This downturn may be taking place in a different environment, but China still acted. Will other governments?

Now that China has put out a large domestic spending plan that amounts to USD586 billion, other governments world-wide strongly affected by the crisis might have to take similar steps, especially given faltering consumer spending and investments. But since the world is different from the past, such as improved technology, greater interconnectivity and higher mobility of workforce, would the downturn play out differently? What’s the resulting impact on developing countries?

With consumers being engines of the economy, their general lack of access to credit, fear of job losses and the resulting belt-tightening are causing a sharp downturn in spending. As such, on the investment component of the GDP, there is a lack of will for businesses to invest; home values, still at elevated levels, have to come down, causing investments to continue to suffer. In the US, the rising dollar does not help with the trade balance, also hurting the export industry, aside from the credit issues. We might be entering a deflationary environment, with input (eg, fuel, commodities) prices falling and firms cutting prices to clear inventory. A deflationary spiral would be a bad outcome.

But this downturn takes place under a different environment, with improved technology and greater mobility of workforce, than previous ones, so could the situation be different?

(1) Would improved technology help? It will, but more in the long run as technology looks to be correlated with increasing productivity. (Hence, economies still have to recover first. However, ways that increases aggregate demand in the short that also helps increase productivity in the long run would be most appropriate. Infrastructure projects are therefore usually taken.) What about the web or the higher interconnectivity around the world? It is hard to say outright. Nonetheless, fundamentally, the web is a platform that consumers and producers transact, rather than doing it on the street, so the basic economic interaction between consumers and producers remain the same. Thus, if demand falters, so does production. Moreover, if the wealth generated by the web is not “tangible,” but people treat it as if it were tangible, then the bursting of the asset bubble could be worse then, as the true value is realized. This happened after the bursting of the technology bubble earlier.

(2) The mobility of the global workforce has also improved significantly in recent years, but it is the very mobility of workforce that will make the situation in many OECD countries worse. As wages in those countries are still high, then moving operations to low wage countries will continue. In the last couple of years when the economy was booming, some companies have slowed or reversed the pace or direction of outsourcing, due partly to customer-service issues and time-zone differences. This reversal to some extent cuts into corporate profit but was more than offset by gains during the boom. But with profits shrinking during the recession, firms would likely to take greater advantage of this labor arbitrage and began another wave of outsourcing/offshoring, now perhaps on more core operations that do not have to be in high-wage countries.

At first glance, developing economies might appear to benefit from it. Nevertheless, I’d think that the benefits are likely to be offset by losses in other areas. As exports still account for a large portion of their economies, internal demand looks unlikely to bridge the gap left by falling exports. In fact, many who work in the exports industries will or are afraid that they would lose their jobs, which dampens the propensity to spend. In fact, this is happening in China as well, as domestic consumption falls measurably in Q3. China is also working off its own real estates bubble.

The role of government could be key. Since self-interests prompt people to hoard cash and not spend, then the hope for a recovery from either consumers or businesses could prove elusive. Given the severity of the downturn, then a coordinated effort is needed to boost the economy, so the government, which is the single biggest entity in the economy, would need to take the lead.
China has taken that step, with the massive government spending program. Will others do the same? Or will they have the means to do the same?

Carbon-absorbing rocks and the implementation?

Essentially the researchers discovered that certain rock formation off the coast of Oman has substantial carbon absorbing capability, upto billions of tons a year, if the rock-cracking process can be self-sustaining. For comparison, coal plants in the U.S. emit between 1-2 billion tons per year. Since carbon dioxide travels long distance and stays in the air, then carbons can be stored with little leakage - a major problem that confronts typical carbon capture and sequestration (CCS) techniques.

CCS works by transporting emitted carbon dioxide and pumping it into some underground storage locations, such a porous aquifiers. But the high cost of transport and building pipelines makes it uneconomical. Carbon dioxide leaking from those locations is also a major problem.

Instead, this new proposed method uses the carbon-dioxide-absorbing ability of sea water and a convection system that pumps sea water deep into the rock formation in one hole and releases the "decarbonized" water in another hole. The rock formation peridotite has a large amount of olivine, which contains magnesium and oxygen, among others. The olivine reacts with water and leaves behind large amounts of dissolved magnesium and bicarbonate. With bicarbonate, the carbon concentration in the water can be increased by 10 times as well. As the water gets deeper into the ground and temperatures get higher, magnesium, carbon and oxygen are released to form magnesium carbonate and dolomite (with calcium). They expand the rock in size, creating more pores and fractures. The chemical reaction also generates heat, making the process self-sustaining. Then the water exits, rises to the sea surface and absorbs more carbon dioxide, completing the convection cycle.

If the science works and it works on a large scale, then it'd be an economical partial solution to carbon emissions, but what about the money needed to pay governments to allow this kind of operation off their coast? Would it involve a global payment system or be incorporated into some permit trading system in some form similar to the CDM? Perhaps it could work like the reforestation mechanism in CDM (Clean Development Mechanism). The CDM was established by the UN following the Kyoto Protocol, which allows for the creation and trading of emission credits through the capture of greenhouse gas and reforestation, among others.

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Kelemen and Matter (2008) "In situ carbonation of peridotite for CO2 storage," Proceedings of the Nationa Academy of Sciences, 105(44)

PNAS abstract: http://www.pnas.org/content/early/2008/10/31/0805794105.abstract

Also at Technology Review: http://www.technologyreview.com/energy/21629/?a=f

Impact of the global recession on future energy prices

The current global slowdown in energy demand growth, and lower oil and energy prices could pave the way for sharply higher prices when economies begin to recover.

(1) While we will very likely see a global recession, which decreases demand of oil and eases prices, the relative reduction in the size of oil exploration and production now will mean much higher oil prices in the future, I believe.

New exploration and production, along with necessary infrastructure investments, could take 10 years or so before oil could start flowing. (Similar outcome, but in shorter time frames, will probably play out in other energy commodities.) Even though many large oil majors have not announced any significant cutbacks in oil investments, the national oil companies (NOCs), controlled by various governments and all in the top 10 in terms of production, may think differently. Higher oil prices to a certain level benefit them more (such as Venezuela). Hence, as the pressure to produce more is off with the sharp drop in oil prices, they could reduce their investment both to conserve cash and, consequently, raise longer term prices. NOCs also tend not to have good reservoir management, where, loosely speaking, the full production of the field may not be reached. Mismanagement could in fact reduce the amount of oil recoverable as well. Hence, on this thesis, a slower growth in supply over the medium and long term is likely.

(2) Alternative energy development is hampered by both the lack of fund due to the recessions and lower energy prices. Without a certain amount of promising alternatives in the pipeline, there would be few substitutes if the supply and demand of traditional energy sources become tight again.

The weak credit environment is already impacting start-ups on solar, bio-fuels or other alternative energy sources, with stories from the venture capital industries about cutbacks. Large scale investments such as nuclear, where a plant costs billions to construct, are likely to be substantially slowed. Wind farms could still be built given government tax breaks, but the bottle necks come from transmission lines. Again, billions of investments are needed for the build-out, assuming all else being equal, including legal issues about access rights, compared with several months ago. Of course there could be "disruptive technologies" that come about and could change the world in short order, but should we count on that? If Paul Romer's Endogenous Growth Theory is any guide, the amount of resources put in would, broadly speaking, affect the R&D outcome.

As such, as the world economy recovers down the road, sharply rising energy prices could very well slow the rate of growth.