Is it kinda sad that the only one with their eye on the ball is the WSJ? --RB
Bernanke's Market Week
June 21, 2008;
The Federal Reserve's Open Market Committee meets again next week, and one of its jobs will be to clean up the mess the Fed made this week.
Earlier this month, Chairman Ben Bernanke signaled a turn in Fed policy to include a focus on maintaining a "stable" dollar. Sure enough, the dollar strengthened, the price of oil fell and stocks crept up. Then earlier this week, someone in the upper reaches of the Fed began leaking to the press in advance of next week's FOMC meeting that Mr. Bernanke saw no reason to raise interest rates this month, or indeed until the autumn.
Sure enough, oil shot up and gold rose back above $900 an ounce, with equities tanking in turn on stagflation fears. Throw in renewed worries over credit problems in the banking system, and the markets had a very ugly week.
What we can't figure out is what in the world Fed officials are thinking, assuming that's even the right word. The most precious commodity a Fed Chairman has is credibility. When he makes a widely advertised public commitment to maintain dollar stability, and then he or his minions leak that he has no plans to back that up with any action, he is squandering his own currency. Central banking isn't an academic seminar where ideas don't have consequences.
With inflation climbing around the globe, most of it inspired by dollar weakness, the Fed has a growing credibility problem. Mr. Bernanke needs to understand that investors are beginning to suspect that the most important financial official in the world doesn't seem to appreciate the Fed's primary role in undermining the greenback. If that conclusion becomes fixed, this week's market meltdown will look pretty by comparison.
Showing posts with label WSJ. Show all posts
Showing posts with label WSJ. Show all posts
Sunday, June 22, 2008
Thursday, June 5, 2008
WSJ Editorial: Is the Fed finally waking up to inflation threat
Isn't it sad when the WSJ editorial page has more credibility than Paul Krugman who recently argued that we didn't have to worry about inflation? -- What breakfast has he been eating? --RB
REVIEW & OUTLOOK
The Buck Stops Where?
June 5, 2008; Page A20
When Paul Volcker declared several weeks ago that the world was in a "dollar crisis," his successors at the Federal Reserve made their private disapproval very clear. This week current Fed Chairman Ben Bernanke waved the white flag over Mr. Volcker's point by declaring his own public concern "that the dollar remains a strong and stable currency." Apologies accepted, provisionally.
The tragedy is that this is big news. The Fed has monopoly power over dollar creation, and concern for its value ought to go without saying. Yet so great has been the Fed's dollar abdication in recent years, and especially since last summer, that Mr. Bernanke's words have come as a great global relief. As the dollar has strengthened in welcome response, the price of gold and oil has fallen in each of the last two days.
The question now is whether the Fed will follow up its new words with action. "We are attentive to the implications of changes in the value of the dollar for inflation and inflation expectations," Mr. Bernanke said on Tuesday, a sign that the Fed may be waking up to the inflation threat. But the Fed chief also signaled that he isn't about to tighten monetary policy any time soon because current "policy seems well positioned to promote moderate growth and price stability over time."
Price stability where? Not in the U.S., where every economic report shows rising price pressure. Yesterday the feds reported that labor compensation rose at a healthy 4.9% for the first quarter, but only 0.6% after inflation. The Fed-inspired commodity boom has sent food and energy prices soaring, while wage gains invariably lag. If Republicans want to know why voters are so upset about an economy with a jobless rate of 5% – below the 5.2% rate when Bill Clinton won re-election in 1996 – this erosion of real incomes is the reason.
The Bernanke Fed has also been oblivious to the fact that it runs a global dollar bloc. Central banks in dozens of countries peg or otherwise link their own currencies to the world's reserve currency, which is the dollar. They do so for the sake of exchange-rate stability, which helps with trade and investment flows. They essentially subcontract their monetary policy to the U.S. central bank.
The Fed's dollar indifference has sent an inflation shock through those dollar-linked economies. This week alone, we've read about price riots in Vietnam; inflation hitting 10.1% in Kuwait; Abu Dhabi contemplating price or wage controls; South Korean and Indonesian central bankers considering rate hikes; and the Chinese letting the yuan rise ever higher to curb inflationary pressures imported from the U.S.
Many of these countries are now delinking from the greenback. Meanwhile, the dollar plunge has translated into a net transfer of trillions in wealth from the U.S. to the rest of the world. The result has been the largest decline in America's global economic influence since the 1970s.
It will take more than a single speech from Mr. Bernanke to undo this damage. A statement of support for the strong dollar from both the Treasury and President Bush would certainly help. The last time Mr. Bush dared to speak his mind this way, in March, Treasury quickly hushed him up. Now would be a good time for the President to say he agrees with what Mr. Bernanke said this week.
The business press has been chattering about Treasury "intervention" in the foreign exchange markets, but this would mostly be symbolic action to scare currency traders. Such interventions are invariably "sterilized," meaning that central banks are careful not to increase or decrease the net supply of dollars. Changing the value of the dollar means reducing the supply of, or increasing the demand for, dollars. At the current moment, the world isn't likely to demand more dollars until it concludes that the Fed is serious about stopping the greenback's further decline.
In this context, last week's announcement of the August departure of Fed Governor Frederic Mishkin is good news. Mr. Mishkin is one of the intellectual architects of the Fed's dollar debacle. His departure means the Fed will soon have three of seven seats unfilled, with one more Governor unconfirmed. The Senate seems disinclined to confirm any more Bush nominees, and that may be just as well. The next President deserves a chance to remake the Fed with sound-money appointees. This Administration has named too many academics who know a lot about monetary theory but too little about currency markets and price signals in the real world.
* * *
The best news would be if this week marks a turning point at the Fed and at the Treasury. The leaders of those institutions have justified the Fed's sprint down the interest-rate curve as a way to boost exports, rescue the financial system and prevent a recession. They were wrong.
What has spared Wall Street more pain is the Fed's decision to open the discount window wider and to more borrowers. The easy-money experiment has merely hit consumers and the already struggling economy with a commodity price wallop, while inspiring a global flight from dollar assets. It's time to start acting to repair the damage.
REVIEW & OUTLOOK
The Buck Stops Where?
June 5, 2008; Page A20
When Paul Volcker declared several weeks ago that the world was in a "dollar crisis," his successors at the Federal Reserve made their private disapproval very clear. This week current Fed Chairman Ben Bernanke waved the white flag over Mr. Volcker's point by declaring his own public concern "that the dollar remains a strong and stable currency." Apologies accepted, provisionally.
The tragedy is that this is big news. The Fed has monopoly power over dollar creation, and concern for its value ought to go without saying. Yet so great has been the Fed's dollar abdication in recent years, and especially since last summer, that Mr. Bernanke's words have come as a great global relief. As the dollar has strengthened in welcome response, the price of gold and oil has fallen in each of the last two days.
The question now is whether the Fed will follow up its new words with action. "We are attentive to the implications of changes in the value of the dollar for inflation and inflation expectations," Mr. Bernanke said on Tuesday, a sign that the Fed may be waking up to the inflation threat. But the Fed chief also signaled that he isn't about to tighten monetary policy any time soon because current "policy seems well positioned to promote moderate growth and price stability over time."
Price stability where? Not in the U.S., where every economic report shows rising price pressure. Yesterday the feds reported that labor compensation rose at a healthy 4.9% for the first quarter, but only 0.6% after inflation. The Fed-inspired commodity boom has sent food and energy prices soaring, while wage gains invariably lag. If Republicans want to know why voters are so upset about an economy with a jobless rate of 5% – below the 5.2% rate when Bill Clinton won re-election in 1996 – this erosion of real incomes is the reason.
The Bernanke Fed has also been oblivious to the fact that it runs a global dollar bloc. Central banks in dozens of countries peg or otherwise link their own currencies to the world's reserve currency, which is the dollar. They do so for the sake of exchange-rate stability, which helps with trade and investment flows. They essentially subcontract their monetary policy to the U.S. central bank.
The Fed's dollar indifference has sent an inflation shock through those dollar-linked economies. This week alone, we've read about price riots in Vietnam; inflation hitting 10.1% in Kuwait; Abu Dhabi contemplating price or wage controls; South Korean and Indonesian central bankers considering rate hikes; and the Chinese letting the yuan rise ever higher to curb inflationary pressures imported from the U.S.
Many of these countries are now delinking from the greenback. Meanwhile, the dollar plunge has translated into a net transfer of trillions in wealth from the U.S. to the rest of the world. The result has been the largest decline in America's global economic influence since the 1970s.
It will take more than a single speech from Mr. Bernanke to undo this damage. A statement of support for the strong dollar from both the Treasury and President Bush would certainly help. The last time Mr. Bush dared to speak his mind this way, in March, Treasury quickly hushed him up. Now would be a good time for the President to say he agrees with what Mr. Bernanke said this week.
The business press has been chattering about Treasury "intervention" in the foreign exchange markets, but this would mostly be symbolic action to scare currency traders. Such interventions are invariably "sterilized," meaning that central banks are careful not to increase or decrease the net supply of dollars. Changing the value of the dollar means reducing the supply of, or increasing the demand for, dollars. At the current moment, the world isn't likely to demand more dollars until it concludes that the Fed is serious about stopping the greenback's further decline.
In this context, last week's announcement of the August departure of Fed Governor Frederic Mishkin is good news. Mr. Mishkin is one of the intellectual architects of the Fed's dollar debacle. His departure means the Fed will soon have three of seven seats unfilled, with one more Governor unconfirmed. The Senate seems disinclined to confirm any more Bush nominees, and that may be just as well. The next President deserves a chance to remake the Fed with sound-money appointees. This Administration has named too many academics who know a lot about monetary theory but too little about currency markets and price signals in the real world.
* * *
The best news would be if this week marks a turning point at the Fed and at the Treasury. The leaders of those institutions have justified the Fed's sprint down the interest-rate curve as a way to boost exports, rescue the financial system and prevent a recession. They were wrong.
What has spared Wall Street more pain is the Fed's decision to open the discount window wider and to more borrowers. The easy-money experiment has merely hit consumers and the already struggling economy with a commodity price wallop, while inspiring a global flight from dollar assets. It's time to start acting to repair the damage.
Tuesday, April 15, 2008
WSJ: Martin Feldstein: Enough With the Interest Rate Cuts
Wall Street Journal
OPINION
DOW JONES REPRINTS
Enough With the Interest Rate Cuts
By MARTIN FELDSTEIN
April 15, 2008; Page A19
It's time for the Federal Reserve to stop reducing the federal funds rate, because the likely benefit is small compared to the potential damage.
Lower interest rates could raise the already high prices of energy and food, which are already triggering riots in developing countries. In order to offset the inflationary impact of higher imported commodity prices, central banks in those countries may raise interest rates. Such contractionary policies would reduce real incomes and exacerbate political instability.
The impact of low interest rates on commodity-price inflation is different from the traditional inflationary effect of easy money. The usual concern is that lowering interest rates stimulates economic activity to a point at which labor and product markets cause wages and prices to rise. That is unlikely to happen in the U.S. in the coming year. The general weakness of the economy will keep most wages and prices from rising more rapidly.
But high unemployment and low capacity utilization would not prevent lower interest rates from driving up commodity prices. Many factors have contributed to the recent rise in the prices of oil and food, especially the increased demand from China, India and other rapidly growing countries. Lower interest rates also add to the upward pressure on these commodity prices – by making it less costly for commodity investors and commodity speculators to hold larger inventories of oil and food grains.
Lower interest rates induce investors to add commodities to their portfolios. When rates are low, portfolio investors will bid up the prices of oil and other commodities to levels at which the expected future returns are in line with the lower rates.
An interest rate-induced rise in the price of oil also contributes indirectly to higher prices of food grains. It does so by making it profitable for farmers to devote more farm land to growing corn for ethanol. The resulting reduction in acreage devoted to producing food crops causes the supply of those commodities to decline and their prices to rise.
Rising food and energy prices can contribute significantly to the inflation rate and the cost of living in the U.S. The 25% weight of food and energy in the U.S. consumer price index means that a 10% rise in the prices of food and energy adds 2.5% to the overall price level. Commodity price inflation is of particular concern now that the CPI has increased 4% in the past 12 months. Surveys indicate that households are expecting a 4.8% rise in the coming year.
In lower-income, emerging-market countries, food and energy are generally a larger part of consumer spending. A rise in these commodity prices can therefore add proportionally more to the cost of living in those countries, and therefore depress real incomes to a greater extent than in the U.S.
Government actions to dilute these effects by increased subsidies on the prices of energy and food add to the government deficits, reducing the national saving available for investment in plant and equipment that would otherwise contribute to faster economic growth.
The rise in the U.S. inflation rate, and the adverse effects in emerging market countries, might be defensible if lower interest rates could significantly stimulate demand and reduce the risk of a deep recession. But under current conditions, reducing the federal funds interest rate from the current 2.25% by 50 or 75 basis points is not likely to do much to stimulate demand.
The current conditions in the housing industry and in credit markets mean that a further lowering of interest rates will have a smaller impact on demand than in previous recessions. In previous recessions, lower rates stimulated aggregate demand by inducing increased home building. But with the massive inventory of unsold homes – up 50% from a few years ago – a further cut in the fed funds rate would have little effect on housing construction.
Moreover, lowering the fed funds rate has not brought down mortgage interest rates. While the fed funds rate is down three percentage points from this time last year, mortgage interest rates are down by less than 0.5 percentage points.
The dysfunctional state of the credit market means that many individuals and businesses are unable to get credit. Lowering interest rates will not stimulate demand for those who cannot get credit.
Economic recovery will require resolving the difficult problems of the credit markets, dealing with the millions of homeowners who may now be tempted to default on mortgages that exceed the value of their homes, and reducing the risk that the ongoing decline in house prices will push millions of additional homeowners into a vulnerable, negative equity condition. A lower fed funds rate will not solve any of those problems.
Mr. Feldstein, chairman of the Council of Economic Advisers under President Reagan, is a professor at Harvard and a member of The Wall Street Journal's board of contributors.
See all of today's editorials and op-eds, plus video commentary, on Opinion Journal1.
OPINION
DOW JONES REPRINTS
Enough With the Interest Rate Cuts
By MARTIN FELDSTEIN
April 15, 2008; Page A19
It's time for the Federal Reserve to stop reducing the federal funds rate, because the likely benefit is small compared to the potential damage.
Lower interest rates could raise the already high prices of energy and food, which are already triggering riots in developing countries. In order to offset the inflationary impact of higher imported commodity prices, central banks in those countries may raise interest rates. Such contractionary policies would reduce real incomes and exacerbate political instability.
The impact of low interest rates on commodity-price inflation is different from the traditional inflationary effect of easy money. The usual concern is that lowering interest rates stimulates economic activity to a point at which labor and product markets cause wages and prices to rise. That is unlikely to happen in the U.S. in the coming year. The general weakness of the economy will keep most wages and prices from rising more rapidly.
But high unemployment and low capacity utilization would not prevent lower interest rates from driving up commodity prices. Many factors have contributed to the recent rise in the prices of oil and food, especially the increased demand from China, India and other rapidly growing countries. Lower interest rates also add to the upward pressure on these commodity prices – by making it less costly for commodity investors and commodity speculators to hold larger inventories of oil and food grains.
Lower interest rates induce investors to add commodities to their portfolios. When rates are low, portfolio investors will bid up the prices of oil and other commodities to levels at which the expected future returns are in line with the lower rates.
An interest rate-induced rise in the price of oil also contributes indirectly to higher prices of food grains. It does so by making it profitable for farmers to devote more farm land to growing corn for ethanol. The resulting reduction in acreage devoted to producing food crops causes the supply of those commodities to decline and their prices to rise.
Rising food and energy prices can contribute significantly to the inflation rate and the cost of living in the U.S. The 25% weight of food and energy in the U.S. consumer price index means that a 10% rise in the prices of food and energy adds 2.5% to the overall price level. Commodity price inflation is of particular concern now that the CPI has increased 4% in the past 12 months. Surveys indicate that households are expecting a 4.8% rise in the coming year.
In lower-income, emerging-market countries, food and energy are generally a larger part of consumer spending. A rise in these commodity prices can therefore add proportionally more to the cost of living in those countries, and therefore depress real incomes to a greater extent than in the U.S.
Government actions to dilute these effects by increased subsidies on the prices of energy and food add to the government deficits, reducing the national saving available for investment in plant and equipment that would otherwise contribute to faster economic growth.
The rise in the U.S. inflation rate, and the adverse effects in emerging market countries, might be defensible if lower interest rates could significantly stimulate demand and reduce the risk of a deep recession. But under current conditions, reducing the federal funds interest rate from the current 2.25% by 50 or 75 basis points is not likely to do much to stimulate demand.
The current conditions in the housing industry and in credit markets mean that a further lowering of interest rates will have a smaller impact on demand than in previous recessions. In previous recessions, lower rates stimulated aggregate demand by inducing increased home building. But with the massive inventory of unsold homes – up 50% from a few years ago – a further cut in the fed funds rate would have little effect on housing construction.
Moreover, lowering the fed funds rate has not brought down mortgage interest rates. While the fed funds rate is down three percentage points from this time last year, mortgage interest rates are down by less than 0.5 percentage points.
The dysfunctional state of the credit market means that many individuals and businesses are unable to get credit. Lowering interest rates will not stimulate demand for those who cannot get credit.
Economic recovery will require resolving the difficult problems of the credit markets, dealing with the millions of homeowners who may now be tempted to default on mortgages that exceed the value of their homes, and reducing the risk that the ongoing decline in house prices will push millions of additional homeowners into a vulnerable, negative equity condition. A lower fed funds rate will not solve any of those problems.
Mr. Feldstein, chairman of the Council of Economic Advisers under President Reagan, is a professor at Harvard and a member of The Wall Street Journal's board of contributors.
See all of today's editorials and op-eds, plus video commentary, on Opinion Journal1.
Monday, March 24, 2008
WSJ: New Limits to Growth Revive Malthusian Fears
March 24, 2008
Wall Street Journal
http://online.wsj.com/article_print/SB120613138379155707.html#CX
"Limits-to-growth" theories are getting a second look amid surging raw material costs.
New Limits to Growth
Revive Malthusian Fears
Spread of Prosperity
Brings Supply Woes;
Slaking China's Thirst
By JUSTIN LAHART, PATRICK BARTA and ANDREW BATSON
March 24, 2008; Page A1
(See Corrections & Amplifications item below.)
Now and then across the centuries, powerful voices have warned that human activity would overwhelm the earth's resources. The Cassandras always proved wrong. Each time, there were new resources to discover, new technologies to propel growth.
ECON ONE ON ONE
James Brander, left, a professor of international business at the University of British Columbia's Sauder School of Business and Matthew Kahn, right, a professor at UCLA's Institute of the Environment, discuss limits-to-growth ideas in the context of today's rapid run-up in raw material costs. Plus, share your own thoughts.1
Could Resources Become a Limit to Global Growth?2
Today the old fears are back.
Although a Malthusian catastrophe is not at hand, the resource constraints foreseen by the Club of Rome are more evident today than at any time since the 1972 publication of the think tank's famous book, "The Limits of Growth." Steady increases in the prices for oil, wheat, copper and other commodities -- some of which have set record highs this month -- are signs of a lasting shift in demand as yet unmatched by rising supply.
As the world grows more populous -- the United Nations projects eight billion people by 2025, up from 6.6 billion today -- it also is growing more prosperous. The average person is consuming more food, water, metal and power. Growing numbers of China's 1.3 billion people and India's 1.1 billion are stepping up to the middle class, adopting the high-protein diets, gasoline-fueled transport and electric gadgets that developed nations enjoy.
The result is that demand for resources has soared. If supplies don't keep pace, prices are likely to climb further, economic growth in rich and poor nations alike could suffer, and some fear violent conflicts could ensue.
Some of the resources now in great demand have no substitutes. In the 18th century, England responded to dwindling timber supplies by shifting to abundant coal. But there can be no such replacement for arable land and fresh water.
WSJ's Patrick Barta reports from India on how development threatens to overwhelm the Earth's resources. (March 24)
The need to curb global warming limits the usefulness of some resources -- coal, for one, which emits greenhouse gases that most scientists say contribute to climate change. Soaring food consumption stresses the existing stock of arable land and fresh water.
"We're living in an era where the technologies that have empowered high living standards and 80-year life expectancies in the rich world are now for almost everybody," says economist Jeffrey Sachs, director of Columbia University's Earth Institute, which focuses on sustainable development with an emphasis on the world's poor. "What this means is that not only do we have a very large amount of economic activity right now, but we have pent-up potential for vast increases [in economic activity] as well." The world cannot sustain that level of growth, he contends, without new technologies.
Americans already are grappling with higher energy and food prices. Although crude prices have dropped in recent days, there's a growing consensus among policy makers and industry executives that this isn't just a temporary surge in prices. Some of these experts, but not all of them, foresee a long-term upward shift in prices for oil and other commodities.
Today's dire predictions could prove just as misguided as yesteryear's.
"Clearly we'll have more and more problems, as more and more [people] are going to be richer and richer, using more and more stuff," says Bjorn Lomborg, a Danish statistician who argues that the global-warming problem is overblown. "But smartness will outweigh the extra resource use."
Some constraints might disappear with greater global cooperation. Where some countries face scarcity, others have bountiful supplies of resources. New seed varieties and better irrigation techniques could open up arid regions to cultivation that today are only suitable as hardscrabble pasture; technological breakthroughs, like cheaper desalination or efficient ways to transmit electricity from unpopulated areas rich with sunlight or wind, could brighten the outlook.
In the past, economic forces spurred solutions. Scarcity of resource led to higher prices, and higher prices eventually led to conservation and innovation. Whale oil was a popular source of lighting in the 19th century. Prices soared in the middle of the century, and people sought other ways to fuel lamps. In 1846, Abraham Gesner began developing kerosene, a cleaner-burning alternative. By the end of the century, whale oil cost less than it did in 1831.
A similar pattern could unfold again. But economic forces alone may not be able to fix the problems this time around. Societies as different as the U.S. and China face stiff political resistance to boosting water prices to encourage efficient use, particularly from farmers. When resources such as water are shared across borders, establishing a pricing framework can be thorny. And in many developing nations, food-subsidy programs make it less likely that rising prices will spur change.
This troubles some economists who used to be skeptical of the premise of "The Limits to Growth." As a young economist 30 years ago, Joseph Stiglitz said flatly: "There is not a persuasive case to be made that we face a problem from the exhaustion of our resources in the short or medium run."
Today, the Nobel laureate is concerned that oil is underpriced relative to the cost of carbon emissions, and that key resources such as water are often provided free. "In the absence of market signals, there's no way the market will solve these problems," he says. "How do we make people who have gotten something for free start paying for it? That's really hard. If our patterns of living, our patterns of consumption are imitated, as others are striving to do, the world probably is not viable."
Dennis Meadows, one of the authors of "The Limits to Growth," says the book was too optimistic in one respect. The authors assumed that if humans stopped harming the environment, it would recover slowly. Today, he says, some climate-change models suggest that once tipping points are passed, environmental catastrophe may be inevitable even "if you quit damaging the environment."
3
Patrick Barta
Resource constraints in fast-growing India are hitting farmers and city-dwellers alike.
One danger is that governments, rather than searching for global solutions to resource constraints, will concentrate on grabbing share.
China has been funding development in Africa, a move some U.S. officials see as a way for it to gain access to timber, oil and other resources. India, once a staunch supporter of the democracy movement in military-run Myanmar, has inked trade agreements with the natural-resource rich country. The U.S., European Union, Russia and China are all vying for the favor of natural-gas-abundant countries in politically unstable Central Asia.
Competition for resources can get ugly. A record drought in the Southeast intensified a dispute between Alabama, Georgia and Florida over water from a federal reservoir outside Atlanta. A long-running fight over rights to the Cauvery River between the Indian states of Karnataka and Tamil Nadu led to 25 deaths in 1991.
Economists Edward Miguel of the University of California at Berkeley and Shanker Satyanath and Ernest Sergenti of New York University have found that declines in rainfall are associated with civil conflict in sub-Saharan Africa. Sierra Leone, for example, which saw a sharp drop in rainfall in 1990, plunged into civil war in 1991.
A Car for Every Household
The rise of China and India already has changed the world economy in lasting ways, from the flows of global capital to the location of manufacturing. But they remain poor societies with growing appetites.
Nagpur in central India once was known as one of the greenest metropolises in the country. Over the past decade, Nagpur, now one of at least 40 Indian cities with more than a million people, has grown to roughly 2.5 million from 1.7 million. Local roads have turned into a mess of honking cars, motorbikes and wandering livestock under a thick soup of foul air.
A local resident takes water from a partially dried-up pond on the outskirts of Yingtan, China. Water shortages have been blamed on global warming, pollution and rising consumption by farmers and cities.
"Sometimes if I see something I like, I just buy it," says Sapan Gajbe, 32 years old, a dentist shopping for an air conditioner at Nagpur's Big Bazaar mall. A month earlier, he bought his first car, a $9,000 Maruti Zen compact.
In 2005, China had 15 passenger cars for every 1,000 people, close to the 13 cars per 1,000 that Japan had in 1963. Today, Japan has 447 passenger cars per 1,000 residents, 57 million in all. If China ever reaches that point, it would have 572 million cars -- 70 million shy of the number of cars in the entire world today.
China consumes 7.9 million barrels of oil a day. The U.S., with less than one quarter as many people, consumes 20.7 million barrels. "Demand will be going up, but it will be constrained by supply," ConocoPhillips Chief Executive Officer James Mulva has told analysts. "I don't think we are going to see the supply going over 100 million barrels a day, and the reason is: Where is all that going to come from?"
Says Harvard economist Jeffrey Frankel: "The idea that we might have to move on to other sources of energy -- you don't have to buy into the Club of Rome agenda for that." The world can adjust to dwindling oil production by becoming more energy efficient and by moving to nuclear, wind and solar power, he says, although such transitions can be slow and costly.
Global Thirst
There are no substitutes for water, no easy alternatives to simple conservation. Despite advances, desalination remains costly and energy intensive. Throughout the world, water is often priced too low. Farmers, the biggest users, pay less than others, if they pay at all.
An underground rail tunnel under construction in New Delhi, India. The nation is adding thousands of miles of rail lines and new roads, along with other infrastructure, using enormous quantities of materials such as steel, copper and aluminum.
In California, the subsidized rates for farmers have become a contentious political issue. Chinese farmers receive water at next to no cost, accounting for 65% of all water used in the country.
In Pondhe, an Indian village of about 1,000 on a barren plateau east of Mumbai, water wasn't a problem until the 1970s, when farmers began using diesel-powered pumps to transport water farther and faster. Local wells used to overflow during the monsoon season, recalls Vasantrao Wagle, who has farmed in the area for four decades. Today, they top off about 10 feet below the surface, and drop even lower during the dry season. "Even when it rains a lot, we aren't getting enough water," he says.
Parched northern China has been drawing down groundwater supplies. In Beijing, water tables have dropped hundreds of feet. In nearby Hebei province, once large Baiyangdian Lake has shrunk, and survives mainly because the government has diverted water into it from the Yellow River.
Climate change is likely to intensify water woes. Shifting weather patterns will be felt "most strongly through changes in the distribution of water around the world and its seasonal and annual variability," according to the British government report on global warming led by Nicholas Stern. Water shortages could be severe in parts Africa, the Middle East, southern Europe and Latin America, the report said.
Feeding the Hungry
China's farmers need water because China needs food. Production of rice, wheat and corn topped out at 441.4 million tons in 1998 and hasn't hit that level since. Sea water has leaked into depleted aquifers in the north, threatening to turn land barren. Illegal seizures of farmland by developers are widespread. The government last year declared that it would not permit arable land to drop below 120 million hectares (296 million acres), and said it would beef up enforcement of land-use rules.
WHERE'S THE WATER?
On Beijing's Outskirts, The Thirst Is Growing4
Many Chinese towns, lacking irrigation systems,
rely on ad-hoc well digging, a practice that is in effect
reducing their ground water levels year by year.
5
Loretta Chao
Well diggers in China are using massive equipment to reach deeper and deeper water supplies.
The farmland squeeze is forcing difficult choices. After disastrous floods in 1998, China started paying some farmers to abandon marginal farmland and plant trees. That "grain-to-green" program was intended to reverse the deforestation and erosion that exacerbated the floods. Last August, the government stopped expanding the program, citing the need for farmland and the cost.
A growing taste for meat and other higher-protein food in the developing world is boosting demand and prices for feed grains. "There are literally hundreds of millions of people...who are making the shift to protein, and competition for food world-wide is a new reality," says William Doyle, chief executive officer of fertilizer-maker Potash Corp. of Saskatchewan.
It takes nearly 10 pounds of grain to produce one pound of pork -- the staple meat in China -- and more than double that to produce a pound of beef, according to Vaclav Smil, a University of Manitoba geographer who studies food, energy and environment trends. The number of calories in the Chinese diet from meat and other animal products has more than doubled since 1990, according to the U.N. Food and Agriculture Organization. But China still lags Taiwan when it comes to per-capita pork consumption. Matching Taiwan would increase China's annual pork consumption by 11 billion pounds -- as much pork as Americans eat in six or seven months.
Searching for Solutions
The 1972 warnings by the Club of Rome -- a nongovernmental think tank now based in Hamburg that brings together academics, business executives, civil servants and politicians to grapple with a wide range of global issues -- struck a chord because they came as oil prices were rising sharply. Oil production in the continental U.S. had peaked, sparking fears that energy demand had outstripped supply. Over time, America became more energy efficient, overseas oil production rose and prices fell.
The dynamic today appears different. So far, the oil industry has failed to find major new sources of crude. Absent major finds, prices are likely to keep rising, unless consumers cut back. Taxes are one way to curb their appetites. In Western Europe and Japan, for example, where gas taxes are higher than in the U.S., per capita consumption is much lower.
New technology could help ease the resource crunch. Advances in agriculture, desalination and the clean production of electricity, among other things, would help.
But Mr. Stiglitz, the economist, contends that consumers eventually will have to change their behavior even more than then did after the 1970s oil shock. He says the world's traditional definitions and measures of economic progress -- based on producing and consuming ever more -- may have to be rethought.
In years past, the U.S., Europe and Japan have proven adept at adjusting to resource constraints. But history is littered with examples of societies believed to have suffered Malthusian crises: the Mayans of Central America, the Anasazi of the U.S. Southwest, and the people of Easter Island.
Those societies, of course, lacked modern science and technology. Still, their inability to overcome resource challenges demonstrates the perils of blithely believing things will work out, says economist James Brander at the University of British Columbia, who has studied Easter Island.
"We need to look seriously at the numbers and say: Look, given what we're consuming now, given what we know about economic incentives, given what we know about price signals, what is actually plausible?" says Mr. Brander.
Indeed, the true lesson of Thomas Malthus, an English economist who died in 1834, isn't that the world is doomed, but that preservation of human life requires analysis and then tough action. Given the history of England, with its plagues and famines, Malthus had good cause to wonder if society was "condemned to a perpetual oscillation between happiness and misery." That he was able to analyze that "perpetual oscillation" set him and his time apart from England's past. And that capacity to understand and respond meant that the world was less Malthusian thereafter.
Write to Justin Lahart at justin.lahart@wsj.com13, Patrick Barta at patrick.barta@wsj.com14 and Andrew Batson at andrew.batson@wsj.com15
Corrections & Amplifications:
China's annual pork consumption would increase by 11 billion pounds if China matched Taiwan's per-capita consumption rate. A previous version of this article incorrectly gave the figure as 11 million pounds.
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Wall Street Journal
http://online.wsj.com/article_print/SB120613138379155707.html#CX
"Limits-to-growth" theories are getting a second look amid surging raw material costs.
New Limits to Growth
Revive Malthusian Fears
Spread of Prosperity
Brings Supply Woes;
Slaking China's Thirst
By JUSTIN LAHART, PATRICK BARTA and ANDREW BATSON
March 24, 2008; Page A1
(See Corrections & Amplifications item below.)
Now and then across the centuries, powerful voices have warned that human activity would overwhelm the earth's resources. The Cassandras always proved wrong. Each time, there were new resources to discover, new technologies to propel growth.
ECON ONE ON ONE
James Brander, left, a professor of international business at the University of British Columbia's Sauder School of Business and Matthew Kahn, right, a professor at UCLA's Institute of the Environment, discuss limits-to-growth ideas in the context of today's rapid run-up in raw material costs. Plus, share your own thoughts.1
Could Resources Become a Limit to Global Growth?2
Today the old fears are back.
Although a Malthusian catastrophe is not at hand, the resource constraints foreseen by the Club of Rome are more evident today than at any time since the 1972 publication of the think tank's famous book, "The Limits of Growth." Steady increases in the prices for oil, wheat, copper and other commodities -- some of which have set record highs this month -- are signs of a lasting shift in demand as yet unmatched by rising supply.
As the world grows more populous -- the United Nations projects eight billion people by 2025, up from 6.6 billion today -- it also is growing more prosperous. The average person is consuming more food, water, metal and power. Growing numbers of China's 1.3 billion people and India's 1.1 billion are stepping up to the middle class, adopting the high-protein diets, gasoline-fueled transport and electric gadgets that developed nations enjoy.
The result is that demand for resources has soared. If supplies don't keep pace, prices are likely to climb further, economic growth in rich and poor nations alike could suffer, and some fear violent conflicts could ensue.
Some of the resources now in great demand have no substitutes. In the 18th century, England responded to dwindling timber supplies by shifting to abundant coal. But there can be no such replacement for arable land and fresh water.
WSJ's Patrick Barta reports from India on how development threatens to overwhelm the Earth's resources. (March 24)
The need to curb global warming limits the usefulness of some resources -- coal, for one, which emits greenhouse gases that most scientists say contribute to climate change. Soaring food consumption stresses the existing stock of arable land and fresh water.
"We're living in an era where the technologies that have empowered high living standards and 80-year life expectancies in the rich world are now for almost everybody," says economist Jeffrey Sachs, director of Columbia University's Earth Institute, which focuses on sustainable development with an emphasis on the world's poor. "What this means is that not only do we have a very large amount of economic activity right now, but we have pent-up potential for vast increases [in economic activity] as well." The world cannot sustain that level of growth, he contends, without new technologies.
Americans already are grappling with higher energy and food prices. Although crude prices have dropped in recent days, there's a growing consensus among policy makers and industry executives that this isn't just a temporary surge in prices. Some of these experts, but not all of them, foresee a long-term upward shift in prices for oil and other commodities.
Today's dire predictions could prove just as misguided as yesteryear's.
"Clearly we'll have more and more problems, as more and more [people] are going to be richer and richer, using more and more stuff," says Bjorn Lomborg, a Danish statistician who argues that the global-warming problem is overblown. "But smartness will outweigh the extra resource use."
Some constraints might disappear with greater global cooperation. Where some countries face scarcity, others have bountiful supplies of resources. New seed varieties and better irrigation techniques could open up arid regions to cultivation that today are only suitable as hardscrabble pasture; technological breakthroughs, like cheaper desalination or efficient ways to transmit electricity from unpopulated areas rich with sunlight or wind, could brighten the outlook.
In the past, economic forces spurred solutions. Scarcity of resource led to higher prices, and higher prices eventually led to conservation and innovation. Whale oil was a popular source of lighting in the 19th century. Prices soared in the middle of the century, and people sought other ways to fuel lamps. In 1846, Abraham Gesner began developing kerosene, a cleaner-burning alternative. By the end of the century, whale oil cost less than it did in 1831.
A similar pattern could unfold again. But economic forces alone may not be able to fix the problems this time around. Societies as different as the U.S. and China face stiff political resistance to boosting water prices to encourage efficient use, particularly from farmers. When resources such as water are shared across borders, establishing a pricing framework can be thorny. And in many developing nations, food-subsidy programs make it less likely that rising prices will spur change.
This troubles some economists who used to be skeptical of the premise of "The Limits to Growth." As a young economist 30 years ago, Joseph Stiglitz said flatly: "There is not a persuasive case to be made that we face a problem from the exhaustion of our resources in the short or medium run."
Today, the Nobel laureate is concerned that oil is underpriced relative to the cost of carbon emissions, and that key resources such as water are often provided free. "In the absence of market signals, there's no way the market will solve these problems," he says. "How do we make people who have gotten something for free start paying for it? That's really hard. If our patterns of living, our patterns of consumption are imitated, as others are striving to do, the world probably is not viable."
Dennis Meadows, one of the authors of "The Limits to Growth," says the book was too optimistic in one respect. The authors assumed that if humans stopped harming the environment, it would recover slowly. Today, he says, some climate-change models suggest that once tipping points are passed, environmental catastrophe may be inevitable even "if you quit damaging the environment."
3
Patrick Barta
Resource constraints in fast-growing India are hitting farmers and city-dwellers alike.
One danger is that governments, rather than searching for global solutions to resource constraints, will concentrate on grabbing share.
China has been funding development in Africa, a move some U.S. officials see as a way for it to gain access to timber, oil and other resources. India, once a staunch supporter of the democracy movement in military-run Myanmar, has inked trade agreements with the natural-resource rich country. The U.S., European Union, Russia and China are all vying for the favor of natural-gas-abundant countries in politically unstable Central Asia.
Competition for resources can get ugly. A record drought in the Southeast intensified a dispute between Alabama, Georgia and Florida over water from a federal reservoir outside Atlanta. A long-running fight over rights to the Cauvery River between the Indian states of Karnataka and Tamil Nadu led to 25 deaths in 1991.
Economists Edward Miguel of the University of California at Berkeley and Shanker Satyanath and Ernest Sergenti of New York University have found that declines in rainfall are associated with civil conflict in sub-Saharan Africa. Sierra Leone, for example, which saw a sharp drop in rainfall in 1990, plunged into civil war in 1991.
A Car for Every Household
The rise of China and India already has changed the world economy in lasting ways, from the flows of global capital to the location of manufacturing. But they remain poor societies with growing appetites.
Nagpur in central India once was known as one of the greenest metropolises in the country. Over the past decade, Nagpur, now one of at least 40 Indian cities with more than a million people, has grown to roughly 2.5 million from 1.7 million. Local roads have turned into a mess of honking cars, motorbikes and wandering livestock under a thick soup of foul air.
A local resident takes water from a partially dried-up pond on the outskirts of Yingtan, China. Water shortages have been blamed on global warming, pollution and rising consumption by farmers and cities.
"Sometimes if I see something I like, I just buy it," says Sapan Gajbe, 32 years old, a dentist shopping for an air conditioner at Nagpur's Big Bazaar mall. A month earlier, he bought his first car, a $9,000 Maruti Zen compact.
In 2005, China had 15 passenger cars for every 1,000 people, close to the 13 cars per 1,000 that Japan had in 1963. Today, Japan has 447 passenger cars per 1,000 residents, 57 million in all. If China ever reaches that point, it would have 572 million cars -- 70 million shy of the number of cars in the entire world today.
China consumes 7.9 million barrels of oil a day. The U.S., with less than one quarter as many people, consumes 20.7 million barrels. "Demand will be going up, but it will be constrained by supply," ConocoPhillips Chief Executive Officer James Mulva has told analysts. "I don't think we are going to see the supply going over 100 million barrels a day, and the reason is: Where is all that going to come from?"
Says Harvard economist Jeffrey Frankel: "The idea that we might have to move on to other sources of energy -- you don't have to buy into the Club of Rome agenda for that." The world can adjust to dwindling oil production by becoming more energy efficient and by moving to nuclear, wind and solar power, he says, although such transitions can be slow and costly.
Global Thirst
There are no substitutes for water, no easy alternatives to simple conservation. Despite advances, desalination remains costly and energy intensive. Throughout the world, water is often priced too low. Farmers, the biggest users, pay less than others, if they pay at all.
An underground rail tunnel under construction in New Delhi, India. The nation is adding thousands of miles of rail lines and new roads, along with other infrastructure, using enormous quantities of materials such as steel, copper and aluminum.
In California, the subsidized rates for farmers have become a contentious political issue. Chinese farmers receive water at next to no cost, accounting for 65% of all water used in the country.
In Pondhe, an Indian village of about 1,000 on a barren plateau east of Mumbai, water wasn't a problem until the 1970s, when farmers began using diesel-powered pumps to transport water farther and faster. Local wells used to overflow during the monsoon season, recalls Vasantrao Wagle, who has farmed in the area for four decades. Today, they top off about 10 feet below the surface, and drop even lower during the dry season. "Even when it rains a lot, we aren't getting enough water," he says.
Parched northern China has been drawing down groundwater supplies. In Beijing, water tables have dropped hundreds of feet. In nearby Hebei province, once large Baiyangdian Lake has shrunk, and survives mainly because the government has diverted water into it from the Yellow River.
Climate change is likely to intensify water woes. Shifting weather patterns will be felt "most strongly through changes in the distribution of water around the world and its seasonal and annual variability," according to the British government report on global warming led by Nicholas Stern. Water shortages could be severe in parts Africa, the Middle East, southern Europe and Latin America, the report said.
Feeding the Hungry
China's farmers need water because China needs food. Production of rice, wheat and corn topped out at 441.4 million tons in 1998 and hasn't hit that level since. Sea water has leaked into depleted aquifers in the north, threatening to turn land barren. Illegal seizures of farmland by developers are widespread. The government last year declared that it would not permit arable land to drop below 120 million hectares (296 million acres), and said it would beef up enforcement of land-use rules.
WHERE'S THE WATER?
On Beijing's Outskirts, The Thirst Is Growing4
Many Chinese towns, lacking irrigation systems,
rely on ad-hoc well digging, a practice that is in effect
reducing their ground water levels year by year.
5
Loretta Chao
Well diggers in China are using massive equipment to reach deeper and deeper water supplies.
The farmland squeeze is forcing difficult choices. After disastrous floods in 1998, China started paying some farmers to abandon marginal farmland and plant trees. That "grain-to-green" program was intended to reverse the deforestation and erosion that exacerbated the floods. Last August, the government stopped expanding the program, citing the need for farmland and the cost.
A growing taste for meat and other higher-protein food in the developing world is boosting demand and prices for feed grains. "There are literally hundreds of millions of people...who are making the shift to protein, and competition for food world-wide is a new reality," says William Doyle, chief executive officer of fertilizer-maker Potash Corp. of Saskatchewan.
It takes nearly 10 pounds of grain to produce one pound of pork -- the staple meat in China -- and more than double that to produce a pound of beef, according to Vaclav Smil, a University of Manitoba geographer who studies food, energy and environment trends. The number of calories in the Chinese diet from meat and other animal products has more than doubled since 1990, according to the U.N. Food and Agriculture Organization. But China still lags Taiwan when it comes to per-capita pork consumption. Matching Taiwan would increase China's annual pork consumption by 11 billion pounds -- as much pork as Americans eat in six or seven months.
Searching for Solutions
The 1972 warnings by the Club of Rome -- a nongovernmental think tank now based in Hamburg that brings together academics, business executives, civil servants and politicians to grapple with a wide range of global issues -- struck a chord because they came as oil prices were rising sharply. Oil production in the continental U.S. had peaked, sparking fears that energy demand had outstripped supply. Over time, America became more energy efficient, overseas oil production rose and prices fell.
The dynamic today appears different. So far, the oil industry has failed to find major new sources of crude. Absent major finds, prices are likely to keep rising, unless consumers cut back. Taxes are one way to curb their appetites. In Western Europe and Japan, for example, where gas taxes are higher than in the U.S., per capita consumption is much lower.
New technology could help ease the resource crunch. Advances in agriculture, desalination and the clean production of electricity, among other things, would help.
But Mr. Stiglitz, the economist, contends that consumers eventually will have to change their behavior even more than then did after the 1970s oil shock. He says the world's traditional definitions and measures of economic progress -- based on producing and consuming ever more -- may have to be rethought.
In years past, the U.S., Europe and Japan have proven adept at adjusting to resource constraints. But history is littered with examples of societies believed to have suffered Malthusian crises: the Mayans of Central America, the Anasazi of the U.S. Southwest, and the people of Easter Island.
Those societies, of course, lacked modern science and technology. Still, their inability to overcome resource challenges demonstrates the perils of blithely believing things will work out, says economist James Brander at the University of British Columbia, who has studied Easter Island.
"We need to look seriously at the numbers and say: Look, given what we're consuming now, given what we know about economic incentives, given what we know about price signals, what is actually plausible?" says Mr. Brander.
Indeed, the true lesson of Thomas Malthus, an English economist who died in 1834, isn't that the world is doomed, but that preservation of human life requires analysis and then tough action. Given the history of England, with its plagues and famines, Malthus had good cause to wonder if society was "condemned to a perpetual oscillation between happiness and misery." That he was able to analyze that "perpetual oscillation" set him and his time apart from England's past. And that capacity to understand and respond meant that the world was less Malthusian thereafter.
Write to Justin Lahart at justin.lahart@wsj.com13, Patrick Barta at patrick.barta@wsj.com14 and Andrew Batson at andrew.batson@wsj.com15
Corrections & Amplifications:
China's annual pork consumption would increase by 11 billion pounds if China matched Taiwan's per-capita consumption rate. A previous version of this article incorrectly gave the figure as 11 million pounds.
URL for this article:
http://online.wsj.com/article/SB120613138379155707.html
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