaking rain and snow storms seems likely due to the increase in water vapor in the atmosphere. Some believe that global climate change may be contributing to the record setting cold and snow storms in Europe. If extreme weather continues to get worse, in addition to higher food prices and the costs of cleaning up the damage, there are also likely to be significant restrictions placed on the economy by a revitalized environmental movement.

The rising markets certainly make the permabears seem wrong. Time will tell how much longer the problems of excessive debt, declining supplies of cheap oil, and increasing frequency of extreme weather events can be kicked down the road

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Friday, February 3, 2012

February Weather Slams Weak Economies of Europe, Boosts Growing U.S Economy

A killer cold wave descended upon Europe last week while most of the U.S. enjoyed moderate winter weather.  This week, while the the cold snap in Europe continues, even the extreme weather in the U.S has its benefits as storms across the southwest plains are providing relief to drought stricken Texas. Even Mother Nature seems to be conspiring to extend the decoupling between the economies of the U.S. and the Euro Zone. The weak European economies will be hurt by higher heating costs, disruptions to travel, and reduced agricultural output. The growing U.S economy will be boosted by a moderate cost of heating, extended construction season, and  areas of Texas benefiting from a break in the drought.

According to Bloomberg, consumption of natural gas in Poland is 41 percent higher than average winter  consumption while in Germany the cost of electricity is up by 14%. These two localized figures suggest that heating costs during the cold snap could be up as much as 50% across Europe. Natural gas shortage could become a major problem as the supplies from Russia have been curtailed. Food cost are likely to rise as the production forecast for the Russian and Ukrainian winter grain harvests are dipping as crops that are already stressed by drought are now being hit with extreme cold weather.

While a few weeks of weather differences will only be relatively minor factor in the difference in economic performance between the U.S and Europe over the long term, it must seem to the citizens of the Euro Zone that they can not catch a break.

2/10/12 Update
The extended duration of the cold spell is converting the economic damage that will result for this severe weather into much more than a blip. The economic benefits to the economy from the moderate December weather are being over written by the extended cold snap.  If the cold spell continues through the end of the month, as some are forecasting, 1st quarter GDP will take a noticeable dip. Tourism and transportation have suffered major setbacks. Thick ice has closed the Danube river in half a dozen countries and confined scores of ships to port on the busiest European waterway.  A ban on navigation is expected to remain in place for 10 days. 1000's of airline flights have been delayed. some industrial facilities may be asked to reduce operations in order to ensure adequate energy for warming households.

A aspect of the killer cold in Europe and the freaky weather in the U.S that is concerning is that it provides more evidence that extreme weather is becoming more common across the globe. According to meteorologist Stu Ostrow
Weather extremes have existed for as long as there has been weather on Earth. That’s a fundamental reason why as a meteorologist who is routinely observing them I was so skeptical for so long that anything was out of the ordinary. 
However, increasingly during the past decade or so, the extremes have been so frequent, and so extraordinary, and sometimes even at the same time and in such close geographical proximity to each other, that I have become convinced that something ain’t right. That while there have always been extremes, their nature is changing. This winter convinces me even further.
While the costs of this week's extreme weather are falling heavily upon Europe, it is far too early in the year to assume that the U.S economy will be able to dodge the impact of extreme weather for the rest of 2012.

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Thursday, February 2, 2012

If Global Warming Deniers Are Proved Wrong, What is the Economic Fallout

Researchers have been warning about global warning for over 40 years. However, given the minimal temperature rise during any individual year over the past four decades, it has become commonplace to shrug off the scary forecasts of climate scientists. There has been a rancorous debate over whether the rise in the Earth's average temperature of about 1 degree Fahrenheit (0.8 degrees Celsius) over the last century (and about twice that in parts of the Arctic) is due to natural or man made causes. Scientists disagree over whether the the increase in global temperature is the result of: 1)  a natural recovery in temperature that has been ongoing at an erratic rate since the Little Ice Age; 2) man made pollution; or 3) a mix of both natural and man made causes.

The global warming debate's focus on temperature change may be misplaced, at least in understanding the ramifications upon the economy of climate change over the next few years. The increase in atmospheric moisture may be the change that is the more relevant metric leading to easily observable changes. Measurements show that global atmospheric water vapor has increased by about 4% since 1970. Increased water vapor in the atmosphere feeds heavier rain and snow storms, leading to more flash floods and disruptive snow e.  Also, global warming theorists claim that the drought in Texas and Florida is due to climate change. The drought is having an immediate economic impact and is a much more likely to convince skeptics that global climate change is occurring than are temperatures increases of a fraction of a degree per year.

If man made activity, particularly burning of fossil fuels, truly can be proved to be causing global climate change, then there will be two negative impacts on economic activity: 1) direct economic costs due to increased flooding and droughts, as well as the wild fires that will accompany the droughts; and 2) restrictions imposed by a reinvigorated environmental movement upon energy development, production, and consumption. 

If global warming is occurring it will make extreme weather even more destructive. Extreme weather led to record damage in the U.S during 2011 of over $46 billion according to the National Climatic Data  Center. Further, it also has led to increased food costs. As an example, the price of beef will be up again this year due to the drought in Texas, as cattleman in the state have reduced the number of the beef cows by 660,000. The price of beef has hit an all-time high in each of the last four months and is likely to. rise even more throughout 2012. 

If the drought gets worse, the costs to Texas residents will start adding up quickly. The drought is even having a "slight impact" on electricity generation, according to testimony from Trip Doggett, the chief executive of the Electric Reliability Council of Texas (ERCOT), which operates the state's electric grid. He anticipated that problems would remain slight through the summer, but if the drought continues into next year, "the consequences are likely to become more severe." Several towns in Texas have come close to running out of water during the drought, but until recently none had to truck in water. Most found solutions to hold them over, often paying tens of thousands of dollars to avoid hauling water. However, last week Spicewood became the first town in the state to run out of drinking water.

The impact on economic activity of a revitalized environmental movement could be far more negative than the cost of extreme weather. The greens will intensify their fight to reduce CO2 emissions.  The primary impact is likely to be an increase in energy costs. There will be:

1) increased pressure to shut down coal fired power plants;
2) continued challenges to obtaining permits for oil developments;
3) attempts to shut down fracking;

4) attempts to bar oil from tar sands from being imported
5) further legislation requiring utilities to increase usage of clean energy despite the high cost
6) a renewed effort to pass cap and trade legislation or impose a carbon tax
6) increased pressure on auto makers to increase fleet mileage 

I went into more detail on the above list in the post Prediction: A Revitalized Environmental Movement Will Impact The U.S Economy

If the global climate change deniers are wrong, it seemingly leaves us with a terrible choice of which do we put at risk - the economy or the environment, and what are the trade-offs that are acceptable. An all out effort to combat global climate change would entail enormous costs to the U.S economy. Given the negative impact this would have on household income, it is little wonder that there is tremendous push back against actions that would harm the economy while not having a measurable impact on the climate. The primary result of the actions in the U.S. to combat global climate change might be to push energy intensive manufacturing over to Asia, resulting in reduced U.S economic activity with no net benefit. Further, unilateral action by the U.S on global warming could be fruitless if not matched by concurrent action by the developing nations of Asia. Thus, global warming and the expense of responding to it will remain incredibly contentious even if the deniers throw in the towel.

The variety of opinions on global warming policy choices is shown by the results of a survey of economists    asked under what circumstances the USA should reduce its greenhouse gas emissions, conducted by New York University School of Law.  While this survey's 144 respondents may not be a representative group, the results are noteworthy.

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