45 thoughts on “Weekend reflections

  1. Any chance that the mother of all depressions would solve all climate change issues?

    I am surprised, myself, how little coverage is given to the obvious bad economic tidings and how that might be a positive for the planet.

  2. Yes Joe 2 if it were to happen that the Chinese economy were to stall, followed by India, such that a global appreciation of hard times was obvious then a Brenton-Woods type conference would seem logical and a uniform approach toward climate change abatement would have to be on the agenda. That’s a lot of ‘ifs’ but fingers crossed.

  3. Frequent guests on this blog would say to you, “Don’t get Ikono started.”

    It is likely that a mega-depression will go some way to resolving anthropogenic climate change dangers over the next few hundred years. Unfortunately, it won’t be a pleasant way to do it. I do think we are in danger of a mega-depression.

    The respectable academics and economists appear afraid to point to the imminence of such dangers -even if they apprehend them – for fear of seeming alarmist and out of step with general opinion.

    The (probable) technical insolvency of the US govt and its general economy along with its huge assets bubble and debt crisis is bad enough. Couple that with the peak oil crisis and factor in high energy costs, high inflation and the likely collapse or contraction of significant world industries which rely on cheap hydrocarbons for energy or feedstock – the automative, airline, tourist, paints, chemicals, plastics, fertilizer industries and even agriculture to name a few – we can see we are in deep trouble.

    Then add in overpopulation, environmental collapse, water shortages, mass extinctions, climate change, rising sea levels, desertification – not to mention mankind’s, as ever, completelely unwise response to such stresses, namely war, then we can see exactly where we stand at this point in human history.

  4. Wow Ikonclast, compared with you I’m an irepressible optimist 🙂

    The great Yankee dream of home ownership is unwinding on cue…and the first runs on banks are occurring. One in Florida, and another in Oregon (I think it was there, memory bit dodgy). Fannie Mae and Freddie Mac soon to have the so-called blank cheque, but for how long? Yeah, it has the feel of the big D, redux.

    Pity that here in Oz we too hold huge personal debt. Ugly.

  5. I’ve made the observation before that you might all be right about the economic outlook, but I wish that you were not so happy about it.
    I am also pretty sure that you are wrong: firstly no-one has any record of forecasting the economy (or for that matter, anything else) with any accuracy. Second, the world economy does seem to have an inbuilt stabilizer and although we are probably due for a recession, it is unlikely (on recent history) to be long or severe.
    Unless of course government foolishness messes things up, as it did in the 1930s and then in Japan in the 90s.
    But, as I said, forecasting is devilishly difficult so we will see.
    One advantage of the internet is that all this stuff is archived, not wrapped around fish and ships and then thrown out.
    Let’s return in a year’s time and se how wrong we all were.
    (That includes you, JQ)

  6. “I am surprised, myself, how little coverage is given to the obvious bad economic tidings..”
    Well joe2 you can read about in the Asia Times here-
    Click on the ‘World Economy’ link on the side and browse the largely Austrian commentary of the Keynesian fools paradise we’re living in. Bear in mind Asians are somewhat amenable to the Austrian view of we in the decadent West, particularly now that they’re holding much of our worthless paper. The Guru of ‘we’re freaking doomed’ fame does produce some grim figures in his inimitable paranoid style. Here’s a sample of his take on the fools paradise-
    Basically the US Govt now has 100 trillion in liabilities with a 13 trillion pa GDP which in anyone’s estimation is not a good look and something will have to give soon unless the Zimbabwe road really works. Since the US is/was around a quarter of the world’s GDP, none of us will be immune from the fallout, the likes of which are only just being acknowledged by the odd NAB bank chairman you’ll notice. Judging by a historical graph of CO2 emissions I’ve seen previously, which includes the 1930s Depression, the coming crash will outdo anything our politicians can cook up as quickly. If history is any guide the US stockmarket will crash no later than the end of October and ETS will be like SUVs with $145/barrell oil prices. Basically unsaleable. Perhaps that’s what Nelson and the Libs are counting on politically now.

  7. ETS fans in particular might like to consider the interrelated big picture we’re talking about here-


    In particular-
    “What the banks are now doing is finding the projects themselves and creating portfolios for clients. When the financial organization is putting this together they can group together high risk and low risk and make it physically safer for investors,” says Sheil.

    “But the twist is they are doing the same thing as they did for the sub prime mortgage market. And there has been some speculation that as the carbon market grows and becomes more complicated, it could create a sub prime mortgage market situation in the future.”

    You have to seriously ask yourself the big questions about ETS. ie the administration and policing costs, coupled with rent seeking and special pleading(free permits), protectionism bound up in trade between ETS and non-ETS countries and concomitant admin/policing and then the threat of another sub-prime financial, sophistication and untermediation which we know was clearly beyond the scope of any regulator. Then you ask yourself what has existing ETS achieved so far? Sorry fans but I just can’t raise any enthusiasm for tacking that minefield on to the existing flawed constitutional marketplace. We have to do better than that.

  8. The world is not coming to an end.

    The US isn’t even in recession yet and there’s no reason to assume that the recession if and when it comes will be particularly severe.

    and you might want ot learn the meaning of the word Keynesain.

    Still I’m sure that when all your predictions fail totally to take part it won’t stop you making more with equal certainty.

  9. I can predict with complete certainty that exponential growth (or even linear growth for that matter) cannot continue indefinitely in a finite system.

    Too easy! Next question please.

  10. Right and the economic system is completely and totally closed because we know that technical innovation and various other nonphysical inputs are finite.

  11. Oh and even if we accept that rexources are finite, can you actually show what percentage of resoruces we’ve expended to date?

  12. To return to Jo2 initial question:

    We need to reduce GHG emissiosn by 80-90% (with the developed countries reducing by 90% or more).

    Anyone want to think about the consequences of bringing about even a 50% reduction through the blunt instrument of simply cutting economic output?

    Any such action would likely be rapidly followed by an equal or greater reduction in the human population as agricultural output collapses and so does food transportation and storage.

    The only way to avoid catastrophe is to restructure our economy so that we can maintain and even increase output while incrasing the efficiency with which we use energyu and investing in low-carbon and zero-carbon energy sources.

    That’s going to require a massive investment over a period of decades. Such investment is going to be effectively impossible unless economic growth continues.

  13. Ian I think your answer lies in your post # 9
    “technical innovation”
    I don’t think we have a chance of reducing co2 output and the only way to go is adaption. And of course economic growth is the key here.

  14. Just to back up Ikonoclast with some transport data, during the last “recession we had to have” traffic volumes on the Bruce Highway dropped about 3% in a year. There would have been a corresponding proportional decline in fuel usage and emissions. People in recessions tend to cut back on luxuries and discretionary expenditure. But basic (energy consuming) expenditure like heating the house and driving to work changes little. So, when you consider that we are looking for a 60%+ reduction in emissions …

    Ikonoclast is right, we would need the collapse of western industrialised society to do it. A recession is not enough. There must be fundamental reform of the electricity adn transport sectors. I agree this is not the end of teh (industrialised) world. But some indsutries will either reform or die.

  15. “and you might want ot learn the meaning of the word Keynesain.”
    I use it in a broad sense of the term to describe those who largely believe in bureaucratic levers rather than free-market ones although I accept it’s a bit of poetic licence. My opposite is ‘Austrian’ and I use them as softer terms than outmoded left and right tags, particularly where we’re considering macroeconomic policy in general. They are broad generalisations and will suffer from that from time to time of course.

    My point is that if you take something as simple as money supply targetting and concomitant exchange rate setting/manipulation, that is largely Keynesian similar to an ETS. If something as simple as controlling inflation via money supply across jurisdictions is about to be shown as a complete disaster, then a more complex ETS regime will no doubt be more prone to such gaming and systemic failure. Actually I think we’re right in it now and doubt there’ll be any major stock market crash. More the series of downward shocks now, followed by dead cat bounces as each new low looks cheap, but gradually wiping the players out all the way to the bottom. The flip side is the inflation as funny money finds its true value against commodities, albeit some overshooting as that has demand implications ie oil prices recently. The market will(is already)demand real rates of return on lending and as inflation rises, so too wil market interest rates, which will ultimately smash the economy again. This is all Keynesian by design.

  16. “I use it in a broad sense of the term to describe those who largely believe in bureaucratic levers rather than free-market ones although I accept it’s a bit of poetic licence.”

    Why nopt use it in the only slighter more poetic sense of “banana”?

    Have you ever actually read Keynes?

    And are you seriously tryign to argue that inflation targtetting is a left-wing policy?

  17. “And are you seriously tryign to argue that inflation targtetting is a left-wing policy?”

    Yes, it belongs with all those policies that believe in bureacrats pulling economic levers to assuage every economic sniffle and sneeze. You don’t really think we free market men believe in 2-3% inflation targetting do you?

  18. I thought that nearly every government in the world targeted money supply? Does that mean that everyone from GWB to Hu Jintao are all “Keynesians”?

    Or is it just a convenient way of always being right, since no one is stupid enough to do differently out there in the real world? For example, could you point to any these “Keynesians” who are doing a better job of managing the money supply that others? Or is the whole idea of attempting to control the money supply so contrary to anything useful that the world would be much better off without it all together? You seem to be a taking a rather utopian position.

  19. The problem is Jim, all those Keynesians have supposedly been targetting money supply and inflation these last few years. You know with those interest rate levers and fractional reserve ratios. How’re they doing now? Having their interest rate lever ripped right out of their grasp by the market I’d suggest. As for their inflation targetting, all I can suggest is you spend every cracker as fast as you can now. It’s every commodity buyer for himself with fiat money now boyoh.

  20. Guys, I really dont think we should be so negative that we hope for a depression to solve climate change.

    We can solve climate change without a depression, the recent advances in solar and wind power mean we can do it cheaper than what we thought.

    Lets be positive – but also lets all get a lot more active to take on the climate change denying nutbags.

  21. “Yes, it belongs with all those policies that believe in bureacrats pulling economic levers to assuage every economic sniffle and sneeze.”

    So Alan Greenspan is a leftwinger.

    Got you.

  22. Inflation targetting took off in the 80’s and 90’s because of the failure of monetarism.

    It has limited theoretical support (see the Taylor Rule) and neither left-wingers or right-wingers have any great fondness for it.

    It was adopted primarily because both “Keynesian” finetuning (most of which Keynes himself would probably have disapproved of) and monetarism had proven themselves incapable of delivering robust growth and low inflation.

    The main reason to continue with inflation targetting is equally non-ideological.

    Inflation targetting has delivered probably the longest period of economic expansion on record along with low inflation.

    The world economy recovered from the 1988 Asian meltdown and the 2000 Tech Wreck with remarkable speed and little lasting economic damage.

    Labelling inflation targetting as Keynesian and left-wing and demanding an end top it is on par with Lysenko labelling genetics “bourgeois science”.

  23. I’d like to request permission to use one of your AFR articles in a text book. Can you please contact me and I’ll email you our publication details?
    Many thanks

  24. Ian,
    I would consider inflation targetting to be a good example of the “I know it works in practice, but it stinks in theory” idea. It seems to work, but I don’t like the idea.

  25. True but it still beats “I know it works in theory, but it stinks in practice”.

  26. “Inflation targetting has delivered probably the longest period of economic expansion on record along with low inflation.”

    You don’t think they were fooled all along by demographic structural change, coupled with Asians propensity to work harder and save more to prop it all up and now the music has stopped where are we all?

  27. Here’s what the UMF has to say:

    “The IMF expects global growth to slow significantly in the second half of the year, before recovering gradually in 2009.

    Updated forecasts in the IMF’s World Economic Outlook (WEO), released July 17, also raise inflation projections, particularly for emerging markets and developing countries.

    The WEO expects a moderation in global growth from 5 percent in 2007 to 4.1 percent in 2008 and 3.9 percent in 2009. Following a better-than-expected performance in the early part of 2008, WEO projections for the United States, the euro area, and Japan show a slowdown in activity in the second half of 2008.

    Expansions in emerging and developing economies are also expected to lose further steam, with growth in these countries projected to ease to around 7 percent in 2008-09 from 8 percent in 2007. China’s growth rate is expected to ease from near 12 percent in 2007 to around 10 percent in 2008-09.”


    World economic growth of close to 4% would have been regarded as outstanding a decade ago.

  28. In reply to comment 10. Real physical quantities (matter and energy) are still the basis of the entire economy. Humans are made of matter and subsist on matter. Our spreading infrastructure is material. The resources we use are material. This material production and consumption system cannot keep growing indefinitely on a finite planet.

    It is no different essentially from the “fruit flies in a bottle” experiment.

    What are the non-physical inputs referred to in comment 10? I’d like to see them properly defined. Technological innovation in its expressed form always involves the use and manipulation of matter and energy ie physical quantities.

    The unspoken assumption re these non-physical inputs seems to relate to “mind”, “intelligence”, “human inventiveness”. This is my guess of what is meant. Without entering into the debate about what is “mind”, I will note that implicit in comment 10 is the assumption that human inventiveness can transcend material limits.

    I think a more defendable position would be that human inventiveness and its expression in technology can stretch material limits but it cannot transcend them. There are dangers as well as benefits in stretching limits. When things “break” or “rebound” then we can be in serious trouble. We ought now to be paying a lot more attention to the possible breaking points in our human and natural systems on a world scale.

  29. How many “material resources” went into a Model T Ford compared with a contemporary sedan.

    How much of the difference between a Ford and a Rolls can be attributed to the difference in material resources?

    How about an Apple I versus a G4?

    The economic value of output is only minimally related to the material inputs.

    That’s why when I propose we cut carbon dioxide emissions by 90-95% over the next several decades I believe we can do so without cutting livign standards – and in fact can continue to imporve living standards why we do so.

  30. I’ll repost this link which I initially posted abotu a week ago.


    There is essentially no correlation between economic output and levels of carbon dioxide emissions.

    Mali, Cambodia and Switzerland have similar levels of greenhosue gas emissiosn per unit of economic output.

    Want to reduce India’s GHG emissions – well o nthe oen hand we can take away people’s motorbikes and deisel pumps, limit the use of nitrogen fertilizer and watch people die of starvation.

    Or we can fix the Indian power grid so Indian businesses no longer have to run inefficient polluting emergency fenerators during the regualr black-outs.

  31. Ian, I don’t care what those ostriches in the IMF say, take a look at what’s happening with our banks, the latest being the ANZ-

    “The bank’s shares are now around half the value of their high in October last year of $31.55.

    The damage at ANZ follows last Friday’s sharemarket rout at rival National Australia Bank after that lender announced it was putting aside $830 million to cover losses related to debt defaults on housing loans in the US.

    ANZ’s second half provision come on top of a first half credit write downs of $980 million, bringing the full year potential loss to close to $2.2 billion.

    But in contrast to NAB, ANZ has attributed its likely losses to local clients rather than any exposure to the troubled US property market.”

    Of course the NAB had only previously made a $181 mill provision in May and now the chairman says there may be more downside. That’s about $3.2bill from 2 of the 4 pillars to date and that aint hay matey. Meanwhile the US Congress panics and goes down the Mugabe road-
    You can’t throw debt at a solvency crisis and those pinstripes at the IMF should know that. Meanwhile today Swan pops up to reassure everyone our banks are as safe as houses. Basically don’t panic chaps. We’ll see about those IMF experts.

  32. Basically Observa you’re making what’s known as the argument from amazement.

    $2.2 billion dollars is a Very Big Number – except in the context of an Australian economy of around A$1 trillion still growing at around 4% per annum.

    Since you keep implying (without giving us any details) that you have some vast wealth of private sector business experience, you should know that more often than not write-downs undertaken during a market downturn are more often than not written back when markets recover. (Take a look at Tricontinental for an example.)

    Ypu might also want to go back and compare the current economci situation i nthe US with either the S&L crisis or with the British housing bust and ask yourself why a crisis which is currently signficantly smalelr in actual (not hypothesised) lossess in relation to GDP is apparently going ot produce the catastrophe you so long for.

    The Asai Times author you link to appears not to understand the difference between a guarantee and a subsidy.

    Here’s a home work assignement for you: How much US taxpayer money has been lost to date “bailing out” Fannie Mae and Freddie Mac? Bear in mind when answering that the Federal Reserve System is not an arm of the US government. Bear in mind too that any Treasury money spent buying Fannie Mae and Freddie Mac shares is only lost to the extent that the shares fall below the market price.

    Bonus question: the Asia Times article you quote says that “trillions of dollars” have been loaned and lost.

    Given that

    a. the US mortgage default rate is currently around 2%; and

    b. US housing prices have fallen around 10% from their peak and most mortgages are for less than 100% of the pruchase price of the property implying a typical recovery via foreclosure of 80-90% of the principal of the loan

    How many quadrillion dollars does the author appear to beleive the US houding market is worth?

    What does this tell us about the author’s credibility?

    The Economist had a recent article discussing when we’d know the share markets were approaching their bottom. They discussed stuff like PE ratios and the relative retrun from government bonds versus blue chips. They concluded that the markets are probably currently within around 10% of their bottoms.

    They missed one of the biggest indicators of all – the endless proliferation of gloom and doom scenarios.

    When your cab driver volunteers stock tips it’s probably time to get out of the market, when your cab driver volunteers “we’ll all be roon’d” it’s probably time to get back into the market.

  33. Debates like thie can be somewhat pointless escpecially when precise predictions aren’t being made meaning it’s impossible to see who was correct.

    So Observa – is it your contention that the US is goign to convert to a gold-baseed or commodity-based currency?

    If so, when do you think this will happen?

    How high do you think the US mortgage default rate is going to go and in what time frame?

    For my part:

    1. The US will not adopt a commodity-backed currency within the next ten years. If the US Fed board changes its interest rate settign policy it will likely be to shift from the current implicit inflation targettign to an explicit stated inflation target.

    2. The US mortgage default rate will nto exceed 3% and will peak within the next three months.

    Oh and while I’m at it – oil prices or the rest of the eyar will remain between $100 and $140 per barrel, barring a US or Israeli attack on Iran.

  34. What is the consensus among cab drivers at the moment about the direction of the stocks, ian?

  35. I dont; take taxis as often as I used too (since I hav to pay for them since I elft the public service) but the last couple to volunteer an opinion were definitely in the “we’re all doomed” camp.

  36. And you seriously believe in raising taxes to pay these loopies Ian? Basically for-‘ Trust us, we’re from the Govt and we’re here to help you work out where all your fiat money went and mourn your losses.’
    Where the bloody hell are all the customers like you hiding is what I want to know. Ditto the cabbies so they could take you the long way round.

  37. “And you seriously believe in raising taxes to pay these loopies Ian?”

    Show me where I said anything of the sort.

    Australia has no need to raise taxes because we have a large and growing government surplus which means that even the worst likely financial sector meltdown can be dealt with.

    The US needs to either raise taxes or cut spending drastically because it’s current government deficit is unsustainable. I’ve been saying that since 2001 so it has nothing to do with the current situation.

  38. Oh and Observa I have been giving detailed point by point responses to your comments and have been prepared to make specific measurable predictions about what I think is going to happen.

    You have failed to respond substantively to most of my points and have failed to convert your vague “Doomsday is coming” claims into a form which can be tested.

    If you continue to simply bluster and point to whatever irrelevant article you happen to have turned up on Google News, I’m not going to bother to continue to respond in this fashion.

    So please –

    When will the US (or Australia) adopt a commodity-backed currency?

    When will US mortgage defaults peak and what will the peak default rate be?

  39. Fair enough Ian and those IMF boys do have to be careful about frightening the horses before they finally state the obvious just before the horses all bolt. If you’ve got the time, listen to Peter Schiff in Nov 2006 (parts 1-8)tell it like it’s happening now-
    A lot of it applies to Oz too I’m afraid, but the overarching problem of moral hazard was always monetary in origin.

  40. I expect the US to go into recession some time over the next few quarters. I think there’s a 50-50 chance Australia will experience a growth recession.

    (A growth recession is where the economy doesn’t actually contract for two consecutive quarters which is the technical definition of a recession but where growth is too slow to keep up with labor force growth resulting in rising unemployment.)

    The question is are we looking at a 2001 recession, a 1992 recession, a 1973 recession or a 1932-style depression.

    My money is on a mild to moderate recession somewhere between 2001 and 1992.

    Observa seems to be anticipating something somewhere between 1932 and Mad Max.

  41. I must admit I’m curious how Observa explains speculative bubbles in species-based financial systems such as the south Seas Bubble; Tulipmania, the Panic of 1873 and the Wall Street crash of 1929.

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