Thursday, May 10, 2012

How Paul Krugman and Global Warming Skeptics Think Alike

In a thought provoking article on the global warming debate, a point made by the author is that the conflicting views about global climate change delve down to a question of how "sensitive" is the earth to the tons of CO2 being pumped into the atmosphere. If global warming skeptics are correct, then the earth's temperature is not very sensitive to the impact of CO2 emissions and global climate change alarmists such as Jeff Masters and James Hansen are misleading the public.

The issue of "sensitivity" is equally critical to the debate on sovereign debt. As shown by the low interest rates for the government issued debt of the U.S., Japan, the UK, and Germany, the economies of developed countries that control their own monetary policy via sovereign central banks have a low sensitivity to their current huge level of national debts and deficits. However, at some point interest rates are almost certain to show more "sensitivity" to government debts and deficit spending.

Paul Krugman favors larger deficits, seeing historically low interest rates as a go-ahead for even more federal borrowing.  He supports massive New Deal-style public-works spending, which would employ “armies of government workers.” Krugman also favors more monetary stimulus by the Fed to boost spending throughout the economy. Krugman's position is that we have not used enough Keynesian stimulus ammunition on the monetary or fiscal fronts. 

In my view, the complacency and optimism of both Krugman and global warming skeptics is lunacy. The U.S. economy may muddle along for another 2-5 years behind a fiscal policy that adds a trillion dollars a year to the national debt, but at some point the sovereign debt will become unsustainable. Similarly, our planet may be able to sustain a couple more decades of pumping over nine billion metric tons of carbon a year into the atmosphere, but eventually this will lead to severe and disruptive climate change. Krugman and global warming skeptics may believe in low sensitivity of: a) the economy to debt and b) the planet to carbon emissions, but this path is filled with frightening long term risks.

Related Posts
A Scorecard For Ranking U.S. Treasury Debt Risk Versus Other Countries

Wednesday, May 9, 2012

Will Greek Exit From Euro Lead to Tourism Limiting Riots

It seems inevitable that Greece will exit the Euro. The kicking the can down the road is coming to an end with there seemingly being little likelihood that a government willing to agree to the Troika imposed austerity measures is electable. It also seems unlikely that the Germans will compromise on making changes to the bailout package. Thus, without a bailout, Greece will run out of money within a few months. This default will lead to converting back to the Drachma .

Conventional wisdom seems to suggest that about a 50% devaluation of the Drachma versus the Euro will  ultimately be the result. However, since Greece is not self sufficient in energy or food supplies, this will result in higher costs, with a doubling of the price of some imported goods. It would not be terribly surprising if the higher cost for food and energy led to civil unrest.

A huge potential benefit to the Greek economy of a devalued Drachma is that it makes traveling in Greece cheaper. Greece could benefit from a huge tourism boom due to exiting the Euro. However, if the consequences of exiting the Euro are turmoil and chaos, tourists will stay away. Thus, in this worst case scenario, Greece would not achieve much of a bump in tourism, but would incur higher costs for imported goods. The assumption that a devalued Drachma would lead to a tourism boosting economic revival may turn out to be wishful thinking. The downward spiral of the Greek economy may continue without much help from the tourism industry.

Friday, May 4, 2012

Will Coal Train Protesters Cause Economic Harm?

Over the last few months on this blog, I have been suggesting that environmental activism is likely to become a  headwind in the future for economic activity. Successes of the environmental movement include  shutdowns of nuclear plants in Japan and Germany, and the moratorium on building the northern section of the Keystone XL pipeline. The next target of the North American environmental movement is coal trains and coal export terminals.

On Saturday (May 5), protesters are planning to block Burlington Northern Santa Fe coal trains from reaching Vancouver’s ports. "From dawn to dusk on May 5th we will also stop all unloaded coal trains traveling [southeast] approaching mile 122  (White Rock pier) on the New Westminster Subdivision, Northwest Division," explains a letter addressed to Warren Buffett from Stop Coal B.C.
The planned Saturday protest follows closely on the heels of the Thursday (5/3) arrest of seven anti-coal protesters after they chained themselves to a railroad track outside of Terrell, North Carolina and halted a coal train heading to a Duke Energy power plant.

The coal train protest movement has the potential to gain significant traction. The Occupy camps tapped into a desire to be a part of a protest movement held by many of today's disaffected and unemployed youth. The Occupy protesters became a mass movement despite a fatally flawed lack of direction and failure to actually accomplish anything. The coal train protesters goal to "save the planet" and capability to disrupt coal deliveries give this movement a highly targeted focus and potential for achievement that is much more compelling than complaining about "the 1%".

A geography that could offer fertile ground for recruiting activists for the coal train protest movement is Appalachia. There is a wide spread sense across this region in which mountain tops are being lopped off  that their beautiful scenery is being destroyed and environment damaged simply in order to ship coal off to India and China.

The coal train protest movement definitely bears watching. Time will tell whether it will gain enough traction to impact coal shipping and harm the U.S. and world economies.

Thursday, May 3, 2012

Drought in Spain and Italy Adds To Economic Woes

The weak economies of Spain and Italy are being battered by Mother Nature. In addition to the debt and  unemployment crisis in these countries, the agricultural sector is also being hit by freakish weather. In Spain, a spring spell of cold and wet weather, coming on the back of the driest winter in over 50 years, reduced crop yields. The continuation of Spain's long-running drought has cut the country's capacity to irrigate crops and generate hydro power. Scarcity of hydropower makes Spain more dependent on gas-fired generators and increases spending on imported natural gas.

Much of Italy is also suffering from drought. As shown in the image below, most of the country is in drought conditions. If the drought worsens significantly this summer, it will a huge drag on the economy due to: 1) reduced income for farmers: 2) reduced employment for farm hands, and 3) higher food costs.

Source: Global Drought Monitor