by Alex Evans | Dec 5, 2007 | Climate and resource scarcity, Cooperation and coherence, Global system
Amid the torrent of news about (a) ongoing turmoil in financial markets and (b) rocketing prices in the real economy for energy and food, it’s fascinating to watch two worlds – the financial economy and the real economy – colliding. All of a sudden, various of globalisation’s chickens are coming home to roost – energy security, food security, hedge funds and financial innovation, to name just a few. And the worrying thing is that as policymakers play catch-up with these esoteric, highly specialised issues, it’s becoming increasingly clear that no-one has a clear strategic overview of what’s happening.
Start , for instance, with a quick snapshot of the financial markets situation from NY Times columnist Paul Krugman:
How bad is it? Well, I’ve never seen financial insiders this spooked — not even during the Asian crisis of 1997-98, when economic dominoes seemed to be falling all around the world. This time, market players seem truly horrified — because they’ve suddenly realized that they don’t understand the complex financial system they created.
Chip Mason, founder of Legg Mason (one of the world’s largest money managers, with $1 trillion of assets under management) says that credit markets are the worst he’s seen in 47 years in the business: “It is a very unusual situation. I have not seen anything like this, where nothing is traded.” Nor is the UK proving immune to the crunch. As Nouriel Roubini notes, two days ago the one month Libor inter-bank interest rate spiked 60 basis points from its Friday levels – to its highest level in nine years.
Already, a kind of inquest on financial innovation is opening up in some quarters. Krugman quotes Bill Gross – the managing director of Pimco, a leading bond manager – thus: “What we are witnessing is essentially the breakdown of our modern-day banking system, a complex of leveraged lending so hard to understand that Federal Reserve Chairman Ben Bernanke required a face-to-face refresher course from hedge fund managers in mid-August.” (See also Gross’s more detailed – and very downbeat – assessment on Pimco’s own website.) Krugman’s own view: “The bottom line is that policy makers left the financial industry free to innovate — and what it did was to innovate itself, and the rest of us, into a big, nasty mess.”
But there’s disagreement over how much the current turmoil matters for the real economy. Not much, says former Bank of England Monetary Policy Committee member Willem Buiter: “The good news in all this is that much of the financial sector has become quite detached from the real economy. The implosion of much of this formerly privately profitable but never socially productive financial intermediation will have little if any adverse macroeconomic effect.” A lot, says Nouriel Roubini: “it does not make sense to avoid bailing out the real economy – and preventing a massive global loss of incomes and jobs – just in order to punish reckless lenders and investors in the financial market and thus avoid moral hazard.”
There’s disagreement too over what needs to happen on interest rates. Roubini thinks it’s urgent, but Wolfgang Munchau begs to differ: “The inflation outlook would justify a neutral policy stance at best. A bias towards low interest rates got us into this mess. Low interest rates will not get us out of it. Central banks should keep their cool.”
The question of inflation brings us neatly over to the real economy, and to prices for energy, crops and other commodities (another issue that we’ve been following here in recent months). If the financial turmoil does present a serious downside risk for growth, at the same time as energy and food prices – for which demand is relatively inelastic – proceed inexorably upwards, does that herald a return to 1970s-style stagflation?
Krishna Guha did a handy analysis piece on that question in the FT on Monday, and concluded that there was indeed at least “a whiff” of the s-word in the air, but that over a 1-2 year time horizon, “the world may see low growth or high inflation – but probably not sustained stagflation in any large economy”.
(I’m not so sure. The more I look at energy and food trends, the more it looks like we may have seen a structural shift towards long term higher prices for both. True, a slowdown in emerging economies would let off some steam. But it would take a very hard landing in China and India to eradicate the massive growth in their demand for energy and agricultural products of recent years. And it will still take a very large amount of investment – in energy infrastructure, in agricultural acreage expansion- to keep up with even lower end demand projections for these commodities.)
But here’s the thing. I know more or less enough about energy and agriculture to form my own views about what’s happening on that front. But I’m completely reliant on interpreters (like the ones I’ve quoted above) to explain the credit crunch to me. And I have no real way of evaluating which of them is right and which of them is wrong.
As the various worlds of the economy continue to collide, an integrated perspective of all of these issues is becoming increasingly urgent. And here’s what should really worry all of us: who the hell does understand both worlds? Almost certainly not any one policymaker, central banker or committee. Yet these are the people we trust to make crucial decisions on this tangled web. Increasingly, we’re going to come to see this perfect storm above all as a crisis in our ability to take and implement effective decisions. More on that in a future post…
by Alex Evans | Dec 5, 2007 | Climate and resource scarcity, East Asia and Pacific
That’s the question I ask in an article published today on ChinaDialogue, a bilingual English / Chinese environment website.
I’ve already blogged here about a paper that I published a few weeks back, The Post-Kyoto Bidding War, which discussed the need for a global ceiling on CO2 concentrations and for developing country targets in a post-Kyoto regime. The paper noted, approvingly, the evolving German-Indian conversation about the need for a future climate deal to centre on convergence to equal per capita emission rights, and suggested that this could potentially pave the way for a more substantive discussion about stabilising the climate than the one we’ve had to date.
What the paper didn’t explore in detail is the fascinating situation of China – a nation whose CO2 emissions per capita are right on the cusp of the crucial tipping point of global average per capita emissions. I spoke recently to the International Energy Agency to ask them when they expected China’s per capita emissions to surpass the global average. Their answer: 2008. That date is of fundamental importance for all negotiators in Bali, as the ChinaDialogue article explains:
When this change takes place, it will represent a major watershed in international climate policy. China has until now been squarely in the same camp as the G77 bloc of developing countries, but its accession to the above average emitters’ club may introduce a much more nuanced picture.
Whereas for India, participation in a global deal based on per capita convergence makes sense for reasons of profitability alone, the same will from next year not hold true for China. As its per capita emissions overtake the global average, it will find itself in the same situation as both the US and the EU, in that any global deal that actually stabilises the climate will involve real terms emissions reductions – regardless of whether the process of convergence to equal per capita levels happens quickly, slowly or not at all.
In this sense, whether China should support a stabilisation ceiling – and the targets for developing countries that it would inevitably entail – depends entirely on how urgent China perceives climate change to be, and how badly it wants the world to agree a solution to the problem.
If China essentially concurs with the relaxed view about urgency of the United States, then there is no problem. But if, on the other hand, China thinks that climate-driven damages are likely to be sufficiently serious and detrimental to Chinese interests to warrant solving the problem sooner rather than later – by setting a stabilisation target, in other words – then that will necessitate the development of a Chinese view on how the resulting “global emissions budget” should be shared out. Few issues involved in China’s “peaceful rise” are likely to be as significant in their implications for the rest of the world as this one.
What it comes down to, in a nutshell, is this: if China does see climate change as urgent, and genuinely wants to solve it, then does it accept per capita convergence as the core principle for sharing out a global emissions budget? And if not, then how does it think such a budget should be divided between 192 countries?
by Richard Gowan | Dec 4, 2007 | Conflict and security
As Alex notes, awareness of the crunch in peacekeeping is spreading. There’s news today of an MIT report arguing that the proposed EU force in Chad would be “engulfed”, which leaves those (like me) who have argued for a rapid deployment a tad uneasy. And, out in the real world, it’s full-scale artillery barrage time in the eastern DRC…
So, any reasons to be cheerful? Well yes, just possibly. The more attention the situation gets now, the higher the chance that the international community may pause to wonder what on earth it’s managed to get itself into. It’s worth remembering that the one really important document on UN peacekeeping – 2000’s Brahimi Report – mattered because it faced up to the catastrophes of the 1990s. Nothing like a great big failure to inspire new thinking.
Maybe if we can work out that peacekeeping is teetering on the brink right now, we can skip the horrible failure bit and start propping it up as we go along? Maybe.
by Alex Evans | Dec 4, 2007 | Conflict and security
Scott Paul at the Washington Note agrees with Richard about the outlook for UN peacekeeping:
“Expectations for UN peacekeeping are sky high even though resources are nowhere to be found. I’m worried that the UN is being set up for failure.”
by Alex Evans | Dec 4, 2007 | Climate and resource scarcity
So says International Food Policy Research Institute head Joachim von Braun in an exclusive interview with the Guardian today:
“Demand is running away. The world has been consuming more than it produces for five years now. Stocks of grain – of rice, wheat and maize – are down at levels not seen since the early 80s,” said von Braun, whose organisation is the world’s largest alliance of agricultural researchers, economists, and policy experts.
So far, crises have been averted because states have eaten into national stocks, but this could be set to change because China, in particular, has run down its supplies.
“Over the next 12 to 24 months we are in a fairly risky situation. Large consuming nations, particularly China, will feel pressed to enter international markets to bid up prices to unusual levels,” von Braun warned ahead of a speech today to the institute’s AGM in Beijing …
The social tensions caused by rising food prices are already evident, says von Braun. “The first sign was the tortilla riot in Mexico city, where 70,000 took to the streets. I think that was only the beginning – there will be more,” said von Braun. “For a year or two countries can stabilise with stocks. But the risk comes in the next 12 to 24 months. The countries that cannot afford to buy will be the losers, while those with huge foreign exchange reserves will bid up the world market.”
