A change in climate is coming

Tuesday, 28 June 2022 — Cap Ferret, France

[8 min read]

Editor’s note: It seems abundantly clear a green energy transition is inevitable, given the insistence from politicians and lobbyists to inject billions of dollars into the renewable sector in the years to come.

Our small-cap expert Callum Newman sees this shift as a profitable opportunity, particularly regarding EV adoption. In fact, Callum thinks there are ASX stocks flying under the radar who could be the next ‘chosen ones’ — stocks tipped by Tesla to be their battery materials supply partners. You can check out his research here.

Of course, not all our analysts are as optimistic about this transition. Below, Vern Gowdie explains how this push towards green energy simply reflects a political system overloaded with undeliverable promises.

Our job is to inform our readers as best we can.

Read on…

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Dear Reader,

‘If you tell a lie big enough and keep repeating it, people will eventually come to believe it. The lie can be maintained only for such time as the State can shield the people from the political, economic and/or military consequences of the lie. It thus becomes vitally important for the State to use all of its powers to repress dissent, for the truth is the mortal enemy of the lie, and thus by extension, the truth is the greatest enemy of the State.’

Joseph Goebbels

Why? Why? Why do we fail to learn from history?

The Nazi propaganda chief understood the power of controlling the public narrative.

The State must use all of its powers to repress dissent.

Any challenge to the government’s false and self-serving storyline must, at first, be discredited and, preferably, silenced.

On 9 June 2022, Axios reported:

‘Gina McCarthy, President Biden’s top domestic climate adviser, said tech companies should do more to prevent the spread of inaccurate information about climate change and clean energy.

‘“The tech companies have to stop allowing specific individuals over and over again to spread disinformation,” she told Axios’ Alexi McCammond at a virtual event that aired Thursday.

‘“We need the tech companies to really jump in,” McCarthy said.’

Who determines what qualifies as ‘inaccurate information about climate change and clean energy’?

Politicians, who tell us ‘the science is settled’? Sycophant bureaucrats? Climate change activists with money invested in ‘green schemes’ benefitting from huge amounts of taxpayer-funded subsidies to personally enrich them? Scientific research funded by green groups? Or all of the above.

This whole ‘science is settled’ argument makes a nonsense of what science is really about: testing and retesting theories.

As reported by NBC News on 3 August 2019:

Here’s an extract:

‘“Newton had a great time for a long time with his description [of gravity], and then at some point it was clear that that description was fraying at the edges, and then Einstein offered a more complete version,” said Andrea Ghez, an astrophysicist at UCLA and a co-leader of the new research.

‘And so today, we’re at that point again where we understand there has to be something that is more comprehensive that allows us to describe gravity in the context of black holes.’

Einstein tested Newton’s long-held theory of gravity and found a better version.
Now, science is challenging Einstein’s findings.

That’s what science is about.
Relentlessly trying to disprove a theory, in order to test the truth of the subject.

But when it comes to climate change, any such robust and relentless testing of the theory is shut down.

If you dare challenge the legitimacy of the so-called science, you’re a climate denier.
It’s such an easy put down for those long on virtue signalling and short on facts.

What the policymakers and shapers (politicians, bureaucrats, central bankers, and virtue signalling institutions) won’t ever tell you is…

The real story behind CO2 emissions

Our fixation with perpetual growth has sown the seeds for a future that’s going to be far more challenging than the past.

Since 1980, China’s competitive cost structure, up until recently, has exported low inflation to the world…

Low inflation gave central banks the room to manoeuvre interest rates lower.
Lower rates gave the world the capacity to borrow more…much more.

The more we could borrow, the more ‘cheap things’ we could buy from China…which, due to economies of scale, made the price of goods even cheaper.

Debt funded demand led to debt funded supply.

China geared up (literally) for production.

More factories. More ships. More power plants. More housing.

The combination of cheap production and cheap debt resulted in…surprise, surprise…China pumping out more emissions.

The cosy commercial arrangement between ‘Eastern makers and Western takers’ created a self-feeding loop of low inflation.

Central banks thought they had discovered economic Shangri-La.
Above average GDP growth without runaway inflation.
Pure genius.

But underneath it all, there were losers.

The manufacturing base in the developed countries went into decline.
China not only exported low inflation, but also lower wage costs.
Wages began stagnating for the first time in decades.
Which, in turn, forced consumers to borrow to maintain living standards.

The trend in global debt moved into the exponential phase around the same time as China embarked on its economic reform…the early 1980s and 1990s:

Compare the pair…here’s the chart for the world’s annual CO2 emissions:

Is it pure coincidence China’s emissions have risen in tandem with global debt levels (used primarily for consumption) AND emissions in the developed world have decreased as its manufacturing base shrank?

I don’t think it’s drawing too long of a bow to suggest there’s a link between these factors.

Which invites the question…

Is the debt-funded growth model the real environmental vandal?

Absolutely.
But those, like Biden, McCarthy, Powell, et al, who worship at the altar of perpetual growth, will never admit to it.

Imagine a world where consumers decide there’s more to life than ‘buying things we don’t need, with money we don’t have, to impress people we don’t know’?

In that world, eventually, the factories stop producing as much stuff. Ships remain in port. Transportation — by air, road, and rail — slows down. Power stations are mothballed.

Partial retrenchment of the fossil fuel dependent links in the supply chain would reduce CO2 output.

Here’s how this hypothetical world actually played out during the early days of the COVID pandemic:

Curtailing economic activity is one proven way of reducing emissions.

However, as we’ve witnessed, government, business, and individuals cannot afford for this to happen. Any tapping on the economic brakes causes much disruption to a world (that’s literally) geared for growth.

So much has been promised to so many, based on an ever-increasing quantity of debt…which fuels the CO2 emitting perpetual growth machine.

Which leads us to…

The real great moral challenge of our generation

And, you might be surprised to learn, it’s neither debt nor climate change.

The real challenge we face is how to deal with the consequences of promises that can never be kept.

When the next credit crisis arrives…and, with a global debt load that’s US$200 trillion greater than what caused the GFC, believe me, it will arrive…the illusion of perpetual growth is going to be shattered into a million pieces.

The collapse in debt levels — from defaults to deferred payment arrangements — is destined to trigger another (more permanent) slowdown in the global supply chain.

Emission levels will fall in line with lower levels of Western demand.

The legacy from four decades of debt-fuelled consumption is…a world of make-believe in perpetual growth.

For perpetual growth to occur, it requires each successive generation to go even deeper into debt than the preceding generation…it’s a Ponzi scheme.

Demographics, sky-high debt levels, and historically low interest rates all combined make the base of this pyramid scheme about as broad as it can get…which is why a piddling 0.5% rate increase is causing household stress…there’s more to come.

Government can and will broaden the debt base.
But this is highly unproductive debt.
Government wastes money on political quick fixes and funding unaffordable welfare schemes.

For an economy to achieve genuine growth, debt has to be productive.

Think of the promises that have been made on the nonsensical premise of perpetual growth.

Pensions — private and public. Health care. Households are taking out massive mortgages on the premise house prices always rise. Enterprises started (with debt) based on assumed growth. Retirement plans made on past returns (a performance influenced by debt-funded growth).

The great moral challenge of our generation is how to deal with the social cost of promises not being kept — marriage breakdowns, business failures, suicides, mental health problems, community anger over job losses, and closure of services.

We’ve created a system loaded with overpromise…but cannot possibly deliver.
The winding back of expectations is destined to be extremely painful.

Climate change is coming…but not the one you think.
The political climate is where the heat is going to be felt most.

And it’s the political response we must watch closely.

Are we going to see the formal introduction of a universal wage or ‘helicopter money’ or more ‘knee-jerk’ handouts to compensate for the inflation caused by the idiocy of green activism or a combination of ‘harebrained’ policy responses or all of the above?

You bet.

The failure to address the global debt problem in 2007 has produced an environment far more toxic and lethal to our community’s wellbeing than any number of coal-fired power stations could ever be.

A climate of hostility, disbelief, and disappointment will herald a change in public attitude…a new frugal generation is in our future.

Ironically, it’s going to be this change in attitude to wanton consumption, not renewable energy, that’ll lead to the greatest reduction in CO2 emissions.

Regards,

Vern Gowdie,
Editor, The Daily Reckoning Australia

Dear Reader,

‘Hearts that are broken and love that’s untrue
‘These go with learning the game
‘When you love her but she doesn’t love you
‘You’re only learning the game’

Buddy Holly

The gist of the ‘stable’ coin concept is that you ‘link’ or ‘back’ one thing with another — like a parent guaranteeing his child’s first auto-loan. Alas, as we saw yesterday, promises were made to be broken.

Putting this in perspective, we’re at the beginning of debt deflation. The Fed is AWOL. And Mr Market is running the show. He’s marking down and writing off debts that can’t be paid — most prominently those of zombie businesses and crypto finance companies. He’s also discounting the collateral value of stocks, bonds, and soon we predict, real estate too.

Bloomberg reports on the housing situation:

‘A housing correction will reach from “coast to coast” in the US, but it will fall short of a crash, according to Mark Zandi, chief economist at Moody’s Analytics.

‘With the Federal Reserve introducing the biggest increase in interest rates in years to combat rising inflation, home prices will likely fall in the housing markets that are most “juiced”, says Zandi. Regions with signs of significant speculation, namely in the Southeast or Mountain West, can expect the pendulum to swing back. Cities and states due for a correction include Phoenix and Tucson in Arizona, the Carolinas, northeast Florida, and above all, Boise — “the most overvalued market in the country,” per Moody’s analysis.’

Going bust

In the short run, this deflation is focused on asset prices. But the fall in housing prices will bridge it over to consumer prices too. And not in a good way. As prices fall, more and more ‘credits’ will drop below the value of their ‘debits’. A business will only be worth, say, $1 million…but will have $2 million in debts. Households will be ‘upside down’ and lose their homes. Businesses will go into Chapter 7 or Chapter 11.

But sovereign nations have more options; they can break their promises and get away with it.

Yes, we are just ‘learning the game’. And the game of currencies is a ruthless one. Legal tender is a government monopoly. And as in heavyweight wraslin’…or online dating…what you see is not always what you think it is.

There are de facto links, market links, legal links, and contractual links. All the members of the European Union, for example, rolled their different national currencies into one central currency — the euro. This gave dodgy borrowers in southern Europe a big boost; they were able to sell bonds in a currency backed by German savers.

This link is thought to be solid…and stable. But what if the Greeks can’t pay their debts? Then what?

In the case of Argentina, linking the peso to the dollar was nothing more than a political promise. When the Argentines couldn’t pay their debts in dollar-linked pesos, they discarded the link.

Broken promises

In our lifetimes, the most important monetary link was broken 51 years ago. 61 US Treasury secretaries, over 180 years, had crossed their hearts, hoped to die, and solemnly promised to redeem the US dollar for gold. Then, with no act of Congress, no debate, and no notice, on 15 August 1971, the Nixon Administration simply closed the ‘gold window’ at the Treasury department. The gold-backed dollar had become inconvenient.

Even before that, there was substantial precedent for changing the rules of the game…and ripping off the public. The ‘continentals’ of the American Revolution…the ‘Graybacks’ of the Confederate states…and Franklin Roosevelt’s gold confiscation of 1933 — each time, promises were broken.

Now, all the world’s major currencies are linked. They all use the dollar as a reserve currency. All follow more or less the same fiscal and monetary policies…and all try to keep their currencies fairly stable with one another so as to avoid a trade disadvantage.

But all central bankers are now dreadfully ‘behind the curve’. All their countries owe far too much money. They are like a group of mountain climbers roped together…too high…too cold…and facing a storm.

If the Greeks slip, the Germans may come to their aid. And if the Japanese slip, Tom Dyson, our investment director, expects the US to come to the rescue. Japan is the most crazily overindebted nation of them all. If it loses its footing, it is likely to pull the whole team down. Here’s Tom:

‘To bail out the Japanese government, the Fed will print dollars to buy Japanese government bonds. Essentially, the US government will assume the debt of the Japanese government.’

Yes, it’s ‘one for all and all for one’. Governments will print money to save each other’s bonds. Then, currencies and credits...dollars and pounds…Germans and Italians…all roped together; they will be stable until they aren’t stable.

There are rules. There are agreements. There are guarantees, promises, contracts, and treaties. But at the end of the day, links…like hearts…break.

But what about gold? Surely, there is a link we can depend on, no?

Tune in tomorrow.

Regards,

Bill Bonner,
For The Daily Reckoning Australia