Is Paper Money Going the Way of the Dinosaur?

"Climate change will likely affect economies and financial markets by causing shocks to long-term growth prospects and shifts in the relative price of carbon-intensive goods," said Morgan Stanley's Elga Bartsch in a recent research report. "Globally, climate change will likely cause stagflationary pressure."

Because "stagflation" sounds a hell off a lot scarier than "recession" you'll probably be hearing a lot about stagflation in the financial media over the coming weeks. By definition, stagflation is a period of time characterized by high inflation and slower growth. This presents a major problem for central banks, as they need to decide which problem (growth/inflation) they should tackle first. Periods of extended stagflation can cause great damage to central bank credibility. When economies go sour, and politicians start playing the blame game, central banks are the obvious (and easiest) targets.

If Morgan Stanley is correct about the link between climate change and stagflation, it means that climate change could indirectly damage central bank credibility. This could have important implications for the European Central Bank, and the Euro currency.

"The role of the European Central Bank might prove to be the most controversial of the next decade. While one can argue that the economies of the euro zone, from Naples to Helsinki, are no more diverse than those of the United States, from Boston to Birmingham, this country [the United States] has a political unity to go along with a common currency," said Floyd Norris in a New York Times editorial.

"All that means that the challenges confronting the European Central Bank in bad times could be of a different order of magnitude than those that confront the Fed, simply because the nonmonetary means of stabilization are less developed. It is conceivable that a prolonged economic downturn [in our case, stagflationary pressure caused by climate change] could lead one European country or another to elect a government that blamed the central bank and wanted out of the euro, thereby precipitating a crisis since no exit from the euro is supposed to be possible," Norris says.

Is this why Europeans have been much more aggressive about implementing environmental policies than the United States? Is Brussels worried about climate change undermining the unity of the European Union? If this is the case, investors can expect Europe stepping up its political commitment to alternative energy, and this should be reflected in alternative energy valuations.

Of course, the European Central Bank will not be the only bank to take a beating if climate change causes an extended period of stagflation. What will happen if the mix of climate change and stagflation undermines central bank credibility to the point where markets start looking for alternative ways to manage currency values? If you want to profit from climate change, maybe you should ignore solar or wind power investments and just buy gold, as it is the only true currency.

Eric Johnston, once the president of the U.S. Chamber of Commerce, said that "the dinosaur's eloquent lesson is that if some bigness is good, an overabundance of bigness is not necessarily better." Some experts claim that climate change wiped out the dinosaurs. If the world's climate is changing, will paper currencies go the way of the dinosaur?

Disclosure: none

Comments

[ussmls7]

The media ran with Al Gore's bull crap, that has surpressd by force & scare tactics, that kept the real facts on global warming to come to light, but now Al's time in the lime light may be cut off by a senate hearing from over 500 very highly respected people from all corners of the earth. From federal orgs, to MIT, they come from all walks of the science spectrum. They will not be bullied by all of the special interest , hollywood green nuts & left wing media. The report will make waves all accross the planet, exposeing Al for what he is , a liar, playing on the commy mans fears with the backing of all of thr green activeist. In my veiw, he will lose that award for his lies, a movie that is a lie & the billions that co's have bet on giong gree will lose there but.
How the ECB deals with it is there problem, if they continue to embrace this gree crap in the industrial sector, there ship will sink, along with there money.
Now gold will shine, but silver will out perfromin a huge way.

[huangjin]

How will climate change cause stagflation? It is likely to increase the growing season, easing food production. What would cause stagflation is something like the Kyoto treaty, which would lead to an sharp increase in prices similar to the 1970's oil shock.

[Hugh]

19,000 scientists say man-made global warming is crap: www.oism.org/pproject/

Gore is lying, take a close look at his face.

[David Lentz]

OK, so I went and actually read the paper that the oism.org/pproject/ is talking about. And it's crap too. The problem with the charts presented therein, and their "study", is the same problem that Al Gore's numbers face -- they are looking at a sufficiently small slice of time that they are able to fit any of a number of explanations to their data.

If you run a bit more data through either proffered model, it falls apart, and does a lousy job of modeling the global climate outside of their carefully selected range of time -- a range that is insignificant in the geological scheme of things.

This phenomenon should be familiar to anyone who browses investment charting sites, where small runs of data are commonly and cheerfully extrapolated to ridiculous conclusions. More serious models -- of anything -- use much larger runs of data, and are very careful about extrapolation very far into the future.

I suggest that you visit your local library (or bookstore), and read a copy of Plows, Plagues, and Petroleum, by Dr William F. Ruddiman, to gain a bit more perspective on what is involved in modeling global climate, and to see a model of global climate that works over more than a few hundred years.

Next, visit about any site on the web that discusses global population growth, and see if you think that maybe, just maybe, human activities (including burning carbon fuels, but by no means restricted to that) are putting a dent in things. Try googling "global population growth" and pick a site at random.

As to how responses to global warming are likely to be reflected economically, I think that the above blog entry focuses overly much on the negatives associated with imposition of controls on and changes to the way we use energy today.

If we look at how Y2K effected the economy, instead of a pronounced economic contraction due to all the effort that was applied toward revising existing IT systems and being a drain on corporate profits, instead we saw a HUGE blossoming of IT-related spending jump-start the broader economy, and fuel much of the dot-com bubble. The downside of that adventure was that when Y2K came and went, IT spending collapsed, due to a lot of budgeted spending and system replacements being pulled forward to pre-Y2K, leaving a dearth of IT spending in the wake of Y2K. The bubble imploded at that point.

I think it is entirely likely that measures taken to arrest global warming will result in a phenomenal economic boom -- as car companies convert to electric hybrids, green power proliferates, and oil is de-throned as an economic king-maker, much to the dismay of OPEC. And we WILL be taking measures to arrest global warming, if only due to the large fraction of humanity, and the enormous investment in properties, that lie along the coastlines worldwide. The economic repercussions of doing nothing and allowing most of our larger cities to submerge are too large to be allowed to happen.

As to whether or not global warming results in an agricultural boom, I think we will have to wait and see whether or not weather patterns change -- a return of the "dust bowl" of the 1930's will not help America's breadbasket. OTOH, Russia may begin to plant crops in the thawing tundra and offset that, although the thought of Putin controlling a major chunk of food as well as energy is not an attractive one.

I think the economic effects of global warming are unlikely to be accurately forecast-able. Too many possibilities, too many unknowns. About the only thing we can count on is an unknowable future.