Tuesday, 28 June 2011

An American Default?


Whilst most eyes are fixed upon the possibility of a Greek default at the moment, the possibility of a far more serious default is looming. The Federal government in America is scheduled to hit its borrowing limit – the maximum that Congress allows the government to borrow – this summer. It is possible that Congress will allow the limit to be raised, but the political strings attached seem to be causing political gridlock in Washington at the moment. Congress has tied the increase in the borrowing limit to a deficit reduction plan. There is no real consensus at to whether tax increases or spending cuts should form the prime feature of the deficit reduction plan, and lines are drawn broadly on party lines.

The interesting question is what happens if America defaults? It should be noted that in terms of sovereign debt, a default occurs when an interest payment is one day late. It appears that a major interest payment is due on August 15th and the CDS markets are pricing in a default. Volumes of CDS trades have increased dramatically over the past couple of weeks and the one year CDS spread is now priced in similar terms to the five year spread. This does not augur well.

Evidence suggests that if the US does default, then US Treasuries could be subject to an additional risk premium of about 60 basis Points (i.e. of 0.6% per annum). This doesn’t sound much, but it is an additional cost of $86 billion a year to the Federal exchequer. To put this into perspective, it’s roughly the size of the Federal spend on pre-primary to secondary education in 2011. The cost of gridlock in Washington roughly equates to the Federal education budget.

I find it hard to believe that an advanced society will allow such political brinkmanship. If there ever was a case for the institutions of a New Enlightenment, then this is it!


© The European Futures Observatory 2011

Monday, 27 June 2011

Is The Well Running Dry?


This little graph tells us quite a large story, not only covering the past sixteen years, but also for the rest of this decade and possibly beyond. It shows two distinct phases in the recent economic history of the US. The first was between 1998 and 2001, a period where the actual output of the US economy was appreciably greater than the potential output. This shows the unsustainable boom of that period, leading to the inevitable bust at the beginning of this century. The second phase is from 2007 to the present, and possibly beyond. The credit crunch, financial bust, and the resultant recession have resulted in actual GDP falling appreciably short of potential GDP. In ball park terms, the US economy could expand by about three quarters of a trillion dollars just by fully using the unemployed and under-employed resources within the economy.

This is a cause for concern. The growth in the US economy over the past two years have been the result of a major fiscal stimulus (about $1.2 trillion) and an unprecedented monetary expansion through a double bout of quantitative easing (about $2.3 trillion). The monetary expansion ends this week. Whilst it is not suggested that a monetary contraction will take place, it is also highly unlikely that a third round of quantitative easing (QE) will take place. The removal of the monetary life support is likely to have something of a contractionary impact this winter (it takes about nine months for the impact to be felt). It may be the case that US unemployment starts to nudge back up towards 10% this year.

One of the areas in which the impact will be felt is in American fiscal policy. A good part of the two rounds of QE has been used in buying US Federal bonds. If this buyer of bonds is no longer in the market, then we can expect to start to see the yields on US Federal debt start to rise, which could start to place a strain on the US Federal deficit. At some point, the US President – if not the current one, then certainly the next one – will have to tackle this issue. It is not too difficult to foresee a period of fiscal austerity in the US, akin to the austerity measures now being enacted across Europe, in the later part of this decade.

This has a number of implications. Firstly, it means that the US will no longer be able to afford expensive overseas military engagements. Whilst this may be something of a shock to Americans, it will be a greater shock in East Asia where nations such as Japan, South Korea, and Taiwan still rely upon the US military guarantee. It will also have an impact in Europe, where the European members of NATO have been free riders on American military spending for decades. Second, it means that America will no longer be able to afford its poor. American welfare (including healthcare) is not exactly generous by OECD standards. Should that be pared back significantly, then we may see a degree of social unrest within the US that we haven’t quite seen before. Thirdly, it means that US seniors will have to rely upon their own provision for the future. In an economy where the costs of eldercare (including medication) are rising significantly faster than incomes in retirement, those retiring Boomers who haven’t laid much in reserve will face quite a constrained future. They could well become part of the poor that America can no longer afford.

And all of this presumes that US Sovereign Debt is not significantly downgraded from AAA. If it is, then all of the vicious cycle described above, becomes even more vicious and on a faster timescale. The key to avoiding this future is the generation of a political consensus in Washington that is prepared to take hard decisions about raising taxes and reducing spending commitments. It requires the sort of political courage that we can’t quite see in Washington at the moment. What we do see is a lot of partisan bickering that is putting self-interest ahead of the national interest. There isn’t even a consensus that America is facing a problem, let alone finding a solution.

But then, perhaps this merely reflects a social preference? American society seems to prefer immediate consumption over future security, in the belief that the good times will go on forever. This is not a preference that I share, but then, who am I to criticise the choices of others?


© The European Futures Observatory 2011

Tuesday, 14 June 2011

The Cost Of PV Generation 1990-2040

Future Cost Of PV Generation

This is an interesting little graph. If the assumptions are correct, it indicates that, sometime over this decade, the cost of PV generation will become comparable to that of peak power fossil fuel based generation systems. Sometime over the next decade, the cost will become competitive with the bulk production of electricity from fossil fuels. Should that happen, in reasonable quantities, then we will have started to make serious progress towards finding renewable alternatives to fossil fuels.

When that happens, we can expect the demand for PV systems to soar. Initially, soaring demand will give rise to a very profitable installation sector. One could argue that we are in that territory now. However, if the market is allowed to respond, new suppliers will enter the arena, attracted by the profits to be made. This injection of competition will serve to start lowering the long term installation cost as supply grows to meet that demand. This is exactly what happened for the supply of Satellite Dishes, and there is no reason why it could not happen for PV installations. 

In the meantime, the role of technology is to move the curves one way or another. For example, a breakthrough in PV technology could have the effect of lowering the generation cost so that Solar becomes competitive with fossil fuels sooner rather than later. As the market grows both in size and competitiveness, the way to achieve a profitable future will be to innovate newer technologies to generate more kWh per £ spent on installation. Like this, we enter a virtuous in which innovation lowers installation cost, which makes the technology more attractive compared to other methods of power generation, which then creates an innovation premium.

This is one possible way out of our reliance upon fossil fuels.


© The European Futures Observatory 2011

Friday, 10 June 2011

The Green House

The Green House

I like the idea that the way to combat Greenhouse Emissions is to start living in a Green House! We are currently looking at a green retro fit at home, which is how we came across this outfit.

At present, the installation cost is fairly high, which has slowed the uptake of the technology. However, this is changing - gradually at first, but it will gather pace in time. As it does so, the uptake will increase in volume. I wonder if this is a good case for a public subsidy to prime the pump and to give the technologies involved a helping hand. It could be paid for by increasing taxes on conventional energy production (e.g. VAT on domestic fuel bills at the full rate of 20% instead of the soft rate of 5%).

I see this as a technology to be exposed to over this decade, and possibly the next. It certainly addresses the issues of which technologies are likely to fit the scarcity agenda.


© The European Futures Observatory 2011

Thursday, 2 June 2011

Global Population 2010-2100

Default template

This table originates from the UN global population forecasts. For the first time, it extends to the year 2100 so that we can see what the shape of demographics could be for this century. As always, the figures used are the mid-point figures, around which there is a cone of uncertainty. This cone (of varying degrees of statistical confidence) can be very wide in some areas, and very narrow in others.

The short story is that this century may well belong to Africa rather than Asia. It is interesting to note that not one European country is in the top 10 for 2100. However, 90 years is a long way to go, and there are many factors that may cause these projections to run off course. One of these factors may be that the political units that we have today may change into something radically different by the year 2100.

For example, the current forecasts presume that we have seen the high water mark of European integration. Some question this. They also presume the current territorial integrity of China (i.e. no shrinkage and no expansion). Some question this. As always with long term futures forecasts, the devil lies in the details of the assumptions made. And yet, some assumptions do have to be made in order to derive these very interesting results. That does not invalidate the results, it merely defines the degree of caution that we should exercise when using them.

Source Article in The Economist

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