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.

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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.

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.

Source: Desmogblog (http://s.tt/1aN0U)

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

May Day 2012 Rioting Was Surprisingly Sparce

Given the high levels of youth unemployment in the North America and Europe, it is mildly surprising that May Day 2012 did not result in a wave of violent protests and riots. While there was violence and vandalism in Seattle, Montreal, and Oakland, the demonstrations were peaceful for the most part across most of Europe and North America. The efforts of anarchists to use May Day to stir up a wave of disruptive demonstrations mostly failed

There is a huge amount of rage among unemployed youth. The hordes of unemployed is a tinder box that may be unleashed in the future, but at least on May Day 2012, did not erupt.

Oil Prices Seem Sticky Above $100 A Barrel Despite Lessening of Iran Tension

A critical reason for the lack of growth in the economies of Europe, Japan, and the U.S. is the high cost of oil. Expensive oil serves as a tax on economic activity. Two of the primary factors getting the blame for the high cost of oil are: 1) speculators; and 2) the threat to supplies due to a potential conflict between Iran and either Israel or the U.S.

The price of a barrel of oil trading on the NY Mercantile Exchange is basically flat today at midday despite news that "Iran Considers Halting Nuclear Expansion to Avert EU Oil Ban". While it may be that traders are discounting this news as simply more posturing by Iran, it is disconcerting that it has not been a bigger market mover.

The price of oil may be permanently stuck at a price above $100 a barrel. Demand keeps increasing while supply stays flat and the cost of production goes up. Yes, lots of new sources of oil are being found or are becoming economic to produce now that oil is so pricey. However, these new sources of supply are barely keeping up with the growing demand from Asia and South America. Further, as the supply from established oil fields with low cost of production diminishes by about 5% per year, the high cost of production from new sources virtually guarantees that oil will never again drop below $80 per barrel for an extended period of time, unless there is an absolute collapse in demand. The supposed  "speculative bubble" may not exist, but simply be a function of traders foreseeing that future demand is likely to outstrip future production.

Some economists judge that the growth of economic activity in Europe, Japan, and the U.S. since WWII was largely based on the availability of cheap oil. If they are correct, it raises serious questions about how these developed economies can rekindle growth given the massive debts they have incurred and the high costs of supporting ageing populations. In addition to the high cost of oil, all three economies have self imposed incremental energy costs. Japan and Germany are paying more for electricity due to shutting down nuclear plants. In the U.S., cost efficient coal power plants are being shut down.

What will it take for Japan, Europe, and the U.S. to re-ignite economic growth despite high oil prices? Lessening of tensions with Iran may not lead to a plunge in the price of oil. Thus, given the drag on the economy from high oil prices, the agonizingly slow pace of economic growth in the U.S. of the last couple of years may be as good as it gets.








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Should We Worry About Extreme Weather Causing Inflated Food Costs?

The cost of buying food is going up. The food-at-home Consumer Price Index (CPI) increased 4.8% in 2011. One of the factors that led to higher food prices was the weird weather. Not only was the U.S. hit with extensive flooding in the Midwest and drought in the Southwest, but changing precipitation patterns and mounting water stress cut into food production around the world.

The weather has gotten even weirder in 2012 and may lead to even bigger increases in food costs this year. The European cold snap is likely to reduce the continent's soft wheat crop by about 5%. Officials in Texas cut off irrigation water to rice farmers downstream of reservoirs depleted by the worst one-year drought in Texas history. It is the first time in its seventy-eight year history that the Lower Colorado River Authority has cut off water to farmers. In California, only 50 percent of the water requested from the State Water Project is expected to be delivered to nearly one million acres of irrigated farmland due to the lack of snow this winter.

So the question becomes, are the spate of floods and droughts just a fluke, or is extreme weather going to get worse? According to a couple of theories, the droughts and flooding are being caused by aspects of global climate change.

1) research by Jennifer Francis and Steve Vavrus suggests that warming in the Arctic is causing weather patterns in mid-latitudes to become more persistent. This persistence can lead to conditions like heat waves, cold spells, drought, flooding, and heavy snows. The researchers found that as temperatures in the Arctic warm and become closer to temperatures in lower latitudes, the waves of the jet stream tend to spread out, and west-to-east winds slow down in the upper level of the atmosphere (where storm tracks form). Both of these effects tend to slow the progression of weather patterns, which means that a weather pattern, whether hot or cold, is more likely to stick around.

2) A 4% increase in atmospheric moisture has been observed and is consistent with a warming climate.⁷ The increased moisture in the atmosphere is driving the shift to heavier but less frequent rains — “when it rains, it pours.” While an atmosphere that holds more moisture has greater potential to produce heavier precipitation, precipitation events also become less frequent and shorter, as it takes longer to recharge the atmosphere with moisture.⁹ By analogy, a larger bucket holds and dumps more water, but takes longer to refill.

If the above theories are correct, then it seems likely that the balance of 2012 will continue to feature extreme weather events. An increase in droughts and flooding would lead to further agricultural losses. And the increase in weird weather may be a long term problem. If extreme weather leads to food shortages in future years, big increases in the cost of food could become a serious problem. Thus, it seems appropriate to worry about extreme weather inflating the cost of buying food.