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Saturday, March 25, 2006

Cities Under The Sea?

The curious thing is that this post isn't about Plato, and the mythical submerged city of Atlantis, rather it is about a report in Scientific American based on a study which is published today in Science.

Modeler Bette Otto-Bliesner of the National Center for Atmospheric Research in Boulder and paleoclimatologist Jonathan Overpeck of the University of Arizona matched results from the Community Climate System Model and climate records preserved in ice cores, exposed coral reefs, fossilized pollen and the chemical makeup of shells to determine the accuracy of the computer simulation. Roughly 130,000 the Arctic enjoyed higher levels of solar radiation, leading to increased warming in the summer and the retreat of glaciers worldwide. The model correctly predicted the extent of the resulting Arctic ice melt, enough to raise sea levels by roughly nine feet.

Over the past 30 years, temperatures in the Arctic have been creeping up, rising half a degree Celsius with attendant increases in glacial melting and decreases in sea ice. Experts predict that at current levels of greenhouse gases--carbon dioxide alone is at 375 parts per million--the earth may warm by as much as five degrees Celsius, matching conditions roughly 130,000 years ago. Now a refined climate model is predicting, among other things, sea level rises of as much as 20 feet, according to research results published today in the journal Science.......

But sea levels rose as much as 20 feet 130,000 years ago and Overpeck speculates that may have been the result of additional melting in Antarctica. After all, the ice there is not all landlocked; some rests in the ocean and a little warming in sea temperatures could melt it or pry it loose. And this time around, the warming is global, rather than concentrated in the Arctic. "In the Antarctic, all you have to do is break up the ice sheet and float it away and that would raise sea level," he says. "It's just like throwing a bunch of ice cubes into a full glass of water and watching the water spill over the top."

Such a sea level rise would permanently inundate low-lying lands like New Orleans, southern Florida, Bangladesh and the Netherlands.

Now anyone with just a smattering of background in the modelling issues which arise in macro-economics will be only too well aware of the modelling problems attached to such complex processes and the margins of error likely to be associated with any such forceasts, yet there is obviously still plenty of food for thought here.

Clearly there are alternative theories, and I still think it is a very open issue whether the long run consequences may not be substantial global cooling (which could be an even worse problem), but there you are. One possibility to keep in mind.

Science has a very interesting collection of material here.

Friday, March 24, 2006

More On Resource Depletion

I found this interesting piece on China's wood consumption in the FT today:

"Consumer demand in Europe, Japan and the US for reasonably priced everyday furniture and other Chinese wood products is feeding a growing appetite in China for imports of illegally felled timber, according to a new report...."

"According to the report by US-based Forest Trends, the Indonesia-based Centre for International Forestry Re-search, and the Beijing-based Centre for Chinese Agricultural Policy, China has become the world’s biggest wood workshop in less than a decade."

Chinese manufacturers account for 30 per cent of the world’s furniture trade, with the value of China’s exports of forest products rising from $3.6bn (£2bn) in 1997 to $17.2bn last year. Big markets such as the US and European Union have in- creased imports of Chinese wood products by between 700 and 900 per cent over the same period, the reports says....

“Until now a lot of the focus has been on China’s role as a destination market for illegally harvested timber. One of the key messages coming out of this report is that China is right in the middle of a global commodity chain that is driven in large part by consumers in North America and Europe.”

Here's a link to the full report.

Now going back to my last post but one, I was tentatively trying to suggest that three processes are intimately interconnected: global demographic change, global resource consumption and global climate change (see my Argentine icebergs post).

Essentially rapidly changing age structure in some very populous countries (in particular China and India) is leading to very rapìd growth in their economies. The economic development that accompanies this is leading to an ever rising demand for raw materials to feed the process (and in China's case to feed the export drive - the point being would we in Europe and the US be consuming so much wooden furniture if it wasn't so cheap??). This is causing resource strain and price rises (with the energy issue being only the tip of the iceberg - ha, ha). At the same time growing manufacturing and energy consumption is feeding the climate problem.

Now, I am not a population 'gloom and doomer', but this doesn't mean we don't have problems. Basically I take the view of the Danish economist Ester Boserup that in the long term changing relative prices and our creativity enable us to adapt. But this is really the point: in the long term, and just how long is long in this context?

In the meantime we are pushing up against some definite limits here, and in the short run I can only see the problem getting worse.

Thursday, March 23, 2006

Chinese Competitiveness

There's an interesting article about Chinese competitiveness in the FT today. It is based on information provided by the Hong Kong-based Li & Fung trading group - one of the world’s largest trade sourcing companies. According to Li & Fung there has been:

an average 2-3 per cent increase in the once unbeatable China price its US and European clients were willing to pay. He pointed to a “double-digit” rise in Chinese labour costs, the revaluation of the renmnbi and higher oil and energy costs for the shift.

“China’s costs are all going up,” Mr Fung said. “It is no longer the most cost-effective country in the region...Anything [sourced] from China has a higher inflation component than from other places around the world.

According to the Financial Times the principal beneficiaries of China’s rising prices have included textile and garment manufacturers in India, Bangladesh and Cambodia.

Now what might be happening here (since the price differential China can offer seems to be sufficiently substantial not to be affected by the comparatively low inflation China still enjoys. Well Brad Setser points us in one direction:

Actually, the market signals have changed a bit, at least on the export -side. Not because of the RMB's trivial moves against the dollar (even if China's government has now allowed the pace of the "crawl" to pick up). But rather because of the dollar's rally against the euro and the yen in 2005. Steve Johnson of the FT reports that China's real effective exchange rate appreciated by 13% in 2005.

So in 2005 Chinese exports actually lost competitiveness because of the dollar peg. That is one part of the story. The other part of the story is that China's labour market may well be tightening in the low value added end of the market, and this may see a migration of these sectors to places like Bangladesh, Cambodia and India, in search of ever lower prices. This does not mean that China itself may not be migrating towards higher value added activities where its comparative price advantage may still be significant.

The Amazon On The Wane?

Some people call it the planet's lungs. Well it won't be for that much longer it seems if present trends continue:

LOWING cattle and sterile fields of soya are replacing Amazonian rainforest so fast that 40 per cent of the forest will be gone by 2050, if present trends continue. Even discounting land cleared for the wood itself, deforestation is threatening ecological meltdown in the region.

Britaldo Silveira Soares-Filho of the Federal University of Minas Gerais in Belo Horizonte, Brazil, along with colleagues in the US, used a computer model to predict how the Amazon might look in mid-century under eight different development scenarios. The destruction of 40 per cent of its forest, in line with current rates, would release 32 billion tonnes of carbon, the equivalent of more than four years' emissions worldwide at today's rates (Nature, vol 440, p 520).

The Amazon contains more than half the world's remaining rainforest, and loss of even part of it threatens hundreds of mammal species, including 35 primates. The integrity of the forest as a rain-making machine for the region is also at risk.

At least half this loss could be prevented by proper policing of conservation laws that are now widely flouted. This would keep eight times as much carbon out of the atmosphere as the Kyoto protocol intends to do. Rich countries should be willing to pay for this, the authors say.
Source: New Scientist

I have been giving quite a lot of thought recently to the idea that three processes must be - in some form or another - interconnected. These processes are:

1/ Global demographic changes and their economic impact
2/ Global resource depletion
3/ Global climatic changes

The big issue is how they are interconnected and how to model these interconnections. For the time being I have enough on my plate with problem number (1), but as we get to understand this issue better it will be essential to move on to the more general level. Is this a possible programme for my future? Time will tell.

Wednesday, March 22, 2006

Russia's Energy Play

Russian energy interests continue to manouevre for position:

Russia on Tuesday promised to build two natural gas pipelines to China and to become one of the country’s biggest gas suppliers within the next decade.

The agreement, signed during a state visit to Beijing by Vladimir Putin, the Russian president, raised fears of shortages of Russian gas in Europe, especially since some of the Russian gas headed to China would be tapped in western Siberia at fields that supply Europe.

Russia holds the world’s largest reserves of natural gas. It appears to be playing Europe, its largest current consumer, and China, its largest potential customer, off each other, analysts said.

Tuesday, March 21, 2006

Icebergs in Argentina

This doesn't look any too promising:

The Argentina coast guard was astonished to find icebergs floating along the Atlantic coast. "It's the first time icebergs of such size reached Buenos Aires," Miguel Angel Reyes, 44, chief of maritime traffic at the coast guard, said in an interview. "The police escorted the icebergs until they were out of the danger zone." For scientists, the icebergs' migration underscored how global warming is disrupting weather patterns and threatening agriculture.

The main problem isn't the presence of icebergs, but the impact of what is causing them to arrive:

The implications are worrisome for farming-dependent countries such as Argentina, the world's third-largest exporter of beef, corn and soybeans. Rising temperatures prompt flooding in some areas and dry up rivers in others, said Vicente Barros, a climatology professor at the University of Buenos Aires.

Warmer weather is evaporating water from rivers in northern Argentina at a faster pace than in previous years, curbing hydroelectric power and cutting the water supply to crops, Barros said. It also is bringing more rain to the central provinces of Cordoba, Santa Fe and Buenos Aires, flooding fields of soybeans, wheat and corn, he said.

Bernanke Soaks Up The Pressure

Well everyone is of course putting Ben Bernanke under the microscope for scrutiny. My fear is that he may end up having to try to appear more of an interest rates hawk than he actually is, just to keep people happy. Luckily this doesn't seem to be causing any great problems at the moment, and since luck is the better part of art, let's just hope he stays lucky and the US economy resists.

Actually I suspect it will, but I need to give more thought to why I think this. The unprecedented run up the ramp in China and India are obviously part of the story, since they create conditions where the whole global economy grows at a healthy clip. Even perpetual sick-men like Japan and Germany almost look as if they have been rejuvanated, although I fear that all that has happened has been some very costly and professional cosmetic surgery. Age will out,in the end.

Back to Bernanke for a second though. Those who are interested in Bernanke 'nuances' in relation to the 'savings glut' thesis, will find more grist for the mill today, as he is even more precise in his wording:

But, drawing on his past speeches on the “global savings glut”, Mr Bernanke said low long-term rates also reflected low levels of intended investment in the global economy relative to savings. Sluggish domestic demand growth outside the US, and in turn weak demand for US exports, was holding down global interest rates, resulting in a lower federal funds rate than would otherwise be needed, he said.

So please note, it is "low levels of intended investment in the global economy relative to savings" which is the point. Personally I have always been convinced that this is what he has been saying, since I don't know how anyone could imagine that someone who knows as much economics as he does could be saying anything else.

The following little snippet is, incidentally, only the same point put another way:

"Mr Bernanke said low long-term rates were in part the result of a decline in the “term premium” investors demand for holding longer-dated securities."

So the big question behind all these interconnected phenomena is why? Aha! That is the hard part.

Anyway, one good point that I am already feeling about Bernanke is that he not only has a good grasp of basic theory, he also isn't scared of getting his hands dirty trying to apply it, and he does seem to have some sort of good intuitive feel for how things work. He also seems pragmatic and willing to adapt theory to life. So all of this basically augurs well. I wish we had such people here in Europe (well, maybe, just maybe, Mervyn King).