Category Archives: On the cover
Climate Agreement, Hypocrisy and Summits
Trump’s decision to withdraw from the Paris “climate agreement” with the aim of negotiating a better one can be debated, but the whole summit and agreement smell of bureaucracy and hypocrisy. What no one should do is deny reality.
If governments were truly concerned about “climate change”, they would make fewer summits and act more.
These summits are photo opportunities that mask a very different truth. Bureaucrats care about the process, not the results, that’s why they love summits and multilateral vague agreements. Those same bureaucrats justify the atrocious results by organizing another summit.
Keep calm. Do not worry about those who make catastrophic predictions. The history of blunders of the end-of-the-world doomsayers is so vast that only a politician could ignore them. Let us remember that, according to “scientific analysis” of a few decades ago, we would have run out of oil and water already seventeen years ago. Ignoring efficiency, technology and substitution is the favorite hobby of subsidy collectors.
The problem of “combating climate change by a committee decision” is that it neither does so, neither helps consumers.
These summits and agreements perpetuate the perverse incentives of subsidized and crony polluters while penalizing consumers via taxes.
But there is good news. Decarbonization is unstoppable . Not thanks to a summit or due to politicians, quite the opposite. Thanks to competition, technology and research. Thanks to human ingenuity. Coal has been disappearing from the global energy mix for decades, despite – not to thanks to – governments. And the same is happening with oil.
In fact, my reader will not be surprised to know that climate summits always hide agreements to perpetuate the polluting rent-seeking sectors of each member country by setting targets to 2030 that no one will monitor and someone else will come to explain .
The reality is that, summit after summit, with a smile and a handshake, leaders return with their state-owned polluting sectors intact.
– Of the 147 countries that have ratified the agreement, in the overwhelming majority (more than 90%) the most polluting companies and sectors are 100% public (producers in petro-states, coal producers, refineries, steel mills, etc …). Even seeing the Climate Accountability Institute analysis, 63% of emissions come from 90 companies, of which 31 are state-owned, 9 are government-run and 50 develop government-owned resources through royalty-providing concessions.
If these countries were so concerned about climate change, they would not need to meet in exotic places at expensive hotels. Closing down their state-owned polluters would solve “the problem”. In fact, no need to close them. If those countries that signed the “climate” agreement implemented the measures of efficiency, environmental control and best practices of US companies, there would be no need for a summit.
The reality is that the US and its companies do more in terms of R &D, technology, efficiency and corporate responsibility than the vast majority of countries that signed this agreement.
- The US energy intensity has plummeted and needs much less energy consumption to grow, even though it has increased its energy independence until it is almost self-sufficient. The energy intensity of the US is 60% lower than that of 1956 and the country grows in a more sustainable way.
- China is the biggest polluter in the world. It accounts for 15% of the global economy but is almost 30% of total emissions. If China is concerned about climate change, all its government needs to do is to look at the sky in Beijing and see that it is black, not blue, then close its coal companies. They are mostly all state-owned.
- India is almost 7% of global emissions and the vast majority comes from state-run and subsidized coal and high-energy intensity sectors.
- China consumes much more coal than their official figures say. Both The Guardian and The New York Times have reported that China emits up to 1 billion tonnes of CO2 more than it officially recognizes each year. But it appears before the world as the leader of the fight against climate change. Well, in 2030 60% of its energy mix will still be coal.
- To say that China and India emit more CO2 because they produce goods for the West is simply untrue. Governments decide what energy mix they want through central planning in four out of five of the top CO2 emitters in the world.
- The so-called “green” European Union spends $ 6.9 billion annually on coal subsidies. Since the 2015 “Paris agreement”, these subsidies have actually increased by $875 million per annum. In other words, coal subsidies (as well as refineries and subsidies to the car industry) have increased, while consumer bills have skyrocketed with the excuse of being “green”. In addition, the European super-green Union is about 10% of the world’s CO2 emissions but its citizens bear 100% of the costs in their tariffs.
- Of the subsidies to fossil fuels, the largest by far is Iran – which has also signed the “Paris agreement” – and spends more than Saudi Arabia, Russia and India together in fossil fuel subsidies.
As I explained before, decarbonisation is unstoppable . But it would be even faster without the pitfalls of those who today present themselves as saviors of the Earth while in reality they just tax citizens to perpetuate their polluting “national champions”.
No Hollywood star in a private jet denounces these hypocrisies. The hundreds of thousands of pages of legislation that this summit will produce are not going to eliminate progress, but delay it, they do .
Trump is not an anti-environment monster, and Macron is no green giant. The US has reduced its CO2 emissions more than the vast majority of countries thanks to competition. The success of the US in its energy policy has been precisely not having one, Dick Cheney told me years ago. If it had been up to the administration in 2007, today the US would not be self-sufficient in natural gas, one of the largest oil producers in the world, and a leader in competitive wind and solar without subsidies.
The gradual decarbonization of the US has not only come from healthy competition, but a cheaper transition helped fthe consumer. The US has cut more emissions in the past ten years thanks to fracking and competition than the European Union’s subsidy -driven interventionist nightmare (read).
The US has achieved this reduction by lowering gas and electricity prices to its citizens, while in the EU they have skyrocketed .
Trump is not going to stop a winning formula. Neither will he join a summit of perverse incentive decisions with little practical use. Obama could not stop the energy revolution that he initially rejected and now considers natural gas and almost energy independence a personal achievement.
Would it have been better for the US to accept the agreement? I’m not sure. It may negotiate something less cosmetic and more realistic. An agreement that does not harm competitiveness and employment.
Therefore, let us be calm.
If you think that Trump’s decision is bad, breathe easy. The Paris agreement is non-binding and completely unenforceable anyway. And the US will take at least three and a half years to fully implement the withdrawal. And if you really think that the climate savers are going to be the Chinese, take a trip to Beijing and Shanghai, look at the sky, and tell me what you see (if you can see anything).
Regardless of what you believe, technology and efficiency will continue to generate more progress, cleaner and more abundant energy.
The whole Paris climate agreement is non-binding, not enforced and with no guidelines other than “annual contribution reports” -ie, papers. Whether or not the agreement was accepted by Trump, nothing in it is enforceable, so efficiency and technology change will happen whether there was an agreement or not.
Daniel Lacalle has a PhD in Economics and is author of “Escape from the Central Bank Trap”, “Life In The Financial Markets” and “The Energy World Is Flat” (Wiley)
@dlacalle_IA
Picture courtesy of Google
Draghi doesn’t see “bubbles”. Let me show them to you
Mario Draghi has again missed an exceptional opportunity to adjust monetary policy. By ignoring the huge risks that are being created from the brutal inflation of financial assets, saying that “there are no signs of a bubble“, the European Central Bank (ECB) remains adamantly foused on creating inflation by decree, denying the effects of technology, demography and overcapacity.
“No signs of bubble”? I’ll show you some of them myself .
– Percentage of debt of major countries “bought” by the ECB: Germany, 17%, France 14%, Italy 12% and Spain 16%. In all cases, in 2016 and 2015 the ECB was the largest buyer of said countries’ net emissions.
Ask yourself a question: On the day the ECB stops buying, which of you would buy peripheral or European bonds at these prices? Clearly, the first sign of a bubble is the absence of demand in the secondary that offsets the impact of the ECB. It indicates that the current price is simply unacceptable in an open market, even if the recovery is confirmed, especially because rates do not even reflect a minimum real return, being below inflation.
– European Union high-yield bonds are trading at record-low yields despite the fact that cash generation and debt repayment capacity, according to Moody’s and Fitch, have not improved significantly
– European largest stocks (Eurostoxx 50) trade at 20x PE and 8.3x EV/EBITDA despite eight years of flat earnings and downgrades, which have only just recently reversed.
– Infrastructure deals’ multiples have increase five-fold in three years to an astonishing average of 16-19x EBITDA.
– Excess liquidity in the euro zone already reaches 1.2 trillion euros. It has multiplied by almost seven since the “stimulus” program was launched.
Anything for Inflation
There is a problem in the huge amount of assets bought by the ECB, whose balance sheet already exceeds 25% of the European Union’s GDP. At the beginning of the repurchase program, it could be argued that risky assets, especially sovereign bonds, could have been cheap or under-valued because of the risk of break-up of the euro and overall negative sentiment. However, that statement cannot be made today, with bond yields at historical lows and debt levels at historical highs. Monetary policy is a perverse incentive to spend more and add more debt .
Of course, what the ECB expects is the arrival of the inflation mantra , that mirage that deficit states yearn for and no consumer has ever wanted.
But the search for inflation by decree meets the pitfall of reality. The positive disinflation that the technological advance generates (read George Selgin) adds to the logical change of consumption patterns due to ageing of the population and the elephant in the room: The European Union has never had a problem of lack of investment, but of excess spending on dozens of industrial and infrastructure plans that have left behind some positive effects, but – due to excess – greater debt and overcapacity .
Now that prices are moderating again with the dilution of the base effect, the opportunity to moderate this unnecessary monetary stimulus is lost. As I explained at CNBC on Monday, the supposed positive effects of the buyback program cannot make us ignore the accumulation of risk in sovereign and corporate bonds and the dangerous impact on the financial sector.
Draghi, at least, warns
The president of the ECB does not stop alerting governments about the importance of reforms to drive growth, lower taxes and reduced imbalances, but no one hears. When Draghi warns banks of their weaknesses, they don’t listen either. When he reminds deficit spending governments that monetary policy has an expiration date, they look the other way. It’s party time .
Monetary policy is “like Coca-Cola,” said Jens Weidmann , president of the Bundesbank. A drink that stimulates, but has too much sugar and no real healing qualities.
The problem of losing this opportunity to moderate monetary policy is that it is highly unlikely that the necessary measures will be taken to correct excesses when they are no longer a debate of economic analyst, but evident to all citizens. Because then, the central bank will be afraid of a financial market correction, after a bubble inflated by its policies.
European governments make a huge mistake thinking that prosperity is going to be generated from debt and not from savings. But they make an even bigger mistake if they think that by perpetuating the imbalances, they will prevent a crisis.
At the press conference, Draghi said that “nobody knows when or where the next crisis will come: the only sure thing is that it will come“.
What Draghi did not explain is that the artificial creation of money without support, well above real economic growth, is always behind those crises. But that is another problem, that will be dealt with by the next president of the Central Bank, who will offer the “new” solution … Yes, you have guessed it: Cut rates and increase liquidity.
Daniel Lacalle has a PhD in Economics and is author of “Escape from the Central Bank Trap”, “Life In The Financial Markets” and “The Energy World Is Flat” (Wiley)
@dlacalle_IA
Picture courtesy of Google
Bitcoin may still double. Here is why
Bitcoin, the virtual currency, although I prefer to call it “virtual reserve of value”, exceeded $ 2,700 and in a single week, its capitalization soared above $4 billion, taking it to historical highs. I think it is worth analyzing the reasons why it continues to grow.
The world’s central banks are increasing money supply uncontrollably and unjustifiably. As we have commented on several occasions, more than $200 billion of monthly repurchases in the greatest transfer of wealth from savers towards governments. As the saver sees deposits disappear with real negative rates and devaluations, and central banks are looking to beggar thy neighbor via devaluations to benefit deficit states, financial repression continues to generate a defense response from citizens, who seek to safeguard savings from the confiscating effect of devaluation.
The main factor that has led Bitcoin to rise so dizzily is this financial repression. Earlier this year, China’s demand for Bitcoin soared almost 80% due to capital controls and the more than founded fear of citizens that the government will try to cover the huge imbalances of the Chinese economy with devaluations and more aggressive capital controls than already imposed. Many defenders of financial repression state openly that China could mitigate its enormous debt and real estate bubble problems by assaulting a population that has one of the highest saving rates in the world (48% of gross savings relative to GDP, surpassed only by Kuwait and Bermuda). This risk alone could increase Bitcoin demand by up to 40%.
But it is not just China. Trading in Bitcoin from Japan and South Korea rose almost 50% due to the legal possibility of using the virtual currency in businesses. With the Bank of Japan “printing” $70 billion a month, Bitcoin is presented as both an alternative to financial repression and a store of value, since supply can not be decided unilaterally by a government or its central bank. This could increase demand of Bitcoin by another 30% conservatively assuming a moderate penetration in total retail sales.
In fact, just considering a 5% of penetration in global retail sales would multiply Bitcoin demand and send it soaring to more than double the current value.
Bitcoin has developed from a financial asset to be used more widely to exchange goods and services. As such, it loses its status as a “rare incomprehensible thing” that some wanted to ignore, to become a real monetary alternative.
But we must not ignore the risks. At the moment, countries do not consider Bitcoin a threat, but if their printing and devaluing objectives are put at risk, governments may resort to legal repression to try to stop crypto-currencies. It will not be easy, anyway.
I prefer to see Bitcoin from a more moderate perspective. As it is implemented, with other crypto-currencies, it may force central banks to return to sanity and abandon disproportionate monetary policies.
Let us not forget that central banks can afford the current orgy of monetary policy only if they maintain the confidence of the secondary market defending the role as reserve currency. When confidence and status as a reserve currency are lost, welcome to Venezuela.
That is why I am convinced that Bitcoin may serve as a mitigating factor on the runaway monetary expansion that we have been living for nine years with the excuse that “there is no inflation”, creating large bubbles in bonds and risky assets and laying the foundations of the next crisis. Bitcoin can be a shock that forces central banks back into logic knowing that they must keep their currencies as a store of value.
At the moment, those who predicted a Bitcoin crash as a kind of electronic scam have been mistaken. I see it as an urgent and necessary alternative to the mismanagement of Keynesian monetary policies. I hope that it continues to grow and that, as a result, it serves as a brake on financial repression.
A strong Bitcoin might be the best thing that happened to global economies worldwide to avoid another crisis.
Daniel Lacalle has a PhD in Economics and is author of “Escape from the Central Bank Trap”, “Life In The Financial Markets” and “The Energy World Is Flat” (Wiley)
@dlacalle_IA
Picture and video courtesy of Google, Bloomberg.