I wonder when this gyration in the market will subside. When will deleveraging, or the unloading of debt to boost return, be done?
(1) For investment firms, if I understand the process correctly, the deleveraging goal post might be moving, prolonging a rather painful process. (Leverages are essentially debt that firms borrow to boost return. Say if I have $1's worth of asset, borrow $4 and invest $5, then a 10% increase in return, ie $0.5, is almost equivalent to a 50% increase in return, since the original amount of asset was $1.) The problem is that the $1's worth of asset might be devaluing, which lengthens the deleveraging process. Say a firm wants to reduce its leverage from 20:1 to 10:1, it will have to sell assets. If the market is under massive deleveraging pressure, prices of assets are also driven down. Even if a firm has reduced its position from 20 to 10, if the value of assets are similarly driven down from $1 to, for argument sake, $0.5, then a 10:0.5 ratio is effectively a 20:1 ratio.
Given how long it took to build up this leverage and the size of it, the unwinding process will take time or that quick action will surely cause turmoil. Quick action is what is being observed now, driven in part by margin calls, redemption requests (or anticipation of such), or flight to safety from volatile assets to something safe.
(2) The next to deleverage are those consumers who loaded up with debt for purchases. I wonder how much banks and other financial institutions have marked down or set aside sufficient amount of reserves for the anticipated defaults on credit card, auto and loans on other purchases. (I still see ads where you can buy furnitures and don't pay until 2010 or 2012...)
One bright spot is the falling fuel prices that helps keep money in people's pockets, but it may not last long, given that some refined products' prices, such as a barrel of reformulated gasoline (RBOB), are less than a barrel of benchmark crude oil. This assumes, of course, that crude oil prices stay in the same range.... more later...
Monday, October 27, 2008
Wednesday, October 22, 2008
Implications on the new land reform in China
A colleague and I were chatting about what Gartman wrote in his letter. With individuals in China being able to own land, Gartman asserted that farmers will become more productive. What are the other implications?
(1) Will farmers, in an effort to boost yield, "overwork" their land? With heavy use of fertilizers and little crop rotation, they can raise their standard of living quickly, but sacrifice the longer term productivity of the land.
(2) How much effort will there be to educate people with their newfound right to own land? Are there enough legal safeguards against exploitation? When people's standard of living is rather low, some may be persuaded to sell their land or effectively give up their claim on the cheap. Besides more education, perhaps individual owners can form some kind of cooperatives and bargain collectively to gain leverage, just like labor negotiations.
(3) Aside from the land-related issues, how will this reform impact the demographics in those places, now that people may have more incentives as agri-entrepreneurs, instead of being de facto peasants? There had been a talent drain as many able adults left the countryside to work in cities. Although they did earn more, families were also separated and children grew up not seeing their parents, ripping apart the delicate family fabric. Children were also not receiving the complementary education from being with their parents.
With ownership of their own land, would they decide to stay? If that is partly the objective of the new legislation, what are other support functions available to keep people there? I do not know how popular micro-lending is, but it may be helpful to expand that to help develop both the core agri-businesses and other supporting activities. Maybe financial institutions like the Agricultural Bank of China can continue to play a major role in that regard.
(1) Will farmers, in an effort to boost yield, "overwork" their land? With heavy use of fertilizers and little crop rotation, they can raise their standard of living quickly, but sacrifice the longer term productivity of the land.
(2) How much effort will there be to educate people with their newfound right to own land? Are there enough legal safeguards against exploitation? When people's standard of living is rather low, some may be persuaded to sell their land or effectively give up their claim on the cheap. Besides more education, perhaps individual owners can form some kind of cooperatives and bargain collectively to gain leverage, just like labor negotiations.
(3) Aside from the land-related issues, how will this reform impact the demographics in those places, now that people may have more incentives as agri-entrepreneurs, instead of being de facto peasants? There had been a talent drain as many able adults left the countryside to work in cities. Although they did earn more, families were also separated and children grew up not seeing their parents, ripping apart the delicate family fabric. Children were also not receiving the complementary education from being with their parents.
With ownership of their own land, would they decide to stay? If that is partly the objective of the new legislation, what are other support functions available to keep people there? I do not know how popular micro-lending is, but it may be helpful to expand that to help develop both the core agri-businesses and other supporting activities. Maybe financial institutions like the Agricultural Bank of China can continue to play a major role in that regard.
Sunday, October 19, 2008
Weekend thoughts
This is one of the quieter weekends over the past few weeks. Has the eye of the storm passed? I sure hope so. Did we see the capitulation in the stock market that signifies the end of a rout?
The credit market did thaw to a certain extent, but the effect seems to be very limited. News reports are saying that banks have begun lending to banks now, although such lending, much of it I think, is guaranteed by the government, so banks are making guaranteed money over the risk-free interest rate. Although many other interest rates, such as mortgages, are tied to some interbank lending rates such as LIBOR, will financial institutions actually start lending to borrowers without the guarantees? The slowdown in the economy will certainly bring more defaults. With the broader market being very unpredictable in a very short period of time, the risk rises substantially for lending past even a few days. For example, the overnight LIBOR dropped quite a bit, but not so much for anything longer term. In fact, longer term rates have increased, since the government will have to borrow more, depressing bond prices and increasing the yield.
I was in Georgetown this weekend, where the mood on campus was pretty positive and M Street remained crowded. Although shops on M Street do cater to people other than students, from this albeit very ancedotal evidence, perhaps students may be the segment of the population that is relatively shielded from this economic downturn, unless they have serious trouble getting student loans and/or parents start cutting off credit cards. Some are worried about their job prospects, but how much of the budget can a student cut? Fewer nights out may mean more gatherings/parties inside, with more consumption of pizza. In contrast, with polls out saying that over 60% of the population are worried about their jobs, spending cutbacks will definitely come from the adults.
The credit market did thaw to a certain extent, but the effect seems to be very limited. News reports are saying that banks have begun lending to banks now, although such lending, much of it I think, is guaranteed by the government, so banks are making guaranteed money over the risk-free interest rate. Although many other interest rates, such as mortgages, are tied to some interbank lending rates such as LIBOR, will financial institutions actually start lending to borrowers without the guarantees? The slowdown in the economy will certainly bring more defaults. With the broader market being very unpredictable in a very short period of time, the risk rises substantially for lending past even a few days. For example, the overnight LIBOR dropped quite a bit, but not so much for anything longer term. In fact, longer term rates have increased, since the government will have to borrow more, depressing bond prices and increasing the yield.
I was in Georgetown this weekend, where the mood on campus was pretty positive and M Street remained crowded. Although shops on M Street do cater to people other than students, from this albeit very ancedotal evidence, perhaps students may be the segment of the population that is relatively shielded from this economic downturn, unless they have serious trouble getting student loans and/or parents start cutting off credit cards. Some are worried about their job prospects, but how much of the budget can a student cut? Fewer nights out may mean more gatherings/parties inside, with more consumption of pizza. In contrast, with polls out saying that over 60% of the population are worried about their jobs, spending cutbacks will definitely come from the adults.
Monday, October 13, 2008
Something new just happens everyday these days. And these days, they are dominated by economic and financial news. Not that I wanted to focus on them solely, but both my occupation and the economist in me really got me thinking...
The current massive government intervention puts a floor on the stock market and rebuilds the confidence for lending. The Dow went up by 900+ points, the most in 75 years! By the time the next one comes around, say 75 years from now, I will be over 100. That might not be the best time for me (or anyone) to be invested in the market, as getting a heart attack then is the surest way for anyone to go to heaven (or hell... it depends...)
What the British and Europeans have put out for the rescue plans, with the US poised to follow, contain some key elements proposed by economists:
(1) Guarantee some form of bank lending. This is akin to guaranteeing bank deposits, which helps to prevent bank-runs. Similarly, banks are in the business of lending. If banks have the ability to lend but not lending because of a mistrust of counterparties (e.g. other banks), then liquidity (e.g. cash) is trapped inside banks. Guaranteeing bank lending would give lenders the confidence to lend to others protected by the guarantee. Banks are mistrustful of each other because many of them know the tricks of the trade, how CDOs and other assets are put together and sold to others.
Perhaps the guarantees should involve some sort of capital requirement, so that bad banks would not make the risky lending that, if those bets go right, they get a higher return, if not, those banks would fail anyway. The capital requirement is like the margin requirement in trading. In case a trading partner defaults, the margin could still cover the losses, if not partially. In any case, governments carry a big risk with this kind of guarantee, particularly when a bad bank in the program fails.
(2) Recapitalize banks: As values of assets are marked down substantially, depleting banks' capital base, banks need to be recapitalized. Governments would inject capital, perhaps through the issuance of preferred shares with a relatively low interest rate so that it won't become too much of a burden on banks. But it'd be hard (esp. politically) for governments to choose which ones to support and which to fail.
(3) Form asset management companies to buy assets from banks: This is essentially the original intent of first rescue package in the US. By having these banks selling those bad assets to the management company, the balance sheets would hopefully look clearer and better. The process would take longer.
But what is interesting is the latest article on the WSJ on how some of the biggest hedge fund managers have decided to exit the markets and stay on the sideline. Of course, information could be deceptive and decisions made yesterday could be reversed today, given new and important events and information. As such, they might be in the market again.
Yet, how long will this bounce last, especially with the following?
Short term
- the liquidity that helped drove the asset inflation in the past few years has been and is contracting as the shadow banking system shuts down
- the continued deleveraging taking place in the market is probably not complete, especially when some firms that were leveraged up to 20:1 have to get down to 10:1 or so, and when the "1" keeps getting smaller with asset marketdowns, threatening the capital base
- margin calls induced selling
Longer term
- the recession is driven primarily by consumers. Prior recessions in recent years were business-led and consumer spending was able to reenergize the economy to some degree.
- the debt burden of governments will likely give upward pressure on interest rates and crowd out private debt. The US government might be an exception, with the flight of safety to the Dollar perhaps keeping rates low.
I wonder what will happen tomorrow!
The current massive government intervention puts a floor on the stock market and rebuilds the confidence for lending. The Dow went up by 900+ points, the most in 75 years! By the time the next one comes around, say 75 years from now, I will be over 100. That might not be the best time for me (or anyone) to be invested in the market, as getting a heart attack then is the surest way for anyone to go to heaven (or hell... it depends...)
What the British and Europeans have put out for the rescue plans, with the US poised to follow, contain some key elements proposed by economists:
(1) Guarantee some form of bank lending. This is akin to guaranteeing bank deposits, which helps to prevent bank-runs. Similarly, banks are in the business of lending. If banks have the ability to lend but not lending because of a mistrust of counterparties (e.g. other banks), then liquidity (e.g. cash) is trapped inside banks. Guaranteeing bank lending would give lenders the confidence to lend to others protected by the guarantee. Banks are mistrustful of each other because many of them know the tricks of the trade, how CDOs and other assets are put together and sold to others.
Perhaps the guarantees should involve some sort of capital requirement, so that bad banks would not make the risky lending that, if those bets go right, they get a higher return, if not, those banks would fail anyway. The capital requirement is like the margin requirement in trading. In case a trading partner defaults, the margin could still cover the losses, if not partially. In any case, governments carry a big risk with this kind of guarantee, particularly when a bad bank in the program fails.
(2) Recapitalize banks: As values of assets are marked down substantially, depleting banks' capital base, banks need to be recapitalized. Governments would inject capital, perhaps through the issuance of preferred shares with a relatively low interest rate so that it won't become too much of a burden on banks. But it'd be hard (esp. politically) for governments to choose which ones to support and which to fail.
(3) Form asset management companies to buy assets from banks: This is essentially the original intent of first rescue package in the US. By having these banks selling those bad assets to the management company, the balance sheets would hopefully look clearer and better. The process would take longer.
But what is interesting is the latest article on the WSJ on how some of the biggest hedge fund managers have decided to exit the markets and stay on the sideline. Of course, information could be deceptive and decisions made yesterday could be reversed today, given new and important events and information. As such, they might be in the market again.
Yet, how long will this bounce last, especially with the following?
Short term
- the liquidity that helped drove the asset inflation in the past few years has been and is contracting as the shadow banking system shuts down
- the continued deleveraging taking place in the market is probably not complete, especially when some firms that were leveraged up to 20:1 have to get down to 10:1 or so, and when the "1" keeps getting smaller with asset marketdowns, threatening the capital base
- margin calls induced selling
Longer term
- the recession is driven primarily by consumers. Prior recessions in recent years were business-led and consumer spending was able to reenergize the economy to some degree.
- the debt burden of governments will likely give upward pressure on interest rates and crowd out private debt. The US government might be an exception, with the flight of safety to the Dollar perhaps keeping rates low.
I wonder what will happen tomorrow!
Sunday, October 12, 2008
How will the stabilization plan take shape?
I wrote the following in response to a friend's email:
How will the stabilization plan take shape?
In the US, following the mode of the RFC (Reconstruction Finance Corporation) would put the government in a tough spot in choosing which banks to keep and which to fail. I believe that was one of the sticking points as the rescue bill was negotiated, where congressmen were pressed hard by community banks for some protection, which aren’t too big to fail. (I think that the raising of FDIC insurance limit, which really wasn’t the real problem, was one of the things they fought for.) But clearly, with what happened on Friday to the Big 3 commercial banks (didn’t see Wells Fargo’s stock), perhaps there is already a preference for which ones to prop up. Nevertheless, the nationalization of banks would dilute current outstanding shares and drive down the stock price. Perhaps the first to be injected with government capital, or even nationalized, could be Morgan Stanley, especially if the Mitsubishi UFJ bid fails or is deemed inadequate.
More crucial is that some quick and credible actions must be taken shortly globally. The capitulation was delayed, which might have taken place on Friday, had that unknown intervention did not happen after the quick 600 point drop in the Dow just after the open. What little confidence left in the market could be gone if market players believe that even the G7 cannot come up with something to right the market and system. If that happens, the consequence could be ugly. The government could keep propping up the market, just like Taiwan did for the past few years, to buy some more time. One success story was Hong Kong during the Asian Financial (Currency) Crisis, where it stepped in to buy stocks. But then HK’s reserve was very large and that speculators were massively shorting stocks, not being forced to sell like what we have now.
Perhaps the US, G7 and such have to ask the Middle East, China, Japan and others with large reserves to join in to help invest or nationalize banks and corporations. Those countries would probably agree, as none of them want to see recessions in the US and Europe to be deep and long. Foreign ownership restrictions would have to be waived. While the US could ask them to buy more treasuries instead, those countries would likely want to ask for more say in return, where a simple ownership of treasuries would not achieve.
Challenging times indeed.
How will the stabilization plan take shape?
In the US, following the mode of the RFC (Reconstruction Finance Corporation) would put the government in a tough spot in choosing which banks to keep and which to fail. I believe that was one of the sticking points as the rescue bill was negotiated, where congressmen were pressed hard by community banks for some protection, which aren’t too big to fail. (I think that the raising of FDIC insurance limit, which really wasn’t the real problem, was one of the things they fought for.) But clearly, with what happened on Friday to the Big 3 commercial banks (didn’t see Wells Fargo’s stock), perhaps there is already a preference for which ones to prop up. Nevertheless, the nationalization of banks would dilute current outstanding shares and drive down the stock price. Perhaps the first to be injected with government capital, or even nationalized, could be Morgan Stanley, especially if the Mitsubishi UFJ bid fails or is deemed inadequate.
More crucial is that some quick and credible actions must be taken shortly globally. The capitulation was delayed, which might have taken place on Friday, had that unknown intervention did not happen after the quick 600 point drop in the Dow just after the open. What little confidence left in the market could be gone if market players believe that even the G7 cannot come up with something to right the market and system. If that happens, the consequence could be ugly. The government could keep propping up the market, just like Taiwan did for the past few years, to buy some more time. One success story was Hong Kong during the Asian Financial (Currency) Crisis, where it stepped in to buy stocks. But then HK’s reserve was very large and that speculators were massively shorting stocks, not being forced to sell like what we have now.
Perhaps the US, G7 and such have to ask the Middle East, China, Japan and others with large reserves to join in to help invest or nationalize banks and corporations. Those countries would probably agree, as none of them want to see recessions in the US and Europe to be deep and long. Foreign ownership restrictions would have to be waived. While the US could ask them to buy more treasuries instead, those countries would likely want to ask for more say in return, where a simple ownership of treasuries would not achieve.
Challenging times indeed.
Reflection on the initial rejection of the rescue package
Originally written on Sept 30, 2008
I watched with disbelief that the majority of people in the country did not like this rescue plan. What are the implications in the political arena and in our communities?
- Political Arena:
The stock market (the Dow) was only down 777 points because investors and traders believe that either those members of Congress who are posturing will come around and support the bill, or that some members of Congress were scared to see what happened in the market and will end up voting for the bill. But its passage is not a certainty: on a micro level, if a member of Congress were given two choices: a high probability of keeping his seat and let the economy tank by voting no, or a high probability of losing his seat but save the economy, what would he choose? His job or the bigger economy? Losing the power and prestige of being a member of Congress, or not get elected and need to find a job? The choice is clear. If the stalemate continues, the stock market is poise to go down further.
- Communities:
What people can't see is the credit market behind the scenes, which is not really functioning now.
The reasons why this bill is extremely important are that:
(1) wage payments are at risk: businesses, big and small, use short term lending to obtain the short term cash needed to pay workers. Now that banks are very unwilling to lend to each other and investors unwilling to buy short term debts so companies can borrow, businesses would face a cash-crunch and possibly unable to pay their workers and bills due to a lack of short term liquidity.
(2) jobs are at risk: when businesses cannot pay each other and their workers, what is the reason for holding on workers? Labor hoarding takes place when businesses think that they would weather the storm, and that it is cheaper to hold workers than to let them go and need to find new ones when the economy picks up. But it appears that both for the short and medium term, the economy will not recover, so letting workers go seem to make business sense, when the survival of the business itself is in question.
(3) purchases are at risk: when lending to businesses is not taking place, then lending to consumers is not likely to take place either. Borrowings have been the engine for the consumer-led growth in this country, both in terms of getting cash by tapping the equity of one's home, or borrowing to buy things, such as car loans, credit card loan, lines of credit or personal loans. With little to no lending, there will little transactions. Hence, those who need the money by selling things could not sell them, further eroding the financial situation of households.
(4) on the consumer side, capital preservation prevails and substantially slows the economy: banks are unwilling to lend to each other because they do not trust lending money to others and they also want to preserve what they have. Likewise, people would want to preserve their cash and assets, so they spend less and hoard more. Given the economic situation, enough people will be doing that that consumer-led economy will experience a substantial slowdown.
(5) on the investment side, business will not invest and housing will not pick up: internally, businesses have substantial problems borrowing, which put a constraint on what they can do. Externally, the pull-back in consumer spending will limit the appetite for businesses to expand or maintain the current operation. A contraction could happen as a result. On the housing side, borrowing difficulties simply crimp demand, as everyone knows.
(6) on the export side, the relatively strong dollar and tight credit will hamper the export sector: the US economy is weak, but others are weaker. Of the 5 largest economic entities, US, EU, Japan, UK and China, the first 4 may be on the verge of or are already in recession and China is slowing down. The relative weakness of most other economies makes the USD stronger, which hurts exports by raising export prices. This weakens the demand for exports. Even if the effect is not that large, the difficulty in obtaining credit to finance operations and expansions will hamper the production side for export
(7) the government is hardly an economic engine: the money that the government has spent is not enough to lift the GDP. A lot of that money actually went to buy up financial assets, which are not "productive" in the economic sense.
(8) the credit situation may further discourage foreign investors to lend to the U.S. The weak economy is not attractive to foreign investors. Foreign investors, which in large part have been financing the boom in the credit-driven US economy, would not be as willing to buy US debt (ie, Treasury). The smaller demand drives interest rate up, making the debt financing and repayment more difficult. This filters down to the broader economy, where the credit market is already under tremendous stress. In addition, a bad economy reduces tax revenues and weakens the government's position to pay off the national debt.
Finally, some say that it is wrong to bailout these financial services firm because of the high pay and severance packages these heads of corporations receive. But given the gravity of the situation, comparing the benefits that a $700 billion would bring, vs the, say, $700 million or $7 billion, of cost that could go to these people, quickly tells a story that the 1% of cost is minimal. One doesn't have to deal with those people now.
Deal with what's urgent and important now. Wake up and stop the bickering.
I watched with disbelief that the majority of people in the country did not like this rescue plan. What are the implications in the political arena and in our communities?
- Political Arena:
The stock market (the Dow) was only down 777 points because investors and traders believe that either those members of Congress who are posturing will come around and support the bill, or that some members of Congress were scared to see what happened in the market and will end up voting for the bill. But its passage is not a certainty: on a micro level, if a member of Congress were given two choices: a high probability of keeping his seat and let the economy tank by voting no, or a high probability of losing his seat but save the economy, what would he choose? His job or the bigger economy? Losing the power and prestige of being a member of Congress, or not get elected and need to find a job? The choice is clear. If the stalemate continues, the stock market is poise to go down further.
- Communities:
What people can't see is the credit market behind the scenes, which is not really functioning now.
The reasons why this bill is extremely important are that:
(1) wage payments are at risk: businesses, big and small, use short term lending to obtain the short term cash needed to pay workers. Now that banks are very unwilling to lend to each other and investors unwilling to buy short term debts so companies can borrow, businesses would face a cash-crunch and possibly unable to pay their workers and bills due to a lack of short term liquidity.
(2) jobs are at risk: when businesses cannot pay each other and their workers, what is the reason for holding on workers? Labor hoarding takes place when businesses think that they would weather the storm, and that it is cheaper to hold workers than to let them go and need to find new ones when the economy picks up. But it appears that both for the short and medium term, the economy will not recover, so letting workers go seem to make business sense, when the survival of the business itself is in question.
(3) purchases are at risk: when lending to businesses is not taking place, then lending to consumers is not likely to take place either. Borrowings have been the engine for the consumer-led growth in this country, both in terms of getting cash by tapping the equity of one's home, or borrowing to buy things, such as car loans, credit card loan, lines of credit or personal loans. With little to no lending, there will little transactions. Hence, those who need the money by selling things could not sell them, further eroding the financial situation of households.
(4) on the consumer side, capital preservation prevails and substantially slows the economy: banks are unwilling to lend to each other because they do not trust lending money to others and they also want to preserve what they have. Likewise, people would want to preserve their cash and assets, so they spend less and hoard more. Given the economic situation, enough people will be doing that that consumer-led economy will experience a substantial slowdown.
(5) on the investment side, business will not invest and housing will not pick up: internally, businesses have substantial problems borrowing, which put a constraint on what they can do. Externally, the pull-back in consumer spending will limit the appetite for businesses to expand or maintain the current operation. A contraction could happen as a result. On the housing side, borrowing difficulties simply crimp demand, as everyone knows.
(6) on the export side, the relatively strong dollar and tight credit will hamper the export sector: the US economy is weak, but others are weaker. Of the 5 largest economic entities, US, EU, Japan, UK and China, the first 4 may be on the verge of or are already in recession and China is slowing down. The relative weakness of most other economies makes the USD stronger, which hurts exports by raising export prices. This weakens the demand for exports. Even if the effect is not that large, the difficulty in obtaining credit to finance operations and expansions will hamper the production side for export
(7) the government is hardly an economic engine: the money that the government has spent is not enough to lift the GDP. A lot of that money actually went to buy up financial assets, which are not "productive" in the economic sense.
(8) the credit situation may further discourage foreign investors to lend to the U.S. The weak economy is not attractive to foreign investors. Foreign investors, which in large part have been financing the boom in the credit-driven US economy, would not be as willing to buy US debt (ie, Treasury). The smaller demand drives interest rate up, making the debt financing and repayment more difficult. This filters down to the broader economy, where the credit market is already under tremendous stress. In addition, a bad economy reduces tax revenues and weakens the government's position to pay off the national debt.
Finally, some say that it is wrong to bailout these financial services firm because of the high pay and severance packages these heads of corporations receive. But given the gravity of the situation, comparing the benefits that a $700 billion would bring, vs the, say, $700 million or $7 billion, of cost that could go to these people, quickly tells a story that the 1% of cost is minimal. One doesn't have to deal with those people now.
Deal with what's urgent and important now. Wake up and stop the bickering.
The place we live and climate change
Originally written on Feb 3, 2007
Debates abound about what should be done, who should do what and when should one start. Be it demand-side conservation, or supply-side emission abatement, everyone can help slow and stablize the warming process and we should start now. But some may ask why: why should we do this, why don't China and India cut emissions and we have to do it, and why start now?
Fictional scenario:
- Imagine the following: everyone lives around a pond. The pond is where everyone gets water from and dumps waste. On one side of the pond, some live a good life at the expense of creating both organic and inorganic waste, all dumped into the pond. Those who are poor are trying to catch up, also dumping into the pond. The pond used to be full of life, with clear water. Fish used to be able to digest some of the waste, but the waste is just too much. The water turns yellow. People on both sides of the pond blame the other side. People keep blaming, little to nothing is done and the water turned brown. Arguments turn into fights, especially for the section of the pond with cleaner water. Those who have no access to clean water got sick and died. Irrigation no longer works...
Other potential scenarios:
- imagine living under 100F+ heat, say, for an extended time in the summer (picture India)
- imagine living in hunger, as crop yield drops, due to extreme weather, drought or heat (many are not as fortunate as us; picture Sub-Saharan Africa)
- imagine living in strife - the last generation fought for freedom; this generation fights for oil; the next generation could be fighting for water and other basic resources
What should be done:
- Demand-side conservation can start with something as little as turning off unused lights, electronics and appliances. Fuel efficiency and insulation are actually good, not only do they help the environment, but they also increase competition by introducing substitutes and entrants, spurring innovations and lower prices as demand for fuel decreases.
- Supply-side emission abatement can start with putting a price on pollution, so that emitters are more responsible with what they do and not transfer their unwanted stuff to others. (Just like with free food, people take more, but with a price, people usually get what they need.) Cap-and-trade with proper market design so far works.
Who should do what:
- Everyone can do something. Why wait for your neighbors to start when you can start now? Your energy bill would most probably go down!
- As for the India-China-not-in-compliance argument, it is only a bargaining strategy. China and India would actually suffer more if they don't curb emissions and they know it. Whenever I visit China now, I rarely see blue sky. Water from the tap is yellow. In India, sudden monsoon destroys crop and kills more people than in the past. Temperature in the summer is higher and sustains longer than before.
- So, show leadership, spur innovation and get the edge!
When should one start:
- Why not sooner the better? Lower energy bills translate into real savings; getting into the habit can help one weather surges in energy prices much better; getting a jump on innovations entails possible first-mover advantages, opening up new markets (or what some people called blue ocean strategy), encouraging "Creative Destruction;" starting sooner may yield benefits: the greening of Seoul in South Korea markedly lowers the city's temperature (the reduced use of air-conditioners as a result also helps curb the increase in temperature); the existing emission abatement programs of acid rain and smog in the U.S. help bring much more health, environmental and economic benefits than costs.
All in all, there is a lot that one can do, everyone can do something, mostly for limited cost, and the starting point is not too far. Now is the time.
Debates abound about what should be done, who should do what and when should one start. Be it demand-side conservation, or supply-side emission abatement, everyone can help slow and stablize the warming process and we should start now. But some may ask why: why should we do this, why don't China and India cut emissions and we have to do it, and why start now?
Fictional scenario:
- Imagine the following: everyone lives around a pond. The pond is where everyone gets water from and dumps waste. On one side of the pond, some live a good life at the expense of creating both organic and inorganic waste, all dumped into the pond. Those who are poor are trying to catch up, also dumping into the pond. The pond used to be full of life, with clear water. Fish used to be able to digest some of the waste, but the waste is just too much. The water turns yellow. People on both sides of the pond blame the other side. People keep blaming, little to nothing is done and the water turned brown. Arguments turn into fights, especially for the section of the pond with cleaner water. Those who have no access to clean water got sick and died. Irrigation no longer works...
Other potential scenarios:
- imagine living under 100F+ heat, say, for an extended time in the summer (picture India)
- imagine living in hunger, as crop yield drops, due to extreme weather, drought or heat (many are not as fortunate as us; picture Sub-Saharan Africa)
- imagine living in strife - the last generation fought for freedom; this generation fights for oil; the next generation could be fighting for water and other basic resources
What should be done:
- Demand-side conservation can start with something as little as turning off unused lights, electronics and appliances. Fuel efficiency and insulation are actually good, not only do they help the environment, but they also increase competition by introducing substitutes and entrants, spurring innovations and lower prices as demand for fuel decreases.
- Supply-side emission abatement can start with putting a price on pollution, so that emitters are more responsible with what they do and not transfer their unwanted stuff to others. (Just like with free food, people take more, but with a price, people usually get what they need.) Cap-and-trade with proper market design so far works.
Who should do what:
- Everyone can do something. Why wait for your neighbors to start when you can start now? Your energy bill would most probably go down!
- As for the India-China-not-in-complia
- So, show leadership, spur innovation and get the edge!
When should one start:
- Why not sooner the better? Lower energy bills translate into real savings; getting into the habit can help one weather surges in energy prices much better; getting a jump on innovations entails possible first-mover advantages, opening up new markets (or what some people called blue ocean strategy), encouraging "Creative Destruction;" starting sooner may yield benefits: the greening of Seoul in South Korea markedly lowers the city's temperature (the reduced use of air-conditioners as a result also helps curb the increase in temperature); the existing emission abatement programs of acid rain and smog in the U.S. help bring much more health, environmental and economic benefits than costs.
All in all, there is a lot that one can do, everyone can do something, mostly for limited cost, and the starting point is not too far. Now is the time.
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