China, India and climate change
Melting Asia
China and India are increasingly keen to be seen to be tackling climate change; though it is dirtier, China is making a more convincing show of action
SINCE 2006 the railway line across the Tibetan plateau (above) has been carrying passengers and freight across a landscape of snow-covered peaks and tundra, antelopes and wolves. China celebrates it as one of the nation's greatest technological feats. But some experts worry that global warming may render it useless.
The impact of warming can be seen on a road that runs parallel to the line for much of its length. Trucks bump along its cracked and undulating surface, which is being ravaged by the freezing and thawing of the tundra beneath. Since the highway was built in the 1950s, the permafrost area has been shrinking and the layer above it, which is subject to seasonal thaw, has been getting deeper. The railway is vulnerable to the same process.
The vast and sparsely populated Tibetan plateau is the origin of the great river systems of China, South-East and South Asia: the Yangzi and Yellow Rivers, the Brahmaputra, the Indus, the Mekong and the Salween. The Ganges rises on the Indian side of the plateau's Himalayan rim. These rivers, fed by thousands of Himalayan glaciers, are an ecological miracle. They support some 1.3 billion people.
But the glaciers are retreating. Chinese experts predict that by 2050 the icy area on their side of the Himalayas will have shrunk by more than a quarter since 1950. Predictions for the Indian side are gloomier still. In April a leading Indian glaciologist, Professor Syed Iqbal Hasnain, measured the East Rathong glacier in lofty Sikkim state. It appeared to have shrunk by 2.5km, or half its length, in a decade.
The average global temperature increase of 0.6°C in a century seems an insufficient explanation; but that may combine with a 3km-thick fug of pollution, known as Asian Brown Cloud, that hangs over northern India. Scientists think this haze, which is created by power stations and cooking-fires, may be radiating heat into the lower troposphere, at altitudes in which glaciers are found. Mr Hasnain estimates that Himalayan glaciers will be gone in 20-30 years. That would leave many great rivers depending on seasonal rainfall. According to the Intergovernmental Panel on Climate Change (IPCC), this may be the fate of the Indus, Ganges and Brahmaputra by 2035. Making matters worse, changes to the weather may meanwhile make the rains less reliable.
North India has two main weather systems. In the summer, south-westerly monsoonal winds reach northern India, in an explosion of heat-busting rain, in late June. During the winter, westerly winds blow rain-clouds across Pakistan and northern India, watering the plains and dumping snow onto the tops of the Hindu Kush, Karakorams and western Himalayas.
These systems are liable to change with the climate; some scientists think the Westerlies have been disrupted already. This might explain why India's winter rains were poor this year; but May delivered a drenching. With 168mm of rainfall, Delhi had its wettest May on record. In Uttar Pradesh state, two storms killed 120 people. With seasonal rivers and sporadic rains, India's ecological miracle would become an ecological calamity.
Now that the American presidential race is down to two candidates who are both committed to cutting emissions, China and India, the world's most populous nations, are seen by many as the world's biggest climate-change problems. Russia's economy is more profligate with energy, but China is widely believed to be the world's biggest emitter of carbon dioxide, and India is rapidly moving up. Their exploding emissions are America's main excuse for failing to take action itself; and their intransigence exasperates those trying to negotiate a global agreement on climate-change mitigation to replace the Kyoto protocol. Meanwhile, both countries are awakening to the problems that climate change will cause them.
In the past couple of years, Chinese officials have begun sounding like converts to the climate-change cause. In late 2006 12 ministries helped produce a 415-page report on the impact of global warming. It foresees a 5-10% reduction in agricultural output by 2030 (a shift from previous thinking on this among Chinese academics which held that global warming might benefit agriculture overall); more droughts, floods, typhoons and sandstorms; a 40% increase in the population threatened by plague. The report also admits the possibility of damage to the Tibetan railway. Last year China published its first policy document on climate change, admitting that coping with global warming presented “severe challenges”.
China also now admits its own contribution to the problem. Officials reacted frostily last year when the International Energy Agency, a rich-country think-tank, said China would overtake America as the world's biggest emitter of greenhouse gases in 2007 or 2008. But the Chinese commerce ministry's website now carries, without negative comment, an article from April this year quoting University of California researchers saying China is already number one.
The impact of climate change on India, a hotter and poorer country, is likely to be worse. According to the Peterson Institute for International Economics, India's agriculture will suffer more than any other country's. Assuming a global temperature increase of 4.4°C over cultivated areas by 2080, India's agricultural output is projected to fall by 30-40%.
Yet India's response to this doomful scenario has been, at best, haphazard. For example, it has made only occasional studies of 11 Himalayan glaciers. It has also shown little concern for the regional political crisis that climate change threatens. As sea-levels rise, for example, the IPCC warns that 35m refugees could flee Bangladesh's flooded delta by 2050. Yet even in India, attitudes are changing.
Manmohan Singh, its sagacious prime minister, has formed a powerful council of ministers, bureaucrats, scientists and businessmen to co-operate on the issue. It has rarely met; yet it is part of a broader push that has sparked a flurry of climate-related initiatives: to boost energy efficiency, improve seed types, encourage forestation and so on. Given India's historic problems with flooding and drought, many of these are built upon existing policies. Indeed, the government claims that 2% of GDP is being spent on coping with climate-induced problems. To display these efforts, and manage them better, India is due this month to unveil a vaunted policy, the National Action Plan on Climate Change.
It will be welcome; because many consider that India is expending even greater effort on justifying its refusal to control its emissions. In particular it argues that its total emissions are relatively low (see chart above) and that it is relatively energy-efficient (see chart below). China uses far more energy than it does per unit of GDP; Russia, vastly more.
The reasons for India's frugality are not all that creditable. Almost half the population has no access to electricity. Also, India cross-subsidises power and petroleum products: farmers get cheap electricity, for instance, while industry pays more for it. This is one of many government-imposed hardships that have forced Indian firms to use power and other resources efficiently. As a result, India is one of the world's lowest-cost producers of aluminium and steel.
During the past four years both China's GDP and its energy consumption have grown at an average of 11% a year. India's GDP, meanwhile, has grown at an annual average of 9% while its energy consumption has risen by 4%. And yet, to achieve its target of long-term 8% growth, India will have to boost its power-generation capacity at least sixfold by 2030. Over the period, its emissions are expected to increase over fourfold.
India defends this on moral grounds: its people have the same right to wealth as anyone. Indeed, given their special vulnerability to climate problems, they have a particularly urgent need for economic development. After all, a factory worker with an air-conditioner will feel global warming less than a subsistence farmer will.
This position is also consistent with the UN Framework Convention on Climate Change, which launched the Kyoto process, and recognised that economic development and poverty eradication were the “overriding priorities” for developing countries. The Bush administration's bid to override this principle by refusing to undertake targeted emissions cuts unless India and China accept comparable cuts has therefore caused fury in India. A senior official in the foreign ministry characterises America's line as: “Guys with gross obesity telling guys just emerging from emaciation to go on a major diet.”
India has entered negotiations to replace the Kyoto protocol, which expires in 2012, in the same spirit. Indeed, Chandrashekhar Dasgupta of the Energy and Resources Institute, who was involved in negotiating the Framework Convention and also the blue-print for the current negotiations, which is known as the Bali Action Plan, says it is a “mischievous mis-statement” even to speak of the protocol expiring. Indian officials consider that the negotiations are to refresh, not replace, the protocol, mainly by imposing more ambitious reduction targets on rich countries.
This would make an IPCC target of reducing global emissions by 25-40% by 2020 unrealisable, which is why India's negotiators insisted that the target be removed from a draft of the Bali Action Plan. Supported by other developing countries, they also watered down the draft's most radical feature: a pledge by developing countries to undertake “measurable, reportable and verifiable” efforts to cut their emissions. At India's instigation, the paragraph in which this phrase appeared was reshuffled, leaving its meaning unclear.
With such tough tactics, India has acquired an ugly reputation on the global front against climate change. Among big countries, perhaps only America and Russia are considered more obdurate. Although China has shown no inclination to commit to specific emissions-cutting targets in the post-Kyoto discussions, some Chinese academics familiar with the process say that after China reaches a certain per head emissions level it might agree to cut emissions. It is anxious not to be cast as a global-warming villain, particularly given pressures mounting on it over issues ranging from trade to Tibet. China is looking to America for its cue. If America commits itself to carbon cuts, China will feel obliged to make some kind of promise too.
Many see India as unhelpful by comparison. Almost nothing could annoy India more. Partly in response, perhaps, Mr Singh has shown some flexibility. At a G8 summit in June last year, he pledged that India's carbon-dioxide emissions per head would never exceed developed countries'. In effect a challenge to the industrialised world to cap India's emissions by curbing their own, this was more imaginative than has been widely recognised. And yet China is perceived to be taking the problem more seriously than India. This is partly because China is doing a lot to try to curb its energy use—but for reasons that have nothing to do with greenhouse gases.
Jia Feng of the Ministry of Environmental Protection says the country's chief concern driving energy policy is security. Imports supply only 10% of China's total energy demand (70% of which is met by coal), but oil is essential for transport. Lacking the military power to protect far-flung sea lanes, China feels vulnerable.
Next on its list of worries is local pollution caused by sulphur dioxide, atmospheric particulate matter and wastewater. Acid rain affects a third of China's land and hundreds of thousands of people die from pollution-related cancer every year. Industrial filth has sparked protests.
A slogan for the planet
The government is trying to curb the use of fossil fuels and promote renewable energy. In 2006 it announced plans to cut the amount of energy consumed for each unit of GDP. The goal is to reduce energy intensity by 20% by the end of the decade. “Save energy, cut emissions” is now one of the party's favourite slogans. Boosting energy-efficiency and the use of renewables not only helps secure energy supplies and cuts local pollution, but also helps keep carbon emissions in check too.
Amid the recent global upsurge of climate-related anxiety, China's leaders have spun its energy-efficiency drive as greenery. In its first published policy paper on energy, which came out last year, the government said it aimed to cut greenhouse gas emissions; and the Beijing Olympic games are to be a showcase for China's new-found greenery. The first “carbon neutral” summer games involve solar power aplenty, tree-planting, banning many cars from the streets and “reducing emissions from enterprises” (temporarily shutting many of them down, presumably). The games, say officials, will produce 1.18m tonnes of CO2 and the countermeasures will save 1.03-1.30m tonnes.
The energy-efficiency drive is spreading out from Beijing. Provincial leaders are required to meet “save energy, cut emissions” targets in order to gain promotion. Of 800 county-level party chiefs questioned in an official survey published in May, a surprising 40% said meeting environmental protection goals should be a critical determinant of their careers. Fewer than 2% said meeting economic growth targets should be given such a priority.
Still, the goal of achieving a 20% reduction in energy intensity by 2010 seems a long way off. In 2006, the first year of the campaign, it fell by only 1.3% and last year by around 3.3%. To meet the target it would need reductions averaging 5% for each of the next three years. It will be hard to do this while holding down energy prices. Academics at the Development Research Centre, an official think-tank, recently said a 15% increase in energy prices by 2010 would promote “conspicuous energy savings”. But the party's political will has its limits. For all its eagerness to save energy, it fears higher prices could stoke inflation and regime-threatening protests.
But China is making considerable efforts to boost the amount of energy produced by non-fossil fuels. By 2020 the aim is to generate 15% of energy from renewable sources, up from around 7% in 2005. This is a big step up from the previous goal of 10% by 2020. China's investment in renewable energy last year, about $10 billion, was second only to Germany's.
Still, even if China meets this target, carbon emissions will continue growing rapidly too. The biggest concern among climate-change activists around the world is the impact of Chinese coal—and also Indian coal. China and India have the world's third and fourth biggest coal reserves; though much of India's is currently out-of-bounds, under protected forests and human settlements. Both countries are meanwhile trying to develop their renewables sectors. For example, India is the world's fourth-biggest producer of wind power. Its solar yield is also bigger than any country except America. Still, in the coming decades, both countries will remain heavily dependent on coal.
Which is why rich-world climate activists are placing their faith in two factors that appeal to India's and China's self-interest. The first is the Clean Development Mechanism (CDM), a scheme whereby companies in rich countries outsource their obligation to cut carbon emissions, by sponsoring carbon-cutting schemes in poor countries. The CDM both allows emissions to be cut efficiently, because reductions take place where they can be made most cheaply, and offers developing countries an incentive to clean up.
China, which has put a lot of government effort into it, has done far better than India out of the scheme. Last year China made more money than any other country out of rich-world polluters—$5.4 billion, or 73% of the total. India, which, along with Brazil, came second, made $445m, 6% of the total. There are, however, question marks over the future of the scheme, because some rich-world businesses and politicians are beginning to argue against handing over such large sums of money to Asia. China, meanwhile, says that it needs not just money but also clean technology, and accuses rich-countries of being tight-fisted with their intellectual property.
The second factor that may encourage China and India to become greener is the growth of indigenous alternative-energy companies. There, both China and India can claim some remarkable successes.
China's Suntech, which was founded in 2001, is the third-largest manufacturer of solar cells in the world. India's Suzlon Energy is one of the world's five biggest makers of wind turbines; 15 years ago it was a modest Gujarati textiles firm. Both countries have innovative companies hungry to make money abroad and in growing local markets. As such firms grow, so will the volume of calls for more climate-friendly policies in China and India.
This is good. And yet, at a time of fast-melting glaciers and strange rains, of spreading deserts and rising seas, it is a frail and distant promise. As China and India awaken to climate change, few of their leaders and thinkers seem to expect a more solid solution: an ambitious replacement, or refreshment, of the Kyoto protocol. Such an accord would have to involve more specific commitments from China, India and other developing countries. But it would depend, first of all, upon binding action by the developed world.
Venezuela
Hugo Chávez does a somersault
The latest uncomfortable manoeuvres of Venezuela's president
IT IS a remarkable turnaround. Back in January Venezuela’s president, Hugo Chávez, told a startled world that the leftist FARC guerrillas in neighbouring Colombia should be recognised as an insurgent army and granted belligerent status. Then, on Sunday June 8th, he generated surprise afresh when he reversed his position and called on the FARC’s leaders to lay down their arms, release their hostages and recognise that guerrilla warfare in Latin America “is history”.
What is going on? Mr Chávez is doing his belated best to distance himself from what most of the world regards as a terrorist organisation. Three months ago Colombia’s army captured a cache of compromising documents in electronic form, during a raid on a FARC camp inside Ecuador. That proved to be a painful blow to Mr Chávez’s standing. As well as containing evidence of possible material and financial support for the guerrillas from the Chávez government, the documents suggest that, as many had suspected, the proposal to grant belligerent status was part of a strategy agreed by the FARC leadership in alliance with Mr Chávez.
Venezuelan spokesmen are denying all: they have dismissed the computer files as a fabrication. But it seems that few believe them. Foreign governments have been queuing up to request access to the files for their own intelligence services.
Things have also been going badly for Mr Chávez on the home front. In December voters narrowly rejected his proposal to redraft the 1999 constitution along “socialist” lines (including a provision for indefinite presidential re-election). That was his first significant electoral defeat in a decade and he has struggled to regain his composure. Since December he has sought ways to reintroduce elements of the rejected constitution using existing powers, including a far-reaching enabling law that was passed last year, which gives him the right to legislate by decree.
But Venezuelan society has proven remarkably impervious to these efforts. Teachers, parents and students have resisted the implementation of a politically inspired school curriculum and attempts to abolish university entrance requirements. The private media forced a retreat on attempts to charge them exorbitant fees for material from state television. And a decree law setting up a new spy system, dubbed the “Getsapo law”—a play on Gestapo and on a local word for snitching—is to be revised after an outcry from human-rights groups.
Mr Chávez faces a fresh electoral test later this year. On November 23rd the country will vote for new state governors and mayors. Crime rates are dreadfully high—successive interior ministers have failed to do anything effective to tackle the problem—and the economy is slowing. Now inflation is surging towards 30%. A big defeat for Mr Chávez’s supporters looks increasingly plausible.
If he were to lose in November, that would, in turn, render all but impossible the revival of his plan to flout the constitutional ban on his re-election to the presidency in 2012. And if his re-election is not going to happen, then the race to find a successor could get under way in earnest.
Among Venezuelan political commentators there are those who believe that the introduction of unpopular measures, followed by partial retreats, amounts in itself to a strategy. They believe that the president is seeking to unsettle the political climate to such an extent that he retains the option to suspend the November elections if the polls look bad for him.
A less conspiratorial interpretation is that the once surefooted Mr Chávez is losing his way. A few months ago, for instance, the government decided on a series of measures to prevent the economy from overheating. The annual growth rate promptly slowed by around four percentage points in the first quarter, to 4.8%. Now the president is preparing a partial reversal of course. It is hard to avoid the conclusion that, far from executing a master-plan, the former army officer is becoming an expert at U-turns.
Commentary by Michael Lewis
June 10 (Bloomberg) -- One of the many consequences of the Federal Reserve's bailout of the subprime-mortgage market is the sudden urge felt by Fed Chairman Ben Bernanke to let everyone know he won't be making a habit of the practice.
``Once financial conditions become more normal,'' he told a Fed conference on May 13, ``the extraordinary provision of liquidity by the Federal Reserve will no longer be needed. As (Walter) Bagehot would surely advise, under normal conditions financial institutions should look to private counterparties and not central banks as a source of ongoing funding.'
I don't know if Bernanke actually believes that his words will make any difference, or if he's just hoping out loud. But he might as well save his breath because his actions have spoken for him.
The long-term effect of the Fed's decision to extend cheap money to distressed firms, and to take on the risk of Bear Stearns Cos.'s mortgage trades, is fantastically transparent: Investment banks now have even less pressure on them than they did before to control their risks.
Potential lenders will be less likely to worry about extending them the credit they need to run these risks, or being counterparty to their trades. Potential investors will suspect that their shares come with a put option attached to them. Potential employees, when deciding which firm to work for, will spend even less time than they now do asking if the place is likely to survive.
New Feel
There's a new feeling in the Wall Street air: The big firms are now too big to fail. If the chaos that might ensue from Bear Stearns going bankrupt, and stiffing its counterparties on its billions of dollars of trades, is too much for the world to endure, the chaos that might be caused by Lehman Brothers Holdings Inc. or Goldman Sachs Group Inc. or Merrill Lynch & Co. or Morgan Stanley going bankrupt must also be too much to endure.
Already we may have seen one of the pleasant effects of this financial order: the continued survival of Lehman. What happened to Bear Stearns might well already have happened to Lehman. Any firm that uses each $1 of its capital to finance $31 of risky bets is at the mercy of public opinion.
Throw its viability into doubt and the people who lent them the other $30 want their money back as soon as they can get it -- unless they know that, if it comes to that, the Fed will make them whole. The viability of Lehman Brothers has been thrown into serious doubt, and yet Lehman Brothers lives, a tribute to the Fed's new policy.
On the Line
But if the Fed's money is implicitly on the line every time Lehman Brothers or Goldman Sachs or Morgan Stanley make a trade, one of two things must now happen: Either the Fed permits nature to take its course and allows investment banks to get themselves into trouble all over again. Or the Fed regulates the risk-taking ability of the traders inside the investment banks.
Either Lehman Brothers, Goldman Sachs and Morgan Stanley will use the implicit government guarantee to underwrite their relentless pursuit of incredible sums of money for themselves -- and thus create problems for the Fed and the financial system that will make the undoing of Bear Stearns seem trivial. Or some government agency will explicitly prevent them from taking those risks.
And there's no chance that Wall Street investment banks, operating with a government guarantee, can be controlled by anything short of new rules. Even without a government guarantee their risk-taking has proven all but impossible to monitor.
One of the unsettling traits of our financial markets is the inability of its putative authorities -- a group that includes not just the Fed chairman and the Treasury Secretary but also the chief executive officers of the big firms -- to understand what the people inside them do for a living.
Nothing to Loss
Another related trait is the near total absence of stigma attached to risk takers who lose large sums of money. There's status to be had from huge trading losses: The guy who lost the fortune must know something or he would never been put into the position to lose it.
Brian Hunter breaks a world record, blowing through $6.8 billion betting on the direction of natural-gas prices at Amaranth Group Inc., then turns up a few months later, inside his new hedge fund, running other people's money.
No, once the government guarantees the debts of a big Wall Street firm it must inevitably also seek to control the risks that firm runs. And so while the bailout of Bear Stearns may seem like a gift to the big Wall Street firms, it's really not. Limit the risk that these firms run and you also limit the sums of money they can make.
Where There's Action
For some time now the action has been moving out of the big Wall Street firms and into hedge funds. The quality of financial information, and the ability to act on it, is better outside the big firms than inside of them, even, it now appears, when the information concerns one of the big firms. (The Security and Exchange Commission's investigation into the run on Bear Stearns that preceded the crash has identified three alleged culprits and two of them are hedge funds: Citadel Investment Group and Paulson & Co.)
That trend is about to accelerate, as the golden age of the Wall Street investment bank draws to a close. The glorious 25- year run of these firms will have ended not with a bang, or a whimper, but with a government guarantee.
And the investment banker himself will have taken the final step on the journey to becoming, in all but name, the worst thing he can imagine being: a commercial banker.
June 10 (Bloomberg) -- Federal Reserve Chairman Ben S. Bernanke said policy makers will ``strongly resist'' any surge in inflation expectations, delivering his clearest message yet the central bank is done lowering interest rates.
Bernanke played down the biggest jump in the unemployment rate in 22 years in May and said the risk of a ``substantial downturn'' receded in the past month. Policy makers will need to pay ``close attention'' to make sure the increase in commodity costs doesn't pass through to broader consumer prices, he said in a speech to a Boston Fed conference late yesterday.
The Fed chief's remarks spurred investors to bet that officials will raise rates later this year. Two-year note yields approached their highest level this year in New York trading, and stocks fell. Bernanke and his colleagues are raising the alarm on inflation after oil costs doubled in the past year and companies from Dow Chemical Co. to tire-maker Titan International Inc. raised prices.
Bernanke's comments ``represent a significant shift,'' said Bruce Kasman, chief economist at JPMorgan Chase & Co. There's the possibility of ``an earlier Fed adjustment than we are now projecting, currently the second quarter of 2009.''
Two-year Treasury yields, more sensitive to Fed rate expectations than longer-dated notes, climbed 12 basis points to 2.83 percent as of 9:53 a.m. in New York. Traders anticipate the central bank will keep its target rate at 2 percent this month and raise it as soon as September, futures prices indicate. The Standard and Poor's 500 Index was down 0.5 percentage point.
`Destabilizing' Threat
Central bankers ``will strongly resist an erosion of longer-term inflation expectations,'' Bernanke said yesterday at the Boston Fed's annual economic conference in Chatham, Massachusetts. Any public anticipation of accelerating price gains ``would be destabilizing for growth,'' he said.
The Fed's communications ``have to make sure that people understand'' that officials are ``going to do the right thing in terms of controlling long-run inflation,'' Federal Reserve Governor Frederic Mishkin said at the conference today.
A measure of investors' forecast for consumer price gains in the coming 10 years, derived from the difference in yield between Treasuries and Treasury notes linked to inflation, stood at 2.56 percent. The gap has averaged about 2.06 percent in the past decade.
A gauge of household expectations for inflation over five years climbed to a 13-year high last month, according to a Reuters/University of Michigan Survey.
`Complicated Balance'
The Fed faces a ``complicated balance'' of lowering interest rates to avert a recession ``without taking too much risk that underlying inflation is going to accelerate over time,'' New York Fed President Timothy Geithner said in New York yesterday.
The New York Fed, the central bank's main link with Wall Street, also yesterday announced an agreement with banks on changes aimed at easing the risk of a collapse of the $62 trillion market for credit-default swaps.
Seventeen banks that handle about 90 percent of the trading in the market will create a system to move trades through a clearinghouse that would absorb a failure by one of the market- makers, the New York Fed said.
Geithner said yesterday in his speech that ``our first and most immediate priority remains to help the economy and the financial system get through this crisis.''
Benchmark Rate
Fed officials have cut the benchmark lending rate to 2 percent from 5.25 percent in September. They next meet June 24- 25.
The consumer price index rose 3.9 percent in the 12 months ending in April, up from a 2.6 percent gain a year ago. Energy costs have spurred the gains. AAA, the largest U.S. motoring group, said this month that gasoline surpassed an average of $4 a gallon (3.79 liters) for the first time. Oil prices reached a record $139.12 on June 6.
``We need to proceed in a very deliberate manner and I expect us to do so,'' Dallas Federal Reserve President Richard Fisher said in a speech today in New York. ``You don't want central banks with trigger fingers.''
Bernanke said ``the risk that the economy has entered a substantial downturn appears to have diminished over the past month or so.'' While risks to growth were still to the ``downside,'' he added that federal tax rebates, past rate cuts and record exports should underpin the expansion.
Figures `Unwelcome'
The unemployment rate rose to 5.5 percent in May, the most in more than two decades, as the U.S. lost jobs for a fifth month. Bernanke called the jobless figures ``unwelcome,'' though he added that recent economic data had ``only modestly'' affected the outlook for growth and employment.
``Inflation has remained high, largely reflecting sharp increases in the prices of globally traded commodities,'' Bernanke said. Though ``the pass through of high raw materials costs to the prices of most other products and to domestic labor costs has been limited,'' officials will need to monitor for any change in the situation, he said.
``The comments suggest that the Fed's bias is now shifting to inflation concern and that this shift will be reflected in the June 25th FOMC statement,'' Kasman said. JPMorgan will wait for Vice Chairman Donald Kohn's comments Wednesday at the conference before changing its federal funds forecast, he said.
European Central Bank President Jean-Claude Trichet yesterday repeated that policy makers in the 15-nation euro area may next month raise their benchmark rate a quarter point to 4.25 percent to combat the fastest inflation in 16-years.
``I did not exclude that we could increase by a small amount,'' Trichet said in Paris, noting he ``never said'' some on the governing council were in favor of a series of rate increases.
June 10 (Bloomberg) -- Treasuries slumped, driving two-year yields to a five-month high, after Federal Reserve Chairman Ben S. Bernanke pledged to ``strongly resist'' any waning of public confidence in stable prices.
Two-year note yields gained following comments by Bernanke after U.S. trading closed yesterday that the risk of a ``substantial downturn'' in U.S. economic growth has diminished. Traders now see a probability of more than 50 percent that policy makers will raise interest rates by a quarter-percentage point by September, futures showed.
``The market certainly believes the next move is a tightening regardless of what the economic data is,'' said Charles Comiskey, co-head of U.S. Treasury trading in New York at HSBC Securities USA Inc., one of 20 primary dealers that trade with the Fed.
The two-year note's yield rose 16 basis points, or 0.16 percentage point, to 2.86 percent as of 12:29 p.m. in New York, according to BGCantor Market Data. It touched 2.95 percent, the highest since it reached 3.10 on Jan. 2. The price of the 2.625 percent security due in May 2010 fell 9/32, or $2.81 per $1,000 face amount, to 99 17/32. The 10-year yield climbed 7 basis points to 4.07 percent.
The difference in yield, or spread, between two- and 10- year notes narrowed to 120 basis points. The difference was as wide as 208 basis points in March.
Two-year yields, which may be among the most sensitive to changes in interest rates, may advance to 3 percent this week, said Matthew Johnson, senior economist in Sydney at ICAP Australia Ltd.
Rate Bets
Futures on the Chicago Board of Trade show investors are betting on an increase in the Fed's 2 percent target rate for overnight lending between banks in September. The odds of a quarter-point increase are 52 percent, compared with 19 percent a week ago.
``People are hyper-concerned about anything that illustrates that the Fed is going to raise rates, even if the economy remains slow,'' said Jim Vogel, head of agency debt research at FTN Financial Group in Memphis, Tennessee.
Bernanke said yesterday in his speech to a Boston Fed conference that the risk of a major drop for the economy ``appears to have diminished over the past month or so.'' The central bank ``will strongly resist an erosion of longer-term inflation expectations,'' he said.
Pricing In Increases
The Fed chairman used ``somewhat stronger language than usual,'' Goldman Sachs Group Inc., the biggest securities company in the U.S., said in a report to clients. Fed officials have cut their benchmark lending rate from 5.25 percent in September to keep a U.S. housing recession and losses from the credit markets from driving the economy into a recession.
``Central banks have spoken out more loudly that they will not allow inflation expectations to go up, so short yields have been shooting up quite dramatically, pricing in rate hikes,'' said Allan von Mehren, a Copenhagen-based fixed-income strategist at Danske Bank AS, the biggest lender in Denmark. ``Bernanke is spending more time on addressing the risk of rising inflation expectations.''
Treasuries extended their losses after the Bank of Canada unexpectedly kept its benchmark interest rate unchanged on concern energy costs may push inflation past the top of its target band later this year. Economists in a Bloomberg News survey had forecast a quarter-percentage point reduction.
`Ridiculously Cheap'
The slump in Treasuries surprised economists, who predicted two-year yields would end this month at 2.35 percent, according to the median of 48 estimates in another Bloomberg survey.
``The short end of the Treasury curve is probably ridiculously cheap right now,'' said Maxwell Bublitz, chief strategist in San Francisco at SCM Advisors LLC, which oversees about $12 billion in fixed-income assets.
U.S. government securities have handed investors a loss of 3.3 percent since yields began rising during the third week of March, according to a U.S. Treasury master index compiled by Merrill Lynch & Co. Japanese bonds lost 2 percent, while the decline was 3.4 percent in Germany.
Treasuries underperformed European government notes. The yield spread between the two-year Treasury and the equivalent German benchmark note narrowed to 180 basis points, from 198 basis points yesterday.
``Some investors view the move as overdone,'' said Michael Pond, an interest-rate strategist in New York at Barclays Capital Inc., a primary dealer. ``As much as the Fed is concerned about inflation and inflation expectations, they also do remain concerned about the overall economic backdrop as well as liquidity in the banking system.''
TIPS Yields
Traders' expectations of inflation over the next decade have risen as oil and commodity prices surged. The difference between yields on 10-year Treasury Inflation Protected Securities, or TIPS, and conventional notes widened to 2.52 percentage points, from 2.45 points a week ago and 2.28 points at the end of April.
U.S. consumer prices rose 3.9 percent in May from a year earlier, the same as in April, according to a Bloomberg News survey of economists before the Labor Department reports the figure on June 13.
That means 10-year notes yield just 16 basis points after inflation, and shorter maturities don't yield enough to keep up with quickening prices for goods and services. The average over the past 10 years is 203 basis points.
June 10 (Bloomberg) -- The dollar rose to a three-month high against the yen and climbed versus the euro after Federal Reserve Chairman Ben S. Bernanke said economic risks have faded, spurring traders to boost wagers interest rates will rise.
Bernanke said late yesterday that the central bank will ``strongly resist'' any waning of public confidence in stable prices. ``Strong'' economic fundamentals will translate to dollar strength, Treasury Secretary Henry Paulson said today in a Bloomberg Television interview in Washington.
Policy makers are trying to ``dispel this notion in the market that the U.S. has a policy of benign neglect to the dollar,'' said Sophia Drossos, a currency strategist in New York at Morgan Stanley, in an interview on Bloomberg Television. ``They are making it very clear that the benefits of a weak dollar are far outweighed by the costs.''
The dollar rose to 107.40 yen, the highest since Feb. 27, at 1:35 p.m. in New York, from 106.31 yesterday. Against the euro, the dollar climbed 1.2 percent to $1.5469 from $1.5646 yesterday, the biggest gain since April 24. Japan's currency traded at 166.01 per euro from 166.33 yesterday.
Futures on the Chicago Board of Trade show a 52 percent chance the Fed will raise its 2 percent target rate for overnight lending between banks by at least a quarter point at its Aug. 5 meeting, compared with 31 percent the previous day. The contracts show a 96 percent chance the Fed will increase the rate by December, up from 67 percent odds a week ago.
The dollar has fallen 11.6 percent against the euro and 7.3 percent versus the yen since September, when the Fed began to lower borrowing costs from 5.25 percent.
``Downturn Diminished''
The U.S. dollar climbed to 94.42 cents per Australian dollar, the highest since May 16, before trading at 94.54 cents. Against the New Zealand dollar, the U.S. currency gained to 75.02 cents, the strongest since January. The British pound slid to $1.9551 from $1.9751 after data showed U.K. house prices dropped in May.
``The risk that the economy has entered a substantial downturn appears to have diminished over the past month or so,'' Bernanke said in a speech at a Boston Fed conference. ``The Federal Open Market Committee will strongly resist an erosion of longer-term inflation expectations.''
The Fed is ``aware'' that the weak dollar boosts inflation, Dallas Fed President Richard Fisher said in response to questions after a speech at the Council on Foreign Relations in New York today. Paulson repeated comments made yesterday that currency intervention is a tool for policy makers. He also urged China to loosen government controls on energy prices and the value of the country's currency.
``Benign Neglect''
The yuan traded near the highest level since a dollar peg was scrapped in 2005. The currency was little changed at 6.9255 per dollar in Shanghai, compared with 6.9230 on June 6, according to the China Foreign Exchange Trade System.
A report today showed that the U.S. trade deficit widened in April as the surging cost of oil boosted imports to a record, overshadowing the biggest gain in exports in four years. The gap grew 7.8 percent to $60.9 billion the Commerce Department said.
The two-year U.S. Treasury yields rose 16 basis points to 2.86 percent. The yield advantage of a German two-year bund over a comparable Treasury has narrowed to 1.80 percent from 2.26 percent on June 6.
Group of Eight
``You are going to see the dollar rally over the next 12 months,'' said Michael Aronstein, chief investment strategist at Oscar Gruss & Son Inc. in an interview with Bloomberg Television. ``Global investors are quite underweight the U.S. You could see the beginning of a real reversal of that''
The U.S. dollar index traded on ICE futures in New York rose 1.1 percent to 73.671, the biggest one-day gain since Dec. 14. The index tracks the dollar against six major trading partners including the yen, euro and pound.
Finance ministers of the Group of Eight industrialized countries may consider joint action to deflate the price of oil and prop up the dollar at their meeting June 13-14 in Japan, said DBS Group Holdings Ltd. in a report to clients.
The last time the major industrialized countries intervened was on Sept. 22, 2000, when they bought the euro after it tumbled 27 percent from its 1999 debut. They last propped up the dollar in 1995, when it sank almost 20 percent in four months against the Japanese yen to a post-World War II low of 79.95 yen.
The greenback dropped 1.4 percent against the euro last week, the most since March, after Jean-Claude Trichet said on June 5 that policy makers may raise borrowing costs in July to contain inflation and the U.S. Labor Department reported the next day that the jobless rate increased the most in May in more than two decades.
The European Central Bank needs to act in a ``forward- looking'' manner in order to ensure price stability, said council member Axel Weber at the University of York today.
Crude oil today climbed to $137.98 a barrel in New York before trading at $131.75. The price more than doubled in the past year.
Monday, June 9, 2008
Political Diary
Talk About Talk
For two candidates who have both benefited greatly from favorable media coverage, Barack Obama and John McCain are now keeping the press at arms-length as they negotiate a possible series of town hall meetings.
![[John McCain]](http://s.wsj.net/public/resources/images/HC-GM098_McCain_20080530162916.gif)
New York Mayor Michael Bloomberg and ABC News had jointly proposed a 90-minute network special from Federal Hall in Manhattan as the kickoff event. ABC proposed that its Diane Sawyer moderate the event.
But emissaries for the two candidates quickly decided they didn't want media sponsors for any events they might agree to do. "Both campaigns have indicated that any additional appearances will be open to all networks for broadcast on TV or Internet ... rather than sponsored by a single network or news organization," said a statement from Team Obama. Sounds like both candidates have had quite enough of the media picking the questions during this past campaign season's interminable series of debates. Some of the debate questions turned out to be either downright silly or demeaning.
But the candidates seem intrigued by the Lincoln-Douglas style debates where candidates themselves control the agenda and the flow of the exchanges. The idea isn't new on the presidential level. The late Barry Goldwater once said that he and President John Kennedy discussed barnstorming across the country together and debating in joint appearances. But no candidate has ever taken the tremendous risks such a series of appearances would involve. Should the two candidates come to an agreement this year, it would truly represent a whiff of the "new politics" that both men proclaim they want to encourage.
The Big Chill
Two years ago a Time magazine's cover warned us about global warming: "Be Worried . . . Be Very Worried." We should be even more worried about the supposed global warming legislation the U.S. Senate debated last week, then rejected without a vote. It would have replaced markets with government controls over the economy and Americans' personal lives. So different would be a Boxer-Lieberman-Warner America, and so likely it is that the same legislation will be back in Congress next year, that it is worth thinking through what it would do and how it would affect us.
First, though, does the world's climate change from time to time? Of course it does. Sometimes it warms, and sometimes it cools. Is it rapidly warming now, threatening our way of life? No. It is neither warming nor cooling. The average of four recent climate temperature studies show that over the past 10 years, the planet has warmed only 0.047 degree Celsius, less than 1/20th of a degree. Recent studies suggest there will be no significant warming until after 2020.
But that does not restrain the full-throated environmental establishment, nor Congress, both presidential candidates, many corporate CEOs and university professors, nor the liberal media, all of whom believe the Earth is warming, requiring an expansion of governmental control system to manage our economy.
* * *
The Senate's global warming bill began by capping greenhouse gas emissions and reducing them each year, from 5.8 billion metric tons in 2015 to 1.7 billion in 2050. A Heritage Foundation study calculates that such reductions would cost more than 600,000 jobs a year through 2028 (900,000 in both 2016 and 2017), and the Environmental Protection Agency estimates the annual economic losses at $1 trillion to $2.8 trillion by 2050. Electricity prices would rise about 44% by 2030, and gasoline prices by more than 50 cents a gallon. Existing coal-fired plants, which provide about half of our electricity, would be shut down, requiring nuclear generation capacity would have to expand by more than 150%, to 1,982 billion kilowatt-hours from the current 782 billion, by 2050. That is a good idea--nuclear plants are virtually pollution-free--but doubling the number of them has zero chance of happening in a country that has not started construction of a new nuclear plant since 1977.
Then comes modern socialism: The government would offer "allowance" permits to emit greenhouse gasses. Initially about half the permits would be auctioned off to businesses, which Sen. Barbara Boxer (D., Calif.) says would raise about $3.3 trillion by 2050--money the federal government would give away to favorite constituencies. There would be $190 billion for "environmental" job training, $228 billion for federal "wildlife adaptation" and $237 billion to the states for similar efforts. There would be billions for international aid, domestic mass transit, energy research and so on.
The permits that wouldn't be auctioned off would be given by the government to the states, foreign countries, Indian tribes, carbon-heavy industries, utilities, oil refineries and so forth to help them meet their global warming challenges.
To make all this work, the bill would create massive new federal bureaucracies, beginning with a Climate Change Credit Corp., which would invest government money in private businesses, and a Carbon Market Efficiency Board, which could change the rules and alter the government demands on businesses.
Finally would come protectionism: A new climate change agency would have the authority to determine whether other countries are taking proper action to prevent climate change, and to restrict their imports into America if not. Sen. Joseph Lieberman (I., Conn.) tells us if a foreign company "enjoys a price advantage over an American competitor" whose country has no cap-and-trade system, "we will impose a fee" on the foreign company's imports "to equalize the price." Sen. Sherrod Brown (D., Ohio) wants to impose trade sanctions on countries that do not cap their emissions. Should Barack Obama become president, his protectionism will become our policy; add to that this global warming bill and rampant protectionism will be with us once again, as it was in 1930.
* * *
The core of the Boxer-Lieberman-Warner legislation is that an expanded government, not the market economy, must control our society. The U.S. Chamber of Commerce has produced a chart--click here to see it--showing that the bill "contains over 300 regulations and mandates," each of which must go through a federal regulatory process.
The bill does focus on some global warming objectives--although it is an America-only program estimated to lower global CO2 emissions only by about 1.4%--but it is less about that and more a step towards traditional socialism. The government would take control of our economy and regulate everything from electricity, oil and gas to imported shoes, our food, how high we may set our thermostats, and what kinds of light bulbs we may use. The EPA and the Energy Information Agency predict such controls would reduce GDP by "as much as seven percent (over $2.8 trillion) by 2050 and reduce U.S. manufacturing output by almost 10 percent by 2030."
Add to that the fact that Barack Obama and John McCain both support the bill, and that the next Congress is likely to have bigger Democratic majorities, and one can see in the next administration where a very collectivist America will be headed.
Why Is Bush Helping Saudi Arabia Build Nukes?
Here's a quick geopolitical quiz: What country is three times the size of Texas and has more than 300 days of blazing sun a year? What country has the world's largest oil reserves resting below miles upon miles of sand? And what country is being given nuclear power, not solar, by President George W. Bush, even when the mere assumption of nuclear possession in its region has been known to provoke pre-emptive air strikes, even wars?
If you answered Saudi Arabia to all of these questions, you're right.
Last month, while the American people were becoming the personal ATMs of the Organization of the Petroleum Exporting Countries, Secretary of State Condoleezza Rice was in Saudi Arabia signing away an even more valuable gift: nuclear technology. In a ceremony little-noticed in this country, Ms. Rice volunteered the U.S. to assist Saudi Arabia in developing nuclear reactors, training nuclear engineers, and constructing nuclear infrastructure. While oil breaks records at $130 per barrel or more, the American consumer is footing the bill for Saudi Arabia's nuclear ambitions.
Saudi Arabia has poured money into developing its vast reserves of natural gas for domestic electricity production. It continues to invest in a national gas transportation pipeline and stepped-up exploration, building a solid foundation for domestic energy production that could meet its electricity needs for many decades. Nuclear energy, on the other hand, would require enormous investments in new infrastructure by a country with zero expertise in this complex technology.
Have Ms. Rice, Mr. Bush or Saudi leaders looked skyward? The Saudi desert is under almost constant sunshine. If Mr. Bush wanted to help his friends in Riyadh diversify their energy portfolio, he should have offered solar panels, not nuclear plants.
Saudi Arabia's interest in nuclear technology can only be explained by the dangerous politics of the Middle East. Saudi Arabia, a champion and kingpin of the Sunni Arab world, is deeply threatened by the rise of Shiite-ruled Iran.
The two countries watch each other warily over the waters of the Persian Gulf, buying arms and waging war by proxy in Lebanon and Iraq. An Iranian nuclear weapon would radically alter the region's balance of power, and could prove to be the match that lights the tinderbox. By signing this agreement with the U.S., Saudi Arabia is warning Iran that two can play the nuclear game.
In 2004, Vice President Dick Cheney said, "[Iran is] already sitting on an awful lot of oil and gas. No one can figure why they need nuclear, as well, to generate energy." Mr. Cheney got it right about Iran. But a potential Saudi nuclear program is just as suspicious. For a country with so much oil, gas and solar potential, importing expensive and dangerous nuclear power makes no economic sense.
The Bush administration argues that Saudi Arabia can not be compared to Iran, because Riyadh said it won't develop uranium enrichment or spent-fuel reprocessing, the two most dangerous nuclear technologies. At a recent hearing before my Select Committee on Energy Independence and Global Warming, Secretary of Energy Samuel Bodman shrugged off concerns about potential Saudi misuse of nuclear assistance for a weapons program, saying simply: "I presume that the president has a good deal of confidence in the King and in the leadership of Saudi Arabia."
That's not good enough. We would do well to remember that it was the U.S. who provided the original nuclear assistance to Iran under the Atoms for Peace program, before Iran's monarch was overthrown in the 1979 Islamic Revolution. Such an uprising in Saudi Arabia today could be at least as damaging to U.S. security.
We've long known that America's addiction to oil pays for the spread of extremism. If this Bush nuclear deal moves forward, Saudi Arabia's petrodollars could flow to the dangerous expansion of nuclear technologies in the most volatile region of the world.
While the scorching Saudi Arabian sun heats sand dunes instead of powering photovoltaic panels, millions of Americans will fork over $4 a gallon without realizing that their gas tank is fueling a nascent nuclear arms race.
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